Every company applying to list on the Hong Kong Stock Exchange (HKEx) must appoint a sponsor to assist with its listing application. The sponsor's role is to guide and advise applicants through the IPO process, assess applicants' suitability for listing and ensure sufficient disclosure in the prospectus.
The sponsor will be responsible for overall management of the IPO and will be closely involved in the preparation of the listing documents. The sponsor will assist in addressing all matters raised by regulators in connection with the listing application. The sponsor will also carry out extensive due diligence on the listing applicant in order to assess the applicant's suitability for listing and to ensure that the prospectus contains sufficient disclosure for investors to form a valid and justifiable opinion of an applicant's financial condition and profitability. The sponsor will also assess the likely interest of investors in the IPO.
Recent changes have been made to the Hong Kong regulatory regime that governs sponsors to enhance various aspects of the sponsor's role in the IPO process and ensure that sponsors thoroughly understand the listing applicant's business prior to filing a listing application. Under the new rules, the emphasis will be on early, comprehensive due diligence and a properly drafted and substantially complete prospectus to accompany the application.
The changes also include amendments to the Hong Kong Companies Ordinance to clarify that statutory civil and criminal liability for misleading information in a prospectus applies to IPO sponsors. Criminal liability will depend on whether a sponsor firm knowingly or recklessly approved a prospectus containing an untrue statement (including an omission) that was materially adverse from an investor's perspective.
The new regulatory measures are in some part a response to a number of high profile cases involving difficulties at Hong Kong listed companies, where the Hong Kong Securities and Futures Commission (SFC) found significant deficiencies in the due diligence carried out by sponsors.
The new requirements will apply to listing applications submitted on or after 1 October 2013. Legislative amendments regarding prospectus liability will follow a separate timetable.
Learn more about the background to the recent changes to the sponsor regime by accessing the SFC's consultation paper on regulation of IPO sponsors here, and the SFC's consultation conclusions here. You can also access our newsletter summarising the key elements of the new regime and details of a new industry initiative coordinated by Charltons to develop due diligence guidelines here. For more on the due diligence process, click here.