Update on Dual Filing

17 Jun 2008

The SFC issues the following update on the operation of the Dual Filing arrangements under the Securities and Futures Ordinance.

Cases handled

In the 12 months from April 2007 to March 2008, the SFC received, via the Stock Exchange, 134 listing applications. Of the 134 listing applications, we raised comments on 93 cases. In the 12 months from April 2006 to March 2007, we commented on 58 cases out of the 95 cases received.

In the three months from January to March 2008, the SFC received, via the Stock Exchange, 46 listing applications. This compares to 30 listing applications in the three months from October to December 2007 (Note 1). Of the 46 applications, we commented on 36 cases. Our average response time was seven working days. In the previous quarter, we commented on 17 cases out of the 30 cases received.

Understanding the business model

The listing applicant’s historical performance normally has a direct relationship with its business model. The SFC noted common deficiencies by many listing applicants in explaining their impressive historical performance during the track record period, in particular where the listing applicants do not directly sell to the end customers.

In one case reviewed, the listing applicant sells its products to a network of distributors which then resell the products to retail outlets for sales to the final customers. The listing applicant achieved growth in sales that significantly exceeded the industry average. However, the initial draft prospectus failed to provide clear information about its distribution network, such as where the listing applicant’s products attracted high demand or whether the growth in sales was supported by actual sales to retail customers. It was only upon the SFC’s repeated requests that the listing applicant provided more information about the sales and inventory level of its distribution network.

In a similar case, the listing applicant sells its products to a large number of franchisees. It was only revealed after the SFC’s enquiries that the listing applicant imposes minimum purchase requirements on each franchisee. A substantial proportion of the listing applicant’s revenue during the track record period came from the initial minimum purchases made by new franchisees upon their joining the network. Against the substantial growth in overall sales, a significant percentage of the franchisees failed to meet the prescribed minimum monthly purchases. Again, it raises the question whether the listing applicant’s sales growth is supported by real demand.

In another case reviewed, the listing applicant distributes its products through authorized licensees and retail outlets. The initial draft prospectus lacked the basic information to enable a proper understanding of the sales model, in particular when the sales were recognized and the terms of the licence agreements. These questions remain unanswered as the application was withdrawn before the listing applicant responded to the SFC’s queries.

The SFC issues this quarterly update as part of its efforts to ensure the transparency of the Dual Filing regime.


Notes :

1. Please see press release of 27 March 2008 for background statistics.

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