SFC concludes consultation on regulation of IPO sponsors
12 Dec 2012
The Securities and Futures Commission (SFC) has published today conclusions on proposals concerning initial public offering (IPO) sponsors.
Taking into account respondents' comments, the SFC has refined a number of original proposals while adopting most of the key reforms, which aim to ensure that sponsors thoroughly understand any company aspiring to access Hong Kong's public capital markets before a listing application is made. The emphasis is on early, comprehensive due diligence and a properly drafted prospectus to accompany the application.
"The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well which should in turn reduce risks for investors and all those involved in IPOs," said SFC Chief Executive Officer Mr Ashley Alder. "Although we are now experiencing lower IPO volumes these reforms will underpin market confidence during all market cycles."
Mr Alder further noted that "a high-quality application should mean that the regulatory commenting process is shorter and less intensive." The SFC and the Stock Exchange of Hong Kong Ltd (SEHK) will work on measures to streamline this process so that companies can be listed more efficiently.
The proposals are intended to enable and incentivise sponsors to take a responsible, proactive and constructive role when leading IPOs and, overall, maintain investor confidence in Hong Kong’s IPO market.
Important aspects of the reforms include:
1. Prospectus liability
The SFC recommends that:
- the law should be clarified so that sponsor firms have civil and criminal liability for defective prospectuses; and
- criminal liability should depend on whether a sponsor firm knowingly or recklessly approved a prospectus containing an untrue statement (including an omission) which was materially adverse from an investor’s perspective.
2. Publication of application proof
- The SFC will proceed with proposals to publish the advanced draft prospectus filed with a listing application on SEHK’s Web site
3. Reliance on experts and meaningful Management Discussion and Analysis (MD&A)
- Expert reports - There has been uncertainty about the extent to which sponsors can rely on expert reports such as those provided by accountants and valuers. The SFC has clarified while a sponsor is not expected to re-perform the work of an expert it should ensure that the scope of the expert’s work adequately covers the reliability of the information provided to the expert. If not, the sponsor should request that the scope be expanded, seek assistance from a qualified person to check the information or extend the scope of its own due diligence.
- Coherent and consistent disclosure - The proposals emphasise the need for sponsors to assess critically any expert report against the totality of its knowledge of the company and its industry sector to ensure that overall disclosure to the public is coherent and consistent.
- MD&A - Concerned that the important MD&A section of a prospectus often contains little meaningful information for investors, the SFC proposes that a sponsor works closely with company management to produce a relevant, adequate and comprehensible MD&A.
4. Initiatives to enhance sponsors’ role
To ensure that a sponsor's ability to carry out its "gatekeeping" role is not undermined by competitive tensions, the SFC shall require that:
- a listing applicant formally appoints a sponsor at least two months before a
- a sponsor notifies the regulators of any instances of non-compliance and explains why if and when it ceases to act for a listing applicant;
- a listing applicant commits that it and all professional advisers involved in the IPO will fully co-operate with the sponsor in discharging the latter’s duties; and
- sponsor fees must be specified in a sponsor’s terms of engagement and be based solely on a sponsor’s role.
The new requirements will apply to listing applications submitted on or after 1 October 2013. Related amendments to the SFC’s Corporate Finance Adviser Code of Conduct and Sponsor Guidelines will also become effective on the same day. Legislative amendments will follow a separate timetable. The Stock Exchange will make appropriate changes to the Listing Rules with a view to bringing the revised rules into force when the requirements become effective.
Page last updated : 12 Dec 2012