Hong Kong to Tighten Rules for IPO Sponsors

Hong Kong’s market regulator is proposing to introduce tougher listing rules that would subject investment banks and other initial public offering (IPO) sponsors to civil and criminal liability for false statements in prospectuses.

Ashley Alder, chief executive officer (CEO) of the Securities and Futures Commission (SFC), said the change would “incentivise sponsors to raise standards, pick the right deals and manage them well, which should in turn reduce risks for investors and all those involved in IPOs”.

Under the proposals, which have to be approved by Hong Kong’s legislature – liability would depend on whether a sponsor “knowingly or recklessly approved a prospectus containing an untrue statement, which was materially adverse” for investors.

Alder said that the SFC aimed for legislation to be enacted in time to meet a 1 October 2013 deadline, when the regulator will introduce other reforms to ensure that “Hong Kong’s listed market remains a quality market”.

Those changes would force investment banks to complete due diligence before a company can make a formal application to list. The draft prospectus that the bank submits on behalf of the company would be made public

The SFC will also introduce a mandatory cut-off point of two months before a listing application, after which no new sponsors can be appointed. Any sponsor who pulls out of a deal will be required to explain the decision to the regulators.

The proposed changes come at a time when IPO volumes on Hong Kong’s stock exchange are reported to have fallen by 63% this year, while issuance has increased at rival Southeast Asian markets in Malaysia, the Philippines and Thailand.

They were first made public in May, when the SFC launched a consultation period. A group comprising most of the major investment banks operating in Hong Kong, including Goldman Sachs Group, Morgan Stanley and Bank of China International (BOCI) lobbied to reduce the severity of penalties they would face for improperly preparing listing documents.


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