This paper reports the progress of development of the Growth Enterprises Market ("GEM") by the Stock Exchange of Hong Kong ("SEHK").

Background

2. The Chief Executive of the HKSAR indicated in his 1997 Policy Address the Administration's support for the study by the SEHK into establishing a Venture Board (now renamed as the GEM) to help small enterprises both locally and in the region raise capital. The proposal would also broaden the product range of our securities market which is also conducive to our efforts to maintain the position of Hong Kong as an international financial centre.

3. The study by the SEHK began in early 1997. It included a comparison of the modus operandi and characteristics of the second boards in other markets as well as an assessment market demand for a second board in Hong Kong. The study was conducted by the "Working Group on New Markets" established by the SEHK with members coming from the Securities and Futures Commission ("SFC"), SEHK Council members as well as market participants. An Advisory Committee composed of business leaders has also been set up to oversee the work of the Working Group.

4. SEHK issued a consultation paper in May 1998 to gather public comments on the setting up of a Second Board in Hong Kong. The consultation completed in end July, the market and public responses to which were generally positive. SEHK has subsequently set up another working group to prepare the implementation details. The Working Group consists of representatives of the SEHK, the SFC and a number of prominent market participants. It decided that "The Growth Enterprise Market" or "GEM" would be an appropriate name for the second market. A comparison between the features of the main board and the GEM is at Annex.

5. Since February 1999, the Working Group and its Listing Rules Sub-Committee have held frequent meetings to develop the GEM Listing Rules. Preparation of the GEM Listing Rules is now at an advanced stage. It is intended that the rules will be submitted to the SEHK Council and the Commission for approval in July 1999. After the rules are approved, the SEHK will invite applications for listing on the GEM. As the vetting and processing of applications will take some time, it is not expected that the first listing on GEM will take place earlier than October 1999. In the meantime, the SEHK will continue to develop related infrastructure of the new market including the GEM Website (which will be used as the principal form of information dissemination), and the development of an investor education programme for investors who may be interested in investing in the GEM.


Financial Services Bureau
30 June 1999

Annex

Main Board	GEM
Profit Requirement: Issuers must have three years profit record requirement of $50 million.	Issuers do not need to meet any profit requirement, but the initial offer document must contain a description of active business pursuits for the 2 years before listing and a description of its business plans for the 2 years after listing. Issuers must be under substantially the same management and ownership for the 2 years prior to listing.
Market capitalisation: Issuers must have a minimum market capitalisation of $100 million upon listing.	Minimum market capitalisation requirement applicable to GEM issuers will be about $46 million. However, the value of issuer's securities in public hands upon listing must not be less than $30 million.
Minimum public float: Generally, issuers must maintain a minimum public float of 25% of the class of securities listed.	Generally, issuers must maintain a minimum public float of 25% as in the Main Board. For issuers who wish to offer less than 25% of its shares to the public, the minimum public float is 20% provided that if public demand for the issuer's shares is more than 20% at the initial public offering stage, the minimum public float should be adjusted to absorb public demand subject to a maximum of 25%.
Requirements on sponsors: No requirement to appoint sponsor for any specified period except for H-share companies (which are obliged to appoint a sponsor for 1 year after listing). No approved sponsors' scheme.	Issuers must appoint a sponsor to assist in the IPO and to advise it for 2 financial years after listing. Only persons who have been admitted by the Exchange into the approved sponsors' list can act as such.
Minimum shareholding by existing shareholders: Existing shareholders of issuers need not maintain a minimum shareholding in listed shares upon listing.	Existing management shareholders and significant shareholders 1 must collectively hold not less than 35% of a GEM issuer's issued share capital upon listing.
Restrictions on shareholders to deal in listed shares: Controlling shareholders cannot dispose of shares in listed company in the first 6 months after listing.	Management shareholders and significant shareholders cannot dispose of listed shares within 2 years and 6 months after listing respectively. If someone wants to make a general offer in the second year, independent shareholders will have to decide whether or not to accept the general offer.

Financial reporting: Annual and half yearly financial reporting.	Annual, half yearly and quarterly financial reporting.
Risk warning requirements: No risk warning requirements.	All listing documents and circulars to shareholders must contain risk warnings emphasising the higher risk profile of GEM. Brokers will be required to open separate trading accounts for clients wishing to deal in GEM securities. Clients will be asked to sign a client agreement and risk acknowledgement statement designed for trading on the GEM.
Information dissemination: Dissemination of information through paid press announcements.	Dissemination of information principally through GEM Website. Such information must also be sent to newspapers in Hong Kong. Issuers are not obliged to make paid announcements.

1. "Management Shareholder" is any person who is (or group of persons who together are) entitled to exercise 5% or more of the voting power at general meetings of the issuer and who is able to direct or influence management of the issuer. "Significant Shareholder" is any person (other than a management shareholder) who immediately prior to the listing date, is (or group of persons who together are) entitled to exercise or control the exercise of 5% or more of the voting power at general meetings of the issuer.