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. 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 (Listing Rules) and the Hong Kong Companies Ordinance.
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. However, the HKEx has deferred the implementation date for this requirement until 1 April 2014 (along with the requirement to submit a Chinese version of the application proof).
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. However, the implementation of this latter requirement has also been deferred until 1 April 2014.
During a transitional period from 1 October 2013 to 30 September 2014, the HKEx will implement an initial three-day check for all listing applications and will only accept an application for detailed vetting after successful completion of such checks. Where the application is rejected in the initial three-day period, the application proof will not need to be published on the HKEx's website but the sponsor's and listing applicant's names will be published (from 1 April 2014).
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 Ordinance. The AP-Publication must also include adequate warning statements advising viewers of the legal status of the AP-Publication. The HKEx has adopted a new Practice Note 22 that sets out the information that must be included and the timing for the AP-Publication. In addition, new 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 market capitalisation of US$200 million or more, or (ii) by waiver (to be considered on a case by case basis) in the case of a spin-off listing.
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:
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. For more information on the expert sections of a listing document, which are typically not covered by verification, please click here.
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 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
In its consultation conclusions on the regulation of IPO sponsors, the SFC has recommended that the prospectus liability provisions of the Hong Kong Companies Ordinance be amended to clarify that an IPO sponsor firm has civil and criminal liability for misleading information in a prospectus. 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.
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.