Securities & Futures Commission of Hong Kong

Due Diligence on Eligible GEM Transfer Applications

This FAQ is issued in conjunction with amendments to the Main Board and GEM Listing Rules published by The Stock Exchange of Hong Kong Limited on 15 December 2017. This FAQ aims to provide guidance on the application of paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC as regards transfer applications made during the three-year transitional period from 15 February 2018 by an Eligible Issuer[1] which did not change its principal activities and controlling shareholders since listing on GEM.

[1] All issuers listed on GEM and all GEM applicants who have submitted a valid listing application on GEM (and subsequently listed on GEM) on or prior to 16 June 2017

Q1:
On 15 December 2017, HKEX published the Consultation Conclusions on the Review of the Growth Enterprise Market (GEM) and Changes to the GEM and Main Board Listing Rules (GEM Consultation Conclusions). The amendments to the Listing Rules provide, among other things, for transitional arrangements[1] in respect of GEM transfer applications that are submitted during a period of three years from 15 February 2018 by Eligible Issuers[2]. Where an Eligible Issuer that did not change its principal businesses and controlling shareholders since listing on GEM submits a transfer application (Eligible GEM Transfer Application[3]), the Eligible Issuer will only need to:
  1. prepare an announcement regarding its Eligible GEM Transfer Application  (GEM Transfer Announcement) that provides investors with a concise update of the Eligible Issuer’s affairs during the most recent full financial year and up to the date of the GEM Transfer Announcement (Relevant Period); and
  2. appoint a sponsor to conduct due diligence in respect of the Eligible Issuer’s activities during the Relevant Period to ensure that the information in the GEM Transfer Announcement is accurate, complete and not misleading.

How do the provisions of paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) apply to the sponsor in connection with the Eligible GEM Transfer Application?

[1] See Chapter 4 of the GEM Consultation Conclusions
[2] All issuers listed on GEM and all GEM applicants who have submitted a valid listing application for listing on GEM (and successfully listed on GEM subsequently with only one refreshed application permitted) on or prior to 16 June 2017
[3] See paragraphs 144(b) and 147 of the GEM Consultation Conclusions

 

 

A:

The sponsor is expected to conduct due diligence in accordance with the standards set out in paragraph 17 of the Code of Conduct. This includes due diligence to ensure that the Eligible Issuer complies with all applicable listing qualifications for listing on the Main Board.  As the Eligible Issuer is not required to publish a listing document in connection with the Eligible GEM Transfer Application and no public offer is involved, the provisions of paragraph 17 referring to the preparation of a listing document, application proof, the contents of a listing document, expert reports, and a public offer will not apply.

Set out below is a summary of the provisions of paragraph 17 that apply to an Eligible GEM Transfer Application followed by a summary of those provisions that do not apply: 

  1. Provisions relating to the following matters will continue to apply:
    1. understanding and advising a listing applicant (paragraph 17.3)
    2. work required before submitting a listing application (paragraph 17.4 (a), (c) and (d))
    3. principles of reasonable judgement, professional scepticism, appropriate verification (paragraph 17.6 (a) – (c))
    4. independent due diligence steps, interview practices and seeking assistance from third parties where necessary as part of its due diligence (paragraph 17.6 (e) – (g))
    5. management discussion and analysis of financial information and condition (paragraph 17.8)
    6. communications with the regulators (paragraph 17.9)
    7. proper records (paragraph 17.10)
    8. resources, systems and controls (paragraph 17.11)
    9. annual assessment of systems and controls (paragraph 17.12)


    Explanatory notes to paragraphs 17.4 and 17.6:

      1. The sponsor is expected to be closely involved in the preparation of the GEM Transfer Announcement that provides investors with a concise update of the Eligible Issuer’s affairs during the Relevant Period. In this regard, the sponsor is required to perform due diligence on the Eligible Issuer’s activities (including events, transactions, undertakings, appointments, etc.) during the Relevant Period.

      2. As each Eligible Issuer is different, specific due diligence steps necessary for the purposes of an Eligible GEM Transfer Application depend on the particular facts and circumstances. In general, a sponsor is not expected to go beyond the Relevant Period when conducting due diligence under paragraphs 17.4 and 17.6 of the Code of Conduct. In relation to an Eligible Issuer’s activities in prior periods, a sponsor can reasonably rely on the historical disclosures made by the Eligible Issuer in its announcements and corporate communication materials up to and immediately before the most recent full financial year (“historical disclosures”). For example,
        • interviews are conducted with major stakeholders (such as customers, suppliers, creditors and bankers) with whom the Eligible Issuer has undertaken activities and/or transactions during the Relevant Period;
        • background checks are required on directors appointed during the Relevant Period (but not all directors); and
        • where an Eligible Issuer is a property developer or property investment company, it would not normally be necessary to verify titles on properties acquired before the Relevant Period.
      3. Notwithstanding (ii), a sponsor should exercise independent judgement and professional skepticism in the course of the due diligence process. If a sponsor becomes aware of any matters which would cast doubt on the accuracy of any historical disclosures, it must perform such further steps as are necessary to satisfy itself that the concerns are resolved; these may involve investigation of matters that took place prior to the Relevant Period.

  2. Provisions relating to the following matters will not apply:
    1. preparation and contents of an application proof (paragraph 17.4 (b))
    2. preparation and contents of a listing document (paragraph 17.5 and 17.6 (d))
    3. due diligence on expert reports (paragraph 17.7)
    4. overall management of a public offer (paragraph 17.13)
    5. information provided to analysts in new listings (paragraph 17.14)

If the sponsor or the Eligible Issuer is in doubt about the requirements in respect of the Eligible GEM Transfer Application, it should consult the Stock Exchange or the SFC in advance.

Eligible Issuers are reminded to appoint sponsors at least two months before the submission of their Eligible GEM Transfer Applications.

 

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