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Hong Kong – New Guidance Letters.

13 May 2012

 

Business Models with Significant Forfeited Income from Prepayments 

 

In January 2012, the Exchange published a Guidance Letter (GL26-12) providing guidance on its review of business models that rely significantly on forfeited income from prepaid services and products (e.g., beauty and slimming salons). 
 
Guidance
 
1. Forfeited income may be regarded as revenue generated in the usual and ordinary course of business for the purpose of Listing Rule 8.05 if it is an industry norm to include it. 
2. A heightened standard of review will be adopted if (a) the applicant has a short history of operating; (b) reliance on forfeited income is significantly above the industry norm; and/or (c) the operation is associated with a high level of complaints or legal claims. 
3. The Exchange may also consider the applicant unsuitable for listing if, after considering the totality of the facts, continued reliance on forfeited income would potentially render the business not sustainable, its business model relies on unethical selling methods, or there is concern about the applicant’s capacity to provide contracted services/products. 
 
Required disclosure in the prospectus and to the Exchange
 
The prospectus should disclose details of the prepaid packages giving rise to forfeited income and the quality and complaints handling process. 
In addition, the Exchange normally requires the following submission: 
 
a. an analysis on the outlook for revenue and profit if forfeited income and related expenses were deducted from the track record period profits;
 
b. a comparative analysis with industry peers on certain material aspects of operation; and 
 
c. the sponsor’s confirmation that:
 
i. the applicant has adequate capacity to provide the contracted services/products; and
ii. the internal control measures are adequate.
 
For a copy of the Guidance Letter, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/gl26-12.pdf
 
Disclosure in the “Summary and Highlights” Section 
 
In January 2012, as part of the Exchange’s initiative to simplify prospectuses, the Exchange published a guidance letter on disclosure in the “Summary and Highlights” section in prospectuses. 
 
The letter aims to ensure that the “Summary and Highlights” section: 
 
• is comprehensible and readable, 
• is concise, easy to read and in plain language, and 
• enables investors to decide whether they might be interested in the offer, and therefore wish to read the rest of the listing document. 
 
Attachment 1 of the letter provides guidance on how to draft the “Summary and Highlights” section in a way that is concise, easy to read, and in plain language, and on what information the Exchange would typically expect to see included in the section and what should be omitted. 
 
Please note that the Exchange is of the view that it will not generally be appropriate for the “Summary and Highlights” section to include paragraphs that have been copied and pasted from elsewhere in the listing document. 
 
For a copy of the Guidance Letter, please follow the link:
 
Disclosures for Applicants Engaged in the Restaurant business
 
In January 2012, the Exchange set out in a Guidance Letter a list of issues which should be discussed and disclosed in detail in prospectuses (to the extent that they are material) for applicants engaged in the restaurant business. The issues range from raw materials suppliers/prices, same store sales and table turnover rate, to cash management, expansion, pricing policy and food safety.
 
For a copy of the Guidance Letter, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/gl28-12.pdf
 
Interim guidance on Pre-IPO Investments 
 
The Interim Guidance on Pre-IPO Investments given by the Listing Committee on October 13, 2010, is now reproduced in a Guidance Letter format. 
 
Generally, the Exchange will require, except in very exceptional circumstances, that pre-IPO investments must be completed either (a) at least 28 clear days before the date of the first submission of the first listing application form or (b) 180 clear days before the first day of trading of the applicant’s securities. Pre-IPO investments 
are considered completed when the funds are irrevocably settled and received by the applicant. For clarity, clear days exclude the day of the pre-IPO investment completion, the day of the submission of the listing application form and the first day of trading of securities. 
 
The Listing Committee recognizes that there may be circumstances where pre-IPO investments on terms more favorable than those offered to investors at the IPO may be justifiable, e.g., where the applicant is in severe financial distress. Each case will need to be considered based on its own facts and circumstances. 
 
For a copy of the Guidance Letter, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/gl29-12.pdf
 
Disclosure of Intellectual Property Rights in Prospectuses
 
In February 2012, the Exchange published a Guidance Letter to encourage issuers to discuss material intellectual property rights and focus on making more meaningful disclosure on such rights to the investors, hence reducing the practice of disclosing intellectual property rights in tabular form in prospectuses. 
 
This would involve more consideration and judgment as to what IP rights are considered material by the issuers, especially when there are numerous IP rights involved. 
 
Applicants should consider the following factors in deciding what IP rights are material in the context of disclosure:
 
i. Materiality should be analyzed from the perspective of investors—what would be relevant to their decision on whether to invest. 
ii. Materiality should be judged in the context of the issuer’s business, profitability and prospects as a whole. 
iii. Materiality should also be judged in the context of the extent to which the issuer’s business activities and operations, financial position and prospects are dependent on the IP rights. 
 
A material IP right is one the absence or defect of which, from a reasonable investor’s perspective, would materially impact the business, profitability or prospects of the issuer and its subsidiaries, taken as a whole. 
 
For a copy of the Guidance Letter, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/gl30-12.pdf
 
Typhoon and Rainstorm Warning Arrangements
 
In March 2012, the Exchange published arrangements in relation to dealings with the Exchange in the event that a typhoon signal no. 8 or above is hoisted and/or black rainstorm warning is issued on the day of the:
 
a. issue of an authorization letter for the registration of a prospectus;
b. opening or closing of application lists of the public offer;
c. pre-vetting of an announcement regarding final offer price, indication of the levels of interest in the placing, the basis of allocation and the results of applications of the public offer shares;
d. issue of a listing approval letter; ore. commencement of dealings in shares.
 
For a copy of the Guidance Letter, please follow the link: http://www.hkex.com.hk/eng/rulesreg/listrules/listguid/Documents/gl31-12.pdf
 
Acquisitions during or after TRP 
 
In March 2012, the Exchange clarified the acquisitions of subsidiaries/businesses during or after the Track Record Period (“TRP”). As explained below, the Guidance Letter largely reflects existing practice:
 
1. Definition of TRP
 
TRP means the applicable three-year track record, including any stub period. Hence, any acquisition during the stub period is an acquisition during TRP.
 
2. Size test threshold
 
For acquisitions during TRP, the size test threshold is 25%. Waivers are only granted in exceptional cases. For an example, please refer to Listing Decision LD85-1where a waiver was granted to a secondary listing applicant subject to alternative disclosure requirements. 
 
For acquisitions after TRP, there is no materiality threshold, but waiver applications can be made on the basis of immateriality, practical difficulty and/or alternative disclosure arrangements. Please refer to Listing Decision LD78-1
 
3. Includes acquisition of minority interest
 

An acquisition includes an acquisition of any percentage of equity interest (e.g., acquisition of only a minority stake), but not an acquisition of assets.
 
4. How to calculate size test
 
For acquisitions during TRP, the numerator should be the financial results of the acquired business/subsidiary in the last financial year of the TRP, and the numerator should be the financial results of the IPO applicant in the same year. This is so even if the acquisition happened in the first two years of TRP.
 
5. “Agreed to be acquired or proposed to be acquired” 
 
This means the signing of a legally binding agreement, or the intention to make such an acquisition. 
 
6. Disclosure of financial information
 
For acquisitions during TRP, the financial information to be disclosed in respect of the acquired business/subsidiary should include full financial statements from commencement of the TRP to acquisition date. 
 
For acquisitions after TRP, the financial information to be disclosed in respect of the acquired business/subsidiary should include at least the balance sheet and income statement.
 
For a copy of the Guidance Letter, please follow the link: 
 

 

For further information, please contact:

 
Venantius Tan, Partner, Morrison & Foerster
vtan@mofo.com
 
John Moore, Partner, Morrison & Foerster
johnmoore@mofo.com

 

Morrison & Foerster Capital Markets Practice Profile in Hong Kong

 

 

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