Preparation of Listing Document

A sponsor must oversee and be closely involved in the preparation of the listing document. The sponsor must ensure that, at the time of issue of a listing document, after reasonable due diligence, it has reasonable grounds to believe and does believe that the listing document contains sufficient particulars and information to enable a reasonable person to form a valid and justifiable opinion of the shares, financial condition and profitability of the listing applicant at the time of the issue of the listing document. This requirement is substantially replicated across the Securities and Futures Commission’s (SFC’s) Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct), the Hong Kong Stock Exchange (HKEX) Listing Rules (HKEX Listing Rules) and the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). .

For more information on the due diligence exercise to be carried out by the sponsor in connection with the preparation of a prospectus, please click here. For further background on the particular due diligence requirements in respect of expert reports contained in the prospectus (including the competent person’s report) please click here.

Application proof of prospectus to be “substantially complete”

The Code of Conduct requires that before submitting a listing application to the HKEX, the sponsor should have already performed all reasonable due diligence on the listing applicant except in relation to matters that by their nature can only be dealt with at a later date, and ensure that all material information as a result of this due diligence has been included in the application proof of the prospectus lodged with the listing application (application proof).

Therefore, the information in the application proof needs to be substantially complete except in relation to matters that by their nature can only be dealt with at a later date.

Publication of application proof

The application proof must be published on the HKEX’s website.

If a listing application is returned on the grounds that the application proof is not substantially complete, there will be an eight-week moratorium imposed before a listing application can be resubmitted. In addition, the names of the applicant and sponsor(s) will be published on the HKEX’s website.

An application proof to be published on the HKEX’s website (AP-Publication) must be redacted to exclude information about the offering, price or means of subscribing for the equity securities, but only to the extent necessary in order not to constitute a prospectus under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). The AP-Publication must also include adequate warning statements advising viewers of the legal status of the AP-Publication. The HKEX Practice Note 22 that sets out the information that must be included and the timing for the AP-Publication. In addition, guidance letters GL56-13 and GL57-13 provide further guidance on content requirements and logistical arrangements for publication of application proofs.

There are exemptions from the requirement to publish an application proof (i) if the applicant has been listed on a recognised stock exchange for not less than five years and has a significantly large market capitalisation (as determined by the HKEX from time to time) or (ii) by waiver (to be considered on a case by case basis) in the case of a spin-off listing of an overseas listed parent upon application by the new applicant.

Verification of the prospectus

Verification is the process by which all material statements made in the prospectus are checked and verified to be true and accurate and not misleading. The verification process can be time consuming and it demands a great deal of coordination between the legal counsel undertaking the exercise and the listing applicant.

Verification is done largely for the protection of sponsors and directors by:

• supporting the responsibility statement that the directors have taken all reasonable care to ensure the accuracy of information in the prospectus; and
• assisting in establishing defences to potential prospectus liability.

The verification process forces each person involved in the preparation of the prospectus to carefully consider and reconsider each material statement, which helps to ensure that any factual statement that has no independent basis will be either amended or deleted from the prospectus. Where the listing document contains statements of opinion, estimates or forecasts, the verification process is designed to establish that there are reasonable grounds for such opinions, estimates or forecasts. Verification also involves identifying appropriate source documents and preserving them for future reference.

Verification is concerned with checking the accuracy of statements contained in a listing document and does not seek to probe into other material matters relating to the listing applicant which ought to be covered in the overall due diligence process.

Verification does not typically cover financial information set out in the listing document, which will be the subject of a separate comfort/verification process carried out by the listing applicant’s reporting accountants.

Much of the verification exercise will comprise obtaining independently sourced information or inquire of independent third parties who may be knowledgeable on the subject. However, where such independent corroboration is not available (for example where the statement relates to the directors’ expectations of future events relating to the issuer’s business or a matter involving a subjective judgment), then the statement may need to be verified by a confirmation from a director or other senior executive who is appropriate to judge. The Code of Conduct does not prohibit sponsors from relying on management’s representations or confirmations for the purposes of verification. However, it cautions against over reliance on such confirmations. Specifically drafted confirmations can show that the listing applicant and / or its directors have addressed their mind to the particular issue.

During verification, no reliance should be placed on unverified information in the listing applicant’s own marketing materials or websites.

Evidence supporting material statements or matters should come from independent authoritative sources. If evidence or confirmation is obtained from an outside source, the sponsor should consider whether that source is one upon which it is reasonable to rely for the purpose. Examples of third party sources suggested in the Code of Conduct include searches of public filings and databases, external confirmations, third-party data about competitors and the engagement of external agents to perform relevant checks.

The verification notes are not made public as part of the listing exercise but the final version should be reviewed and adopted by the directors at a board meeting as confirmation on the board’s behalf of the accuracy and completeness of the listing document.

Verification requires input from across the listing applicant’s business. Verification should take place during the drafting of the listing document, as the process of verification itself will assist and affect the drafting. It may cause non-verifiable statements to be omitted. It may also caution against the inclusion in the listing document of qualitative statements that can be reasonably interpreted in different ways. A coherent, well-coordinated, verification strategy will help avoid delays when the prospectus reaches an advanced form.

As a result of the new requirement to make the application proof publicly available, verification needs to start early in the process and the transaction timetable should allow sufficient time for an application proof in a more final state to be prepared.

Sponsor liability for prospectus

Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), there is a statutory liability for misstatements in a prospectus which falls on the issuer and other specified parties which include the sponsor.

For civil liability under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), the principal defences are having reasonable grounds to believe that the statement was true (i.e. a due diligence defence) and, with respect to expert opinions, that the expert was competent to give the opinion and had given its consent.

In relation to criminal liability under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), where a prospectus is issued which includes any untrue statements, any person who authorised the issue of the prospectus shall be liable unless that person can prove either (i) that the statement was immaterial or (ii) that he had reasonable grounds to believe and did up to the time of issue of the prospectus believe that the statement was true.

Criminal liability will only apply directly to a sponsor firm. However, in situations where there is evidence that an individual (not limited to directors or senior management) in the sponsor’s firm has colluded in the making of an untrue statement in a prospectus, or where a director or other officer has participated in or consented to the commission of the offence, it is possible for these individuals to be prosecuted for aiding and abetting, consenting or conniving to commit an offence under general law.