Hong Kong: A Materially Different View On Pre-deal Research Reports In Hong Kong IPOs

As financial markets globalize, particular markets have increasing opportunities to shape themselves by adopting processes, concepts and regulatory frameworks borrowed from other markets.  Given their highly-developed nature, United States capital markets feature many aspects that have been mimicked widely in developing markets and economies.  However, in most cases developing markets usually strive to preserve particular facets of their past, for conceptual or, just as often, purely historical reasons, rather than adopting things wholesale from other parts of the world.

Hong Kong provides an excellent example of this evolutionary clash between developing global best practices and historical legacy.  In the Hong Kong initial public offering market, certain aspects – such as standards of prospectus disclosure – have quite clearly been shaped, for more than a decade, by global thinking led, in many respects, by the standards prevailing in the US.  On the other hand, other key characteristics of Hong Kong IPOs (for example, the continuing emphasis on the public offer process, the "retail" portion of HK IPOs) can very easily be linked to Hong Kong's past and the British colonial experience.  One facet of the IPO process which has been considered recently in quite a bit of detail by Hong Kong regulators and market professionals is the use of pre-deal research reports, produced by research analysts at financial institutions participating in the underwriting syndicate for an IPO, in conjunction with the marketing process for the IPO.  Arguably, and somewhat unfortunately, the latest evolutionary step in this area may reflect the worst of both worlds.

In the United States, research reports written by analysts affiliated with an underwriter of a particular IPO are generally prohibited from being used in connection with the marketing of that IPO, out of concern that the report could be deemed by a court or regulator an offer to sell securities, potentially running afoul of federal securities laws or regulations relating to timing issues, antifraud standards or other technical aspects of the regulatory regime.  This prohibition is by no means a global standard, and research reports are quite often used in conjunction with IPOs in many non-US markets, including Hong Kong (relevant standards in Hong Kong require such reports to be somewhat more balanced and comprehensive than in a non-IPO context, without recommendations or pricing targets regarding the shares, or even any references to a prospective offering, but including such things as significant risk factors; still, the purpose of publishing such reports shortly before an IPO is easy to glean).

The Securities and Futures Commission of Hong Kong, the principal securities regulator, showed a strong interest in the issue of use of research reports in Hong Kong IPOs in releasing a Consultation Paper on the Regulatory Framework for Pre-deal Research in September 2010 and, following significant input from financial institutions and other market participants, promulgating Consultation Conclusions on the Regulatory Framework for Pre-deal Research in June 2011.  In connection with a substantial overhaul of the Code of Conduct for Persons Licensed by or Registered with the SFC, effective as of October 2013, a group of industry participants created the Hong Kong Sponsor Due Diligence Guidelines in September 2013, which embody in Chapter 30 the Consultation Conclusions and a wide variety of model documents for use in connection with research reports in HK IPOs.

The Consultation Conclusions set forth a core standard which is spelled out in the very first paragraph of Chapter 30 of the Guidelines and restated, in similar language and varying contexts, repeatedly throughout the Chapter:

"A sponsor should take reasonable steps to ensure that all material information ... concerning a listing applicant or listing application disclosed or provided to analysts is contained in the relevant listing document." 1

This is neither a mistaken concept nor an unreasonable one.  The problem, rather, is that it is unnecessary – there can be no material information given to analysts that is not in the prospectus because, under relevant disclosure standards, there can be no material information that is not in the prospectus.  The requirements regarding inclusion of material information in a Hong Kong IPO prospectus (as well as those governing use of such a document as an international offering memorandum) are quite clear.2  There is no need to prohibit giving material information to analysts if that information is not in the prospectus, because regardless of whether the analyst gets it, it needs to be in the prospectus.

Given the substantial amount of effort the SFC clearly put into the Consultation Paper and the Consultation Conclusions, it seems reasonable to assume that the core concept regarding provision of material information to research analysts is not to be read as simply redundant or even nonsensical.  Rather, it seems likely that the concept of "materiality" was not intended to be read too narrowly, and that the quality of the information not to be given to analysts if it is not intended to be in the prospectus actually falls somewhere between "material" and "substantive". 3 Obviously, there is a great deal of substantive information about issuers and their businesses that is not typically included in IPO prospectuses.  With this more generous reading of "materiality", the SFC's position appears more aptly tailored to address its publicly-expressed concerns about fairness of disclosure and equal access to information.

Even if more sensible, there are at least three concerns about using a more expansive reading of "materiality" in this context, one conceptual, and two practical.  First, there is no principled basis for denying analysts factual information which, by definition, is not material.  Simply put, if it isn't material, it should not matter (from a legal disclosure obligation standpoint) who has the information, and who doesn't.  Second, if all substantive information given to analysts is also included in the prospectus, research reports will almost certainly devolve to executive summaries of the prospectuses, lacking much in the way of substance not included in the latter documents.  Financial institutions may see some benefits to this, as investors may prefer to have access to a streamlined document instead of only a bulky prospectus, but this cuts significantly into the overall value of research reports, which leads directly to the final point.  If analysts are denied substantive (but not material) information about issuers, they will be unlikely to be able to compile certain of the factual data necessary to support their creative ideas; in other words, they will be prevented, in the IPO context, from doing the very type of analysis that allows them to differentiate themselves from their peers and, more importantly, provide real value to their clients.4

It is difficult or impossible to determine exactly where issuers and underwriters are drawing the line between information that is "material" and that which is not in deciding what may be provided to research analysts before a Hong Kong IPO, in part because there may not be complete consistency from transaction to transaction and in part because what is given to analysts and what ends up in research reports may be different things.  Anecdotally, it appears that those parties who review drafts of pre-deal research (such as legal professionals) have seen (and provided) comments along the lines of "This information is not in the prospectus – please delete from the research report" with far greater frequency than before the Consultation Conclusions were promulgated.  It is therefore possible that, in many cases, analysts receive information needed to support their views, but are prevented from including that information in their reports (or else do so against the advice of professional parties).  Nevertheless, while some limited availability to analysts of non-material information not included in prospectuses may lessen the extent of the problem, it does not eliminate it: it is still the case that research analysts are often being prevented from seeking information they should be entitled to, and/or from using that information in their writings to voice their opinions.

If the effect of the Consultation Conclusions and the Guidelines is to devalue the research reports produced in connection with HK IPOs, then what are the available alternatives?  Here are four possibilities:

  • Restore the status quo ante.  Revert to the prior regime, where analysts were permitted to seek information relatively freely from issuers, on the theory that all such information not included in the prospectus was by definition not material, since all material information was required to be so included.  While this may have a certain conceptual propriety, given the regulators' apparent general distaste for the provision of information to analysts where such information is not in an IPO prospectus, it seems the least likely option to be accepted by the SFC.
  • Focus on the provision of information, not prospectus disclosure.  Require issuers to keep records of all written information provided to research analysts, and to ensure that copies of that information are also given to representatives of the parties involved in preparing the prospectus.  This will ensure that the working group parties consider such information and take a view on its materiality and the need to disclose it in the prospectus, just as is the case with all other information provided by the issuer to the working group in the due diligence process.  In this manner, factual information included in a research report but not the prospectus may be presumed to have been found not to be material, though it will of course be subject to the same standards of liability for material omissions from the prospectus as is the case with any other factual information.  This option is somewhat similar to a reversion to the prior regime, but inserts an additional level of control (tracking disclosure to analysts) to provide certainty that information provided to research analysts is also subject to business and legal due diligence in the context of prospectus preparation.
  • Make all pre-deal research publicly available in Hong Kong.  Concerns about policing the research analysts and the information provided to them would be reduced, if not eliminated, if their work product was made available to all prospective investors, not just a select few, perhaps in the same variety of ways (hard copy distribution, availability on various websites, etc.) as prospectuses are made available.  If this option were chosen, financial institutions would have to decide on their own whether to continue producing IPO research in Hong Kong, evaluating the commercial benefit of preparing reports for public consumption, as opposed to just for their clients.
  • Ban pre-deal research in Hong Kong.  This option would appear somewhat revolutionary to Hong Kong financial institutions and market professionals (and may be objectionable to those believing that even the new style of stripped-down IPO research is favored by customers) though, as noted above, it is unlikely to faze US-trained personnel, as it would bring HK in line with US practices, while at the same time mooting the need to expend resources to ensure that the production of pre-IPO research reports meets with SFC standards and the Guidelines, even as those efforts leave such reports with reduced value.  However, just as restoring the status quo is perhaps unlikely to satisfy the SFC, prohibiting pre-deal research in Hong Kong would probably not appeal, at least at present, to underwriters and institutional investors in HK IPOs.

While it is not at all certain that the SFC will choose to pursue any of these alternatives (or any other), or that financial institutions or other market professionals are widely dissatisfied with the current research report regime, it seems that something should be done to modify the present situation.  Both the role of research reports in connection with securities offerings, and the broader core concepts of transparency and fairness in disclosure, are too important to be left subject to a regulatory mechanism which is, on its face, flawed.

1 Section 1.1, Standards, of Chapter 30 of the Guidelines.  This concept is also noted elsewhere in the Chapter in the negative: "To avoid the risk of liability, the directors and senior management of the Company must ensure that no material information about the Company or its securities is provided to any investment research analyst, unless the information is reasonably expected to be included in the prospectus or is publicly available."  Addendum 2 to Chapter 30.

2  See, for example, the statement included in the prospectus for every HK offering of equity securities pursuant to Appendix 1-A, Section 2 of the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited:"The directors, having made all reasonable enquiries, confirm that to the best of their knowledge and belief the information contained in this document is accurate and complete in all material respects and not misleading or deceptive ... [emphasis added]." See also Rule 10b-5 under the US Securities Exchange Act of 1934, which makes it unlawful for any person, in connection with an offering of securities, "[t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading ... [emphasis added]."

3  Regarding the meaning of material in this context, the Consultation Conclusions say: "In judging whether any information ... is material, consideration has to be given as to whether, if included in a prospectus, it is likely to significantly influence a reasonable person's opinion of the listing applicant and its financial condition and profitability."  Paragraph 40 of the Consultation Conclusions. Compare this to the traditional definition of materiality under US law, where information is material if there is:"a substantial likelihood that the disclosure of the omitted fact would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available." 

4 It should be noted that, in addition to certain types of financial analysis that may be done in reliance on financial information in prospectuses, there is one other area typically addressed in research reports, but not necessarily in prospectuses, that will still be open to research analysts.  Analysts will be able to draw comparisons between IPO issuers and other public companies in similar businesses, based on information included in the IPO prospectus and publicly available information about the comparable companies.

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.

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 Video
Up-coming Events Search
Font Size:
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
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement

    Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of www.mondaq.com

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at enquiries@mondaq.com.

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.

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