Monday, August 08, 2011

Hong Kong Securities and Futures Commission Urges More Diligence for Sponsors of Listing Applicants

The Hong Kong Securities and Futures Commission issued guidance reminding sponsors of listing applicants to exercise reasonable judgment in conducting due diligence on the applicants and ensure that all major issues are properly addressed before submitting listing applications. The SFC noted that some sponsors have failed to critically evaluate the implications of actual or potential loss of major revenue sources on the sustainability of the listing applicants’ businesses.

In two cases, the applicants’ core businesses involved apparently questionable practices that could lead to legal claims, regulatory actions and even business cessation. In two other cases, the major revenue sources of the applicants were either discontinued shortly before submission of the listing applications or subject to significant risk of being terminated imminently. The sponsors involved failed to provide an objective and balanced analysis of the issues despite the regulators’ repeated enquiries.

Loss of major revenue sources can be detrimental to the business of a listing applicant, said the SFC, and thus in assessing whether an applicant will continue to have sufficient operations after listing, the sponsor should conduct a balanced and objective assessment of the pertinent factors, such as the applicant’s fundamentals, the relative bargaining powers of the applicant and its business partners and the industry environment.

The Commission also observed various disclosure deficiencies regarding significant changes in the applicants’ cost structures, which were rectified only after regulators raised questions. This called into question whether the sponsors had carefully reviewed the adequacy of disclosure of the draft listing documents before submitting the listing applications.

Sponsors are expected to critically assess issues fundamental to listing applications and the associated risks instead of simply relying on management representations, emphasized Alexa Lam, the SFC’s Acting Chief Executive Officer. Listing documents should provide sufficient information to enable investors to make an informed assessment of applicants’ business, prospects and risks, said the Acting CEO, and a mere inclusion of risk warnings without the necessary analyses is far from satisfactory.

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