The Hong Kong Securities and Futures Commission has proposed the
enhanced regulation of initial public offerings under a regime containing both
civil and criminal penalties. For clarity and to
enhance efficiency, the SFC proposes to consolidate all key obligations for
sponsors of IPOs into a centralized code. The new code would clarify the
liabilities of sponsors, both civil and criminal, for untrue statements,
including material omissions, in a prospectus. Under the reform, all key
sponsor obligations would reside in the Code of Conduct for Persons Licensed by
or Registered with the SFC.
According to SF Chairman
Eddy Fong, a major objective of the new regulatory regime is to ensure that sponsors
maintain a high standard of due diligence in their work. A sponsor must
exercise careful judgment about the nature and extent of due diligence and the
manner in which it should be performed, emphasized Chairman Fong, and should
not place uncritical reliance on other experts’ reports, including accountants
reports, contained in the IPO prospectus.
Sponsors play a
lead role in coordinating an IPO, noted SFC CEO Ashley Alder, since they advise
and guide directors and are centrally involved in ensuring that prospectuses
contain reliable and relevant information for investors. Mr. Alder said that
the proposals encourage best practices across all sponsor firms whom investors
rely on as key gatekeepers of market quality.
Regarding due diligence, the proposed
regulations require sponsors to gain a thorough understanding of a company and
adopt an open and questioning approach and not accept statements at face value.
Moreover, a sponsor should collaborate and discuss with auditors, lawyers,
directors and other experts to assess all information available to it about the
company.
When submitting a listing application under the new regime, a
sponsor should have already completed the vast majority of due diligence and
resolved key issues concerning the operation, governance and structure of the
company, as well as issues affecting the suitability for listing. Further, the first draft of the
prospectus must be published on the website of Hong Kong Exchanges and Clearing
Ltd.
A sponsor
should also be reasonably satisfied through due diligence on the company that
information in the prospectus is accurate and complete; and be able to
demonstrate that it is reasonable to rely on accountants, valuers and other
experts’ reports in the prospectus. While proper due diligence does not
envision repeating the work done by experts, noted the Commission, it does
involve testing the information provided in the reports to ensure that the
totality of disclosure in the prospectus is credible and coherent. Sponsors
must also be closely involved in the preparation of the MD&A section of a
prospectus to ensure that sufficient qualitative information explaining the
company’s track record is communicated clearly to potential investors.
A sponsor’s
management should ensure that sufficient resources are allocated to an IPO and
oversee the progress and the standard of due diligence, as well helping resolve
difficult issues. The regulations
would restrict the number of independent sponsors for each listing to one only
or a limited number.
The role of sponsors is unique, said
the Commission. While other experts and advisers are subject to a range of
legal, regulatory and professional obligations, only sponsors have a function
that begins and ends with the IPO itself and in that capacity are specifically
licensed by the SFC.
Among other things they perform a lead
role in co-ordinating all of those involved in the IPO process, they advise and
guide directors throughout and they are centrally involved in the conduct of
intensive due diligence on the company designed to ensure that the listing
document contains sufficient information to ensure that investors are in a
position to form a valid and justifiable opinion on its business and prospects.
Further, investors rely on sponsors to act as key gatekeepers of market quality,
emphasized the Commission, 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.
The Commission proposes that a sponsor should not submit a listing
application unless it is satisfied that the applicant is ready to be listed, in
that any material deficiencies as to its operations structure, and systems and
its directors and key senior managers have been remedied and it meets the
listing qualifications. Similarly, a sponsor should not submit a listing
application unless it is satisfied that the draft listing document submitted
with the application is substantially complete and all material information is
disclosed in this draft or otherwise brought to the attention of regulators.
According to
the SFC, the appointment of multiple sponsors can
lead to fragmentation of work, gaps and overlaps. Moreover, there is no benefit
for investors in having more than one sponsor. Thus, the Commission proposes
that either a sole independent sponsor should be appointed for each listing
transaction, or, alternatively, there should be a limit on the number of
sponsors that can be appointed for each listing transaction, each of whom should
be independent of the listing applicant.