Consultation Paper on the Regulation of Sponsors

 

Background

Hong Kong was the world’s largest IPO fund raising centre for three consecutive years up to and including 2011.The market capitalization of companies from Mainland and overseas now represents approximately 75% of the total. Sponsors play a critical role in maintaining the quality and integrity of the IPO market.

The listing document is the vehicle through which public investors are first given extensive information to enable them to judge whether to apply for the company’s securities. Investors rely on sponsors to act as key gatekeepers of market quality and at the heart of this lies the expectation that sponsors have conducted sufficient due diligence to properly understand and assess a company aspiring to join the stock market.

As a result, the Securities and Futures Commission (SFC) launched a two- month (from 9 May 2012 to 6 July 2012) consultation on proposals to enhance the regulatory regime of sponsors. It believes that the proposals are important to provide a regulatory basis for defining the expected quality of sponsor work and as such are in the interests of public investors and all other stock market participants.

 

Key elements of the proposed regime include

The proposals in this consultation paper concern the conduct of sponsors in meeting their responsibilities in connection with new listings. Some proposals relate to the SFC’s licensing regime for sponsors and some concern legal liability of sponsors under the Companies Ordinance.

 

Key changes to various Standards are summarized in table below:

The proposals in this consultation paper concern the conduct of sponsors in meeting their responsibilities in connection with new listings. Some proposals relate to the SFC’s licensing regime for sponsors and some concern legal liability of sponsors under the Companies Ordinance.

Proposals relating to Code of Conduct

1.

Upon submission of a listing application

  • A sponsor should have completed the vast majority of due diligence;

  • The first draft of the prospectus should be published on the website of Hong Kong Exchanges and Clearing Ltd; and

  • A sponsor should have resolved key issues concerning the operation, governance and structure for listing.

 

2.

Due diligence – a sponsor should

  • Gain thorough knowledge and understanding of a company;

  • Adopt an open and questioning approach and should not accept statements at face value; and

  • Collaborate and discuss with auditors, lawyers, directors and other experts to assess all information available to it about the company.

 

3.

Responsibility for disclosure – a sponsor should

  • Be reasonably satisfied through due diligence on the company that information in the prospectus is true, accurate and complete;

  • Be able to demonstrate that it is reasonable for it to rely on accountants’, valuers’ and other experts’ reports in the prospectus – this does not involve repeating the work done by experts in the reports to ensure that the totality of disclosure in the prospectus is credible and coherent; and

  • Be closely involved in the preparation of the Management Discussion and Analysis section of a prospectus to ensure that sufficient qualitative information explaining the company’s track record is communicated clearly to potential investors.

 

4.

Resources and management – a sponsor’s Management should

  • Ensure sufficient resources are allocated to an IPO;

  • Oversee the progress and the standard of due diligence; and

  • Be closely involved in resolving difficult issues.

 

5.

Multiple sponsors

  • Restrict the number of independent sponsors for each listing to one only or a limited number.

 

Proposal concerning legal liability of sponsors

6.

Prospectus liability

  • Make clear in sections 40 and 40A of the Companies Ordinance that sponsors have civil and criminal liability for untrue statements (including material omissions) in a prospectus.

 

 

 

For detailed information of the consultation paper, please visit http://www.hkex.com.hk.

 

 

If there are any aspects which we may assist, please do not hesitate to contact our partner Mr. Roy Lo at 3583 8048 (roy.lo@shinewing.hk) or our Risk Principal Ms. Helen Lee at 3583 8519 (helen.lee@shinewing.hk).

 

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