Jurisdiction - Hong Kong
Reports and Analysis
Hong Kong – New Guidance Letters.

16 May, 2013

Side benefits for cornerstone investors

In February 2013, the Exchange published a guidance letter to remind applicants that it does not allow any direct or indirect benefits (by side letter or otherwise) to be given to cornerstone investors to participate in the placing tranche of an IPO, other than a guaranteed allocation of shares at the IPO price.


Placings to cornerstone investors are generally permitted based on the following principles:


IPO price The transaction must be at the IPO price
Lock-up The shares subscribed must be locked 
up, generally for at least six months 
following the listing date
Independence No representation on the board of the 
listing applicant is allowed, and the 
investor must be independent of the 
listing applicant, its connected persons 
and their respective associates
Disclosure Details of the placing arrangement, 
including the identity and background 
of the investors, must be disclosed in the 
Public float The shares will form part of the public 
float under Rule 8.08 (provided the 
investor is a member of the public for 
the purpose of Rule 8.24)


The Exchange considers it misleading to the public if any investors are being considered as cornerstone investors in an IPO and yet they receive direct or indirect benefits by side letter or otherwise, other than a guaranteed allocation of the shares. Where any such benefits are given, these investors should be reclassified as pre-IPO investors and comply with the Interim Guidance on Pre-IPO Investments (Guidance Letter GL29-12). 

The Exchange is also of the view that non-disclosure of such side benefits given to cornerstone investors violates the principles under Rule 2.13 (relating to accuracy and presentation of information). 

Examples of side benefits may include: 

•     waiver of brokerage commission
•     put option to sell shares to a controlling shareholder (or 
another person) after IPO
•     sharing of underwriting commissions
•     agreement to invest IPO proceeds in funds managed by 
cornerstone investor
•     agreement to allow allocation of shares in another IPO
•     any other transaction or arrangement entered into on non-arm’s length terms in connection with the cornerstone investment.

This guidance does not prevent the making of arm’s length commercial arrangements between applicants and investors (e.g. where the investors are major customers and suppliers, or formation of joint ventures for business development with such investors), which are considered strategic dealings and/
or arrangements with strategic investors. Details of any such commercial arrangements should be fully disclosed in the prospectus. 

Please follow this link for a copy of Guidance Letter, GL51-13: 


Chapter 18 Mineral Company applicants: disclosure in 
listing documents 

In March 2013, the Exchange published a guidance letter to assist mineral companies by giving guidance for better preparation of listing documents under Chapter 18 (Chapter 18A of the GEM Rules): 

(i) Disclosure

The Exchange suggests that the following disclosures be made in the listing document:


•     overview of the Mineral or Petroleum Assets
•     salient terms of the mining and exploration licenses in tabular format
•     access to major transportation networks from the mines/oilfields
•     financial information of each major product
•     mining rights pledged to secure banking facilities (if any)
•     risks associated with capital expenditure projects
Report and 
•     data related to mining valuation
•     any differences in views between the Competent Person and the applicant on assumptions adopted
•     detailed analysis of any harmful elements identified in deposits at mines
•     scale diagrams of the location of the Mineral or Petroleum Assets
•     data related to reserves
•     net present value rates and bases
•     onsite investigation and verification work conducted, or reasons why none are needed
•     disclosure in the Risk Factors section of all material risks mentioned in the Competent Person’s Report

Project development

•     construction details by key stages
•     options available to the applicant



•     workflow diagram for the major steps/processes
•     production data in tabular format and commentary on material fluctuations
•     major accidents and relevant internal controls


Outsourcing arrangements

•     identity of the contractors and details of the agreements with contractors




•     measures to secure utility supplies
•     utility fees charged compared with market rates
•     material disruptions as a result of shortage of utilities, and the associated risks 

Sales/Product delivery

•     details of sales agreements
•     whether any product transportation shortage has occurred, and associated risks and remedies in the context of the expansion plan


Regulatory, environmental and social matters

•     summary of all outstanding approvals and the current status of the relevant applications
•     details of applicable regulations
•     environmental impact, weakness of applicant’s environmental management policies, local community concerns and operational and financial impact of new environmental regulations/programs, and the associated risks


Financial information

•     analysis on changes in price/fees/expenses/costs of Mineral or Petroleum Assets
•     breakdown of production costs and total cash operating costs
•     amounts of exploration expenses
•     major assumptions adopted for the forecast operating costs


(ii) Drafting

The Exchange requires applicants to:

•     Avoid using the word “mine” to describe projects at an 
early stage of development or exploration work, and giving 
unrealistic indications of accuracy where estimates are 
•     explain qualitative descriptions; and 
•     ensure the consistency of terminology.

Please follow this link for a copy of the Guidance Letter, GL52-2013:




For further information, please contact:


John Moore, Partner, Morrison Foerster

Stephen Birkett, Morrison Foerster

[email protected]


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