Hong Kong: SFC Proposals To Enhance Regulation Of IPO Sponsors In Hong Kong

Hong Kong has become one of the world's leading destinations for initial public offerings and has recently experienced record years in terms of the number of listings and overall deal value. The Hong Kong market has also experienced an increasing number of problematic situations involving recently listed companies that have prompted initiatives toward regulatory reform. One area of concern for Hong Kong regulatory authorities has been the quality of listed issuers and the vetting process undertaken by IPO sponsors during the listing process. Following on the heels of a report issued in March 2011 by the Securities and Futures Commission of Hong Kong (the "SFC") that focused on deficiencies found in the work performed by sponsors in the listing process, the SFC published a two month1 consultation paper on May 9, 2012 (the "Consultation Paper") containing proposals to enhance the regulation of sponsors in Hong Kong that emphasize improving the quality of due diligence performed by sponsors.

Key proposals in the Consultation Paper include:

  • clarifying that sponsors have civil and criminal liability for untrue statements (including material omissions) in a prospectus;
  • requiring the draft prospectus accompanying the listing application submission (the "Form A1 Submission") to be published on the website of the Hong Kong Exchanges and Clearing Limited (the "HKEx");
  • limiting the number of sponsors for each listing to as low as one and requiring each sponsor to be independent;
  • requiring sponsors to complete the vast majority of due diligence prior to the Form A1 Submission;
  • requiring sponsors to report any material information concerning non-compliance with applicable legal or regulatory requirements by the listing applicant; and
  • requiring sponsors to be able to demonstrate, at the time of issue of the prospectus, that it is reasonable for the sponsor to rely on the expert sections of the prospectus.

In addition to clarifying the liability regime in the Companies Ordinance of Hong Kong (Cap 32) (the "Companies Ordinance"), the other proposals would consolidate all existing and newly proposed sponsor obligations into the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the "Code of Conduct"). The Consultation Paper indicates that the SFC plans to implement the amendments to the Code of Conduct as soon as practicable although no definitive timetable has been announced, but that the implementation of the proposals dealing with sponsor liability will be subject to further consultation and the legislative process.

Sponsor liability for untrue statements (including material omissions) in a prospectus

Sections 40 and 40A of the Companies Ordinance impose civil and criminal liability for untrue statements (including material omissions) in a prospectus on the following four groups of persons: (i) each director of the listing applicant at the time of issue of the prospectus; (ii) each individual who has authorized himself or herself to be named as a director in the prospectus or as having agreed to become a director; (iii) any promoter of the listing applicant; and (iv) each person that has authorized the issue of the prospectus. The Consultation Paper notes that although it has been argued that sponsors fall within the category of persons having authorized the issue of the prospectus, there is no Hong Kong case law to support this argument. The Consultation Paper proposes to clarify the Companies Ordinance to include sponsors within the group of persons that may be subject to potential civil and criminal liability. If implemented, these proposals would establish a framework in which sponsors could be subject to potential legal action from public shareholders, prosecution by the Hong Kong Department of Justice, and investigations and remedial orders by the SFC. The SFC believes that subjecting sponsors to this liability regime should "further encourage sponsors to prepare and review disclosures in a prospectus critically so as to provide a high level of assurance that the information disclosed is accurate, relevant, concise and meaningful for investors," thereby furthering the protection of investors.

Publication of the prospectus accompanying the Form A1 Submission

Under the current framework, until finalized and publicly issued all submissions of the prospectus to the Stock Exchange of Hong Kong Limited (the "HKSE") and the SFC are made on a confidential basis, other than the publication of the WPIP2 immediately prior to the start of the roadshow. In an effort to improve the quality and completeness of listing applications, the Consultation Paper includes proposals to require the draft prospectus accompanying the Form A1 Submission to be published on the website of the HKEx. The Consultation Paper is silent as to whether there is any expectation that the written comments and responses exchanged between the regulators and the listing applicant and subsequent amendments to the prospectus would also need to be published on the HKEx's website.

Limiting the number of sponsors in an IPO

There is currently no limitation on the number of sponsors a listing applicant can appoint to shepherd it through the IPO process, although at least one needs to be independent from the listing applicant. The SFC is concerned that the practice of appointing multiple sponsors has affected the standard of sponsors' work. Where an independent sponsor has been appointed in order to meet the independence requirements, the SFC is further concerned that the non-independent sponsor nonetheless leads the sponsor process, thereby undermining the purpose of the independence requirements. To address these concerns, the SFC is proposing to permit listing applicants to appoint only one sponsor that must be independent. Alternatively, the SFC may consider permitting multiple sponsors, all of which would have to be independent. If approved, this proposal could have significant implications for sponsors.

Completing all reasonable due diligence before the Form A1 Submission

Under the current Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the "Listing Rules"), listing applicants are required to include an advanced proof of the prospectus in the Form A1 Submission. The HKSE expects this advanced proof to be substantially complete and compliant with the Listing Rules. In addition, at the time of issue of the prospectus, which is often many months after the Form A1 Submission, sponsors are required to make a declaration to the HKSE supported by reasonable due diligence that, among other things, the listing applicant is qualified for listing and the non-expert sections of the prospectus are truthful and complete. The SFC believes that the timing of this declaration may have unintentionally led to instances of sponsors not completing all reasonable due diligence prior to the Form A1 Submission, resulting in important issues arising after the Form A1 Submission. To address this, the Consultation Paper expresses a view that sponsors should not make the Form A1 Submission until the listing applicant is ready for listing and proposes to amend the Code of Conduct to require sponsors to complete all reasonable due diligence prior to the Form A1 Submission (other than due diligence that can only be conducted at a later date such as when there are subsequent transactions or developments involving the listing applicant). For those sponsors not already in the practice of completing all reasonable due diligence prior to the Form A1 Submission, this proposal serves to clarify the SFC's expectations and any ambiguity about the obligations of all sponsors.

Reporting any material information concerning non-compliance with applicable legal or regulatory requirements by the listing applicant

The Consultation Paper includes proposals to require sponsors to report any material information concerning non-compliance with the Listing Rules or other applicable legal or regulatory requirements by the listing applicant to the HKSE as soon as sponsors become aware of such information. Currently, when sponsors become aware of any instances of non-compliance they are only obligated to encourage the listing applicant to report the matter to the HKSE. The obligation of sponsors to inform the regulators only arises when the regulators request information from sponsors.3 In addition, where sponsors cease to act for a listing applicant, sponsors will be required to inform the HKSE of the reasons for ceasing to act. This proposal is intended to avoid instances of non-compliance by listing applicants going unchecked.

Demonstrating reasonable reliance on the expert sections of the prospectus

Unlike the declaration that sponsors are required to make on the non-expert sections of the prospectus, sponsors are not required to give a confirmation to the HKSE that the information in the expert sections (e.g., the accountants' report and the property valuer report) are truthful and complete. Rather, the Listing Rules require sponsors to diligence the qualifications and experience of the experts, the assumptions made by the experts, and the accuracy of factual information relied on by the experts. Given the significant importance of expert sections, the SFC's proposals intend to heighten the standard by which sponsors should vet expert sections of the prospectus. Drawing from standards found in defenses afforded to underwriters in Australia and the United States, the proposals would require sponsors to be able to demonstrate that they reasonably relied on the expert sections of the prospectus. For instance, the SFC notes that sponsors cannot blindly rely on expert sections and that, when facts emerge that call into question the reliability of expert sections, further investigation is warranted.

Other proposals

The Consultation Paper also includes a number of clarifications of existing sponsor requirements, standards and obligations, such as:

  • independent due diligence – among other independent due diligence steps, sponsors are expected to obtain and review underlying records of the listing applicant, such as tax certificates, bank statements and contracts, conduct site visits, interview major stakeholders and obtain information outside the listing applicant, such as searching public filings and databases, obtaining third-party confirmations and hiring external agents to assist in due diligence;
  • interview practices – the sponsor is expected to identify and interview major business stakeholders, such as customers, suppliers, creditors and bankers, with minimal involvement from the listing applicant;
  • over-delegation of due diligence – sponsors cannot delegate their due diligence responsibilities to third parties and remain responsible for the overall due diligence exercise (i.e., due diligence work undertaken by third parties, such as lawyers or consultants, is not itself sufficient evidence that sponsors conducted reasonable due diligence);
  • record keeping – sponsors are expected to maintain records of their due diligence work, including a due diligence plan, a record of significant issues, the bases for opinions and conclusions, and the involvement of management in the process, and sponsors are expected to retain a complete set of such records in Hong Kong for at least seven years after completion of the transaction; and
  • disclosure of all material issues with Form A1 Submission – the sponsor should ensure that the Form A1 Submission discloses all material issues known to it which, in its reasonable opinion, are necessary for the consideration of whether the applicant is suitable for listing and whether the listing is contrary to the interests of public investors or the public generally.

Footnotes

1. The SFC is accepting comments to questions posed in the Consultation Paper through July 6, 2012.

2. The Web Proof Information Pack, commonly referred to as the "WPIP", is an abbreviated version of the prospectus which omits any disclosure relating to the offering to avoid any implication that it is a prospectus. The WPIP is published on the website of the HKEx prior to the commencement of the roadshow for the purpose of ensuring the equal dissemination of information to potential investors that are unable to attend or view the roadshow. The Consultation Paper seems to suggest that, like the WPIP, the published version of the prospectus accompanying the Form A1 Submission would similarly exclude information relating to the offering.

3 It is important to note, however, that the Listing Rules require sponsors who become aware of information that casts doubt on the truth, accuracy or completeness of information previously provided to the HKSE by a listing applicant to inform the HKSE of such information, which could include legal and regulatory non-compliance issues.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions