Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – SFC Looks To Enhance The Regulation Of Sponsors.

21 May, 2012

 

Potential Civil and Criminal Penalties under Consideration
 
Against a background where Hong Kong has been the world’s leading IPO center for the third year in a row, the Hong Kong Securities and Futures Commission (SFC) has published its much-anticipated consultation paper on the regulation of sponsors. In an effort to improve the quality of listings in Hong Kong, the SFC’s proposals concern the conduct of sponsors in meeting their responsibilities in connection with new listings and aim to provide a regulatory basis for defining 
the expected quality of sponsor work. 
 
One of the key proposals in the consultation paper, prospectus liability of sponsors, was first discussed in an SFC consultation in 2005 but subsequently it was considered premature to proceed at that time as the new non-statutory 
sponsor regime had yet to be fully implemented.1 
In recent years, the SFC has noted in a number of cases that sponsors failed to address issues that were fundamental to the listing applications. This culminated in a HK$42 million fine and the revocation of the sponsor license for Mega Capital in April 2012. For a summary of the case and other key SFC enforcement actions to date, please click here.
 
The first part of the consultation paper relates to the SFC’s licensing regime for sponsors, with the SFC proposing to consolidate all key sponsor obligations in a new paragraph 17 in the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct). The second part of the consultation paper relates to the legal liability of sponsors under the Companies Ordinance. 
 
We set out a summary of the key proposals in the consultation paper below.
 
Prospectus liability2
 
To clarify3 that a sponsor will have civil and criminal liability for untrue statements (including any material omissions) in a prospectus under Sections 40 and 40A of the Companies Ordinance.

 

Multiple sponsors4
 
To provide greater assurance to the market as to the quality of the listing documents, each listing transaction is restricted to either (i) a sole independent sponsor only; or (ii) a limited number of sponsors, each of whom should be independent of the listing applicant.  
 
Principals5
 
To increase the number of individuals who may qualify as Principals through (i) expanding the eligibility criteria by recognizing relevant experience acquired overseas in comparable jurisdictions, (ii) greater emphasis on experience in 
the area of due diligence, either in Hong Kong or elsewhere, and/or (iii) new examinations for Principals. 
 
Publication of first draft prospectus online at A1 stage
 
To encourage the submission of quality listing documents and to enhance the efficiency of the application process, the first draft of the listing document submitted with a listing application is to be made available on the website of the Stock Exchange of Hong Kong (Stock Exchange) when the application is made. 
 
Due diligence  
 
To require sponsors to complete all reasonable due diligence on a listing applicant before submitting a listing application, save only any matters that by their nature can only be dealt with at a later date. 
 
To codify the expectation in the Listing Rules concerning the quality of the listing application by requiring that before submitting a listing application, a sponsor should come to a reasonable opinion that the information in the listing application is substantially complete.
 
To clarify that a sponsor be able to form a reasonable opinion in relation to issues concerning eligibility criteria, internal systems and controls, and the credentials of directors prior to making a listing application. 
 
To clarify that a sponsor should provide appropriate advice and recommendations to the listing applicant on any material deficiencies identified in relation to its operations and structure, procedures and systems, or its directors and key senior 
managers, and ensure that any material deficiencies are remedied prior to the submission of a listing application. 
 
To clarify certain interview practices when interviewing major business stakeholders (e.g., customers, suppliers, creditors and bankers) in order to ensure the interview results are accurate, complete and reliable. 
 
Reliance on experts
 
Sponsor should be able to show it is reasonable for it to rely on 
the expert sections of the listing document at the time of issue.6
 
Reliance on non-expert third parties to conduct due diligence
 
To clarify a sponsor’s obligations when working with third parties, including professionals such as legal counsel, and make clear that a sponsor cannot delegate its regulatory obligation to conduct due diligence.
 
Information to regulators
 
To enhance disclosure to the regulators by the sponsors, including disclosing to the Stock Exchange in a timely manner any material information relating to the applicant or the application concerning non-compliance with the Listing Rules or 
other legal or regulatory requirements, and notifying the regulators of the reasons for ceasing to act.  
 
Records
 
To document certain prescribed matters in respect of each listing transaction, such as due diligence procedures, bases for the opinions, assurances and conclusions, involvement and supervision of sponsor’s management. 
 
To maintain a complete set of sponsor’s records for at least seven years in Hong Kong
 
Resources, systems and procedures
 
To ensure sufficient resources are allocated to each listing transaction, with clear and effective reporting lines and channels. 
 
Sponsor’s management to review standard and extent of due diligence work, and to be closely involved in resolving suspicious circumstances, difficult or sensitive issues, conflicting informationand material non-compliance.
 
The consultation period ends on July 6, 2012, and interested parties are encouraged to submit their comments in writing to the SFC. The SFC has stated that there is no definite timetable in place for implementing the proposed regulatory changes should they be adopted.  In addition, any revisions to the prospectus liability provisions of the Companies Ordinance would be subject to further consultation with the Hong Kong government and would need to go through the normal legislative process, and accordingly would be on a slower timetable than potential revisions to the Code of Conduct and the Listing Rules.
 
For a copy of the consultation paper, please click here
For a copy of our Sponsors’ Milestones guide, please click here
 
 
For further information, please contact:
 

 

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

 

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