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Hong Kong IPO guide

2010

Hong K

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092010

Introduction

“Going public” is a key stage in the growth and development of a company. Obtaining a listing

on the Hong Kong Stock Exchange enables a company to improve its standing in the business

community and gives it greater access to equity and debt capital raising markets, while at the

same time providing shareholders with an internationally recognised stock exchange on which

they can freely trade their shares.

The Herbert Smith Hong Kong IPO Guide is intended to provide an overview to capital raising

in Hong Kong and in particular to the initial public offering (“IPO”) process for companies listing

on the Main Board of the Exchange – from the pre-IPO strategic investor stage through listing.

There has been a significant growth in the market capitalisation of the Hong Kong market in

recent years, spurred by the listing of Mainland enterprises. Red chip and H share companies

now account for approximately 50% of the total market capitalisation of the Hong Kong

market.

The global nature of the investment community and capital markets has resulted in more and

more companies considering dual listings on other international exchanges, like New York or

London, or structuring their offerings as exempt offerings so their shares can be offered to US

and other investors.

This Guide is a summary only of the more significant legal and regulatory issues encountered

in the IPO process as at August 2010 and as such should not be relied upon as legal advice.

In particular, this Guide does not consider regulatory issues imposed by jurisdictions other than

Hong Kong and the US. Herbert Smith accepts no responsibility for any errors or omissions

this Guide may contain. Reference should be made to the Herbert Smith “Compliance Guide

for companies listed on the Hong Kong Stock Exchange” for details of the continuing

obligations applicable to companies following listing on the Exchange.

This Guide may be updated from time to time. However, we are under no obligation to do so

or to forward any revised Guide to any previous recipients.

We trust you will find the Herbert Smith Hong Kong IPO Guide a useful reference tool and a

helpful introduction to the IPO process in Hong Kong. If you have any questions please feel

free to contact any of the people named on the following page.

Ashley AlderHead of Asia

Herbert Smith – HK IPO guide

Herbert SmithHerbert Smith is a leading international legal practice with over 1,400 lawyers based in its

offices in Asia, Europe and the Middle East. We are committed to providing high quality and

innovative legal services to corporations, governments, financial institutions and all types of

commercial organisations. The firm advises its clients on corporate, dispute resolution, banking

and finance issues, and energy and projects and offers a full range of specialist services

including investment funds, regulatory, construction, insurance, tax and IP/IT.

Hong Kong office: Beijing office: Shanghai office:23rd Floor, 28th Floor Office Tower, 38th Floor, Bund Center

Gloucester Tower Beijing Yintai Centre 222 Yan An Road East

15 Queen’s Road Central 2 Jianguomenwai Avenue, Shanghai 200002

Hong Kong Chaoyang District People’s Republic of China

Beijing 100022

People’s Republic of China

ContactsCorporate partnersAshley Alder T +852 2101 4001 [email protected]

Tom Chau T +86 10 6535 5136 [email protected]

Matt Emsley T +852 2101 4101 [email protected]

Gary Lock T +852 2101 4228 [email protected]

Carolyn Sng T +852 2101 4155 [email protected]

Tommy Tong T +852 2101 4151 [email protected]

Andrew Tortoishell T +852 2101 4012 [email protected]

US securities partnersJohn Moore T +852 2101 4106 [email protected]

Kevin Roy T +852 2101 4102 [email protected]

Practice support consultantNicky Cardno T +852 2101 4137 [email protected]

Business development – AsiaTim Wright T +852 2101 4665 [email protected]

Defined termsCSRC China Securities Regulatory Commission

Exchange The Stock Exchange of Hong Kong Limited

GEM Growth Enterprise Market

INEDs Independent Non-Executive Directors

LR or Listing Rules the Main Board Listing Rules

MOFCOM Ministry of Commerce of the People’s Republic of China

SEC United States Securities and Exchange Commission

SFC Securities and Futures Commission of Hong Kong

SFO Securities and Futures Ordinance (Cap. 571, Laws of Hong Kong)

Share Repurchase Code SFC Code on Share Repurchases

Takeovers Code SFC Code on Takeovers and Mergers

The information provided in this Guide is general and may not apply in a specific situation.

Legal assistance should always be sought before taking any action based on the information

provided.

© Herbert Smith 2010


Contents


Regulatory background1. Offers of securities

– is a prospectus required? 1

2. Who can offer securities? 4

3. Main Board and GEM key listing criteria 5

4. Hong Kong Depositary Receipts 7

Pre-IPO preparation5. Group reorganisations 8

6. Strategic investors and pre-IPO

placings 12

Liability and due diligence7. Prospectus liabilities 17

8. Due diligence and verification process 22

9. Comfort letters and US legal opinions 26

10. Director and Officer liability insurance 29

IPO process11. The team 30

12. Listing methods and criteria 33

13. Listing timetable and

Exchange documents 36

14. Sponsor’s responsibilities 43

15. Prospectus content 51

16. Approval and registration of

prospectus 55

Specific listing issues17. Listing of PRC businesses 57

18. Continuity of management

and ownership 62

19. Accounts 65

20. Independence from parent company 69

21. Competing interests of controlling

shareholders and directors 71

22. Connected transaction waivers 73

23. PRC property issues 75

24. Forecasts 76

25. Share option schemes 79

Underwriting and marketing26. Structure of the offering 81

27. Underwriting arrangements 84

28. Publicity restrictions 87

29. Research reports 92

30. Stabilisation and over-allotments 97

International offerings31. Exempt US offerings 102

32. Hong Kong and US dual listings 105

33. Hong Kong and Shanghai dual listings 115

Post-IPO matters34. Post-IPO restrictions on shareholders

and company 117

1. Offers of securities – is a prospectusrequired?

When securities are offered to the “public” (which includes an IPO) anyprospectus issued for the offering must contain prescribed information andmust be registered. The “public” is defined widely however there are anumber of exempt offers (including offers to less than 50 people) which arediscussed below.

Before a company effects an IPO it will often have already raised equity capitalby issuing shares or other securities to investors. In order for these pre-IPOcapital raisings to proceed without a registered prospectus it is important toensure that the offers of these shares fall within one of the categories ofexempt offers.

The Hong Kong prospectus legislation has been under review for some years. In September

2006, the SFC published its “Consultation Conclusions on the Consultation Paper on Possible

Reforms to the Prospectus Regime in the Companies Ordinance”. The Consultation

Conclusions propose various changes to the prospectus regime which will be subject to further

consultation once a draft bill containing the legislative amendments is available. It is presently

not possible to predict when any of the reforms will be effected.

LegislationOrdinances – The primary legislation in Hong Kong governing the offering of “securities” and

other investment arrangements to the public in Hong Kong is the Companies Ordinance and

the Securities and Futures Ordinance.

Companies Ordinance – The Companies Ordinance requires that a prospectus issued in

connection with an offering of shares to the public must comply with detailed content

requirements and must be approved by the SFC and filed with the Registrar of Companies.

The Companies Ordinance also contains guidelines as to certain exempt offers which do not

require a prospectus (such as offers to not more than 50 people).

Securities and Futures Ordinance – Under Section 103 of the SFO, a person is prohibited

from issuing any advertisement, invitation (including any oral invitation), offering memorandum,

or document (together an “offer document”) which to his knowledge is or contains an

invitation to the public to subscribe for securities or acquire an interest in a collective

investment scheme (such as a unit trust or mutual fund), unless, among other things, the offer

document:

• is a prospectus complying with the Companies Ordinance; or

• relates to an exempt offer under the Companies Ordinance; or

• is authorised by the SFC; or

• is issued to “professional investors” (discussed below).


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Exempt offersA prospectus is required where an offer of securities is made to the public. Very little guidance

is given as to who constitutes the “public”. However, the Companies Ordinance specifically

identifies offers which do not require a prospectus. If an offer does not fall within one of these

exemptions, the more important of which are noted below, then generally it will be considered

as being made to the public and will require a prospectus:

• offers to “professional investors” as defined in the SFO (see definition below);

• offers to not more than 50 people;

• offers with a maximum offering value of HK$5 million;

• offers with a minimum subscription value of HK$500,000;

• offers made in connection with a genuine invitation to enter into an underwriting

agreement;

• offers made under a takeover or merger made in compliance with the Code on Takeover

and Mergers;

• offers where there is no consideration involved (such as bonus issues) or as an alternative

to a dividend or other distribution;

• offers to qualifying persons (including directors and employees) of the company or of any

other member of the same group of companies;

• offers in connection with a collective investment scheme (mutual fund or unit trust)

authorised under s104 of the SFO.

All of the above can be used in combination with each other (other than offers with a maximum

offering of HK$5 million and offers with a minimum subscription of HK$500,000) so that it is

possible to offer shares to an unlimited number of professional investors and up to 50 other

investors. The offer document for certain of the exempt offers noted above must include a

warning statement that the offer document has not been reviewed by any regulatory authority.

Only offers to persons in Hong Kong need be considered. Thus an offer could be made to 50

persons in Hong Kong and additional persons outside Hong Kong provided the offer complies

with the rules of the relevant overseas jurisdictions.

For the purposes of the above exemptions “professional investors” include:

(a) SFO licensed/registered firms and banks, or any person carrying on the business of the

provision of investment services regulated under the law of any place outside Hong Kong;

(b) Hong Kong and overseas regulated banks;

(c) Insurers authorised under the Insurance Companies Ordinance, or any person carrying on

insurance business and regulated under the law of any place outside Hong Kong;

(d) authorised “collective investment schemes” under the SFO;

(e) any individual, either alone or with his spouse or child, having a portfolio of securities

and/or currency deposits of not less than HK$8 million;


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(f) any corporation or partnership having a portfolio of securities and/or currency deposits of

not less than HK$8 million or total assets of not less than HK$40 million;

(g) any corporation the sole business of which is to hold investments and which is wholly-

owned by an individual who falls within (e) above; and

(h) any trust corporation with total assets of not less than HK$40 million.

Offer document contentIf the offer of securities is exempt from the prospectus requirements under the Companies

Ordinance, the offer document need not be in any prescribed form, other than containing any

necessary warning statement to the effect that the offer document has not been reviewed by

a regulatory authority.

If the offer is not exempt then it must comply with the prospectus disclosure requirements of

the Companies Ordinance and contain the information required by Section 175 and Schedule

7 of the SFO.


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2. Who can offer securities?

While a large IPO will generally always be marketed by appropriately qualifiedpersons, where an exempt offer is made (without a prospectus) the companymust take care to ensure that any person it engages to assist it with themarketing of the securities is an appropriately qualified person.

Permitted personsThe SFO effectively provides that the only persons who can offer securities in Hong Kong (or

offer securities from outside Hong Kong but target persons in Hong Kong) are:

• persons licensed by the SFC to carry out Type 1 regulated activities; and

• the officers of the company whose securities are being offered, or any agent of the

company who is not being paid to market such securities, provided that the offer is either

an exempt offer under the Companies Ordinance or the issue of the offer document is

authorised by the SFC.

Unsolicited callsA licensed intermediary cannot make unsolicited calls or send emails offering to sell securities

except:

• if the call is made to a solicitor, professional accountant, licensed intermediary, authorised

financial institution, money lender, professional investor, or an existing client; or

• if the “call” is a “permissible communication” (pursuant to the Securities and Futures

(Unsolicited Calls – Exclusion) Rules) being any communication other than one made in the

course of a visit in person, or by a telephone conversation, or any other interactive dialogue

in the course of which statements and responses to them are exchanged immediately.


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3. Main Board and GEM key listingcriteria

The Exchange operates two listing boards commonly referred to as the MainBoard and GEM (Growth Enterprise Market). GEM was primarily establishedto enable the listing of smaller more speculative companies which did notsatisfy the Main Board listing criteria. GEM has now been repositioned as asecond board and stepping stone to a Main Board listing. Both the size of thecompanies listed on GEM and the volume of shares traded in thosecompanies are generally significantly smaller than those listed on the MainBoard.

Main Board listing criteriaThe principal listing criteria for the Main Board is that the company must have (i) a trading

record of not less than three financial years, (ii) management continuity for the last three

financial years, (iii) ownership continuity and control for at least the most recent audited

financial year, and (iv) either:

• profit test – a profit in the most recent year of not less than HK$20 million, and in respect

of the previous two years, an aggregate profit of not less than HK$30 million (such profits

to exclude any income or loss generated by activities outside the ordinary and usual

course of the business); or

• market capitalisation/revenue/cash flow test – a market capitalisation of at least

HK$2 billion, revenue of at least HK$500 million in the most recent financial year, and

positive cash flow from ordinary activities of at least HK$100 million in aggregate in the last

three years; or

• market capitalisation/revenue test – a market capitalisation of at least HK$4 billion and

revenue of at least HK$500 million in the most recent financial year, and at least 1,000

shareholders at the time of listing. The Exchange is currently consulting the market on a

proposal to reduce the minimum shareholder spread under this test to 300.

The Exchange may accept a shorter trading record period or may modify or waive the profit or

other financial standards for mineral companies, newly formed project companies and in

exceptional circumstances.

More details on the Main Board listing criteria are set out in ‘Listing Methods and Criteria’.

GEM listing criteriaThe GEM listing criteria were amended in July 2008 to set new quantitative admission

standards for GEM companies. The main listing criteria for GEM are that the company must

have:

• a trading record of at least two full financial years;

• positive cash flow from ordinary operating activities (before changes in working capital and

taxation) of at least HK$20 million in aggregate for the two years before listing;

• a market cap of at least HK$100 million;


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• continuity of ownership and control for the last full financial year up until listing; and

• management continuity for the last two financial years.

The Exchange may accept a shorter trading record or modify or waive the ownership or

management continuity requirements for newly formed “project” companies, mineral

companies and in exceptional circumstances, in each case, subject to acceptable reasons.


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4. Hong Kong Depositary Receipts

In July 2008, the Exchange introduced a framework to enable companies tolist Hong Kong depositary receipts (HDRs) on the Main Board. HDRs may bea convenient alternative listing method for overseas issuers whose homejurisdiction discourages overseas listings of shares or otherwise restricts acompany pursuing a traditional share listing. The issuer will appoint adepositary to hold shares in the issuer represented by depositary receipts forthe benefit of the HDR holders.

HDR listingThe Main Board listing criteria generally apply equally to HDRs, with some additional

requirements and modifications set out in Chapter 19B of the Listing Rules. An HDR issuer

will still need to satisfy the Exchange that its jurisdiction of incorporation provides standards of

shareholder protection equivalent to those in Hong Kong and will need to satisfy the criteria set

out in the joint policy statement regarding the suitability for listing of overseas companies. As

with shares, the HDRs must be freely tradable and the underlying shares must be free from

restrictions on transfer by the depositary.

Appointment of depositaryAn HDR issuer will need to appoint a depositary acceptable to the Exchange. The depositary

must be a suitably authorised and regulated financial institution which the Exchange considers

has suitable experience in issuing and managing depositary receipts programmes in Hong

Kong or overseas. The depositary will issue the depositary receipts as the agent for the issuer.

The issuer will need to enter into a deposit agreement with the depositary which complies with

the requirements set by the Exchange, including that the depositary hold the shares in the

issuer on trust for the sole benefit of the HDR holders.

Whilst the share register of the HDR issuer does not need to be maintained in Hong Kong, the

depositary must maintain a register of HDR holders through an approved Hong Kong share

registrar.

The issuer must ensure that the depositary performs its obligations under the deposit

agreement and the Listing Rules and that the rights of the HDR holders are fully recognised

and equivalent to rights of shareholders.

Listing method and procedureThe listing methods and procedures are broadly the same as for a Main Board share issuer.

More details on the Main Board listing criteria are set out in “Listing methods and criteria”.


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5. Group reorganisations

At the early stages of an IPO it is essential to ensure that the group ofcompanies to be listed has the correct group structure and that the groupholds all assets, intellectual property, licences, permits, approvals, contractualand other rights necessary to carry on its business operations. For large IPOsthis reorganisation process may begin more than a year before the IPOprocess commences. Below are some of the issues which need to beconsidered.

Group structureAs a group develops over time it will often end up with a large number of subsidiaries, some

of which may have multiple divisions, while others may no longer be needed or should be

excluded from the group. The pre-IPO reorganisation process gives the opportunity to

restructure the overall group if desired including addressing issues such as:

• winding up any redundant companies;

• moving companies around the group to ensure they sit within the correct business groups

and reporting lines;

• splitting up large subsidiaries with multiple divisions and placing the divisions within

separate subsidiaries;

• ring-fencing any speculative or high risk business ventures in separate subsidiaries (and

where possible excluding these companies from general group funding obligations to

avoid triggering cross-defaults);

• enhancing tax efficiency of the group structure; and

• excluding subsidiaries whose operations are not relevant to the group’s principal

businesses.

Regard should also be had to potential competition issues where competing businesses may

be excluded from the group, and connected transactions issues where part of the group’s

operations are held by connected persons following the reorganisation. The reorganisation

process may also present an opportunity to eliminate minority interests in major subsidiaries,

particularly where the minority shareholders are connected persons which may render the

subsidiary itself a connected person of the company under the Listing Rules.

Assets and contractual rightsIt is important to ensure that all assets and contractual rights needed to operate the group are

owned by the group or the contractual rights are granted in favour of a group member. Often

during the due diligence process it becomes apparent that certain key assets and contractual

rights are held by a parent company outside the group, by part of the group which is not being

listed, by a shareholder, or are simply held on an informal basis and no formal contracts have

ever been prepared. These assets and contractual rights should be identified and transferred

into the group as appropriate.


8

Sometimes the transfer of assets and contractual rights is subject to third party consents

pursuant to prior arrangements or agreements with the third party. It is important to

commence communications with the third parties as early as possible to avoid delays to the

listing timetable.

Where contractual rights or assets are to be transferred it is important to get all necessary

approvals. If the assets being transferred constitute a stand-alone business in Hong Kong

then you must take into account the provisions of the Transfer of Business (Protection of

Creditors) Ordinance.

The consideration paid for any transfer of assets must be carefully considered. If the transfer

of assets is at less than market value or book value it may amount to a distribution of the

transferor company’s assets, in which case the company must have sufficient distributable

reserves available. In addition, if the transferor company is insolvent at the time of the

transaction or becomes so within certain time periods, a liquidator may be able to challenge

the transaction if it is at an undervalue (where the company does not receive adequate

consideration) or if it is an unfair preference (where a particular creditor is put in a better

position on an insolvency than he would otherwise have been).

Intellectual property rightsAs with other assets and contractual rights, it is important to identify all intellectual property

rights used by the group and if they are not held by the group ensure they are transferred into

the group or at a minimum a group member obtains the rights to use such intellectual property.

TaxWhen implementing group reorganisations it is important to liaise with the group’s accountants

or auditors to ensure that the group’s tax position is optimised. Often the use of offshore

holding companies may be preferable both for minimising any tax liability and enabling easier

distribution of cash from operating subsidiaries up to the parent company. The listing applicant

may want to consider enhancing the tax efficiency of the group corporate structure, for

example, when considering the jurisdiction of incorporation of immediate holding companies

of key operating subsidiaries to take advantage of any preferential withholding rates applicable

to dividends.

In addition, any inter-group transfers of shares and assets must be reviewed from a tax

perspective to consider issues such as the appropriate transfer price, stamp duty and

protection of accumulated losses.

Financial assistanceOn a share sale, it is important to ensure that the transaction does not involve any unlawful

financial assistance by a company for the acquisition of its own shares. The financial

assistance provisions of the Companies Ordinance or equivalent legislation in other

jurisdictions can be quite far reaching.

IPO reorganisation stepsThe reorganisation steps undertaken in preparation for the IPO will vary, depending on the

existing and intended group structure. One of the key steps is determining the jurisdiction of

incorporation of the listing entity.


9

Companies incorporated in Hong Kong may list on the Exchange. Chapter 19 of the Listing

Rules sets out a general framework which applies to overseas companies seeking an

Exchange listing. The Listing Rules are therefore not prohibitive with respect to the listing of

overseas companies. Overseas companies are encouraged to contact the Exchange to seek

guidance on compliance matters, including waivers and modifications to the Listing Rules

based on the particular facts and circumstances of the company.

There are a number of recognised jurisdictions which are acceptable to the Exchange

comprising Bermuda, the Cayman Islands and the PRC. Beyond these, companies

incorporated in other overseas jurisdictions may also be listed, provided the Exchange is

satisfied that the company is incorporated in a jurisdiction where the standards of shareholder

protection are at least equivalent to those provided in Hong Kong. The Exchange has indicated

that Australia, British Virgin Islands, Canada (Ontario and British Columbia), Cyprus, Germany,

Jersey, Luxembourg, Singapore and the UK are acceptable jurisdictions for the purpose of a

primary listing on the Exchange.

In case of any shortfall in the shareholder protection standards of an overseas applicant’s home

jurisdiction, the applicant is expected to compensate by making changes to its constitutional

documents. The Exchange has established a uniform approach for reviewing shareholder

protection standards in such overseas jurisdictions covering matters such as the adoption of

a corporate structure that protects shareholder rights, fair proceedings for general meetings to

enable shareholders to utilise their rights in full, corporate governance measures to ensure that

powers of directors are reasonably contained and subject to scrutiny and the adoption of

standards to ensure capital maintenance.

The Exchange has stated that it will view favourably an application by a company incorporated

in a jurisdiction in which the securities regulator is either a full signatory to the IOSCO MMOU

(the International Organisation of Securities Commissions Multilateral Memorandum of

Understanding Concerning Consultation and Co-operation and the Exchange of Information)

or has entered into a bi-lateral agreement with the SFC to provide mutual assistance and

exchange of information to enforce and secure compliance with the laws and regulations of

that jurisdiction and Hong Kong. However, an overseas applicant will be subject to greater

scrutiny by the Exchange if there is only a distant relationship between its principal business

operations and its jurisdiction of incorporation and, if there is no relationship, the applicant may

be considered unsuitable for listing.

In order to demonstrate that its place of incorporation is acceptable for the purposes of the

Listing Rules, an overseas applicant from a jurisdiction not yet approved must provide to the

Exchange:

• a comparative analysis of its constitutive documents against the articles requirements of

the Listing Rules;

• an overview of the foreign regulatory regime, including its securities laws and stock

exchange rules;

• a comparative analysis of the foreign and Hong Kong laws governing areas relevant to

shareholder protection; and

• a legal opinion from the applicant’s advisers and a confirmation from the sponsor that the

applicant’s constitutive documents are in full compliance with the Listing Rules

requirements.


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For issuers from jurisdictions which have already been accepted by the Exchange (referred to

as ‘second comers’) a streamlined procedure is in place. No line-by-line comparison of

shareholder protection matters is required to be given to the Exchange for its consideration.

The Exchange will accept second comers putting in place similar arrangements to previous

issuers from accepted jurisdictions regarding amendments to constitutional documents or

other means to address shareholder protection issues. It should be noted that the company

and the sponsors will need to give confirmations as to the shareholder protection measures

and so in practice this often means that a line-by-line analysis may still be required in order to

give the confirmations.

The Exchange is also prepared to allow cross-benchmarking to demonstrate the acceptability

of a new jurisdiction. This would allow a potential issuer to compare its shareholder protection

measures with those of one of the accepted jurisdictions rather than requiring a comparison

with Hong Kong.

The Exchange has stated that it will adopt a purposive interpretation of the requirements for

‘equivalence’ to Hong Kong corporate regulation standards. It will not rigidly require issuers to

change their constitutional documents where this is not permitted by local laws or may be too

burdensome.

For listing entities incorporated outside the PRC, the business of the group is generally injected

into the listing entity by way of a share swap. For H Share companies, the listing entity will

need to be converted into a joint stock limited company or the business operations and assets

injected into a newly established listing entity. Such reorganisation will require approvals from

relevant PRC governmental authorities and a valuation of the PRC issuer’s assets by a PRC

valuer will need to be carried out. From August 2006, the PRC has enacted new regulations

relating to the reorganisation of PRC entities into offshore vehicles to facilitate listings, under

which approval from MOFCOM is required in respect of such offshore vehicle’s incorporation,

and approval from CSRC is required in respect of such offshore vehicle’s listing. It will be

important to check early in the transaction whether the listing applicant’s PRC legal advisers

consider that the applicant will require approvals under the applicable requirements.

It is important that the reporting accountants review the reorganisation proposal to ensure that

the proposed reorganisation would permit the preparation of the company’s accounts on an

appropriate basis for inclusion in the prospectus.


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6. Strategic investors and pre-IPOplacings

When contemplating an IPO, the company will often look for one or moreinstitutional or strategic investors to provide capital to enable the company toproceed to the IPO stage and/or lend credence to the company and itsproposed listing. This investment may be made prior to the IPO processcommencing, or the investor may simply agree that it will commit to acquiringpart of the IPO shares (and thus make its investment at the time of the IPO).The investment may be made in ordinary shares or in other securities such asconvertible bonds or preference shares which may be converted into ordinaryshares at the investor’s option.

Careful consideration is required of the terms of any pre-IPO placing. If these terms are

excessively favourable to the investor the Exchange may not approve the company’s listing. If

the terms of the pre-IPO placing are required to be modified as a consequence, such

modification may well require the approval of the investor and thus potentially delay the listing.

The following discussion assumes that the investor does not become a connected person of

the company as a result of the placing.

Nature of investmentWhere the investment is made at the same time as the IPO, the investor will invariably take

ordinary shares like the other IPO investors. However, where the investment is made prior to

the IPO, the investor may wish to subscribe for securities which offer the investor a greater

degree of protection than ordinary shares. Convertible bonds or preference shares are

commonly used for these pre-IPO investments as they can be converted into ordinary shares

on the IPO (or later), but can also be redeemed for cash in certain situations thus providing the

investor with priority in liquidation over ordinary shareholders without limiting the potential

upside associated with an equity investment.

Offer price and lock-up undertakingsIn listing decision 36-1, the Exchange stated that as a general principle a strategic investment

made prior to an IPO should be permitted (even where it is at a discount to the IPO price),

provided there is full disclosure in the prospectus. The placee may, however, be subject to a

lock-up of its shares.

Whether the shares placed to the placee should be considered part of the public float or

subject to a lock-up undertaking to the Exchange is determined by the Exchange on a case-

by-case basis considering factors such as the size of any pricing discount, the length of time

between the placing and the listing application, the purpose of the placing, special rights given

to the placees and the placees’ assumption of equity risk. Whether the placing is of existing

or new shares and whether the placee is subjected to a voluntary lock-up in favour of the

company or the underwriters is of little relevance to the Exchange’s consideration.

Where the Exchange imposes a lock-up on the shares placed to the investor, such shares will

not count towards the company’s public float.


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Terms of a pre-IPO investmentWhere the terms of a pre-IPO placing are considered contrary to the principles of LR 2.03, the

Exchange may reject the listing application even if a lock-up is provided by the investor. LR

2.03 provides, amongst other things, that the issue and marketing of securities must be

conducted in a fair and orderly manner and all holders of listed securities must be treated fairly

and evenly. The Exchange has published listing decision series 55 and 59 which provide some

useful guidance on what is acceptable and what might be problematic in structuring pre-IPO

investments. There are some inconsistencies in the listing decisions, which the Exchange

acknowledges. Until the Exchange clarifies the position, a company considering a pre-IPO

investment is encouraged to make a pre-IPO submission to the Exchange to seek further

guidance.

In general, in considering if the principles of LR 2.03 have been breached, the Exchange will

be guided by, amongst others, considerations as to whether:

• the proposed arrangement creates the existence of two different prices for the same

securities at listing;

• the pre-IPO investor’s equity risk is effectively reduced to that of IPO investors; and

• the pre-IPO investor has been given rights unavailable to IPO investors.

Terms which the Exchange has generally had difficulty with include where:

• the investment would only be completed after or was otherwise conditional on in-principle

listing approval or other IPO milestones – listing decisions 55-1, 55-2 and 59-3;

• the pre-IPO investor was given rights to nominate a certain number of directors to the

board of the applicant and such rights were over and above what other shareholders were

given under the articles – listing decisions 59-1 and 59-6;

• discounts are pegged to the IPO listing price - listing decisions 55-1, 59-2 and 59-3; .

• there are guaranteed returns for the pre-IPO investor by way of compensation from the

company (cash or securities) or put options at prices which effectively ensure that the pre-

IPO investor makes a minimum profit from his investment -listing decisions 55-1, 55-3 and

59-5; and

• there are veto rights which give the pre-IPO investor the ability to block certain corporate

decisions such as mergers, incurring indebtedness, amending the constitution and issuing

shares where these rights are not available to the IPO investors - listing decisions 59-2,

59-4 and 59-6. However, veto rights which are defined narrowly and which are made

subject to the directors’ overriding fiduciary duties may be acceptable, depending on the

nature of the right – listing decision 59-1.

Application of LR 2.03The application of LR 2.03 is not limited to arrangements between the company and the pre-

IPO investor. In its Listing Committee Report for 2007, the Listing Committee clarified that while

the controlling shareholders of a listing applicant may be at liberty to enter into private

arrangements with pre-IPO investors (as was recognised in listing decision 59-5), where the

combined effect of such arrangements means that the pre-IPO investors are not exposed to

equity risks prior to the IPO, the Exchange may view this absence as being inconsistent with

LR 2.03 (for example see listing decision 55-3).


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Please note that there are no hard and fast rules as to whether a proposed arrangement with

a pre-IPO investor is acceptable. The Exchange will examine each arrangement in light of its

prevailing circumstances. When a pre-IPO placing is undertaken, its terms must be carefully

considered as the Exchange may require the investor to give a lock-up undertaking (regardless

of whether one is already given to the company and/or the underwriters under the terms of the

placing or investment) or may require other changes to the terms of the placing or investment

to ensure that such terms do not breach the intent of LR 2.03. In these situations, the consent

of the investor will be required to any such changes and this may delay the listing or result in

the investor trying to renegotiate the terms of its investment.

Offer price for IPO investmentsIn practice, it will not be possible for an investor to invest at a price below the IPO price if the

investment is made for shares being offered in the IPO. As the IPO price will not be fixed until

the IPO is launched, a strategic investor may agree to invest a specific dollar amount, or may

agree to take a specific percentage of shares (and thus the investment amount will not be

known until the IPO price is set).

Limitations for PRC companiesFor a PRC company, if the strategic investor wishes to invest prior to the IPO, the investor will

take legal person shares of the PRC company, not H shares. However, there are PRC legal

issues which affect the timing of the IPO following a private placement to such an investor and

there are PRC procedural issues to be observed if the legal person shares are to be converted

into H shares upon listing as part of the company offshore listing approvals process in the PRC.

Size of investmentOften a strategic investor will acquire less than 10% of the shares of the company as once the

investor holds 10% or more, the investor will be treated as a connected person of the

company. This would mean that the strategic investor would not constitute part of the “public”

for the purposes of calculating the minimum public float. Further, if the strategic investor has

ongoing business dealings with the company, any such transactions would need to comply

with the connected transaction regime in Chapter 14 A of the Listing Rules.

IPO clawback provisionsWhere an IPO includes both a placing tranche and a public subscription tranche, the minimum

allocation of shares to the public subscription tranche in accordance with Practice Note 18

(“PN18”) will be as follows:

• an initial allocation of 10% of the shares offered in the IPO; and

• a clawback mechanism that increases the number of shares available under the public

subscription tranche to 30%, 40% and 50% respectively when the total demand for shares

in the subscription tranche is at least 15 times, 50 times or 100 times respectively, the initial

allocation.

To deal with a potential trigger of the clawback rules, given that a strategic investor usually

invests as part of the placing tranche of the IPO, strategic investors sometimes negotiate a

guarantee of a specific allocation of shares which will not be reduced in the event of a

clawback due to an over-subscription for the public tranche of the IPO. This is a commercial

decision for the company to make, provided that sufficient shares would otherwise be available

for reallocation to the public offer tranche pursuant to any clawback.


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The alternative is to seek a prior waiver from the Exchange from strict compliance with the

clawback provisions under PN 18 in particular circumstances.

Disclosure of investment in prospectusThe Exchange usually requires full disclosure in the prospectus of any strategic investment or

other pre-IPO investment including:

• identity of the investor;

• principal terms of the investment, eg, offer price, number of shares placed to the investor

and timing of issue of the relevant shares and other material terms;

• reason for the investment, eg, any long-term commercial benefits and how long the

relationship is expected to last;

• background and the principal businesses of the investor;

• any contribution which the investor has made or is expected to make to the company;

• any benefits which the investment is expected to bring to the company and a justification

of the placing price;

• any agreed lock-up period in respect of non-disposal of the relevant shares;

• any representation of the investor on the board of directors of the Company;

• whether the shares are subject to clawback; and

• whether the placing shares are included as part of the shares in the public float.

In addition, if the investment agreement is likely to be a material contract of the company, it

has to be disclosed as such in the prospectus and a copy made available for public inspection.

Publicity restrictionsUpon submission of the Form A1 to the Exchange, the company will be bound by LR 9.08

which provides that all publicity material (including an announcement of a possible pre-IPO

investment) must be reviewed and cleared by the Exchange before release. In the event of any

leakage of information regarding a proposed investment, the Exchange is likely to require

written submissions on the reasons for the leak which can result in the timetable for the listing

being delayed.

Level of information to investorsIt is a general requirement that the level of information provided to all investors should be the

same. Therefore, the assumption is that a strategic investor who is investing immediately prior

to an IPO or is taking shares in the IPO should be provided with no material information over

and above that contained in the prospectus. Any information which is regarded as material

information for the purposes of the potential strategic/corporate investor agreeing to invest in

the company will have to be included in the prospectus under LR 11.07.


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Other jurisdictionsThere may be potential securities law issues relating to offers and sales of securities to

investors in other jurisdictions (such as the US). For example, if the pre-IPO investor is in the

US, the offer and sale of the securities to such pre-IPO investor must comply with the

requirements of the US securities laws, including but not limited to restrictions on publicity,

provision of information, the manner of the offer and sale and the status of the investor to

qualify for applicable exemptions from registration requirements under the US securities laws.

If the restrictions under applicable securities laws are such that the investor has to consider

using a Hong Kong affiliate to hold the shares, the investor should ensure that the relevant

applicable securities laws do not apply to the affiliate. For example, US securities laws

generally require that a Hong Kong affiliate holds the shares for its own account and not for the

account of its US affiliate unless certain requirements under the US securities laws are

complied with.

DocumentationWhere the investment is made prior to the IPO process starting, the documentation may

include a subscription agreement, the terms of the securities (if the investor wishes to take

convertible notes or other quasi-equity securities) and possibly a shareholders’ agreement.

Where the investment is to be made in the IPO shares, an investment agreement will generally

be entered into and the global coordinator should be a party to this agreement to enjoy the

benefit of the subscription undertaking and any lock-up undertakings. At a minimum, the

investor would give an irrevocable undertaking to subscribe for a certain number, or value, of

shares in the IPO.

Timing of disclosure to ExchangeIdeally, any discussions with pre-IPO investors should be held as early as possible and the

investment decision should be made prior to the Listing Committee hearing. If the final decision

has not been made prior to the Listing Committee hearing, the sponsor should, as a matter of

good practice, inform the Exchange that a strategic investor has been approached and is

considering an investment so that the Exchange will not be surprised if and when the strategic

investment subsequently materialises. The Exchange would generally require the company’s

listing application to be reported back to the Listing Committee for approval of the pre-IPO

investment if the Listing Committee had not been forewarned.

Generally the latest practical time for the entry of a strategic or corporate investor is prior to

bulk printing of the preliminary or “red herring” prospectus so that the roadshow may benefit

from the investor’s association with the IPO. Otherwise, issues relating to recirculation of

offering documents may arise.

Disclosure of interests under the SFOIf a strategic investor subscribes for shares of any class in the company constituting 5% or

more of that class post the IPO, it will be subject to a disclosure obligation under the SFO upon

listing.

Takeovers Code implicationsIf the strategic investor and its associates will hold a significant stake in the company, the

mandatory takeover thresholds under the Takeovers Code (namely exceeding 30% or creeping

more than 2% in any 12 month period) will apply.


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7. Prospectus liabilities

At the start of the IPO process it is important that the directors of the companyare informed of the potential civil and criminal liabilities they face inconnection with the issue of the prospectus, in particular liability for anyuntrue statements or for the omission of any material information. A numberof the regulatory provisions are wide enough to impose liability not only on thecompany and its directors but also on persons who authorised the issue of theprospectus such as the sponsor.

Common lawMisrepresentation – A prospectus is a document upon which potential investors rely to

assess whether they wish to subscribe for shares in the company. As a general principle,

where representations are made by one party to induce another party to enter into a contract

and those representations are false, the other party may be entitled to rights of rescission

and/or damages if it suffers loss as a result, regardless of whether the misrepresentation was

made deliberately, negligently or innocently.

Negligent misstatements – Directors may also be liable for negligent misstatements in a

prospectus if persons whom the directors intend will rely on those statements suffer financial

loss as a result of such reliance and it was reasonable for those persons to have relied on those

statements.

Deceit – Directors may be liable under the tort of deceit if it can be shown that they signed or

authorised the issue of a prospectus containing a false statement which they did not honestly

believe to be true, with the intention that another person would rely upon such statement, and

that other person acted upon the statement and suffered a loss as a result.

Verification – There is no strict legal requirement to prepare verification notes for a prospectus.

Verification is carried out for the protection of the company, the directors, sponsors and all

those upon whom liability for misstatements in the prospectus may fall. The object of

verification is to ensure, as far as practicable, that statements in the prospectus can be

independently verified and are made by the directors and other relevant parties based upon a

reasonable belief in the truth of the statements. For a number of offences, it is a valid defence

to claim that the person had reasonable grounds to believe the accuracy of the statement.

Listing RulesThe Listing Rules require that the prospectus includes a statement that the directors of the

company collectively and individually accept full responsibility for the document and confirm,

having made all reasonable enquires, that to the best of their knowledge and belief the

information contained in the prospectus is accurate and complete in all material respects and

not misleading or deceptive and there are no other matters the omission of which would make

any statement in the prospectus misleading. This statement can be relied upon by investors.


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Companies OrdinanceSections 38 and 342 – These sections, in conjunction with the Third Schedule to the

Companies Ordinance, set out the minimum level of information which should be contained in

a prospectus. If a prospectus does not comply with or contravenes such requirements, the

Company and any person who is knowingly a party to the issue, circulation or distribution of

the prospectus is liable to a fine.

Section 40(1) – This section provides that where a prospectus invites persons to subscribe for

shares in a company, the following persons will be liable to pay compensation to all persons

who subscribe for any shares on the faith of the prospectus for the loss or damage they may

have sustained by reason of any untrue statement included in such prospectus (which includes

the omission of material information):

• directors of the company at the time of the issue of the prospectus;

• any person who has authorised himself to be named and is named in the prospectus as

a director or as having agreed to become a director;

• every promoter of the company; and

• every person who has authorised the issue of the prospectus (which we believe includes

the sponsor).

A person will not be liable under section 40(1) if he proves that:

• having consented to become a director, he withdrew his consent before the issue of the

prospectus and that it was issued without his authority or consent;

• the prospectus was issued without his knowledge or consent and that on becoming aware

of its issue he forthwith gave reasonable public notice that it was issued without his

knowledge or consent;

• after its issue, but before allotment of the shares, he became aware of an untrue statement

in the prospectus, withdrew his consent and gave reasonable public notice of the

withdrawal of his consent and the reason for it;

• if the untrue statement was not purported to have been made on the authority of an expert

or a public official document or statement, he had reasonable grounds to believe, and did

until the time of allotment of shares believe, it was true;

• if the untrue statement was purported to have been made by an expert or copied or

extracted from an expert’s report and it fairly represented the statement or was a correct

and fair copy of or extract from such a report, he had reasonable grounds to believe and

did up to the time of the issue of the prospectus believe that the person making the

statement was competent to make it and that the person had given his consent to the

inclusion of the statement and had not withdrawn the consent prior to delivery of a copy

of the prospectus for registration or (to the knowledge of the director) had not withdrawn

his consent prior to allotment of the shares pursuant to the prospectus; or

• if the untrue statement was purported to have been made by an official person or

contained what purported to be a copy or extract from a public official document, it was

a correct and fair representation of the statement or extract.


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Section 40A – In addition to the civil liability under section 40(1), section 40A provides that any

person who authorised the issue of a prospectus containing any untrue statement (or omits

any material information) shall be liable to imprisonment and a fine, unless he proves either that

the statement was immaterial or that he had reasonable grounds to believe and did up to the

time of issue of the prospectus believe that the statement was true.

The Hong Kong prospectus legislation has been under review for some years. In September

2006, the SFC published its “Consultation Conclusions on the Consultation Paper on Possible

Reforms to the Prospectus Regime in the Companies Ordinance” which proposed various

changes to the prospectus regime including the scope of the prospectus liability regime and

the categories of persons who should be liable for the prospectus. Further consultation will be

required on the draft bill once it is available and so it is presently not possible to predict when

any of the proposed reforms will be effected.

Securities and Futures OrdinanceFalse or misleading information – Sections 274 to 278 of the SFO set out certain acts of

“market misconduct” which are prohibited. For prospectuses the main provision is section

277, which covers the situation where a person discloses information likely to induce another

person to subscribe for, sell or purchase securities in Hong Kong, where such information is

false or misleading in a material way and its disseminator either knows or is reckless as to its

being false or misleading. There are exceptions to this rule, for example, a person will not be

considered to have disclosed false or misleading information if, at the time of issue of the

information, the person did not know the information was false or misleading. A breach of

these provisions can result in both civil and criminal liability including a maximum of 10 years

imprisonment.

Fraudulent or reckless misrepresentation – Section 107 of the SFO prohibits fraudulent or

reckless misrepresentation made in relation to investments, and is wide enough to cover

misrepresentation and misstatements in a prospectus. Under this section, a person commits

an offence punishable by a fine and/or imprisonment if he induces another person to enter into,

or offer to enter into, an agreement to acquire, dispose of, subscribe for or underwrite

securities, by:

• any statement which he knows to be false, misleading or deceptive, or which is false,

misleading or deceptive and was made recklessly;

• any promise which he had no intention of fulfilling or which, to his knowledge, was not

capable of being fulfilled, or which was made recklessly;

• any forecast which he knows was not justified on the facts known to him at the time it was

made, or which was not justified on the facts known to him at the time he made it and was

made recklessly; or

• any statement or forecast from which he intentionally or recklessly omitted a material fact,

with the result that the statement was thereby rendered untrue, misleading or deceptive,

or, as the case may be, the forecast was thereby not capable of being justified or was

thereby rendered misleading or deceptive.

Besides criminal liability, a person guilty of fraudulent or reckless misrepresentation may also

incur civil liability under section 108 to compensate persons who have suffered pecuniary loss

as a result of having relied on the misrepresentation.


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Negligent misrepresentation – Section 108 also imposes civil liability for negligent

misrepresentation inducing another person to enter into or offer to enter into an agreement to

acquire, dispose of, subscribe for or underwrite securities. A negligent misrepresentation is a

statement, promise or forecast which is false, misleading or deceptive and was made without

reasonable care. However, if a remedy is available under section 40 of the Companies

Ordinance, no right of action arises under section 108 of the SFO.

Misrepresentation OrdinanceSection 3(1) of the Misrepresentation Ordinance provides that a party to a contract who is

induced to enter into that contract by a misrepresentation made by the other party and who

suffers loss as a result of the misrepresentation can rescind the contract or recover damages

in lieu of rescission from the party who made the misrepresentation. The only exception to this

is where the misrepresenting party proves that he had reasonable grounds to believe, and did

believe up to the time the contract was made, that the facts represented were true.

Theft OrdinanceIn addition to any civil liability for misrepresentation, directors should also be aware of criminal

liability under the Theft Ordinance. The Theft Ordinance contains a number of offences

relevant to directors and officers of companies regarding the publication of various documents

and announcements, such as the prospectus and other information disclosed to the public. In

particular, if a director of a company intends to deceive members or creditors about the

company’s affairs, publish or concur in publishing a written statement or account which he

knows is or may be misleading, false or deceptive in a material way, he may be held criminally

liable and punishable by a maximum of 10 years’ imprisonment.

US securities lawsSeveral key provisions under the US securities laws create liability in connection with offering

documents.

Liability provisions applicable to Rule 144A and other exempt offerings

Section 12(a)(1)Pursuant to Section 12(a)(1) of the United States Securities Act of 1933, as amended (the

“Securities Act”), purchasers of any security offered in violation of the registration

requirements of the US securities laws may recover from the seller the consideration paid for

such securities. Strict liability exists for the seller of the securities.

In order to prevail, plaintiffs need show only that the defendant was a “seller” or broker, the

defendant failed to comply with the Section 5 registration requirements, there was use of the

means and instrumentalities of interstate commerce, the applicable statute of limitations has

not elapsed (ie, the suit was filed within one year of the violation) and adequate tender of the

securities is made by a plaintiff seeking rescission. The only practical defence available to a

defendant is that the security or the transaction was exempt from the registration requirements

of Section 5.


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Rule 10b-5Pursuant to Rule 10b-5 under the Securities Exchange Act of 1934, purchasers of a security

have a cause of action against any person who makes an untrue statement of a material fact,

or omits to state a material fact necessary in order to make the statements made in connection

with the purchase or sale of any security, in the light of the circumstances under which they

were made, not misleading. If successful, private litigants in Rule 10b-5 claims may be

awarded damages, or may seek to rescind the transaction and obtain a refund of the original

purchase price.

In addition to establishing materiality, a plaintiff must demonstrate each of the following

elements:

• Reliance – the plaintiff must prove that it relied on the misstatement or omission. Under

the “fraud on the market theory,” US courts will presume reliance on a material

misstatement or omission if the securities are traded on an established trading market.

Under the fraud on the market theory, a material misstatement or omission will be deemed

to have affected the market price of the stock, and courts will presume that the plaintiff

traded in reliance on the integrity of the price set by the market.

• Scienter – the plaintiff must prove that the defendant made the material misstatement or

omission with some intent to defraud or manipulate. US courts have held that

recklessness may constitute scienter, but mere negligence will not. This is in contrast to

claims under Sections 11 or 12(a)(2) of the Securities Act, which principally apply to SEC-

registered offerings, for which only a failure to show reasonable care is required.

• Causation of Loss – US courts have required claimants under Rule 10b-5 to prove that

they relied on and suffered loss as a result of the misstatement or omission.

The exercise of reasonable care, in the form of a carefully conducted due diligence

investigation, may provide strong evidence to refute the existence of an intent to deceive. As

a consequence, underwriter due diligence has become a critical component of a defence to

liability in Rule 144A and other exempt transactions.


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8. Due diligence and verification process

As outlined in the previous chapter, directors and other parties involved in theIPO process face potential liability in connection with the issue of theprospectus. However, a large number of the liability provisions provide adefence for statements made where the person had reasonable grounds tobelieve the statements were true. This defence is sometimes referred to asthe “due diligence defence” – the basis being that if adequate due diligenceis carried out then the directors and other parties could rely on this and claimthat they had reasonable grounds to believe the statements were true.

Due diligence and verificationDue diligence for an IPO can be viewed as a two stage process:

• a set of due diligence questions is prepared (generally comprising legal, financial and

business sections and prepared before the prospectus is drafted) to which the company

will provide responses; and

• a set of verification notes is then prepared which endeavour to verify all material statements

made in the draft prospectus, where possible by reference to independent written material.

These notes are updated throughout the IPO process so that the final set of verification

notes reflects the final form of the prospectus.

Due diligence defenceThe “due diligence defence” stems from a number of the legislative provisions imposing

prospectus liability which provide a defence for statements made where the person had

reasonable grounds to believe the statements were true.

To rely on this defence it is generally accepted that the person must have made all reasonable

enquiries to verify the statements. This verification can be undertaken by advisers provided it

is reasonable to assume they have the necessary expertise to verify the statements and the

director/officer has no reason to believe that any statements are incorrect.

US securities backgroundGenerally, liability will arise under US securities laws in the case of either materially misleading

misstatements or an omission of material information that would have been necessary to make

statements in the offering document not misleading. Explicitly or implicitly, a due diligence type

defence generally exists for underwriters, which provides that liability can be avoided if a

defendant can prove it was duly diligent in investigating the business and financial condition of

the issuer to ensure that the disclosure in the offering document is adequate.

In an SEC registered offering, due diligence allows underwriters, directors and officers to

establish that a reasonable investigation of the contents of the registration statement was

made, thereby meeting the requirements of the due diligence defence against Section 11 and

Section 12 liability available under the Securities Act.

In a Rule 144A or other exempt offering, due diligence allows underwriters, directors and

officers to refute the scienter element of a Rule 10b-5 claim.


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Due diligence guidelinesWhile there are no legislative guidelines as to what constitutes adequate due diligence, the

Listing Rules include a requirement that a sponsor must conduct reasonable due diligence to

enable it to give the required declaration to the Exchange. The Exchange has issued guidance

as to the due diligence which should be undertaken by a sponsor in Practice Note 21 to the

Listing Rules, which is summarised on pages 45-49. However, the guidance is not intended

to exhaustively set out all of the due diligence steps sponsors should take and notes that

sponsors must exercise their judgment in determining what investigations or steps are

appropriate for any particular listing applicant.

The following general comments in relation to due diligence standards are worth noting:

• an officer may not rely exclusively on the company’s advisers to verify the prospectus;

• an officer may not simply rely on assurances from management that the prospectus is

accurate;

• an officer will not be excused from his due diligence obligation simply because he joined

the company shortly before the IPO or even after the IPO where he is held out in the

prospectus as a person who will be a director of the company upon listing; and

• an officer should make efforts to investigate matters which he does not understand or

which he has reason to believe may not be accurate.

Conducting due diligenceMarket practice has developed such that most investment banks routinely request 10b-5

letters for Rule 144A offerings over a certain threshold amount. The due diligence conducted

by US counsel will form the basis for its delivery of a 10b-5 letter in connection with the offering.

Although the extent of the due diligence review will differ for each transaction depending on

the size of the transaction, the type of issuer and various other matters, any transaction in

which a 10b-5 letter is to be delivered merits a thorough and comprehensive due diligence

review. This diligence process generally will involve three aspects: (1) documentary due

diligence, (2) discussions with management and accountants and other advisers, and (3)

participation in the preparation of the offering document.

The goal of this process is to gain information relevant to disclosure which a reasonable

investor would find helpful in making an investment decision. Although underwriters will rely

on 10b-5 letters and an auditor comfort letter in the course of establishing their due diligence

defence, underwriters are ultimately responsible for conducting due diligence and must be

intimately involved in the due diligence carried out by their counsel.

Documentary due diligenceDocumentary due diligence includes a review of all material documents and information

relating to a company including: minutes of meetings of the board of directors, board

committees and shareholders, constitutional documents, information about share capital and

group structure, company procedures, material agreements and obligations, employment

arrangements, real property, intellectual property, litigation and public records.


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Underwriters’ counsel normally prepares a set of due diligence questions (generally comprising

legal, financial and business sections and prepared before the prospectus is drafted) to which

the company will provide responses. A typical due diligence request list is comprehensive,

although tailored to the type of transaction being conducted and the issuer’s business. The

issuer will make available its corporate books and records, material contracts and other

documents relating to matters identified in the due diligence question list.

The primary goal of legal counsel in reviewing the documents provided by the issuer is to

identify potential issues that may expose those working on the transaction to liability under US

securities laws. Generally, the risk of 10b-5 liability can be reduced if any risks or potential

problems involving the issuer or the securities being offered are disclosed to potential investors

in the offering documentation. Accordingly, legal counsel conducting the documentary due

diligence review should look for any information that could affect the value of the securities to

ensure that potential problems identified are rectified prior to the offering and/or disclosed to

potential investors in the offering document. The review forms a basis for further questions to

be asked of the issuer and its management at face-to-face meetings. The documentary due

diligence process also allows the reviewing counsel to identify any obstacles that might prevent

the transaction completing (eg, debt covenants which may require lender consents or changes

in capital structure which could be triggered by an IPO).

Discussions with management and accountantsOne or more meetings are usually held with senior management and directors of the issuer

during the due diligence review and offering circular drafting process. The issuer will often

organise, upon request, a presentation by operating management in each of its divisions in

order to give the underwriters and legal counsel a general overview of the business. In addition

to this general presentation, the underwriters and legal counsel typically (and should) hold

meetings with specific officers or employees of the issuer responsible for particular areas of the

issuer’s business. The underwriters and legal counsel also typically hold at least one meeting

with the Chief Executive of the issuer to review strategic aspects of the issuer’s business and

to obtain his or her personal assessment of the issuer’s strengths and weaknesses.

Discussions with management also will include discussion of the issuer’s business, prospects,

plans, internal and disclosure controls and risks.

It is also customary to meet with the issuer’s current and former auditors for a broad-based

discussion of the issuer’s internal accounting policies, controls and procedures, any signs of

illegality, contingent liabilities, any aggressive positions taken vis-a-vis accounting or tax policy

and any disagreements or adjustments regarding the issuer’s financial statements.

Drafting the offering documentIf the transaction involves the registration of securities in the US, US securities laws will provide

detailed guidelines as to the type of information that must be included in the offering

document. However, even if the securities will be offered in the US under an available

exemption from registration, US counsel generally will strive to produce an offering document

that contains the disclosure required in registered offerings to protect against 10b-5 liability and

in order to be able to deliver a 10b-5 letter.


24

Legal counsel generally will begin the drafting process by utilising precedent documentation

used in similar offerings by issuers in the same business or industry as the subject issuer and

based on information on the issuer from the due diligence review and management

discussions. US counsel should ensure that the offering document discloses all material

information discovered in the documentary due diligence review and through discussions with

management and the accountants. It is also important in the process of drafting to obtain a

confirmation from the issuer’s management that the disclosure accurately reflects the reality of

the issuer’s business. This is most important for three key sections of the disclosure

document: the description of the business, the management’s discussion and analysis of the

issuer’s financial condition and results of operations and the risk factors.


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9. Comfort letters and US legal opinions

Auditor comfort letters

The due diligence defence that underwriters seek to establish to guardagainst potential liability depends on a thorough due diligence investigationbeing conducted in the course of the transaction. Obtaining a comfort letterfrom the issuer’s independent auditors is one of the many procedures used byunderwriters to establish that they have conducted a reasonable investigationin connection with preparing the offering document.

Comfort letters are delivered to the underwriters by independent auditors and provide comfort

on certain financial data contained in an offering document. The purpose of auditor comfort

letters, from the underwriters’ point of view, is two-fold: establishment of a defence to liability

under the US federal securities laws and protection of the underwriter’s professional reputation.

Primarily, however, the comfort letter from the accountants to the underwriter is intended to

help establish the underwriters’ due diligence defence regarding the correctness of the

financial statements and other financial information included in the offering circular. The actual

scope of the comfort letter will vary somewhat and is subject to negotiation between the

parties.

In the context of a Hong Kong IPO with a Rule 144A tranche, current market practice is

generally for the underwriters to request three comfort letters: one for the US tranche (the

“Rule 144A Comfort Letter”), one for the international tranche (the “Regulation S ComfortLetter”) and one for the Hong Kong public offer (the “Hong Kong Comfort Letter”). Although

practice varies by audit firm and transaction, generally the Rule 144A Comfort Letter and

Regulation S Comfort Letter are very similar, if not identical (subject to geographic limitations

on reliance), tracking the content of a typical “SAS 72” comfort letter described in more detail

below. A Hong Kong Comfort Letter, by contrast, may track SAS 72 or track HKSIR 400, a

Hong Kong accounting standard which is generally regarded as being more limited in the level

and type of comfort provided.

Whereas the main condition to delivery of a Rule 144A Comfort Letter is that the underwriters

simply represent that they conducted due diligence in a manner substantially consistent with

diligence in an SEC-registered offering, market practice with regards to Regulation S Comfort

Letters and Hong Kong Comfort Letters is for the auditors to require the underwriters and the

Company to enter into arrangement letters with the auditors containing extensive terms and

conditions pursuant to which the Regulation S Comfort Letter and Hong Kong Comfort Letter

will be delivered. All comfort letters provide auditor comfort on unaudited interim statements

and specified financial statement items during the “stub period” (ie, the period between the end

of the audit and the cut-off date for the comfort letter).

SAS 72 comfort letterIn a typical SAS 72 comfort letter (which gets its name from the AICPA’s Statement on

Accounting Standards 72), the auditors confirm they are independent in accordance with

applicable accounting rules and confirm that they have audited the financial statements set out


26

in the offering circular. The auditors will also note that they have performed certain procedures

with respect to the unaudited interim financial statements and specified financial statement line

items during the stub period, and on that basis are providing “negative assurance” comfort to

the underwriters.

“Negative assurance” refers to the auditors’ confirmation that, after having carried out the

specified procedures, including certain review procedures described below on the unaudited

interim financial statements:

• nothing has come to their attention that would cause them to believe that any material

modifications should be made to the unaudited interim financial information in the offering

circular for it to be in conformity with the applicable generally accepted accounting

principles (“GAAP”) and that it complies as to form in all material respects with the

applicable GAAP; and

• nothing has come to their attention that would cause them to believe that there have been

material changes in certain financial statement line items since the date of the latest

financial statements included in the offering circular.

The specific financial statement line items included in the negative assurance are subject to

negotiation between the underwriters and the accountants but they are usually items which are

considered to be important indicators of the issuer’s financial condition or that directly affect

pricing sensitive attributes of the issuer or are good predictors of the issuer’s future

performance.

Another important source of auditor comfort letter procedures is SAS 100, which was adopted

in October 2002. This standard governs the review of interim financial information and the

comfort that is permissible on such information by limiting the situations where auditors are

permitted to perform reviews of interim financial statements. SAS 100 provides that auditors

may conduct a review of interim financial information of an issuer in preparation for a public

offering or listing, if its latest annual financial statements have been or are being audited.

The goal of a SAS 100 review is to provide the auditors with a basis for reporting whether

material modifications should be made to conform the interim financial statements in the

offering circular to the applicable GAAP. Without a SAS 100 review, a comfort letter cannot

contain negative assurance comfort as to the interim unaudited financial statements. As a

practical matter, comfort letters delivered in connection with Hong Kong IPOs which have Rule

144A/Regulation S tranches rely on HKSRE 2410, a Hong Kong accounting standard that is

similar to SAS 100.

Auditors may not give negative assurance on interim financial statements if 135 days or more

have passed between the date of the most recent financial statements that have been audited

or reviewed and the date of the comfort letter.

On negative assurance comfort letters, the auditors also deliver a “circle draft” as an

attachment to their comfort letter, whereby financial information in the offering document is

circled and comfort provided by the auditors to the extent of certain procedures identified in

the comfort letter, with each specific piece of circled financial information being ticked and tied

to a specific procedure identified in the comfort letter.


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Agreed-upon procedures comfort letterAgreed-upon procedures letters offer a lower level of comfort than SAS 72 comfort letters. In

such letters the accountants are limited to reporting procedures performed and the resulting

findings. This type of comfort is used where an underwriter is unable to make the required due

diligence representation or interim financials are issued 135 days or more after the most recent

audit or SAS 100 or SAS 700 review.

US legal opinionsA variety of US legal opinions may be requested in connection with an IPO being offered into

the US pursuant to an exemption. Some commonly requested US legal opinions are the

following:

• a “no registration” opinion – an opinion that the sale of the securities to the initial

purchasers, and from the initial purchasers to subscribers, does not require registration

under the Securities Act.

• a “1940 Act” opinion – an opinion that the issuer is not required to register as an

investment company under the Investment Company Act of 1940.

• a “10b-5” letter – a letter from US counsel which states that nothing has come to such

counsel’s attention that leads it to believe that the offering circular contains material

misstatements or omissions.

The 10b-5 letterThe most well-known US legal opinion actually is not an opinion at all, but rather a negative

assurance letter known as the “10b-5 letter”. In most offerings into the US, the managing

underwriter will require a 10b-5 letter from both its own counsel and from the issuer’s counsel.

Although 10b-5 letters typically are sought for public (SEC-registered) offerings, they are also

useful and customary in Rule 144A offerings.

A 10b-5 letter is a statement by US counsel that upon reviewing the offering circular and after

having conducted documentary and management due diligence, nothing has come to the

attention of counsel suggesting that the offering circular contains any untrue statement of

material fact or fails to state a material fact necessary in order to make the statements made,

in the light of the circumstances under which they were made, not misleading. The 10b-5

letter helps establish a due diligence defence for the underwriter to certain potential bases for

litigation in the US.

Pursuant to Rule 159 of the Securities Act, liability under Section 12(a)(2) of the Securities Act

for material misstatements or omissions on SEC-registered deals is fixed shortly after the time

of pricing at the time of the first sale to any investor. Although Rule 159 is inapplicable to Rule

144A and other exempt offerings, market practice on such transactions is to ensure that due

diligence is completed prior to the printing of the preliminary offering circular, which together

with any final term sheet or similar written document available at the time of such sale used to

convey the final terms, form the disclosure package used to make such sale. Most banks

therefore request that the 10b-5 letter on Rule 144A and other exempt offerings cover such a

disclosure package at the time of sale, as well as the final offering circular as of its date and

the closing date.


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10. Director and Officer liability insurance

When a company goes public the chances of its directors being sued increasesignificantly. For this reason the directors will wish to ensure that thecompany has adequate Director and Officer liability insurance (“liabilityinsurance”). The extent to which a company can insure its directors differsdepending on the jurisdiction in which the company is established. For aHong Kong company, the liability insurance can cover up to any monetary limitand can extend to liability arising from negligence, default or breach of duty(but not fraud) and liability incurred in defending proceedings.

Indemnifying directors A Hong Kong company cannot indemnify a director or officer for negligence, default or breach

of duty, save that a limited indemnity can be granted for any liability incurred in defending

proceedings in which the director/officer is found not guilty. Any indemnity provisions included

in a director’s/officer’s employment contract not falling within the limited exemption in respect

of legal proceedings will be void. However, a company is permitted to take out liability

insurance (as only the insurance premium is payable by the company).

Liability insuranceA Hong Kong company may purchase liability insurance for any officer which can cover:

• any liability to any party in respect of any negligence, default, breach of duty or breach of

trust (save for fraud) of which he may be guilty in relation to the company or a related

company; and

• any liability incurred by him in defending any proceedings taken against him for any

negligence, default, breach of duty or breach of trust (including fraud) of which he may be

guilty in relation to the company or a related company.


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11. The team

The parties commonly involved in a listing on the Exchange with aninternational offering, and their roles, are outlined below. Two or morepersons/entities may be appointed to act jointly for some of these roles.

Party Roles undertaken in the IPO process

Sponsor Performing the duties of sponsor as prescribed by the Listing

Rules, including providing corporate finance advice to the

company in relation to its listing, being closely involved in the

preparation of the listing documents, reviewing and supervising

the company’s other professional advisers and all relevant

documentation in relation to the listing application, assisting

the company in appointing and coordinating the work of other

professional advisers, conducting reasonable due diligence

and liaising with the Exchange

Global coordinator, Forming and coordinating an underwriting syndicate, with

bookrunner and lead overall responsibility and control of the international offering

manager (which is usually and underwriting process; underwriting part of the offering

also a sponsor)

Other underwriters Underwriting part of the offering

Legal adviser to the Providing legal advice to the company in relation to Hong Kong

company (as to legal and regulatory requirements pertaining to various matters

Hong Kong law) arising in the course of the IPO and the preparation of relevant

documentation

Legal adviser to the Providing legal advice to the company in relation to US legal

company (as to US law) and regulatory requirements pertaining to various matters

arising in the course of the IPO, including providing a “Rule

10b-5 letter” and “no-registration legal opinion” if required –

where the IPO will include an exempt US offering it is generally

preferable to engage a law firm, like Herbert Smith, which can

handle both the Hong Kong and US legal aspects of the

offering

Legal adviser(s) to the Providing legal advice to the company in respect of legal and

company for any other regulatory issues relevant to that jurisdiction, assisting with

jurisdiction(s) where the local due diligence and providing any legal opinions which may

company may have be required

material business interests or otherwise where the company is incorporated, eg, the PRC


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Legal adviser to the Providing legal advice to the sponsors and the underwriters in

sponsors and the relation to Hong Kong legal and regulatory requirements

underwriters (as to pertaining to various matters arising in the course of the IPO

Hong Kong law)

Legal adviser to the Providing legal advice to sponsors and the underwriters in

sponsors and the relation to US legal and regulatory requirements pertaining to

underwriters various matters arising in the course of the IPO, including

(as to US law) providing a “Rule 10b-5 letter” and “no-registration legal

opinion” if required

Legal adviser(s) to the Providing legal advice to the sponsors and the underwriters in

sponsors and the respect of legal and regulatory issues relevant to that

underwriters for any jurisdiction, assisting with local due diligence and providing any

other relevant legal opinions which may be required

jurisdiction(s)

Reporting accountants Acting as the reporting accountants of the company to

prepare, among other things (a) an accountants’ report; (b) a

report on unaudited pro forma financial information; (c) an

opinion on profit forecast and (d) appropriate comfort letters

Independent property Preparing an independent valuation on the property interests

valuer held by the group for inclusion in the prospectus

Receiving banks Receiving and processing applications under the Hong Kong

public offering tranche of the international offering

Share registrar and Processing and balloting public offer applications, liaising with

transfer office the sponsors, Hong Kong Securities Clearing Co. Ltd. and the

company on the preparation and dispatch of share certificates

to successful applicants and processing of share transfers of

the company after listing

Public relations consultant Providing strategic advice on communications, media relations

and event support to the IPO, including developing content of

speeches and media materials

The following persons and committee must also be appointed for the purposes of the

company’s listing. However, they will not necessarily have an active role in the listing process.

Compliance adviser The compliance adviser must be acceptable to the Exchange

(and may be the sponsor or someone who has acted as a

sponsor). The adviser is appointed from the date of listing until

the publication of the issuer’s accounts for its first full financial

year commencing after the date of listing. Under the Listing

Rules, the company must seek advice from the compliance

adviser if it wishes to undertake certain specific matters such

as issuing a regulatory announcement or entering into a

notifiable or connected transaction


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Company secretary The company secretary must be an individual ordinarily

resident in Hong Kong, have the requisite knowledge and

experience to discharge the functions of a company secretary

and be either (i) an ordinary member of the Hong Kong Institute

of Chartered Secretaries, (ii) a solicitor, barrister or professional

accountant, or (iii) an individual with academic or professional

qualifications or relevant experience acceptable to the

Exchange

Authorised representatives The company must appoint two authorised representatives to

act as the company’s principal channel of communication with

the Exchange, being two directors or a director and the

company secretary

Audit committee The audit committee must comprise non-executive directors

only, have a minimum of three members, the majority of the

members and the chairman must be independent non-

executive directors and they must include at least one

independent non-executive director with appropriate

professional qualifications or related financial management

expertise as set out in LR 3.10

In addition, the Code on Corporate Governance Practices sets out requirements in relation to

the establishment of the following committees.

Remuneration committee Under the Code on Corporate Governance Practices, the

company must appoint a remuneration committee to

determine, among other things, the directors’ remuneration

policy. A majority of the members must be independent non-

executive directors. If no such committee is appointed, the

company must disclose and explain the reasons for such fact

in its annual and interim reports

Nomination committee Under the Code on Corporate Governance Practices, it is a

recommended best practice that a nomination committee is

established to determine the policy for appointing directors.

Again a majority of the members must be independent non-

executive directors. Issuers are encouraged, but not required,

to state whether they have complied with this requirement in

their annual and interim reports

For companies listing Hong Kong Depositary Receipts, the issuer will need to appoint a

depositary to issue the depositary receipts as the agent for the issuer. Further details are set

out in “Hong Kong Depositary Receipts”.


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12. Listing methods and criteria

It is important that the company and its advisers confirm that all the listingcriteria are satisfied at the start of the IPO process before significant legal andaccounting costs are incurred – the key requirements being a trading recordof not less than three financial years, management continuity for the last threefinancial years, ownership continuity for at least the most recent auditedfinancial year and satisfying at least one of the profit, marketcapitalisation/revenue/cashflow or market capitalisation/revenue tests. TheExchange will accept a shorter trading record in certain circumstances butotherwise will generally not grant any waivers.

Listing methodsA company can seek a listing on the Exchange either by way of:

• Initial public offering – which may comprise an offer of new shares, the sale of existing

shares by a major shareholder(s) or a combination of the two. An offering in respect of a

listing on the Main Board of the Exchange will have both a public tranche (which must be

underwritten) and a private placement tranche (which is invariably underwritten).

• Introduction – this is possible where the company already has a sufficient spread of public

shareholders and it does not wish to raise further capital. Where a company which is

already listed on another market seeks a Hong Kong listing by introduction, the Exchange

will expect the sponsors and the company to put in place certain precautionary measures

to ensure that there is sufficient liquidity in the shares in the Hong Kong market and that

there is a reasonable supply of information to investors in order to mitigate any price

volatility upon listing.

• Migration from GEM – a streamlined process was introduced in July 2008. This enables

companies meeting the Main Board listing criteria to migrate from GEM without the need

to appoint a sponsor or prepare a prospectus. The company must have been listed on

GEM for the period at least until the publication of its results for one full financial year

following its GEM listing and must not have been subject to any disciplinary investigations

by the Exchange in respect of any serious rule breaches in the last 12 months.

Listing criteriaThe qualifications for a primary listing on the Main Board of the Exchange are detailed in

Chapter 8 of the Listing Rules. The principal qualifications are set out below.

• Incorporated in an acceptable jurisdiction - Companies incorporated in Hong Kong,

the Cayman Islands, Bermuda and the PRC may be listed on the Exchange. The

Exchange also considers listing applications from companies incorporated in other

overseas jurisdictions, provided the applicant can show that its home jurisdiction offers

equivalent standards of shareholder protection as are provided in Hong Kong. The

Exchange has indicated that Australia, British Virgin Islands, Canada (Ontario and British

Columbia), Cyprus, Germany, Jersey, Luxembourg, Singapore and the UK are acceptable

jurisdictions for the purpose of a primary listing on the Exchange.


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The Exchange has established a uniform approach for reviewing shareholder protection

standards of companies incorporated in other overseas jurisdictions, and will view more

favourably those jurisdictions whose securities regulators are either full signatories to the

IOSCO MMOU (International Organisation of Securities Commissions Multilateral

Memorandum of Understanding Concerning Consultation and Co-operation and the

Exchange of Information) or have entered into bi-lateral co-operation agreements with the SFC.

However, an overseas applicant will be subject to greater scrutiny if there is only a distant

relationship between its principal business operations and its jurisdiction of incorporation and,

if there is no relationship, the applicant may be considered unsuitable for listing.

• Suitability for listing (LR 8.04) – the company and its business must, in the opinion of the

Exchange, be suitable for listing.

• Sufficient trading record (LR 8.05) – the company must have (i) a trading record of not

less than three financial years, (ii) management continuity for the last three financial years,

(iii) ownership continuity for at least the most recent audited financial year, and (iv) one of

the following:

– profit test – a profit in the most recent year of not less than HK$20 million, and in

respect of the previous two years, an aggregate profit of not less than HK$30 million

(such profits to exclude any income or loss generated by activities outside the ordinary

and usual course of the business or by associated companies or entities whose results

are recorded in the company’s accounts using the equity method of accounting);

– market capitalisation/revenue/cash flow test – a market capitalisation of at least

HK$2 billion, revenue of at least HK$500 million in the most recent financial year, and

positive cash flow of at least HK$100 million in aggregate in the last three years; or

– market capitalisation/revenue test – a market capitalisation of at least HK$4 billion

and revenue of at least HK$500 million in the most recent financial year, and at least

1,000 shareholders at the time of listing. The Exchange is currently consulting the

market on a proposal to reduce the minimum shareholder spread under this test to

300.

The Exchange may accept a shorter trading record period or may modify or waive the profit or

other financial standards for mineral companies, newly formed project companies and in

exceptional cases. In addition, in June 2009 the Exchange clarified that it would consider

granting waivers in certain circumstances to individual listing applicants from complying with

the profit test requirement where the profit over the track record period has been temporarily

and adversely affected by the financial crisis.

• Latest financial accounts (LR 8.06) – the most recent financial period reported on in the

prospectus must not have ended more than six months before the date of the prospectus.

• Sufficient public interest (LR 8.07) – the Exchange must be satisfied that there will be

sufficient public interest in the company.

• Minimum public shareholding (LR 8.08) – the shares held by the public must constitute

at least 25% of the issued shares, although if the market capitalisation of the company is

over HK$10 billion, the Exchange may accept a lower percentage of between 15% and

25%. In addition, there must be a minimum of 300 public shareholders and not more than

50% of the shares in public hands at the time of listing can be beneficially owned by the

three largest public shareholders.


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• Minimum market capitalisation (LR 8.09) – the expected initial market capitalisation of

the company must be at least HK$200 million, with at least HK$50 million held by

members of the public.

• Competing businesses of controlling shareholder (LR 8.10) – if the controlling

shareholder (being a person, or group of persons, who exercise or control the exercise of

30% or more of the voting power of the company or who is in a position to control the

composition of a majority of the board), or any director of the company has an interest in

a business which competes or is likely to compete, either directly or indirectly, with the

company’s business, various disclosures must be made in the listing document. See page

71.

• Voting power of shares (LR 8.11) – the share capital of the company must not include

shares which have a voting power which does not bear a reasonable relationship to the

equity interest of such shares.

• Local management presence (LR 8.12) – the company must have a sufficient

management presence in Hong Kong. This will usually require at least two of the executive

directors to be ordinarily resident in Hong Kong. In its July 2009 guidance letter (GL9-09),

the Exchange sets out the conditions it would normally expect to see in any application for

a waiver from strict compliance with this requirement which focus on the communication

arrangements with the Exchange.

• Shares freely transferable (LR 8.13) – the shares for which listing is sought must be freely

transferable.

• Directors’ qualifications (LR 8.15) – each director must satisfy the requirements of

Chapter 3 of the Listing Rules including satisfying the Exchange that he has the necessary

character, experience and integrity to act as a director of a listed company. The board

must include at least three independent non-executive directors and at least one of the

independent non-executive directors must have appropriate professional qualifications or

accounting or related financial management expertise.

Additional listing criteria for mineral companiesMineral companies are subject to certain additional requirements set out in Chapter 18 of the

Listing Rules. These include satisfying the Exchange that the company:

• has the right to participate actively in the exploration for or extraction of natural resources;

• has a meaningful and sufficient portfolio of indicated resources or contingent resources

identified in a technical report prepared by a suitably qualified and independent person in

accordance with prescribed standards; and

• has available working capital for 125% of the group’s requirements for the next 12 months.

The company must include a statement on working capital in the prospectus.

If a mineral company is unable to satisfy the profit test, market capitalisation/revenue/cash flow

test or the market capitalisation/revenue test, it may still be suitable for listing if it can satisfy

the Exchange that its directors and managers have sufficient experience in the relevant mineral

exploration or extraction activities of the company. This will require individuals to have a

minimum of five years relevant industry experience which must be disclosed in the prospectus.


35

13. Listing timetable and Exchangedocuments

Provided that the listing criteria can be satisfied, the documents submittedwith the company’s listing application are in good order and the Exchange hasno significant issues with the proposed listing, a company can achieve a listingwithin as little as three to four months from the date it instructs its advisers,although in practice the timeframe for achieving a listing is often longer.

The formal listing application process is initiated by lodging with the Exchange the Form A1

(Listing Application Form), together with the other prescribed documents required by the

Listing Rules to be submitted with the Form A1. The Form A1 will set out a proposed timetable

for the listing, including a proposed date on which the company’s listing application will be

considered for approval by the Exchange Listing Committee at a hearing held at least 25

business days after the Form A1 is filed. Once the Form A1 is filed, the company is required

under the Listing Rules to lodge other relevant documents within a prescribed timeframe.

Listing flowchartThe key steps in a listing are set out below.

Application for listing (Form A1)(at least 25 clear business days before hearing)

Further documentary submissions to the Exchange (profit and cash flow memoranda)(at least 15 clear business days before hearing)

Further documentary submissions to the Exchange (at least four clear business days before hearing)

Recommendation/rejection by Listing Division(if rejected can appeal to Listing Committee)

Formal hearing by Listing Committee to approve listing application(if rejected may appeal to Listing (Review) Committee and Listing Appeals Committee)

Issue of pre-deal research

Posting of Web Proof Information Pack (“WPIP”) on the Exchange website

Issue of “red-herring” offering circular and roadshow

Further documentary submissions to the Exchange(before bulk print, and before issue, of the prospectus)

HK underwriting documents signed and prospectus registered, issued and posted onthe Exchange’s website

Public offer opens and closes

IPO price fixed and international underwriting documents signed and final offering circular issued

Announcement of results of public offer share applications

Further documentary submissions to the Exchange(before dealings commence)

Dealings in shares commence on the Exchange


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Listing timetable and documentsAn indicative listing timetable and list of documents to be filed with the Exchange is set out

below. The dates are approximate only. Business days exclude Saturdays, Sundays and days

on which the Exchange is closed for trading.

Approximatedays beforelisting

Action required

90 + Commence preparation of all listing documents – this is an indicativedate only and, depending on the circumstances, the commencementdate may need to be significantly earlier

56 Main documents to be submitted when making the listing application atleast 25 clear business days before the expected hearing date include:

• Form A1 – Listing Application Form• Listing application fee• Draft prospectus (must generally include draft accountants’ report

for three full financial years)• Drafts of all waiver applications (eg, continuing connected

transactions, management presence, qualification of companysecretary (if applicable))

• Draft statement of adjustments relating to accountants report (ifany)

• Various checklists (eg, listing qualifications, prospectus content,accountants’ report, offering mechanism, property valuationreport)

• Various prescribed additional information (eg, information on topfive suppliers and customers, comparison of the group’sperformance with peer group companies, details of reorganisationand corporate structure)

• Confirmation from the independent non-executive directors ontheir understanding of the obligations and duties of anindependent non-executive director

• Confirmation and undertaking from the directors and supervisorson the accuracy of their biographical information

• For companies with operations in the PRC, a PRC legal opinion onissues including corporate matters and property interests (ifapplicable)

• For companies with operations in the PRC, tax confirmations fromrelevant PRC tax bureaux (if applicable)

• Sponsor’s undertaking to use reasonable endeavours to ensure allinformation provided to the Exchange is true and does not omitmaterial information

• Sponsor’s statement of independence• Specified matters to be brought to the attention of the Exchange

which include confirmation on various aspects of the company’soperations (eg, compliance with relevant laws, litigation or otherinvestigations)

• Draft share option scheme (if any)

Responses to various standard comments are required whenresponding to the Exchange’s first comments


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Action required

42 Documents to be submitted at least 15 clear business days before

the expected hearing date:

• Board’s draft profit forecast memorandum covering (a) the period

of the profit forecast if the prospectus will include a profit forecast

and (b) if no profit forecast will be included in the prospectus,

covering the period up to the forthcoming financial year end date

after listing

• Board’s draft cash flow forecast for the period ending at least 12

months from the expected prospectus date

28 Advance notification to the Exchange of proposed date for

registration of the prospectus

26 Documents to be submitted at least 4 clear business days before

the expected hearing date include:

• Hearing proof of the prospectus

• Sponsor’s draft confirmation regarding the statement in the

prospectus as to the sufficiency of the issuer’s working capital

• For PRC issuers, certified copy of the approval from the CSRC

• Confirmation from the company’s legal advisers that the articles

of association are not inconsistent with the Listing Rules and laws

of the place of its incorporation

• Summary of new listing particulars

• Summary of key financial ratios during the track record period

• Unless previously provided, all executed waiver applications

21 Exchange Listing Committee hearing date

17 When the Exchange sends out the comments letter after the Listing

Committee hearing, assuming a second hearing is not required, it will

also issue a “request for posting” requiring the company to submit the

Web Proof Information Pack (“WPIP”) for posting on the Exchange’s

website not later than the earlier of the first distribution of the “red

herring” prospectus or the first meeting with institutional investors for

bookbuilding purposes


38


Action required

15 Documents to be submitted before bulk-printing of the prospectusinclude:

• Final form of formal notice and application forms

• Certified copy of the certificate of incorporation or equivalent

document

• Final form sponsor’s confirmation regarding the statement in the

prospectus as to the sufficiency of the issuer’s working capital

• Undertaking from the issuer’s controlling shareholder as required

by LR 10.07

• Undertaking from connected persons that they will provide

information to auditors for the purpose of reviewing connected

transactions

• If applicable, an undertaking from directors to exercise share

repurchase powers in accordance with the Listing Rules and a

confirmation from the company that the explanatory statement

and proposed share repurchase doesn’t contain any unusual

features

• Confirmation as to adoption of Standard Transfer Form (STF)

• Consent to include website hyperlinks(s) on the Exchange’s

website

• E-submission system registration

• Authorised representatives and company secretary form

• Sponsor’s confirmations regarding (1) the date on which it is

proposed to register a prospectus and (2) the posting of the

WPIP

• Submission on responses to the updates of the standard

comments (if any)


39


Action required

14 Documents to be submitted as soon as practicable after ListingCommittee hearing but before 11 am on the intended date of

registration of the prospectus include:

• Application for authorisation for registration of the prospectus

• Signed prospectus

• Translator’s certificate certifying the accuracy of the Chinese

translation

• Sponsor’s certificate relating to competency of the translator

• Certified copy of each power of attorney pursuant to which the

prospectus is signed

• Submission of soft copies of the prospectus and application

forms and related confirmations for publication on the Exchange

website

Filing of prospectus and accompanying registration documentswith the Companies Registry

Prospectus registered

Documents to be submitted as soon as practicable after ListingCommittee hearing but before the date of issue of the prospectus:

• Formal notice

• Notification issued by HKSCC that shares will be eligible

securities

• Sponsor’s confirmation in relation to publication of the

prospectus on the Exchange website together with a copy of the

letter from the Companies Registry confirming the registration of

the prospectus

• Sponsor’s declaration under LR 3A.13 (see Chapter 14)

• Undertaking from the Company and other persons to the

Exchange not previously provided

• Final forms of all documents previously submitted to the

Exchange in draft

13 Prospectus issued


40

Where a listing does not take place within six months from the filing of the original application

for listing, the initial listing fee will be forfeited and the company will need to reactivate its listing

application. Guidance letter GL7-09 provides that where the renewed application is made

within three months of the lapse of the original application, a further listing fee will be required

but the A1 documents do not need to be re-filed, unless there have been material changes.

Beyond three months from the lapse of the original application, a full set of A1 documents will

need to be filed together with the further listing fee. For any reactivation, the sponsor will be

required to make a submission to the Exchange to address all outstanding matters from the

original application and any material changes in the listing application, business or

circumstances of the applicant since the original application.

Selling into the USMany issuers listing in Hong Kong will decide to sell a portion of the shares to US investors

both within and outside the US pursuant to certain available exemptions under US securities

laws. Assuming that US counsel is brought into the Hong Kong IPO process at or close to the

kick-off, there should not be any delay to the timetable set out above caused by the addition

of an exempt US offering. The absence of regulatory involvement by the SEC means that US

counsel can work to the Hong Kong IPO schedule.

A decision as to the inclusion of a Rule 144A and/or Reg S tranche in an offering should be

made at the outset of the transaction in order to allow US due diligence procedures and

preparation of disclosure to commence as early as possible. A late decision to include an

offering to US investors can substantially delay the completion of the capital raising.


Action required

1-2 Documents to be submitted after issue of prospectus but before

dealings in the securities commence include:

• Certified copies of board and shareholders’ resolutions

authorising the issue of securities for which listing is sought

• List of successful applicants showing the names and

addresses

• Form D – Placing letter and marketing statement and placee

lists

• Form E – Sponsor’s declaration

• Form F – Declaration by issuer

• Form B/H/I – Declaration by the directors/supervisors and

proposed directors/supervisors on various matters and

undertaking regarding exercise of powers and duties

• Letter from the registrar confirming despatch of share

certificates

• Letter from the receiving bank confirming receipt of cleared

funds

• Compliance adviser’s undertaking

0 Expected listing date – dealing in securities commences


41

If a Rule 144A and/or Reg S tranche is included alongside the Hong Kong listing, an

international “wrap” will be prepared by US counsel containing certain summary terms, risk

factors and other disclosures that are specific to US or other international investors. This is

“wrapped” around the Hong Kong prospectus approximately 7-10 days prior to bulk printing

the Hong Kong prospectus to create the preliminary offering circular or “red herring”. The

preliminary offering circular, which generally does not contain pricing information, is primarily

used to market the shares to US and other international investors on the international

roadshow. Following the finalisation of the share price and just prior to listing, the offering

circular will be finalised and circulated to investors who have committed to purchase shares

together, where relevant, with a pricing term sheet.


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14. Sponsor’s responsibilities

The sponsor plays a key role in the listing process and is the person primarilyresponsible for liaising with the Exchange. It has specific responsibilitiesunder the Listing Rules and the SFC’s Corporate Finance Adviser Code ofConduct.

Key responsibilitiesCompliance undertaking (LR 3A.04) – each sponsor must give an undertaking to the

Exchange in the form set out in Appendix 17 to the Listing Rules confirming that the sponsor

will comply with the Listing Rules applicable to sponsors, use all reasonable endeavours to

ensure that all information provided to the Exchange is true in all material respects and does

not omit any material information and cooperate in any investigation by the Exchange.

Independence statement (LR 3A.08) – the sponsor must make a statement to the Exchange

regarding its independence from the issuer in the form set out in Appendix 18 to the Listing

Rules. The sponsor must demonstrate independence from the time of the Form A1 filing up

until the date of listing. If there are two or more sponsors, only one need be independent. The

prospectus must disclose whether each sponsor satisfies the independence requirement.

Sponsor’s role (LR 3A.11) – LR 3A.11 specifies the sponsor’s role and in particular provides

that the sponsor must be closely involved in the preparation of the listing documents and must

conduct reasonable due diligence to be able to make the sponsor’s declaration required by LR

3A.13 (see below). In determining what is reasonable due diligence sponsors must have

regard to Practice Note 21 of the Listing Rules which is discussed below.

Sponsor’s declaration (LR 3A.13) – as soon as practicable after the listing hearing, the

sponsor must submit to the Exchange a declaration in the form set out in Appendix 19 to the

Listing Rules which confirms that all relevant documents required for the listing application

have been filed with the Exchange and that, having made reasonable due diligence enquiries,

the sponsor reasonably believes that:

• the company is in compliance with all the conditions in Chapter 8 of the Listing Rules;

• the prospectus contains sufficient particulars and information to enable a reasonable

person to form as a result thereof a valid and justifiable opinion of the shares and the

financial condition and profitability of the company at the time of the issue of the listing

document;

• the information in the non-expert sections of the prospectus:

– contains all information required by relevant legislation and rules;

– is true in all material respects, or, to the extent it consists of opinions or forward looking

statements on the part of the directors of the company or any other person, such

opinions or forward looking statements have been made after due and careful

consideration and on bases and assumptions that are fair and reasonable; and

– does not omit material information;


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• the company has established procedures, systems and controls (including accounting and

management systems) which are adequate having regard to the obligations of the

company and its directors to comply with the Listing Rules and other relevant legal and

regulatory requirements (in particular Rules 13.09, 13.10, 13.46, 13.48 and 13.49,

Chapters 14 and 14A and Appendix 16) and which are sufficient to enable the company’s

directors to make a proper assessment of the financial position and prospects of the

company and its subsidiaries, both before and after listing;

• the directors of the company collectively have the experience, qualifications and

competence to manage the company’s business and comply with the Listing Rules, and

individually have the experience, qualifications and competence to perform their individual

roles, including an understanding of the nature of their obligations and those of the

company as an issuer under the Listing Rules and other legal or regulatory requirements

relevant to their role;

• in relation to each expert section in the prospectus, having made reasonable due diligence

inquiries, the sponsor reasonably believes (to the standard reasonably expected of a

sponsor which is not itself expert in the matters dealt with in the relevant expert section)

that:

• where the expert does not conduct its own verification of any material factual

information on which the expert is relying for the purposes of any part of the expert

section, such factual information is true in all material respects and does not omit any

material information, where factual information includes:

• factual information that the expert states the expert is relying on;

• factual information the sponsor believes the expert is relying on; and

• any supporting or supplementary information given by the expert of the company

to the Exchange relating to an expert section;

• all bases and assumptions on which the expert sections of the prospectus are

founded are fair, reasonable and complete;

• the expert is appropriately qualified, experienced and sufficiently resourced to give the

relevant opinion;

• the expert’s scope of work is appropriate to the opinion given and the opinion required

to be given in the circumstances (where the scope of work is not set by a relevant

professional body);

• the expert is independent from the company and its directors and controlling

shareholder(s); and

• the prospectus fairly represents the views of the expert and contains a fair copy of or

extract from the expert’s report.


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Practice Note 21 due diligencePN21 sets out a number of general provisions in respect of the due diligence procedures to be

carried out by sponsors.

• Scope of due diligence – sponsors should make such enquiries as may be necessary

until the sponsor can reasonably satisfy itself as to the disclosure in the listing document.

In this regard, the sponsor should examine with professional scepticism the accuracy and

completeness of statements and representations made, or other information given, to it by

the company or its directors. Professional scepticism means making a critical assessment

with a questioning mind and being alert to information, including information from experts,

that contradicts or brings into question the reliability of such statements, representations

or information.

• Documentation of due diligence – the Exchange further expects sponsors to document

their due diligence planning and significant deviations from their plans. This includes

demonstrating that they have turned their minds to the question of what inquiries are

necessary and reasonably practicable in the circumstances of the relevant transaction and

documenting conclusions reached in respect of the company’s compliance with the

requirements of Chapter 8 of the Listing Rules, taking into account any waivers obtained

from the Exchange.

• Engagement of third party professionals – it may be appropriate for the sponsor to

engage third party professionals to assist it with certain due diligence inquiries. However,

the sponsor is required to satisfy itself that it is reasonable to rely on information or advice

provided by the third party professional, including being satisfied as to the competence of

the professional, the scope of work and methodology employed and that the third party

professional’s report or opinion is consistent with the other information known to the

sponsor about the company, its business and its business plans.

In addition, it should be noted that the Exchange expects the sponsor to remain primarily

responsible for being satisfied itself as to the overall due diligence conducted and therefore it

would not be appropriate to appoint third party professionals to undertake all due diligence

inquiries. The sponsor should lead all core aspects of due diligence, for example business and

financial due diligence.

Suggested due diligence stepsPN21 also sets out a number of specific areas expected to be covered by sponsors in their

due diligence review. It should be noted that PN21 only sets out the Exchange’s expectations

of due diligence that sponsors should typically perform and is not meant to be exhaustive. The

scope and extent of due diligence to be performed in a particular case may be different from

the specific examples set out in PN21. The sponsor is expected to exercise its judgment as

to what investigations or steps are appropriate for each company and the extent of such steps.

• Directors – typical due diligence inquiries in relation to the collective and individual

experience, qualifications and competence and integrity of the directors (including non-

executive directors) include:

• reviewing written records that demonstrate each director’s past performance as a

director of the company including participation in board meetings and decision making

relating to the management of the company and its business;


45

• assessing individually and collectively the financial literacy, corporate governance

experience and competence generally of the directors with a view to determining the

extent to which the board of the company as a whole has the depth and breadth of

financial literacy and understanding of good corporate governance required; and

• reviewing the financial and regulatory track record of each publicly listed company

(including those listed on other exchanges) of which any of the directors is or was an

executive or non-executive director, for example, by reference to company

disclosures, media articles and information about these companies on the website of

the relevant stock exchange.

• Qualifications for listing – typical due diligence inquiries in relation to the qualifications for

listing and suitability of the company for listing include:

• searching the company registry in the company’s place of incorporation to confirm that

the company is duly established in that place and that the company is in compliance

with its memorandum and articles of association or equivalent constitutive documents;

• reviewing material financial information, including:

– financial statements of the company;

– financial statements of all subsidiaries of the company and other companies that

are material to the group’s financial statements; and

– the internal financial records, tax certificates and supporting documents to the tax

certificates for the track record period.

The Exchange expects that in conducting such review, the sponsor should in most cases

interview the company’s accounting staff and internal and external auditors and reporting

accountants and, where relevant, obtain comfort from the company’s external auditors or

reporting accountants based upon agreed procedures; and

• assessing the accuracy and completeness of the information submitted by the

company in demonstrating that it satisfies the trading record requirement.

• Preparation of listing document and supporting information – typical due diligence in

respect of the preparation of the listing document and supporting information includes:

• assessing the financial information to be published in the listing document including:

– obtaining written confirmation from the company and its directors that the financial

information (other than that already reported upon by a reporting accountant) has

been properly extracted from the relevant underlying accounting records; and

– being satisfied that the confirmation referred to above has been given after due

and careful inquiry by the company and its directors;

• assessing the company’s performance and finances, business plan and any profit

forecast or estimate, including an assessment of the reasonableness of budgets,

projections and assumptions made when compared with past performance, including

historical sales, revenue and investment returns, payment terms with suppliers, costs

of financing, long-term liabilities and working capital requirements.

The Exchange expects that this would normally include interviewing the company’s senior

management and often the company’s major suppliers, customers, creditors and bankers;


46

• assessing whether there has been any change since the date of the last audited

balance sheet included in the listing document that would require disclosure to ensure

the listing document is complete and not misleading;

• assessing whether it is reasonable to conclude that the proceeds of the issue will be used

as proposed by the company, taking into account the outcome of the sponsor’s

assessment of, in particular, the company’s existing cash and liquid reserves, projected

liabilities, working capital requirements and expenditure controls;

• undertaking a physical inspection of material assets, whether owned or leased, including

property, plant, equipment, inventory and biological assets (for example, livestock or crops)

used or to be used in connection with the company’s business;

The Exchange expects the sponsor to visit the site of the asset in order to view the asset and

to assess its extent, quality and quantity and the purpose for which it is used. Nevertheless,

the Exchange understands that where, in the reasonable opinion of the sponsor, assessment

of an asset, including as to its extent, quality, quantity and use, genuinely cannot be achieved

without the use of an expert (for example, in undertaking the physical inspection the sponsor

becomes suspicious that the asset does not exist as to the extent represented or exists but is

not used for the purpose claimed) the company may instruct an appropriately qualified

independent expert to conduct all or part of the inspection. In such cases the sponsor should

ensure the expert is required to provide a written report in respect of the inspection:

• reaching an understanding of the company’s production methods;

• reaching an understanding of the manner in which the company manages its business,

including as relevant actual or proposed marketing plans, including distribution channels,

pricing policies, after-sales service, maintenance and warranties;

• reviewing the business (ie non-legal) aspects of all contracts material to the company’s

business;

• reviewing legal proceedings and other material disputes that are current or recently

resolved (for example, resolved in the previous 12 months) and in which the company is

involved, and all proceedings or material disputes the company knows to be contemplated

and which may involve the company or one of its subsidiaries;

• analysing the business aspects of economic, political or legal conditions that may

materially affect the company’s business;

• considering the industry and target markets in which the company’s business has

principally operated and is intended to principally operate, including geographical area,

market segment and competition within that area and/or segment (including existing and

potential principal competitors and their relative size, aggregate market share and

profitability);

• assessing whether there is appropriate documentation in place to confirm that the material

assets, whether owned or leased, including property, plant, equipment, inventory and

biological assets used or to be used, in connection with the company’s business, are

appropriately held by the company (for example, reviewing the relevant certificates of title

and rights of land use);

• assessing the existence, validity and business aspects of proprietary interests, intellectual

property rights, licensing arrangements and other intangible rights of the company;


47

• reaching an understanding of the technical feasibility of each new product, service or

technology developed, being developed or proposed to be developed pursuant to the

company’s business plan that may materially affect the company’s business; and

• assessing the stage of development of the company’s business and assessing the company’s

business plan and any forecasts or estimates, including reaching an understanding of the

commercial viability of its products, services or technology, including an assessment of the risk

of obsolescence as well as market controls, regulation and seasonal variation.

• Experts – typical due diligence inquiries in relation to the expert sections of the listing

document include:

• interviewing the expert, reviewing the terms of engagement (having particular regard

to the scope of work, whether the scope of work is appropriate to the opinion required

to be given and any limitations on the scope of work which might adversely impact on

the degree of assurance given by the expert’s report, opinion or statement) and

reviewing publicly available information about the expert to assess:

– the expert’s qualifications, experience and resources; and

– whether the expert is competent to undertake the required work;

• reviewing the expert sections of the draft listing document in order to form an opinion

as to whether the following are disclosed and commented on appropriately:

– the factual information on which the expert relies;

– the assumptions on which the expert opinion is based; and

– the scope of work performed by the expert in arriving at his/her opinion;

• verifying factual information where the expert does not conduct its own verification of any

material factual information on which the expert is relying for the purposes of any part of

the expert section, and ensuring that such factual information is true in all material respects

and does not omit any material information;

• where the sponsor is aware that the company has made formal or informal representations

to an expert in respect of an expert section or in respect of a report made in connection

with the listing application, assessing whether the representations are consistent with the

sponsor’s knowledge of the company, its business and its business plans;

• by reference to the sponsor’s knowledge of the company, its business and its business

plans assessing whether the assumptions disclosed by the expert as those on which the

expert’s opinion is based, are fair, reasonable and complete;

• if the expert’s opinion is qualified, assessing whether the qualification is adequately

disclosed in the listing document; and

• where the standard of independence is not set by a relevant professional body, obtaining

written confirmation from the expert that it is independent from the company and its

directors and controlling shareholder(s), and being satisfied that there is no cause to

inquire further about the truth of such confirmation. This would include confirming that the

expert does not have a direct or indirect material interest in the securities or assets of the

company, its connected persons, or any associate of the company beyond those allowed

by LR 3A.07.


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• Accounting and management systems – typical due diligence inquiries in relation to the

company’s accounting and management systems and in relation to the directors’

appreciation of their and the company’s obligations include:

• assessing the company’s accounting and management systems that are relevant:

– to the obligations of the company and its directors to comply with the Listing Rules

and other legal and regulatory requirements, in particular the financial reporting,

disclosure of price sensitive information and notifiable and connected transaction

requirements; and

– to the directors’ ability to make a proper assessment of the financial position and

prospects of the company and its subsidiaries, both before and after listing.

Such assessment should cover a review of the company’s compliance manuals,

policies and procedures including corporate governance policies and any letters

given by the reporting accountants to the company that commented on the

company’s accounting and management systems or other internal controls.

• interviewing all directors and senior managers with key responsibilities for ensuring

compliance with the Listing Rules and other legal and regulatory requirements

(including the staff responsible for the accounting and financial reporting function, the

company secretary and any compliance officers) to assess:

– their individual and collective experience, qualifications and competence; and

– whether they appear to understand relevant obligations under the Listing Rules

and other relevant legal and regulatory requirements and the company’s policies

and procedures in respect of those obligations.

To the extent that the sponsor finds that the company’s procedures or its directors

and/or key senior managers are inadequate in any material respect in relation to the

issues referred to above, the sponsor should typically discuss the inadequacies with

the company’s board of directors and make recommendations to the board regarding

appropriate remedial steps. The Exchange also expects the sponsor to ensure that

any such steps are taken prior to listing, which could include training tailored to the

needs of individual directors and senior managers.

Corporate Finance Adviser Code of ConductThe SFC Corporate Finance Adviser Code of Conduct sets out requirements and guidelines in

respect of the overall conduct of corporate finance advisers, including IPO sponsors. There

are specific requirements in connection with listing applications such as the following:

• a corporate finance adviser acting as a sponsor to a listing applicant should satisfy all the

requirements applicable to sponsors as set out in the Listing Rules. It should ensure that,

when giving a view as to whether an issuer is suitable for listing, it is capable of giving

“impartial advice” before accepting the sponsorship role and that such view is given

independently; and


49

• where information and representations are provided by a client for incorporation in a public

document (eg, the prospectus) or submission to the regulators, the corporate finance

adviser should advise its client to take all reasonable steps to ensure, and obtain

confirmation from the client, that the information and representations provided are true,

accurate, complete and not misleading, and that no material information or facts have

been omitted or withheld.


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15. Prospectus content

The content requirements for a prospectus are set out in the CompaniesOrdinance and the Listing Rules. The overriding consideration is that theprospectus should contain such particulars and information as are necessaryto enable an investor to make an informed assessment of the activities, assetsand liabilities, financial position, management and prospects of the companyand of its profits and losses and rights attaching to the securities beingoffered.

The Third Schedule to the Companies Ordinance and Part A of Appendix 1 to the Listing Rules

set out the matters required to be included in a prospectus. These matters include (but are

not limited to):

• information about the securities to be listed and the company’s capital;

• general information about the group’s business and assets;

• financial information about the group and the prospects of the group including an

accountant’s report;

• management discussion and analysis of the financial condition;

• property valuation;

• information about the company’s management, directors, securities held by the directors

and directors’ service contracts;

• details of shareholders whose interests in the company would fall to be disclosed under

the SFO (essentially those holding 5% or more of the share capital);

• how the IPO proceeds are to be used; and

• various material contracts and other documents which must be made available for public

inspection.

For mineral companies, Chapter 18 of the Listing Rules sets out additional information which

must be included in the prospectus including:

• a technical report by a suitably qualified and independent person as to resources and/or

reserves of the company prepared in accordance with prescribed standards, with a

confirmation that no material changes have occurred since the date of the report or details

of any material changes;

• details of the nature and extent of the company’s prospecting, exploration, exploitation,

land use and mining rights;

• a statement of any legal claims or proceedings that may influence the rights to explore or

mine;

• disclosure of specific risks and general risks with reference to a new Guidance Note 7 for

suggested risk analysis;


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• disclosure of other material issues related to the business operation including

environmental, social and health and safety issues, compliance with host country laws and

regulations, sufficiency of funding plans for remediation and rehabilitation and other

prescribed information; and

• an estimate of the operating cash cost for the minerals or petroleum produced, if the

company has begun production or, if it hasn’t yet begun production, its plans to proceed

to production with indicative times and costs.

US disclosure standards and practiceAn offering circular contains substantive disclosures to investors regarding the issuer, the

securities being offered and the manner of distribution. Even if the securities are being offered

in the US under an available exemption from registration rather than pursuant to a registration

statement filed with the SEC, the underwriters will generally expect US counsel to produce an

offering document that contains the disclosure of a standard equivalent to that required in

registered offerings in order to protect against Rule 10b-5 liability. To the extent US counsel is

expected to issue a Rule 10b-5 letter, it will also insist on complying as closely as possible with

the disclosure required in SEC-registered offerings.

Rule 10b-5 under the Securities Exchange Act of 1934 establishes the basic disclosure

standard for US offerings, by providing that purchasers of a security have a cause of action

against any person who makes an untrue statement of a material fact, or omits to state a

material fact necessary in order to make the statements made, in the light of the circumstances

under which they were made, not misleading, in connection with the purchase or sale of any

security. As a result, all material information must be provided and no material information may

be omitted or misstated.

Offering documents written to US disclosure standards for Hong Kong IPOs will generally

include significant disclosure in a so-called “international wrap” preceding the Hong Kong

prospectus. The purpose of the international wrap is to provide additional disclosure regarding

the issuer and the offering relevant to US and other international investors, including:

• Risk factors (specific to international investors);

• Exchange rate information;

• Capitalisation and indebtedness;

• Dilution;

• Description of the Exchange;

• Description of the shares;

• US federal tax considerations; and

• Plan of distribution

Prior to certain US rule revisions with respect to US GAAP reconciliation in November 2007,

the international wrap also contained discussions on the summary of significant differences

between the GAAP under which the audited financial statements were prepared and US GAAP.

After the rule revisions, such discussions are often no longer included, particularly if the

financial statements of the issuer are prepared in compliance with International Financial

Reporting Standards (IFRS).


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Of the sections in the Hong Kong prospectus, those sections of particular importance to US

counsel are the following:

• Risk factors: the risk factors section in both the international wrap and the Hong Kong

prospectus contains a discussion of the principal factors that make an investment in the

issuer speculative or of high risk.

• Business: the business section is a description of the principal business, products and

services of the issuer, frequently addressing total sales and revenue by categories of

activity and geographic market.

• Financial information: in a Hong Kong prospectus, the financial information section is the

functional equivalent of the management discussion and analysis (“MD&A”) commonly

found in Rule 144A offering circulars. As discussed further below, this section of the

prospectus presents a discussion of the historical performance and current financial

condition of the issuer and calls for disclosure of information as to trends, uncertainties and

other circumstances that may have a material impact in the future on the issuer’s financial

performance.

MD&AAs noted above, the MD&A section is frequently referred to in Hong Kong prospectuses as the

“Financial Information” section.

In a Rule 144A offering, the MD&A includes information with respect to results of operations,

liquidity, capital resources and other information necessary to an understanding of a

company’s financial condition, changes in financial condition and operating results. The

purpose of the MD&A is to improve overall financial disclosure and provide the context within

which financial statements should be analysed, to provide information about the quality of, and

potential variability of, a company’s earnings and cash flow and to provide a narrative

explanation of the issuer’s financial statements to enable the investor to see the company

“through the eyes of management”. This is achieved by presenting in the MD&A, on a period-

on-period basis, the issuer’s financial condition, changes in financial condition and results of

operations for each year and interim period for which financial statements are included in the

prospectus and explaining causes of material period-to-period changes in key financial

statement line items, focusing on the issuer’s profit and loss statement and statement of cash

flows.

The MD&A also typically includes a summary of the issuer’s critical accounting policies

(estimates and assumptions involved in the application of GAAP which have a material impact

on the issuer’s reported financial condition and operating performance), principal factors

affecting financial performance and a narrative summary of the components of key line items.

An issuer must also provide a description of any known trends or uncertainties that have had,

or that the issuer reasonably expects will have, a material impact on the issuer’s net revenues

or income.

Where, in the issuer’s judgment, a discussion of segment information would be appropriate to

an understanding of the issuer’s business, segment discussion and analyses of the issuer’s

financial condition and results of operation should also be included in the MD&A. Segment

information would be commonly included in a MD&A if a segment contributes in a materially

disproportionate way to revenues, profitability or cash needs, or if failure to discuss a segment

would present an incomplete and misleading picture of the enterprise.


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In the past, extensive US-style MD&A sections were not typical in Hong Kong listings, but such

sections have become increasingly common and expected by the Exchange. SEC-registered

offerings must include an MD&A section and hence it is market practice to include them in Rule

144A offering circulars as well. US-style MD&As are also being included in some Regulation S

offerings, as investors and the Exchange have become accustomed to such disclosure.


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16. Approval and registration of prospectus

The Exchange, the SFC and the Registrar of Companies can review aprospectus before it is registered, but in practice the sponsor will liaise solelywith the Exchange which will copy the draft prospectus to the SFC and collateits comments and any comments it receives from the SFC. The Registrar ofCompanies will not see a draft of the prospectus until the date of itsregistration and will generally rely on a confirmation letter from the Exchangethat the Exchange has reviewed the prospectus and authorised it forregistration.

Approval processThe draft prospectus is filed by the sponsor with the Exchange with the first set of filing

documents at the time of filing the Form A1. At the same time the issuer will authorise the

Exchange to provide the draft prospectus to the SFC for its review. The SFC will not always

provide comments on the prospectus but when it does the general practice is for the

Exchange to pass on the SFC’s comments to the sponsor.

The SFC will generally make only a limited number of high level comments, whereas the

Exchange will generally provide a large number of comments over the entire period of the

listing process (at least twenty-five business days to the listing hearing and up to the finalisation

of the prospectus).

Registration processOnce the listing application and the prospectus have been approved, the final step before

issuing the prospectus to the public is registration of the prospectus with the Registrar of

Companies. Registration of the prospectus with the Registrar of Companies is a two stage

process involving an application to the Exchange for authorisation for registration followed by

an application to the Registrar of Companies for registration. The Exchange must be given at

least 14 days advance notice of the intended date of registration of the prospectus (LR

11A.09).

Application for authorisation for registrationThe following documents must be submitted to the Exchange at the time of applying for

authorisation for registration:

• an application for authorisation for registration;

• the prospectus duly signed by the directors;

• any power of attorney pursuant to which the prospectus is signed;

• a translation certificate in respect of the Chinese translation of the prospectus and a

certificate issued by the sponsor confirming that the translator is competent to give the

certificate;

• the consent of any expert named in the prospectus;

• details of any selling shareholders;


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• any statement of adjustments; and

• certified copies of the material contracts referred to in the prospectus.

In addition, the Exchange may request additional documents are filed such as the application

forms.

Registration of the prospectusAt registration various documents will be filed with the Registrar of Companies including:

• a cover letter requesting registration of the prospectus;

• the prospectus duly signed by the directors;

• application forms;

• the consent of any expert named in the prospectus;

• details of any selling shareholders;

• any statement of adjustments;

• certified copies of the material contracts referred to in the prospectus; and

• a certificate of authorisation for registration from the Exchange.


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17. Listing of PRC businesses

PRC businesses may be listed by way of an H share listing or a red chip listing.An H share listing is the listing on the Exchange of a joint stock limitedcompany incorporated in China. A red chip listing is a listing on the Exchangeof a company incorporated outside of China but with most of its business inChina. These listings are generally more complicated than other listings ofHong Kong businesses as relevant PRC approvals may be required for thereorganisation and listing processes.

A company with its business in China may seek listing by way of an H share listing or by way

of a red-chip listing. In each case, approvals may be required from PRC government

authorities in connection with any proposed reorganisation and the proposed listing as well as

for the conduct of the company’s business. Issues relating to the company’s title to its real

properties located in the PRC are often also an issue (see Chapter 23 for a discussion of

potential property title issues).

H share listingChapter 19A of the Listing RulesChapter 19A of the Listing Rules deals specifically with the listing on the Exchange of

companies incorporated in China setting out additional requirements, modifications and

exceptions to the other relevant chapters of the Listing Rules to take account of the following:

• the PRC legal system is not a common law system;

• restrictions on use of foreign exchange in the PRC and its remittance out of the PRC are

imposed by PRC law; and

• only PRC citizens and legal persons are permitted to own domestic shares and only

foreign investors and investors from Hong Kong, Taiwan and Macau may own overseas

listed foreign shares – the two types of shares therefore operate in separate markets.

Among such additional requirements are that:

• PRC issuers are expected to present their accounts in accordance with Hong Kong or

international accounting standards;

• the articles of association of PRC issuers must contain provisions reflecting the different

nature of domestic shares and H shares and the different rights of their respective holders;

and

• disputes involving holders of H shares arising from a PRC issuer’s articles or from any

rights or obligations under the PRC Company Law or other relevant PRC laws and

regulations are to be settled by arbitration in Hong Kong or the PRC at the election of the

claimant.


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Basic qualifications: The Exchange will consider an application for listing by a PRC issuer only in the following

circumstances:

• Due incorporation – the issuer is duly incorporated in the PRC as a joint stock limited

company;

• Arrangement with regulators – the Exchange is satisfied that there are adequate

communication and cooperation arrangements in place between the Exchange and

relevant securities regulatory authorities in the PRC;

• Stock Exchange communication – where a PRC issuer has equity securities listed (or to

be listed) on another stock exchange, the Exchange is satisfied that there are adequate

communication arrangements in place between the Exchange and such other stock

exchange; and

• Shareholder protection – the Exchange is satisfied that applicable PRC law and the

articles of association of the PRC issuer provide a sufficient level of shareholder protection

to holders of H shares.

Additional requirements, modifications and exceptions to the Listing Rules underChapter 19A Sponsors – sponsors for a listing application by a PRC issuer have a particular responsibility

to satisfy themselves that:

• the PRC issuer is suitable to be listed; and

• the PRC issuer’s directors and supervisors appreciate the nature of their responsibilities

and can be expected to honour their obligations, and understand what is required of them,

under the Listing Rules and applicable PRC laws and regulations.

Compliance advisers – a PRC issuer is required to appoint a compliance adviser for the

period of time from its IPO on the Exchange until it sends to its members its annual report and

accounts for the first full financial year after its IPO. The PRC issuer should ensure that there

are adequate and efficient means of communication between itself, its authorised

representatives, directors and officers and the compliance adviser and should keep the

compliance adviser fully informed of all communications with the Exchange.

The compliance adviser must inform the PRC issuer on a timely basis of any amendment or

supplement to the Listing Rules and any applicable new or amended law, regulation or code

in Hong Kong applicable to the issuer.

Where the authorised representatives of the PRC issuer are expected to be frequently outside

Hong Kong, the compliance adviser must act as the principal channel of communication with

the Exchange.

Accountants’ reports – accountants reports must have been audited to a standard comparable

to that required in Hong Kong. Reports will normally be required to conform with the

requirements of the Hong Kong Financial Reporting Standards or International Financial

Reporting Standards (IFRS). PRC issuers may, in addition, present in a separate part of the

report, financial information conforming with applicable PRC accounting rules and regulations

provided that the report contains a statement of the financial effect of the material differences

from HKFRS or IFRS as appropriate. In August 2009, the Exchange issued a Consultation


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Paper setting out proposals to accept Mainland accounting and auditing standards and

Mainland audit firms endorsed by the Ministry of Finance and the CSRC for PRC issuers listed

on the Exchange. The outcome of the consultation exercise is not yet known, but if the

proposals are implemented, compliance costs in respect of audit related matters for PRC

issuers should be reduced.

Qualifications for listing – The following modifications and additional requirements apply:

• Public interest – The Exchange has absolute discretion to refuse a listing of securities of a

PRC issuer if it believes that it is not in the public interest to list them.

• Authorised person – The PRC issuer must appoint and maintain while its shares are listed

on the Exchange a person authorised to accept service of process and notices on its

behalf in Hong Kong. The contact details (and any changes to such details) of such

person must be provided to the Exchange.

• Hong Kong register – For registered securities, the PRC issuer must maintain a register of

holders in Hong Kong for local registration/transfers of shares. Unless the Exchange

otherwise agrees, only securities registered on the Hong Kong register may be traded on

the Exchange.

• Competing business – LR 8.10 requires disclosure of any competing business in which a

controlling shareholder or directors of the company have any interests. For these

purposes, the Exchange will normally not consider a PRC governmental body (including

central, provincial or local level governments, but excluding entities under the PRC

government carrying out commercial business or operating a commercial entity) as a

“controlling shareholder” of a PRC issuer.

• Management presence – the requirement in LR 8.12 for sufficient management presence

in Hong Kong, i.e., at least two executive directors to be ordinarily resident in Hong Kong,

shall apply except as otherwise permitted by the Exchange. PRC issuers will commonly

seek a waiver from the Exchange from the requirements of LR 8.12. In considering any

such waiver application, the Exchange will have regard to factors set out in its July 2009

guidance letter (GL9-09) which include, among others, the PRC issuer’s arrangements for

maintaining regular communication with the Exchange.

• Company secretary – the secretary of a PRC issuer need not be ordinarily resident in Hong

Kong, provided such person can meet the other requirements of LR 8.17. If the secretary

does not meet the qualification requirements of LR 8.17(2) (ordinary member of The Hong

Kong Institute of Chartered Secretaries, solicitor, barrister or professional accountant) the

PRC issuer will have to satisfy the Exchange that the secretary has the relevant experience

to be capable of discharging the functions of a company secretary. In assessing relevant

experience, the Exchange will have regard to, among others, the period of the person’s

employment with the PRC issuer, and his familiarity with the Listing Rules. A submission

must be made to the Exchange setting out details of the training provided to the person

for these purposes. A waiver is commonly sought from LR 8.17 providing for the

appointment of joint company secretaries for a period of at least three years following

listing, one of whom meets the qualification requirements under LR 8.17(2) (listing decision

35-1).


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• Independent non-executive directors – in addition to the requirements under Chapter 3 of

the Listing Rules, the INEDs of a PRC issuer must demonstrate an acceptable standard of

competence and adequate commercial or professional experience to ensure that the

interests of shareholders will be adequately represented. At least one INED must be

ordinarily resident in Hong Kong.

• Supervisors – supervisors of a PRC issuer must have the character, experience and

integrity and demonstrate a standard of competence commensurate with their positions.

• Connected persons – connected persons of PRC issuers include its directors,

supervisors, chief executive and substantial shareholders. The Exchange will normally not

consider a PRC governmental body (as defined above) as a “controlling shareholder” of an

issuer for these purposes.

Application procedures – Chapter 19A contains certain modifications to the application

procedures, including the documents to be filed with the Exchange. The PRC issuer will be

required to submit a copy of the approval of the State Council Securities Policy Committee or

other PRC competent authority approving the PRC issuer’s listing on the Exchange and the

issue of equity securities which, in practice, is required prior to the Listing Committee hearing.

A PRC issuer will also be required to submit to the Exchange a PRC legal opinion covering a

range of PRC legal issues including the obtaining of all requisite PRC approvals for the listing,

all requirements under applicable PRC laws and regulations relevant to the conduct of its

business in the PRC and the company’s compliance the relevant requirements, including

details of the licences, permits or certificates obtained.

Listing Documents – Chapter 19A contains modifications to the content requirements for

listing documents for PRC issuers, including in particular:

• Constitutive documents – a summary of provisions of its constitutive documents affecting

shareholders’ rights and protection and directors’ powers.

• Summary of PRC law – a summary of relevant PRC law including taxation, taxation of

dividends, foreign exchange controls, company law, securities regulations and relevant

PRC regulations affecting the issuer’s industry and major businesses.

• Warning statements and risk factors – specified warning statements and risk factors.

• Company law – a description of applicable company law including material differences

between PRC and Hong Kong laws.

Language – All documents submitted to the Exchange in a language other than English must

be accompanied by a certified English translation. Documents for inspection which are not in

English must, unless otherwise provided by the Companies Ordinance, be accompanied by a

certified English translation.

Offering structure – National Social Security Fund

Pursuant to applicable PRC regulations, shareholders who hold State-owned shares are

required to reduce their shareholdings in an amount of 10% of the entire offering (i.e., including

any additional shares offered upon the exercise of an over-allotment option) in any overseas

public offering by remitting the sales proceeds of such shares to the National Social Security

Fund (NSSF), transferring such shares to the NSSF for retention or pursuant to other methods

that are approved by the competent PRC authorities. Such shares will be converted from

domestic shares to H shares upon listing.


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Red chip listingA red chip listing will generally involve a corporate reorganisation resulting in the transfer of the

PRC businesses or assets to a company incorporated outside the PRC (eg, Hong Kong,

Bermuda or Cayman Islands) which will form the listing vehicle. While similar regulatory and

related issues arise in respect of the business and assets of the company as for H Share

issuers, once the relevant business is held outside the PRC, the PRC regulatory process for

the reorganisation and listing has historically been simpler than that for H Share applicants.

However, following the introduction of regulations by the CSRC and other regulatory authorities

in the PRC, the listing process for red chip listing applicants has become increasingly difficult.

From August 2006, the PRC has enacted regulations relating to the reorganisation of PRC

entities into offshore vehicles to facilitate listings, under which approval from MOFCOM is

required in respect of such offshore vehicle’s incorporation, and approval from CSRC is

required in respect of such offshore vehicle’s listing.

Typically red chip listings also give rise to the following issues in common with the listing of H

share issuers:

• Legal compliance – the company will be subject to compliance with applicable PRC legal

requirements, including requirements for applicable business permits and licences

(particularly where there are restrictions on foreign ownership in the relevant industry).

• Legal opinion – the company must submit to the Exchange a PRC legal opinion covering

a range of PRC legal issues including the obtaining of all requisite PRC approvals for the

listing (or a confirmation that no such approvals are required), setting out all requirements

under applicable PRC laws and regulations relevant to the conduct of its business in the

PRC and the company’s compliance the relevant requirements, including details of the

licences, permits or certificates obtained.

• Disclosure – disclosure of specific risks relating the conduct of business in the PRC.

Where the red chip listing applicant is State-owned, the State-owned shareholder may be

subject to a requirement to sell part of its shareholding and remit the sales proceeds to the

NSSF or to transfer such shares to the NSSF for retention etc.


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18. Continuity of management andownership

One of the key listing criteria is that the company must have an adequatetrading record under substantially the same management and ownership. Thecompany must demonstrate management continuity for at least the last threefinancial years and ownership continuity and control for at least the mostrecent audited financial year.

Relevant Listing RulesThe Listing Rules governing the continuity of management and ownership are summarised

below:

Management continuity – the company must show management continuity for at least the

three preceding financial years under limb (b) of the profit test (LR 8.05(1)(b)), the market

capitalisation/revenue/cash flow test (LR 8.05(2)(b)) or the market capitalisation/revenue test

(LR 8.05(2)(b)).

Ownership continuity – the company must show ownership continuity and control for at least

the most recent audited financial year under limb (c) of the profit test (LR 8.05(1)(c)), the market

capitalisation/revenue/cash flow test (LR 8.05(2)(c)) or the market capitalisation/revenue test

(LR 8.05(2)(c)).

Pursuant to LR 8.05A, where a company applies for listing under the market

capitalisation/revenue test, the Exchange will accept a shorter trading record under

substantially the same management provided the company’s directors and management have

sufficient and satisfactory experience of at least three years in the same business line and

industry as the company. More onerous requirements apply to mineral companies where

individuals need to demonstrate five years industry experience. The company must also

demonstrate management continuity for the most recent audited financial year.

The Exchange may also accept a shorter trading record period for mineral companies, newly

formed project companies and in exceptional circumstances.

Practice Note 3 (PN3) trading record – the trading record period (last three financial years)

of the company must enable the Exchange and investors to make an informed assessment of

the management’s ability to manage the company’s business and the likely performance of that

business in the future. In order to make this assessment, the Exchange must be satisfied that

the company’s main business or businesses, as at the time of listing, have normally been

managed by substantially the same persons throughout the trading record period and that

such persons are the management of the company.

The management continuity requirement is primarily aimed at preventing listing of a company

which has only recently purchased or established its current main line of business and thus

management have not been able to establish that they can successfully manage this specific

type of business.


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The Exchange encourages potential listing applicants who have made acquisitions during the

track record period, who intend to make an acquisition prior to listing or where there has been

a material change in management or ownership of the company during the track record period

to contact the Exchange for confidential advice before submitting a listing application.

While a company is free to dispose of assets at any time, it may be difficult to satisfy the

Exchange that the company meets the management and ownership continuity requirements

where it has acquired new businesses during the track record period or where the companies

comprising the group to be listed have been recently organised into a group.

Paragraph 4 of PN3 sets out the factors the Exchange will take into account where the

company has acquired new businesses during the track record period:

• whether the new business forms a material part of the company’s business at the time of

listing;

• whether the new business is forecast to make a material contribution to the company’s

profit forecast;

• whether the new business is in a similar line to that of the company’s previous business

activities and is part of the logical growth trend of the business;

• whether the company has retained the management of the new business and whether it

can be demonstrated to the Exchange that necessary continuity and synergy of the

management is provided;

• the period of time which has elapsed since completion of the acquisition; and

• whether the new group has been formed solely for the purpose of satisfying the listing

requirements or to enhance the apparent attractiveness of the group as a new applicant

for listing.

The issue of materiality and compliance generally with the requirements of LR 8.05 will be

determined by the Exchange, in its sole discretion.

Listing decisions/guidelinesThe Exchange has issued a number of rulings on management and ownership continuity, each

addressing slightly different factual situations.

Management continuityAn Exchange Consultation issued in July 2002 states that the Exchange has interpreted the

management continuity requirement to mean that applicants must demonstrate that there has

been no change in the majority of the applicant’s board of directors and senior management

of its principal operating subsidiaries during the three financial year track record period.

In the 2005 listing decision 45-1 the Exchange noted that management continuity was a

question of fact and clarified that it would focus on the substance of management of the

business when examining management continuity particularly considering whether:

(a) an identifiable group of individuals most relevant and responsible for the track record

results of a listing applicant remained in positions of responsibility throughout the relevant

track record period; and


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(b) such group of individuals would form the core management of the applicant at the time of

listing and thereafter.

When assessing the relevance of individual members of a management team to the track

record results of the company and its predecessor, the Exchange followed the practice of

ordinarily attributing proportionately greater responsibility to officers with more senior positions,

reflecting the formal responsibilities of senior officers in their corporate roles. The Exchange

will also consider special facts and circumstances in making its decision. Provided that the

company demonstrates management continuity within the core management group

responsible for the track record results of the company, the management continuity

requirement may be satisfied notwithstanding that such core management may constitute a

minority in number on the board of directors.

The principles laid down in the above decision were largely followed in the 2006 listing

decisions 54-1 and 54-2. The Exchange indicated in listing decision 54-2 that the extent of

the responsibilities bestowed on particular directors during the relevant track record may be

more relevant than the number of directors. The Exchange decided that on the facts, the

requirement for management continuity was satisfied even though only one director was on

the company’s board during the relevant track record period. The Exchange’s decision was

influenced by the fact that the director was the group’s founding member, chairman, legal

representative and general manager throughout the track record period and was responsible

for the overall management and the strategic development of the group.

Ownership continuityThe Exchange defines “ownership continuity and control” as “the continuous ownership and

control of the voting rights attaching to the shares for the latest financial year on the trading

record period by a controlling shareholder, or where there is no controlling shareholder, the

single largest shareholder” (Exchange – “Frequently Asked Questions Series 1”).

In listing decision 44-4, the Exchange confirmed that the requirement for ownership continuity

and control under LR 8.05(1)(c) could be satisfied by aggregating the shareholding interests

and control of a group of individual shareholders, where such shareholders could, on the facts,

be regarded as a controlling group for the purposes of the Listing Rules.

This principle was extended in listing decision 51-4, where the Exchange went on to confirm

that two separate groups of controlling shareholders could be viewed as the controlling

shareholders exerting management influence on the group for the purpose of satisfying the

ownership continuity and control requirement of LR 8.05(1)(c). The Exchange considered that

the management influence exerted by the controlling shareholders in aggregate had not

changed in the last financial year of the track record period. The two controlling shareholders

continued to work together in the operations of the group and were the only two parties who

could exert influence on the management of the group in the last financial year of the track

record period.


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19. Accounts

A prospectus must contain an accountants’ report which reports on the lastthree audited financial years results and, if the latest financial year endedmore than six months before the date of the prospectus, then an auditedinterim (or stub) set of accounts is required for part of the current financialyear.

Relevant Listing RulesThe main Listing Rules dealing with the accountants reports to be included in a prospectus

are:

LR 4.01 (1) and 4.01(2) – a listing document must contain an accountants’ report. The

accountants’ report must be prepared by independent, certified public accountants qualified

under the Professional Accountants Ordinance.

LR 4.04 and 4.05 – these set out the content requirements for an accountants’ report, which

include income statements and cashflow statements for the last three year financial years or

such shorter period as may be acceptable to the Exchange and balance sheets as at the end

of each of the last three financial years. In addition, financial information is required in relation

to any business or subsidiary acquired, agreed to be acquired or proposed to be acquired

since the date to which the audited accounts have been made up.

LR 4.05A – if the company has acquired any material subsidiary or business during the three

year trading record period and such acquisition if made by a listed issuer would have been

classified as a major transaction or a very substantial acquisition, then certain pre-acquisition

financial information must be included.

LR 4.09 – the reporting accountants must report on the consolidated or combined results and

balance sheet of the company and its subsidiaries and any business or subsidiary which has

been acquired or is proposed to be acquired since the last accounts date.

LR 4.11 – such results and balance sheet must normally be drawn up in conformity with Hong

Kong Financial Reporting Standards or International Financial Reporting Standards.

LR 4.14 – where adjustments are made by the reporting accountants in preparing the

accountants’ report, a written statement of adjustments must be prepared, signed by the

reporting accountants and must be made available for public inspection.

LR 4.18 – where the reporting accountants qualify or modify their report, they must refer to all

material matters about which they have reservations and give all reasons for the modification

or qualification and its effect, quantified if relevant and practical. A qualified or modified

accountants’ report may not be acceptable where the modification or qualification relates to a

matter of significance to investors.

LR 4.28 – where the company has acquired or proposes to acquire any businesses or

companies (which would be classified as a major subsidiary) since the date to which its latest

audited accounts have been made up, it must include specified pro forma financial information

in respect of the enlarged group in the prospectus.


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LR 4.29 – where pro forma financial information is included in the prospectus, such information

must comply with the requirements of LR 4.29 and must be reported on by the reporting

accountants.

LR 8.06 – the latest financial period reported on by the reporting accountants must not be

more than six months before the date of the prospectus and must include a comparison with

the corresponding interim period for the previous financial year. Thus where the prospectus

will be dated more than six months after the end of the latest financial year a set of interim (or

stub) accounts must be prepared (with the comparable financial information for the previous

financial period being subject to a review).

In August 2009 the Exchange issued a consultation paper on the acceptance of Mainland

accounting and auditing standards and Mainland audit firms for Mainland incorporated

companies listed on the Exchange.

Additional financial informationWhere the company is listed on another stock exchange and has published interim financial

information covering a more recent period than that required by the Listing Rules to be

included in the prospectus, the company will be required to include certain additional financial

information in the prospectus.

Listing decision 54-4 sets out the requirements, including that such unaudited financial

information must be included in the prospectus and must include comparative statements for

the same period of the prior financial year and selected note disclosure to provide an

explanation of significant events and changes. The financial statements may be in a

condensed form provided major line items from the audited financial statements and major

components are included. The interim financial information must either be reviewed or

presented in a separate part of the accountants’ report in a manner conforming with applicable

accounting rules and regulations and must include a statement of the financial effect of material

differences from either Hong Kong Financial Reporting Standards or International Financial

Reporting Standards (IFRS). The prospectus must also describe ways in which the accounting

principles, practices and methods used vary from those in Hong Kong or under IFRS and

quantify any material variations.

Listing decision 54-5 extends equivalent requirements where the company has a subsidiary

listed on another exchange which has published more recent financial information.

135 day ruleIt should be noted that auditors may not give negative assurance comfort on interim financial

statements if 135 days or more have passed between the date of the most recent financial

statements that have been audited or reviewed and the date of their comfort letter. This may

have an impact of the timetable of the IPO to ensure that appropriate comfort can be given.

Please see Chapter 9 for further information on auditors comfort letters.

Waivers from the Exchange and the SFCPursuant to LR 4.04 and paragraphs 27 and 32 of the Third Schedule to the Companies

Ordinance, the prospectus must include the company’s results for each of the three financial

years immediately preceding the date of the prospectus. Companies seeking to issue their

prospectus shortly after the expiration of its financial year may apply to the Exchange and the


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SFC for waivers from the requirements of LR 4.04 and paragraphs 27 and 31 respectively. In

listing decision 31-2, the Exchange ruled that such a waiver would not be granted where the

proposed listing date is more than three months after the latest financial year end.

Accounts required by A1-filingPursuant to LR 9.03(3), the prospectus filed with the Form A1 must be in an advanced form.

This generally requires the prospectus to include advanced drafts of the financial information

for the three financial years of the track record and any stub periods where relevant.

The Exchange has, however, implemented administrative practices on accepting early filings of

listing applications, clarifying the position in a guidance letter in July 2009. Guidance letter 6-

09 provides as follows:

• Applicants filing within 45 days after the end of the trading record period

An applicant must apply to the Exchange for permission if it intends to file its Form A1 within

45 days after the end of the trading record period and cannot include the third financial year

figures in audited or advanced draft form in its first draft listing document. For the Exchange to

accept the Form A1 for vetting, the applicant must satisfy the Exchange that:

• the applicant and the sponsor have made a demonstrable effort in good faith to produce

an advanced draft of the listing document;

• the Exchange will have enough information to begin a substantive review of the listing

application; and

• following its due diligence review, the sponsor considers beyond a reasonable doubt that

the applicant will satisfy the listing criteria under LR 8.05 or other financial requirements

(the “Acceptance for Vetting Conditions”).

The first draft listing document must contain (i) audited figures for the two financial years before

the most recent balance sheet date and related management discussions; and (ii) stub period

figures as of a date within 230 days of the filing of the Form A1 in audited or advanced draft

form and the prior year stub comparative figures and related management discussions. The

applicant is not required to provide any prior year stub period comparatives and related

management discussions if the final listing document will not include any stub period figures.

• Applicants filing within 230 days of their latest audited financial statements

The Exchange will normally reject a Form A1 if the latest financial period reported on in the draft

listing document is more than six months old at the date of filing the Form A1. However, the

applicant may apply for permission to file the Form A1 if:

• it satisfies the Exchange of the Acceptance for Vetting Conditions; and

• it undertakes to include in the first draft listing document audited figures for the three

financial years before the most recent audited balance sheet date and related

management discussions (provided that the latest audited financial statements are within

230 days of the filing of the Form A1).


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If the latest audited financial statements are of a date more than 230 days from the filing of the

Form A1, the applicant must include in the first draft listing document (i) audited figures for the

three financial years preceding the most recent audited balance sheet date and related

management discussions; and (ii) stub period figures in audited or advanced draft form that

are not more than six months old at the time of filing the Form A1 and the prior year stub period

comparative figures and related management discussions. The applicant is not required to

provide with the A1 filing any prior year stub period comparatives and related management

discussions if the final listing document will not include any stub period figures.

This guidance enables the Exchange to start reviewing the prospectus earlier without having

to wait for the latest period and interim accounts to be finalised.

The above administrative practices only apply to Form A1 filings submitted to the Exchange

after the end of the trading record period, preventing a listing applicant from filing its Form A1

prior to the end of the trading record period relying on GL6-09.


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20. Independence from parent company

The Exchange must be satisfied that the company can carry on its businessindependently of its controlling shareholders once it is listed. Where thedegree of dependence on the controlling shareholder is excessive, this maygive rise to concerns as to suitability for listing.

Relevant Listing RulesLRs Appendix I Part A para 27A requires that the prospectus must include a statement

explaining how the company is satisfied that it is capable of carrying on its business

independently of its controlling shareholder(s) (including any associates, as defined in the

Listing Rules) after listing and particulars of the matters that it relied on in making such

statements.

Listing decisions/guidelinesThe Exchange has issued a number of rulings on the requirement for independence, each

addressing different aspects of the independence requirement.

When considering independence issues, the Exchange will generally require the company to

take into account the following:

• financial independence;

• operational independence; and

• management independence.

Where the degree of dependence on the controlling or substantial shareholders is excessive,

this may give rise to concerns as to the suitability of the company for listing under LR 8.04.

When reviewing the reliance issue, the Exchange ordinarily would consider the particular facts

and circumstances of the applicant.

In listing decision 46-1 the Exchange noted that the issue of reliance on controlling

shareholders can usually be dealt with by disclosure in the prospectus but where the degree

of reliance could not be addressed by disclosure alone the company must take concrete steps

to address the issue of reliance before listing.

• Financial independence

Historically, the Exchange’s practice was to ordinarily require a listing applicant, barring

exceptional circumstances, to repay all outstanding loans due to, and discharge all

guarantees provided by, its controlling/substantial shareholders (even though such loans

may constitute exempt financial assistance allowed under the Listing Rules’ connected

transactions regime).

However, in listing decision 69-1 issued in July 2009 the Exchange stated that it has

accepted other methods than release of parent guarantees and repayment of funding in

demonstrating an applicant’s financial independence. In this decision, the Exchange

determined that, where it was satisfied that the listing applicant was financially

independent from its parent company, the company was not required to release parent


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company guarantees of the company’s banking facility prior to or at the time of listing.

Further, the company was permitted to ask its parent company for a secured loan facility

if the terms offered by independent third parties were considered less favourable by the

directors.

• Operational independence

In listing decision 46-1, the Exchange noted that the reliance which the listing applicant

placed on its controlling shareholder for provision of sales and procurement functions gave

rise to concerns including conflicts of interests, substantial reliance on the protection

mechanisms offered by the connected transaction requirements under the Listing Rules

and how performance of the listed company may be independently evaluated.

Reliance on a controlling shareholder for supply of raw materials may, in certain

circumstances, be dealt with by prospectus disclosure including a description of the

associated risks provided that adequate mechanisms are put in place to protect minority

shareholders (listing decision 46-2).

• Independence of management

In assessing the level of independence of management of the company, the Exchange will

consider the level of overlap between the management of the company and its controlling

shareholder. In listing decision 52-2, the Exchange considered factors including the

number of common directors between the company and its controlling shareholder, the

role of the common directors in the management of the company’s business and daily

operation, the extent of delineation of the business of the company and that of its

controlling shareholder, the number and amount of continuing connected transactions

between the company and that of its controlling shareholder and the independence of the

senior management of the company and the controlling shareholder group.

Spin-off listings and Practice Note 15In the context of a spin-off listing, Practice Note 15 sets out the principles applied by the

Exchange in considering the listing application. These principles include a focus on

independence from the new listing applicant’s parent requiring that:

• there should be a clear delineation between the businesses retained by the parent and

those of the listing applicant; and

• the listing applicant should be able to function independently from its parent both in terms

of its business and operations. In this regard, the Exchange would expect the listing

applicant to have directors and management that are independent from the parent

(although common directors are not in themselves a bar) and generally to have

independence of administration. The Exchange expects ongoing connected transactions

between the parent and the listing applicant to be properly transacted under Chapter 14A.


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21. Competing interests of controllingshareholders and directors

Where a controlling shareholder or director of the company has an interest ina business which is likely to compete directly or indirectly with the company,this interest must be disclosed in the prospectus (and for directors, in itsannual reports post listing). However, if there are inadequate arrangements tomanage conflicts of interest and delineation of businesses between thecompany and other businesses under common control, the Exchange mayconsider the impact on the company’s suitability for listing.

Relevant Listing RulesLR 8.10 (1) and (2) – where a controlling shareholder or director of the company has an interest

in a business which competes or is likely to compete, either directly or indirectly, with the

company then certain disclosures must be made in the prospectus, including:

• reasons for the exclusion of the excluded business;

• a description of the excluded business and its management, including its nature, scope

and size and an explanation as to how such business may compete with the company’s

business;

• facts demonstrating that the company is capable of carrying on its business independently

of and at arms length from the excluded business; and

• any intention of the controlling shareholder to inject the excluded business into the

company.

Non-competition undertakingsAlthough not specifically required under the Listing Rules, it is common market practice for the

controlling shareholder of a new listing applicant to enter into a non-competition agreement

with the listing applicant to delineate their businesses following listing and to eliminate future

competition. Such undertakings may include provisions for referral of future business

opportunities to the listing applicant, approval procedures prior to the controlling shareholder

entering into future competing businesses and rights of first refusal for the listing applicant to

acquire any excluded business retained by the controlling shareholder.

Listing decisions/guidelinesThe Exchange has issued a number of rulings on the issue of competing interests, each

addressing slightly different factual situations.

In listing decision 51-3, the Exchange stated that it normally requires the company to take into

account factors relating to the conduct of the company’s business independently from its

controlling shareholder, in areas including financial independence, operational independence

and management independence. An applicant may be dependent on its controlling

shareholders in one or more of these areas. Where the degree of dependence is excessive,

this may translate into a concern about the suitability of an applicant for listing.


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Competition is normally regarded by the Exchange as a disclosure issue. However, in extreme

cases where in the view of the Exchange, there are inadequate arrangements to manage

conflicts of interest and delineation of businesses between the applicant and other businesses

under common control, the Exchange would consider the impact on the applicant’s suitability

for listing.

A review of whether the company is or is not capable of carrying on its business independently

of its controlling shareholder in the light of competing businesses operated by the controlling

shareholder therefore involves careful balancing of all the relevant factors. The giving of non-

competition undertakings by the controlling shareholder on a voluntary basis is a relevant factor

but is not decisive. Non-competition undertakings may or may not effectively contain

competition within acceptable boundaries. Enforceability of non-competition undertakings, in

turn, is often dependent on a number of other factors, including but not limited to (a) the effect

of exemption clauses on non-competition undertakings, (b) how independently a listing

applicant can exercise its right to enforce the non-competition undertakings in light of its own

corporate governance and (c) the degree to which the management of the listing applicant and

its controlling shareholders are closely connected. If there are indications that a non-

competition agreement may not function effectively in light of the facts and circumstances of

an individual case, the Exchange may disregard the agreement when determining whether the

requirements of the Listing Rules have been satisfied.

In its Listing Committee report for 2006, the Listing Committee clarified that it is not the

ordinary practice of the Exchange to request the use of a non-competition undertaking where

one is not proposed to exist. However, the Listing Division does review the delineation

arrangement and arrangements for managing conflicts and may comment on the corporate

governance arrangements of the company. The Listing Committee also considered other

arrangements which have been adopted by applicants to regulate the management of

companies controlled by a single controlling shareholder. These arrangements will also be

subject to review and commentary from the Exchange during the listing process and include:

• Independent director review – undertakings by the independent directors to review

options, pre-emptive rights or rights of first refusal granted by the controlling shareholder

over its existing or future competing businesses and to decide whether to exercise these

rights. This is consistent with the principles in the Code on Corporate Governance

Practices which promote a strong independent element on the board;

• Increased transparency – undertaking by the controlling shareholder to provide all

information necessary for the enforcement or the options, pre-emptive rights or rights of

first refusal. This is particularly relevant where the listed issuer holds rights of first refusal

over future opportunities. This practice is consistent with the principles concerning access

to information in the Code on Corporate Governance Practices; and

• Public disclosure of decisions – agreement by the listed issuer explicitly to disclose

decisions on matters reviewed by the independent directors relating to the exercise or

non-exercise of options, pre-emptive rights or rights of first refusal either through the

annual report, or by way of announcements to the public.


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22. Connected transaction waivers

Connected transactions are transactions between the company (or any of itssubsidiaries) and any connected persons of the company. At the time thelisting application is filed any ongoing connected transactions must beidentified and appropriate waivers sought from the Exchange.

Identification of connected transactionsThe first step is to identify all transactions or arrangements between the company (and its

subsidiaries) and any connected persons (being the directors, CEO, substantial shareholders

and their associates and in the case of companies established in the PRC, also includes the

supervisors and their associates) and the historic and expected future amounts of such

transactions.

ExemptionsOnce the transactions have been identified it is then necessary to determine which of them are

exempt under the Listing Rules. The main exemptions for continuing connected transactions

are noted below. The first five are exemptions from reporting, annual review, announcement

and shareholders’ approval, while the last is solely an exemption from shareholders’ approval:

• the acquisition as consumer or realisation in the ordinary course of business of consumer

goods or services on normal commercial terms;

• the sharing of administrative services on a fair and equitable cost basis;

• a transaction on normal commercial terms where each of the applicable percentage ratios

(other than the profit ratio) is either (i) less than 0.1% on an annual basis, (ii) less than 1%

on an annual basis and the transaction is connected only because it involves a person

connected by virtue of its/his relationship with the issuer’s subsidiaries or (iii) less than 5%

and the total consideration is less than HK$1 million on an annual basis;

• a transaction on normal commercial terms with persons connected only at the level of the

issuer’s subsidiaries where the value of the relevant subsidiary’s total assets, profits and

revenue falls below certain thresholds and, where relevant, the consideration ratio is less

than 10%;

• a transaction of a revenue nature in the ordinary and usual course of business and on

normal commercial terms with an associate of a substantial shareholder who is a passive

investor; and

• a transaction on normal commercial terms where each of the applicable percentage ratios

(other than the profit ratio) is on an annual basis either (i) less than 5%, or (ii) less than 25%

and the total consideration is less than HK$10 million.

The company must enter into written agreements with relevant parties in respect of its

continuing connected transactions unless the transaction is exempt from the reporting,

announcement and shareholder approval requirements (ie fully exempt). The agreement must

be for a fixed period and must not exceed three years, save in special circumstances. Each

transaction must be subject to an annual cap which must be expressed in monetary terms


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rather than as a percentage of annual revenue and, where available, based on previous

transactions.

Other requirements Following listing, unless they are fully exempt, continuing connected transactions are subject

to an annual review by the INEDs to confirm that they have been entered into in the ordinary

and usual course of business, are on normal commercial terms (or terms no less favourable to

the company than terms available to or from independent third parties) and are in accordance

with the relevant agreements on terms that are fair and reasonable and in the interests of the

shareholders as a whole. The INEDs’ confirmation, together with details of the connected

transactions must be set out in the company’s annual report and accounts.

In addition, the auditors must provide a letter to the company confirming that the continuing

connected transactions have (i) received the approval of the board of directors of the company;

(ii) are in accordance with the pricing policies of the company if the transactions involve the

provision of goods or services by the company; (iii) have been entered into in accordance with

the relevant agreement; and (iv) have not exceeded the annual caps.

Waiver submissionIf shareholder approval would be required upon listing for any of the continuing connected

transactions then a waiver must be sought from the Exchange. Waivers will also generally be

sought from the announcement requirements, although the ongoing annual review and

reporting requirements will still need to be complied with.

Details of the connected transactions and any waivers granted by the Exchange need to be

disclosed in the prospectus. The sponsor is also required to opine in the prospectus whether

the continuing connected transactions for which waivers are sought are in the ordinary and

usual course of business of the company, on normal commercial terms, are fair and reasonable

and in the interests of the shareholders as a whole.


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23. PRC property issues

Every prospectus must contain a property valuation report. Where thecompany has PRC property a number of issues commonly arise in respect ofthe title and ownership rights to its PRC properties.

Valuation report requirementChapter 5 of the Listing Rules provides that every prospectus must include a property valuation

report. This chapter also sets out the content requirements for the report.

Where a property is simply leased, or where the company has incomplete title documents

evidencing ownership of the land or the building on the land, or if the properties are not freely

transferable then the land or building as appropriate is generally given a nil valuation.

The valuer will also rely on a legal opinion given by a firm of lawyers which is responsible for

checking the title documents for all relevant land and buildings.

Land use rights and building ownershipOwnership of PRC property is evidenced by land use rights certificates and building ownership

certificates (or in certain areas of the PRC, a combined real estate ownership certificate).

Practice Note 12 of the Listing Rules provides that where the issue of a land use right certificate

is pending, a properly approved land grant or land transfer contract in writing accompanied by

a PRC legal opinion as to the validity of the approval may be acceptable as evidence of a

transferee’s pending title to the land to be granted or transferred.

In July 2010 the Exchange issued guidance letter GL19-10 to give guidance as to the

Exchange’s requirement for land use right certificates and/or building ownership certificates for

Mainland properties. For infrastructure project companies and property companies, the

Exchange’s March 1998 announcement clarifying the requirements for land use title to

properties in the PRC continues to apply and the relevant title certificates are a pre-requisite

for listing approval. For mineral and exploration companies, the requirements are now

contained in Chapter 18 of the Listing Rules. For companies other than infrastructure project

and property companies, the Exchange no longer requires title certificates. Instead the

Exchange expects new applicants to disclose in the prospectus the risks to their operations of

not having a title certificates for a PRC property. The Exchange will consider each listing

application based on GL19-10 and the circumstances of each case.


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24. Forecasts

Profit forecasts are not required to be included in a prospectus. However,where a forecast is included, or any language is used which implies a forecast(eg, “the company’s profit should increase next year”) then various rules mustbe followed, assumptions must be prepared, the accounting policies andcalculations must be reviewed and reported on by the reporting accountantand the sponsor must be satisfied that the directors have made due andcareful enquiries in making their forecast.

The inclusion of a profit forecast in the prospectus will also determine whetherprofit forecasts or other forward looking financial information may be includedin analysts’ research reports. It is therefore common for companies seeking alisting in Hong Kong to include a profit forecast or profit estimate in theirprospectus. Where a company does not include a profit forecast in itsprospectus, the Listing Rules prohibit the inclusion of profit forecasts andforward looking information in pre-deal research.

Profit forecasts

Relevant Listing RulesListing Rules 11.16 to 11.19 set out the rules relating to profit forecasts which include:

• LR 11.16 – the prospectus must not contain any general or particular reference to future

profits or contain dividend forecasts based on an assumed future level of profits unless

supported by a formal profit forecast. The term “profit forecast” is defined very widely in

LR 11.17 to include any profit or loss forecast however worded and includes any estimate

for a period which has already passed but for which results have not yet been audited or

published. In addition, any valuations of assets (other than land and buildings) or

businesses purchased by the company based on discounted cashflows or projections of

profits, earnings or cashflows will be treated as profit forecasts.

• LR 11.17 – the company may elect to include a profit forecast if it wishes to, however if

one is included it must be clear, unambiguous, and presented in an explicit manner. The

principal assumptions must be stated, it must be prepared on a basis consistent with

accounting policies adopted by the issuer, the reporting accountants must report on the

accounting policies and calculations and the sponsor must report that it has satisfied itself

that the forecast has been made by the directors after due and careful enquiry.

• LR 11.18 – a profit forecast should normally cover a period which ends on the financial

year-end. If it is only prepared to the half year-end then the relevant interim accounts will

need to be audited in due course. A profit forecast cannot cover a period not ending on

the financial year end or the half year-end.

• LR 11.19 – the assumptions must provide useful information to investors to help them

form a view of the reasonableness and reliability of the forecast, draw attention to and

where possible quantify factors which could materially affect the achievement of the

forecast, and be specific and definite rather than vague and general. It will not normally


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be acceptable for assumptions to relate to matters which the directors are best able to

take a view on or are able to exercise control over since such matters should be directly

reflected in the profit forecast.

Following listing, the company must consult with and seek advice from its compliance adviser

if its results deviate from any profit forecast or estimate contained in its prospectus. In such

circumstances, the company will be required to issue an announcement and include an

explanation of the difference in its annual report.

If the prospectus will not contain a profit forecast, the board must still prepare and submit to

the Exchange for review a profit forecast memorandum covering the period up to the

forthcoming financial year end date after the listing and a cash flow forecast memorandum

covering at least 12 months from the expected prospectus date.

Listing decisionsIn listing decisions 35-2 and 50-4, the Exchange determined that it was inappropriate to

include in the prospectus a risk factor in respect of the profit forecast or a disclaimer in respect

of the accountant’s report on the profit forecast.

Profit forecasts in analysts’ research reportsPursuant to LR 8.21B, pre-deal research issued by the sponsor, each of the underwriters or

their associates must not incorporate any profit forecast or other forward looking statements

unless such statements are included, in substantially the same form, in the company’s listing

document. The rules relating to research reports are considered in more detail in Chapter 29.

Working capital statementA new applicant is also required to include in its prospectus a working capital statement which

states that, after due and careful enquiry, the company and its subsidiaries have available

sufficient working capital for the group’s present requirements, that is for the 12 months from

the date of the prospectus. A company which does not have sufficient working capital is

unlikely to be suitable for listing.

The sponsor must confirm that it has obtained written confirmation from the company the

working capital available to the group is sufficient for that 12 month period, that it is satisfied

that this confirmation has been given after due and careful enquiry by the company and that

the persons or institutions providing finance have stated in writing that the relevant financing

facilities exist.

The working capital requirement is modified for mineral companies which must comply with

LR18.03(4) and LR10.03(5). In addition, no working capital statement is required for a

company whose business is entirely or substantially the provision of financial services, provided

the Exchange is satisfied that the inclusion of such a working capital statement would not

provide significant information to investors and the company’s solvency and capital adequacy

are subject to regulatory supervision.

Profit forecast and cash flow forecast memorandumWhere the company intends to include a profit forecast in its prospectus, it must prepare a

profit forecast memorandum covering the same period of the profit forecast contained in the

prospectus and a cash flow forecast memorandum covering at least 12 months from the


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expected prospectus date with the principal assumptions, accounting policies and calculations

for the forecasts. The memoranda must be submitted to the Exchange for review at least 15

clear days before the expected listing hearing date. The profit forecast memorandum will be

reviewed by and discussed with the reporting accountants and sponsor prior to submission to

ensure that such forecast is prepared on a basis consistent with the accounting policies used

in the preparation of the company’s audited accounts contained in the prospectus and to

check the calculations. The sponsor needs to be satisfied that the profit forecast has been

prepared by the directors after due and careful enquiry. Reports from the reporting

accountants and the sponsor are included in the prospectus.

US considerationsThe inclusion of forecasts and projections in offering documents is generally disfavored in the

context of offerings to be sold in the US. Even where forecasts and projections are qualified,

the risk of liability in the US may exist with regard to such forecasts and projections. In general,

projections, forecasts and other forward-looking statements are considered inherently

unreliable, involving known and unknown uncertainties which may cause actual results to be

materially different from any projected or forecasted results.

The international wrap prepared by US counsel in connection with Hong Kong-listed IPOs

typically contains one or more risk factors stating that forecasts and projections provided in the

base prospectus pursuant to local legal requirements should be disregarded as unreliable.

Many offering circulars set out detailed assumptions made in providing forecasts and

projections, the incorrectness of any of which may cause the forecast or projection to be

inaccurate.

The US Private Securities Litigation Reform Act, as amended, contains a “safe harbour” from

anti-fraud liability in private securities litigation for certain forward-looking information under

certain conditions. As a result, market practice on Rule 144A transactions is to comply with

the requirements of the safe harbour. These include accompanying the forward-looking

information with “meaningful cautionary language” identifying “important factors” that could

cause results to differ.

It is common to exclude from the international offering circular copies of the letters from the

reporting accountants and the sponsor in respect of the profit forecast.


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25. Share option schemes

When contemplating an IPO there are two types of schemes, pre-IPOschemes and post-IPO schemes. For the post-IPO schemes there are anumber of rules to be followed which are set out in the Listing Rules. For pre-IPO schemes these do not need to comply with all aspects of the Listing Rules(such as the minimum strike price for the shares) but generally they arestructured to comply with the rules to the extent possible.

Post-IPO share option schemesAny share option scheme under which options will be issued after listing must comply with the

requirements of Chapter 17 of the Listing Rules, the key requirements being:

• eligible grantees – eligible grantees generally include directors and employees of the

group and other persons who have or will contribute to the group.

• maximum number of shares – the maximum number of shares which can be issued

under the scheme and all other schemes must not exceed 30% of the relevant class of

securities in issue from time to time, provided that once options equivalent to 10% of the

capital at the time of approval of the scheme have been issued, further shareholder

approval is required for each subsequent 10% up to the 30% limit.

• maximum number of shares per grantee – unless approved by shareholders, the

maximum number of shares issued and to be issued on exercise of the options granted to

any grantee in any 12 month period cannot exceed 1% of the relevant class of securities

in issue.

• issue of options to a director, CEO, substantial shareholder or their associates –

where an option is to be granted to a director, CEO, substantial shareholder or their

associates, such grant must be approved by the independent non-executive directors

(excluding the grantee).

• issue of options to substantial shareholder or INED – shareholder approval is required

if an option is to be granted to a substantial shareholder or an independent non-executive

director (or their associates) and will result in the securities issued or to be issued to such

persons in any 12 month period up to and including such grant representing more than

0.1% of the relevant class of securities in issue, and where such securities are listed on the

Exchange, having an aggregate value of greater than HK$5 million.

• minimum exercise price – the exercise price must be at least the higher of (i) the closing

share price on the date of grant of the options and (ii) the average closing price for the last

five business days prior to the date of grant (where the company has been listed for less

than five days the IPO price will be used as the closing price for the period prior to listing).

• period of scheme – no options can be granted under the scheme after the 10th

anniversary of the adoption of the scheme.

• price sensitive events – options cannot be granted after a price sensitive event has

occurred or a price sensitive matter has been the subject of a decision until an


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announcement has been made. In particular, no option may be granted in the period

beginning one month preceding the earlier of (i) the board approval of any annual, interim

or quarterly financial results; or (ii) the deadline for the announcement of such results and

ending on the date of the results announcement.

The Exchange also issued a directive to all listed companies in 2005 clarifying the application

of LR 17.03(13) which deals with adjustments to option exercise prices on the issue of new

shares by the company. While this clarification did not expressly amend the Listing Rules (and

is arguably inconsistent with the Listing Rules) regard to this ruling should be had when

preparing the option scheme and when issuing new shares while there are options

outstanding.

Pre-IPO share option schemesWhere a company wishes to issue options to employees prior to an IPO then it is free to do

so. Where the scheme does not comply with the provisions of Chapter 17 of the Listing Rules,

options granted before listing remain valid after listing (subject to approval of listing of the

underlying shares) but no further options may be granted following listing. The company is

required to disclose in the prospectus full details of outstanding options, the grantees and their

dilution effect and impact on earnings per share upon exercise. It is possible to apply to the

Exchange for a waiver from the requirement to include details of the grantees if this disclosure

would be unduly burdensome or irrelevant. Guidance letter GL11-09 sets out the conditions

the Exchange would expect in any such waiver application. Such pre-IPO option schemes

often provide that the exercise price of options will represent a limited discount to the IPO

price.

Share appreciation rightsDue to the restrictions under PRC law on PRC nationals holding H shares, H share companies

do not generally adopt share option schemes upon listing. Some H share issuers adopt

“phantom” share option schemes or share appreciation rights schemes upon listing.

US ConsiderationsIf the issuer has employees in the US who will receive shares, options or other securities as

part of its employee compensation scheme, the issuance of these securities will require

registration under, or an exemption from, US securities laws. Under Rule 701 of the Securities

Act, a non-US issuer that is not required to file periodic reports with the SEC may offer and sell

securities in the US to its employees, officers, directors and advisers pursuant to a written

option, savings, bonus or other compensatory plan or contract without registration of those

shares under the Securities Act. Sales under Rule 701 may not exceed various limits stated

in the Rule, and securities issued to employees in reliance upon this Rule would be considered

to be restricted securities and, as such, may only be resold pursuant to US registration

statement or an available exemption. The issuance of securities under Rule 701 is not exempt

from the anti-fraud, civil liability or other provisions of the US federal securities laws.


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26. Structure of the offering

The Listing Rules provide for an initial allocation of 10% of the offer shares tothe public offer tranche with clawback arrangements where the public offer issignificantly over-subscribed. In addition, an over-allotment option may begranted to the underwriters in respect of additional shares representing up to15% of the shares initially offered under the IPO.

Initial allocation to public offer and placing tranchesPursuant to Practice Note 18, the minimum allocation to the public offer tranche of the IPO is

generally 10% of the total number of shares offered in the IPO. As a result, the initial allocation

of shares to the placing tranche is generally 90% of the shares initially offered in the IPO.

Clawback arrangementsPractice Note 18 provides for a reallocation of shares from the placing tranche to the public

offer tranche where the public offer tranche is significantly over-subscribed, as follows:

• a clawback mechanism that increases the number of shares under the public offer to 30%

of the shares initially available under the IPO when total demand in the public offer tranche

is at least 15 times, but less than 50 times, the initial allocation;


when total demand in the public offer tranche is at least 50 times, but less than 100 times,

the initial allocation; and


when total demand in the public offer tranche is at least 100 times or more the initial

allocation.

Shares may be transferred from the public offer tranche to the placing tranche where there is

insufficient demand in the public offer tranche to take up the initial allocation. In addition,

underwriting agreements may provide an additional discretion to the underwriters to reallocate

shares from the placing tranche to the public offer tranche to satisfy excess applications in the

public offer tranche, to cater for the position where the level of over-subscription in the public

offer is insufficient to trigger the clawback provisions of PN18.

Waivers from the requirements of Practice Note 18In respect of large offerings where the number of shares available to the public in Hong Kong

would be very large if the requirements of PN18 were applied in full, the Exchange may be

willing to grant waivers from the above allocation ratios to reduce the percentage of the offering

allocated initially and upon triggering of the clawback arrangements to the public offer.

Typically, PN18 waivers would be available where the total offering exceeds HK$10 billion, and

with the following oversubscription clawback trigger points:

• initial allocation to public pool: 5%

• when demand in public offer is at least 15 times, but less than 50 times: clawback to 7.5%


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• when demand in public offer is at least 50 times, but less than 100 times: clawback to

10%

• when demand in public offer is 100 times or more: clawback to 20%

The Exchange may be prepared to consider waivers outside the typical PN18 waivers scenario

subject to the following guidelines which are set out in listing decisions 60-1 and 60-2:

• due regard must be had to the interests of local investors and whether there is significant

public demand

• the trigger points for the clawbacks should be set as early as possible

• the number of shares that Hong Kong retail investors would obtain under the actual

offering structure should not be less than the number under a typical PN18 waiver

• the trigger points for clawbacks should be easy to implement and easy for an average retail

investor to understand.

Over-allotment optionIt is common for companies and/or selling shareholders to grant an option to the underwriters

to require the company to issue and/or the selling shareholder to sell additional shares

representing up to 15% of the number of shares initially available under the IPO for the purpose

of covering over-allocations in the placing tranche. Such additional shares will generally be

allocated to the placing tranche. Please refer to Chapter 30.

Allocation of shares within the public offer trancheThe total number of shares available for subscription in the public offer tranche is to be divided

equally into two pools, Pool A and Pool B. Shares in Pool A should be allocated to investors

who have applied for shares with an aggregate price (representing the price initially payable on

application rather than the price as finally determined, and excluding brokerage of 1%,

Exchange trading fee of 0.005% and SFC transaction levy of 0.004% of the offer price) of

HK$5 million or less. Shares allocated to Pool B should be allocated to investors who have

applied for shares with an aggregate price of more than HK$5 million and up to the total value

of Pool B. Where one of the pools is under-subscribed, surplus shares should first be

reallocated to the other pool to satisfy excess applications.

Multiple applicationsThe company, its directors, the sponsor and the underwriters should take reasonable steps to

ensure that multiple or suspected multiple applications are identified and rejected. For these

purposes “multiple applications” means circumstances where (i) more than one application is

made under the public offer by the same person; (ii) an application under the public offer is

made for more than 100% of the total number of shares originally allocated to each pool; or

(iii) an application is made under the public offer by an investor who has also applied for or

been placed shares in the placing tranche. In March 2007, the SFC, the Federation of Share

Registrars, the HKMA and the Hong Kong Association of Banks jointly issued a set of

preventative measures to deter multiple applications in IPOs. These measures must be

complied with on IPOs.


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Pricing of the IPO sharesAlthough shares may be offered under the IPO at a fixed price, it is more common that shares

will be offered under the public offering at a price range, with applicants under the public offer

required to pay the maximum offer price on application together with relevant brokerage, fees

and levies, subject to refund. Where the offer price is expressed as a range, the prospectus

will generally provide for a reduction in the price range and/or the number of shares offered

under the IPO, at any time up to the morning of the last day for filing applications under the

public offer. The company is required to issue an announcement in the event of a reduction in

the offer price range and/or number of IPO shares with such announcement to be issued no

later than the morning of the last day for filing applications under the public offer. Such

announcement is required to include updates of any financial information set out in the

prospectus which is impacted, including the use of proceeds. In the event of such an

announcement, the final offer price range, if agreed, must be set within the reduced range.

Applications filed prior to any such announcement may not be withdrawn. Where no such

announcement is made the final offer price may not be set outside the range stated in the

prospectus.

However, where the proposed reduction in offer price or offer price range is material, this would

constitute a material change of circumstances following the prospectus publication, and would

therefore require a supplemental prospectus to be issued. The supplemental prospectus

would need to update all financial and other information in connection with such change, and

extend the offer period to allow potential investors sufficient time to consider their subscription.

The company would need the give potential investors who have applied for shares the right to

withdraw their applications. The Exchange prefers an opt-in withdrawal mechanism, where

potential investors who want their applications to continue to be valid should confirm their

decision by a positive confirmation form. The Exchange has set out guidance on the

requirements for a supplemental prospectus where there is a change in the offer price or a

material change in circumstances following publication of the prospectus in listing decisions

61-1 and 86-1.

The offer price will generally be determined through a book-building process based on the

orders placed in the placing tranche. The final offer price will be fixed by agreement between

the global coordinator of the IPO and the company and possibly the selling shareholder.

Where no such agreement is reached the IPO will lapse. The offer price will generally be

determined after the end of the roadshow and in any event, not later than the day on which

the results announcement is published, and, in practice by 5:00pm on the preceding day. The

offer price as finally determined will be the same in both the public offer and placing tranches.


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27. Underwriting arrangements

Pursuant to LR 7.02, the public offer tranche of an IPO must be fullyunderwritten. In practice, the placing tranche is also underwritten. Thecompany and any selling shareholder will enter into underwriting agreementswith the underwriters of the public offer and placing tranches setting out theirrespective rights and obligations.

Hong Kong underwriting arrangementsLR 7.02 requires that the public offer tranche of an IPO is fully underwritten. In this regard, the

company and potentially other parties including major shareholders and executive directors of

the company, will enter into an underwriting agreement with the underwriters setting out the

underwriting arrangements for the public offer. The Hong Kong underwriting agreement is

generally signed on the morning of the day of registration of the prospectus and is a material

contract which will be registered with the prospectus and made available for public inspection.

Pursuant to the Hong Kong underwriting agreement, the Hong Kong underwriters will agree to

procure subscribers for, or failing which to subscribe for, the shares offered under the public

offer tranche in return for the payment of an underwriting commission. The obligations of the

underwriters under the Hong Kong underwriting agreement are several, with each Hong Kong

underwriter agreeing to take up a fixed proportion of the shares available under the public offer.

The Hong Kong underwriting agreement will also set out the mechanics of the public offer

including the determination of the allotment of the offer shares available under the public offer,

clawback and reallocation provisions and arrangements for the delivery of shares and payment

of the proceeds of the public offer to the company, subject to the deduction of fees incurred

in connection with the IPO.

In addition to setting out the underwriters’ underwriting obligations, the underwriting

agreement sets out other provisions in respect of the public offer, including the following:

• Conditions precedent – the conditions precedent to the Hong Kong underwriting

agreement will generally include the registration of the prospectus, the agreement of the

final offer price, the signing of the international purchase agreement and that agreement

becoming unconditional, the Exchange granting listing of and permission to deal in the

company’s shares and the delivery of specified documents to the underwriters.

• Representations and warranties – the company and other warrantors under the

underwriting agreement will give extensive representations, warranties and undertakings to

the Hong Kong underwriters covering the accuracy and completeness of prospectus

disclosure, the financial information, due incorporation, title to assets, legal compliance,

approvals required for the offering and other matters. The undertakings will generally cover

issues including maintenance of listing status, using the proceeds of the offering in

accordance with the prospectus and the issue of announcements.

• Indemnity – the company and other warrantors will also provide the Hong Kong

underwriters with an indemnity from liabilities arising from misstatements or omissions in

the prospectus, breaches of laws and breaches of the terms of the underwriting

agreements, including the representations and warranties.


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• Termination provisions – the Hong Kong underwriting agreement will also set out

comprehensive events of termination, including force majeure events, material restrictions

on trading on major securities markets, adverse changes in the business of the company,

breaches of warranties, litigation being brought or threatened against the company and

material omissions or misstatements in the prospectus, on the occurrence of which prior

to a specified time (generally 8:00am on the morning of listing) the underwriters have the

right to terminate their obligations under the underwriting agreement.

• Lock-up provisions – the company and controlling shareholders will give undertakings

not to issue shares (in the case of the company) or dispose of their interests in the shares

of the company for a specified period of time following the listing of the company’s shares

on the Exchange.

Agreement among Hong Kong underwritersAt the same time as entering into the Hong Kong underwriting agreement with the company,

the underwriters of the public offer tranche will enter into an agreement among Hong Kong

underwriters, setting out their respective rights and obligations in respect of the public offer.

The agreement will include provisions in respect of any default by any Hong Kong underwriter

of its underwriting obligation, allocation of the underwriting commissions among the

underwriters and authorising the global coordinator to exercise the underwriters’ discretions

under the Hong Kong underwriting agreement on their behalf.

Price determination agreementAs the offer price will generally be expressed in terms of a range at the time the Hong Kong

underwriting agreement is entered into, upon agreement of the final offer price between the

global coordinator (on behalf of the underwriters) and the company, the global coordinator and

company will enter into a simple price determination agreement setting out the offer price as

finally agreed.

Receiving bankers agreementIn connection with the public offering, the company and the global coordinator will enter into a

receiving bankers agreement with a commercial bank, in respect of the distribution of

prospectuses and application forms and collection and processing of applications and

application monies. The agreement will also provide for the payment of interest on application

monies, which on major and popular IPOs can be a significant amount.

International underwriting arrangementsInternational underwriting agreements are entered into for tranches to be offered outside of

Hong Kong. Typically such tranches are exempt from registration under the Securities Act in

reliance on Regulation S and Rule 144A. International underwriting agreements generally

contain US-specific representations and warranties, and US-specific covenants, depending on

the exemption(s) from registration being relied upon in connection with the offering.

US-specific representations, warranties and covenantsRepresentations, warranties and covenants requested by the underwriter from the issuer and

selling or controlling shareholders in an international underwriting agreement are similar to

those requested in the Hong Kong underwriting agreement, except that US-specific

representations, warranties and covenants are also obtained in order to establish exemptions

from registration.


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These include, in the case of Regulation S offerings, that no “directed selling efforts” have been

made in the US by the issuer, a distributor, any of their respective affiliates or any person acting

on behalf of the foregoing, that applicable offering restrictions have been complied with and

that there is no substantial US market interest in the securities offered. Where Rule 144A or

other exemptions for offers into the US are relied upon, typical representations, warranties and

covenants include that no “general solicitation” or “general advertising” has been made in the

US by the issuer, a distributor, any of their respective affiliates or any person acting on behalf

of the foregoing, and that no securities of the same class are listed in the US.

Agreement among international underwritersA separate agreement, referred to as an agreement among international underwriters, will

specify the underwriters’ obligations to each other in relation to an international offering.

This agreement will generally establish a several commitment of the underwriters and is similar

in effect to the Agreement among Hong Kong underwriters. The global coordinator will be

authorised but not obliged to arrange for subscription by others of any defaulting underwriters’

shares. It will also provide terms as to commissions and expenses.

The agreement among international underwriters will also establish the authority of the global

coordinator to exercise, on behalf of all underwriters, rights under the underwriting agreement

on their behalf, such as extending deadlines and waiving conditions precedent to closing under

the underwriting agreement, terminating the underwriting agreement, reallocation among the

public offer and the international offering, determining pricing, exercising any over-allotment

option, making payment to the issuer in accordance with the underwriting agreement and

engaging in stabilising activities.

Intersyndicate agreementA separate agreement, referred to as the intersyndicate agreement, is an agreement among

the underwriters of the Hong Kong offering and the underwriters of the international offering,

and will govern reallocation between the offerings, commissions and expenses and agreed

selling restrictions.


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28. Publicity restrictions

There are a number of regulations governing the release of information by thecompany or any of its advisers in connection with an IPO. It is important thatappropriate guidelines are put in place to ensure that any release ofinformation does not breach the regulations as this may result in potentialliability, delays to the timetable and possibly prevent the IPO from beingmarketed in certain jurisdictions. We have dealt with the rules relating to therelease of research reports in Chapter 29.

Principal regulationsThe regulations governing the release of information in connection with an IPO are contained

in the Companies Ordinance, the SFO, guidelines issued by the SFC and the Listing Rules.

In this chapter we have endeavoured to summarise these regulations and outline what we

consider to be accepted market practice.

The Companies Ordinance and SFO contain restrictions on the issue of prospectuses, extracts

from prospectuses, abridged versions of prospectuses and advertisements, invitations and

documents relating to investments, subject to various exemptions. It is important that a

company issuing any publication in connection with an offer of shares made by a prospectus

does not breach these provisions. To assist companies, the SFC has issued guidelines on the

use of offer awareness and summary disclosure materials setting out the SFC’s view on the

treatment of such materials. These guidelines are discussed in more detail below.

In addition, under LR 9.08, any publicity material issued by the company relating to the IPO

must be approved by the Exchange before release and must not be released until the

Exchange has confirmed that it has no further comments thereon. For these purposes,

publicity material does not relate to an issue of securities if its purpose is the promotion of the

company or its products or business and not the securities to be issued. If any material relating

to the proposed IPO is released before the Listing Committee hearing without prior review by

the Exchange, the Exchange may delay the timetable for the Listing Committee hearing by up

to one month. The company should consult with the Exchange regarding any publicity

materials. The Exchange has confirmed in its guidance letter GL18-10 that it will treat publicity

materials which qualify as offer awareness materials under the SFC offer awareness guidelines

as approved under LR9.08. It is rare for authorised publicity material to be issued which does

not comply with the SFC Offer Awareness Guidelines.

Publicity guidelinesGuidelines – It is recommended that a set of publicity guidelines is prepared and distributed

to directors, senior management and all other parties involved in the IPO.

Approval by Authorised Person – The company should appoint an internal Authorised

Person to approve all written publicity material (including any oral presentations) relating to the

IPO, current or future trading prospects, or the operations of the group other than material

issued in the ordinary course of business. Where the Authorised Person is in doubt as to

whether the information may breach the regulations he should consult with the company’s legal

advisers. All approved information should be copied to the legal advisers.


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Enquiries by press or public – Before registration of the prospectus, if the company is asked

to respond to any enquiry from the press or any member of the public relating to the IPO, or

the current or future trading prospects of the group, then the company should decline to

comment. If the enquiry relates only to the general business of the group (excluding trading

prospects) or relates to publicly available information then the company can respond to the

enquiry, but caution is required. After registration of the prospectus the directors or employees

can respond to enquiries provided that they do not provide more information than is contained

in the prospectus.

Press releases and other materials – Prior to registration of the prospectus the company

should not issue any press releases or other written material relating to the IPO, except for the

very limited information as permitted by the SFC Offer Awareness Guidelines discussed below.

After registration of the prospectus all press releases and other written material relating to the

IPO or the operations of the group must be approved by the Authorised Person and, if such

release relates to the IPO, it must comply with the SFC Offer Awareness Guidelines.

SFC Offer Awareness Guidelines – The SFC guidelines set out details of certain offer

awareness materials which the SFC considers will not constitute a prohibited advertisement

under the SFO or give rise to a prospectus (or abstract or abridged version of a prospectus)

under the Companies Ordinance. The guidelines permit offer awareness materials to be issued

before publication of the prospectus without the prior approval of the SFC provided this

contains only very limited procedural and administrative information (as specified in the

guidelines) concerning the IPO and does not contain any information promoting the company

or the offer of shares under the IPO. Such materials should not be issued earlier than 14 days

before the prospectus date and should not be used after the close of the offer period. The

guidelines also permit offer awareness materials to be issued without the prior approval of the

SFC on or after registration of the prospectus, provided the contents are restricted to limited

offer awareness information set out in the guidelines. Again, any such materials should not be

used after close of the offer period. Offer awareness materials complying with the guidelines

do not need to be vetted by the SFC. As mentioned above, if the offer awareness materials

comply with the guidelines, the Exchange will treat them as approved for the purpose of

LR9.08 and will in practice not vet them.

Following the issue of a prospectus, a company may wish to issue a mini-prospectus or fact

sheet to highlight key information about the company and the IPO. Any such document will

constitute an abridged prospectus or prospectus extract under the Companies Ordinance and

will need to comply with the requirements for “summary disclosure materials” set out in the

guidelines. The guidelines require that summary disclosure materials must not contain any

substantive information that is not contained in the prospectus and must reflect whether the

materials are a fair summary of the material information in the prospectus. The guidelines also

prescribe certain information and warning statements which must be included, together with

various other requirements regarding the manner of publication. Summary disclosure materials

must be approved by the Exchange, but are rare in practice.

Unsolicited communications – No director, officer or employee of the group should make any

unsolicited communications to any analyst, potential investor or other person regarding the

IPO or the business of the group.


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Company website – Save for information required by the Listing Rules to be published on the

company’s website, the website should not refer to the IPO or include any material which is

not usually placed on its website, as this information may be viewed as conditioning the market

to the IPO. In addition, prior to submission of the Form A1, the company’s website should be

screened for any information which is inconsistent with the draft prospectus.

Press conferences – No press conferences regarding the IPO should be held until the

prospectus is registered. Once registered, a press conference is often called the same day, at

which the prospectus can be made available and the company can respond to questions. No

material should be released which goes beyond that contained in the prospectus. If a press

conference is held prior to registration of the prospectus on matters not related to the IPO, the

company should decline to answer any questions concerning the IPO or its trading prospects.

Underwriter marketing and roadshow – Before the Listing Committee hearing, the sponsor

and underwriters should not discuss the IPO with the press or any potential investors other

than any cornerstone or anchor investor(s) who should be required to enter into a

confidentiality undertaking.

Following the Listing Committee hearing, the pre-marketing process is commenced.

Roadshow meetings with potential investors will generally commence after the Listing

Committee hearing and pre-marketing process but before the prospectus is registered. At

these meetings the practice is to release the “red-herring” draft of the prospectus to

institutional investors and give presentations supported with slides and answer questions. The

presentation and any answers should not include any substantive material which goes beyond

that included in the prospectus. Those attending these meetings should be required to keep

the information confidential until the prospectus is registered.

Web Proof Information Pack (“WPIP”) – The WPIP contains essentially the same information

as the “red herring” prospectus but must not contain any information about the proposed

offering, price or means to subscribe for shares in the company. When the Exchange sends

out the comments letter after the Listing Committee hearing, the Exchange will also issue a

“request for posting” requiring the company to submit the WPIP for posting on the Exchange’s

website not later than the earlier of the first distribution of the “red herring” prospectus and the

first meeting with the institutional investors for bookbuilding purposes. The roadshow meetings

cannot therefore commence until the WPIP has been published.

US considerations as to publicity guidelinesThe distribution of publicity in the US immediately before or during an offer of an issuer’s

securities is subject to restrictions under US federal securities laws. The term “offer” is

construed broadly under the US securities laws, such that any documents in which a

contemporaneous or contemplated offering of securities by an issuer is discussed – including

publicity or marketing materials – could be interpreted as offering materials, and their

dissemination in the US as an offer of securities.

It is illegal under the Securities Act to make an offer of securities in the US without either (i)

registering such securities under the Securities Act by filing a registration statement with the

SEC or (ii) relying on an exemption or safe harbour from such registration requirement.


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Where Regulation S is the safe harbour relied upon, Regulation S bars all “directed selling

efforts” made in the US by the issuer or a distributor, any of their respective affiliates or any

person acting on behalf of the foregoing. Where Rule 144A or another exemption for offers

into the US as the exemption relied upon, “general solicitation” or “general advertising” is

prohibited in connection with an offering.

Directed selling efforts, as defined in Regulation S, include any activity undertaken for the

purpose of, or that reasonably could be expected to have the effect of, conditioning the market

in the US for securities being offered in reliance on Regulation S.

General solicitation or general advertising includes, but is not limited to:

• publishing any advertisement, article or notice in any US newspaper, magazine or similar

media in the US or broadcasting such over US television or radio; or

• any seminar or meeting in the US whose attendees have been invited by any general

solicitation or general advertising.

Examples of marketing activities or publicity that could be deemed to be directed selling

efforts, general solicitation or general advertising include:

• the promotion of feature articles about the issuer or management interviews in US

publications by representatives of the issuer;

• advertisements for the offering in any US publication; and

• meetings between representatives of the issuer and research analysts or brokers in which

the offering is discussed, if such analysts or brokers then distribute such information in the

US.

Any distribution of publicity by any offering participant in the US that was found to be directed

selling efforts or a general solicitation or general advertising could (i) result in a loss of the

exemption from the registration requirements of the Securities Act for either the US or the non-

US portions of the offering, (ii) create a risk that the SEC could prevent or delay the US portion

of any such offering and (iii) subject offering participants to liability to US investors under US

laws for statements made in such publicity.

Protective measuresAs a result of these considerations, in general, underwriters should ensure that no press

conferences are held in the US and no press releases or other announcements relating to the

IPO are issued or disseminated in the US by any person involved with the IPO or the company.

Press conferences may be held outside the US in accordance with local market practices and

US journalists may be invited provided that access to the conference is provided to both US

and non-US journalists. One-on-one interviews may be held with US journalists provided

similar opportunities are given to non-US journalists. The issuer should not solicit media

coverage in US media or non-US media commonly disseminated in the US (such as The

Financial Times or The Economist).

Any written press-related materials must contain an appropriate legend. The legend should

state that the written press-related materials are not an offer of securities for sale in the US,

that securities may not be offered or sold in the US absent registration or an exemption from

registration, that any public offering of securities to be made in the US will be made by means


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of a prospectus that may be obtained from the issuer or the selling security holder and that will

contain detailed information about the company and management, as well as financial

statements.

Since materials posted on a website are generally available to persons located in the US, any

offering materials posted on the issuer’s websites could be construed as an offer of securities

into the US, as directed selling efforts in violation of the Regulation S safe harbour and/or as a

general solicitation or general advertising, rendering Rule 144A unavailable.

Other restrictions on publicity on offerings sold into the US are similar to those referred to

above in relation to offerings generally.


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29. Research reports

The IPO publicity restrictions also apply to the release of information byanalysts who are connected with the sponsors and underwriters. Generally aseparate set of guidelines in relation to pre-IPO research reports is put inplace for each IPO and circulated to the relevant parties to ensure that reportsdo not breach relevant laws and regulations. This chapter sets out somesample guidelines, assuming the IPO will include an exempt US offering,although practices tend to vary between institutions depending on their owninternal compliance practices.

This area of law is complex and relevant legislation is open to conflicting interpretations

resulting in uncertainty as to how it should be applied. To address this uncertainty the

legislation is presently under review by the regulators.

Research report guidelinesGenerally underwriters’ counsel will prepare guidelines in relation to the distribution of research

reports which are circulated to members of the underwriting syndicate. Research report

guidelines typically include provisions similar to the following, although specific provisions vary

between institutions:

Research reports — these include any analyst’s report, broker’s circular, opinion,

recommendation or other research material concerning the company or any of its subsidiaries,

whether newly issued or previously issued and whether prepared as a separate report or

included in a report dealing with other companies (eg, a sector report).

Application to all syndicate members – all syndicate members, being the sponsors,

underwriters and their related group companies, must adhere to the guidelines in relation to

any reports issued by them.

Key expected dates — the following is a summary of certain key dates in relation to the

distribution of research reports:

Deadline for submission of Usually at least three days before publication

research reports for reviewof the report

Latest time for publication Usually the day before the Global Blackout Period

and distribution of research reports

Start of Global Blackout Period Usually 14 days prior to the printing of the preliminary

prospectus and commencement of the IPO

roadshow

End of Global Blackout Period Usually 40 days after the date of listing

Start of US Blackout Period Immediately upon commencing planning of offering

End of US Blackout Period Usually 40 days after the closing date of the offering

or the completion of the distribution of the securities

if later


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Own research — each research report should be based on the syndicate member’s own

research.

Internal compliance procedures — all research reports should be reviewed by the syndicate

member’s research compliance officer (or internal legal compliance officer) before publication

to ensure that the report is in accordance with internal guidelines. In addition, research reports

should also be cleared with a designated person from the syndicate member’s corporate

finance team before publication. This is to check that there are no factual errors in the research

report, and no material inconsistencies with the draft prospectus.

Compliance with regulatory requirements – each syndicate member issuing a research

report is responsible for ensuring that all applicable regulatory requirements and standards of

professional conduct in relation to the preparation, publication and distribution of the research

report are complied with in all relevant jurisdictions.

Chinese Walls – appropriate information barriers should be maintained between the analyst(s)

preparing the research and those other divisions of the financial organisation advising the

company or involved in the IPO. Such analysts should not attend due diligence meetings in

relation to the offering or have other contact with the company, save that they will often attend

formal analysts presentations.

Date and disclaimer – all research reports should be dated and must include a disclaimer of

liability and an indication statement in the form recommended by the underwriters’ legal

advisers. The disclaimer should appear prominently at the front of the research report and the

indication should appear on each page. The disclaimer is of assistance in avoiding liability but

is not conclusive. To the extent disclosure of an underwriter’s participation in the offer is

required in its research report due to regulatory or liability considerations, such disclosure must

not be given greater prominence than any other disclaimers, legends and qualifying statements

in the research report.

Basis of preparation – each research report must be produced using a high standard of care.

This requires that:

• the research report should be, and present itself as, an outsider’s view of the company

which has been independently produced;

• qualifications, explanations and caveats should be clearly stated;

• it should be clear what information is a matter of fact and what is a matter of the author’s

judgment;

• to the extent that information is based on published or historic information, and particularly

if this has not been updated, this should be made clear;

• the facts should where possible be checked against authoritative sources (and the relevant

source should be stated in the research report); where this is not possible, this should be

made clear and appropriate qualifications should be included;

• the research report makes clear that it does not, and does not attempt to, contain

everything material about the company;

• research reports must be accurate and not misleading by omission; and

• where there is a reference to the author’s belief, there must be a reasonable basis for that

belief.


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No reference to the IPO – the research report should not contain any reference to the IPO or

suggest in any way that it is being issued in connection with or because of the IPO.

Forecasts, projections and valuations – subject to the restrictions set out below, research

reports may include forecasts, projections and valuations prepared independently of the

company. Inclusion of forecasts, projections or valuations in the research report may lead to

increased liability with respect to such research report and great care should be taken. If

forecasts, projections or valuations are to be included, in order to minimise the potential risk:

• they must comply with the requirements of local law;

• they must be fairly based;

• there must be no price target or fair value per share. Comments on valuation should be

restricted to general remarks about the methods that the market generally uses to value

comparable companies. It should be made clear that any suggested valuation framework

is based upon long-term analysis and is not linked to a short-term assessment of the likely

performance of the securities;

• it must be made clear that they represent the opinion of the authors alone and not of

anyone responsible for the preparation of the prospectus or in possession of confidential

information regarding the company or any of the subsidiaries and must be accompanied

by appropriate cautionary language indicating that such forecasts, projections or

valuations may or may not occur, as well as any other applicable risk factors; and

• detailed assumptions on which they are based must be clearly stated, the sources used

must be identified and the sensitivity of the projections to any exogenous factors must be

estimated.

The Listing Rules provide that pre-deal research issued by the sponsor, each of the

underwriters or their associates must not incorporate any profit forecast or other forward

looking statements unless such statements are included, in substantially the same form, in the

applicant’s listing document. Historically, a practice had developed where a submission would

be made to the Exchange requesting a confirmation that the Exchange would not comment

on the inclusion of independently prepared profit forecasts covering a limited period (of an

additional one to two years) beyond that covered in the prospectus. The Exchange has

recently indicated that it does not require such a submission and so current market practice is

that generally no submission is made.

No recommendations – the research report must not include any investment

recommendation or any wording that implies such a recommendation.

Independent production – except as referred to in the disclaimer, nothing in the research

report should suggest that the report is definitive or authoritative or that any part of the

research report is based on information provided by, represents the views of, or has been

written, verified or approved by, the company, the sponsor or any other syndicate member or

any of their directors.

Submission of final draft for review – at least three days prior to the publication of the

research report and after review by the syndicate member’s legal and research compliance

departments, a final draft of the research report must be provided to the sponsor and the

sponsor’s lawyers. Any drafts submitted to the company should have any sections covering

forecasts or projections, the research summary and assumptions removed.


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Basis of review – the sponsor may review the research reports for factual accuracy and

consistency with the prospectus. The sponsor’s legal advisers will review the research reports

for compliance with the research report guidelines.

Global Blackout Period – no research report may be published or distributed anywhere in the

world during the Global Blackout Period.

US Blackout Period – no research report may be published or distributed in, or transmitted

to, the US or to US persons during the US Blackout Period which commences immediately

upon preparation of the offering and which is expected to end (a) 40 days after the closing date

of the offering or (b) upon the completion of the distribution of the securities, whichever is later

(the “US Blackout Period”). During the US Blackout Period, syndicate members should:

• screen potential recipients of research reports to ensure that only persons who are outside

the US and institutional investors on the relevant analyst’s current research mailing list with

addresses outside the US receive research reports. A list should be kept of all recipients;

• adopt procedures to ensure that all personnel responsible for the preparation, storage or

distribution of research reports and the recipients of the research reports understand that

the research reports are not to be distributed in the US; and

• if any reasonable doubt exists regarding a person’s US status, the syndicate member

should refrain from sending research reports to such person.

Distribution of research reports in Hong Kong – research reports may not be issued,

circulated, or distributed in Hong Kong other than to persons whose ordinary business is to

buy or sell shares or debentures, whether as principal or agent (except in circumstances which

do not constitute an offer to the public within the meaning of the Companies Ordinance), and

either (i) such persons fall within the meaning of professional investors as defined in the

Securities and Futures Ordinance and the Securities and Futures (Professional Investor) Rules

or (ii) the issue of the document to such persons is exempt from the Securities and Futures

Ordinance. No research reports should be distributed before the formal hearing by the Listing

Committee of the Exchange.

Distribution of research reports outside Hong Kong – reports should only be distributed to

potential investors in jurisdictions outside Hong Kong in compliance with local laws. The

distribution of research reports in certain jurisdictions may be prohibited.

Hard copy distribution only – research reports must be delivered in physical form in one mail

shot only and must not be published on the internet, sent by email or other electronic form or

put on an electronic retrieval system. Each individual research report should be numbered and

records kept of the recipient to whom such report was sent. Any such records are subject to

review at any time by the sponsor.

No distribution at roadshows, to press or public – research reports must not be distributed,

discussed or reviewed at large meetings, such as roadshow presentations, or given to the

press (including information vendors and wire services) or any other media organisation, private

investors or members of the public anywhere in the world.

Distribution consistent with past practice – all syndicate members who distribute research

reports should issue only such number of research reports as is consistent with their past

practice on similar transactions and should maintain records of the names and addresses of

all recipients of research reports.


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Distribution of final reports only – research reports should not be sent to clients until they

are in final form. If a draft research report is circulated internally, it should be stamped or

marked for “internal use only”. The company should in any event be provided with a final copy

of each research report as soon as it is disseminated to clients.

Distribution of prospectus – each syndicate member should ensure that any person to whom

a research report has been sent also receives a copy of the preliminary offering circular and,

to the extent such recipient is an investor in the offering, any final offering circular when

published.


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30. Stabilisation and over-allotments

A stabilising manager may be appointed to stabilise the price of shares afterlisting by undertaking primary stabilising actions (such as purchasing sharesin the secondary market to minimise any reduction in the share price) and alsoancillary stabilising actions (such as exercising any over-allotment option).

Price Stabilisation RulesStabilisation seeks to maintain or support the price of securities at levels different to those

which might otherwise prevail. As such, stabilisation activities may be considered market

misconduct under the SFO as being false trading and stock market manipulation.

The Securities and Futures (Price Stabilizing) Rules (“PS Rules”) provide a “safe harbour” from

the market misconduct provisions under the SFO. The PS Rules apply to offers of equity

securities, debt securities and depositary receipts of equity or debt securities (“RelevantSecurities”) provided, among other things, the total value of the Relevant Securities offered

(excluding shares offered pursuant to any over-allocation) is not less than HK$100 million. This

chapter considers the application of the PS Rules to initial public offerings of shares.

Who can carry out stabilising actionsOnly a stabilising manager or its agents can carry out stabilising actions. The stabilising

manager is a single intermediary appointed by or on behalf of the issuer to take stabilising

action under the PS Rules.

The consultation paper which led to the implementation of the PS Rules envisaged that only

lead managers and underwriters of the public offering may conduct stabilising actions and be

appointed as the stabilising manager. In particular, the consultation paper stated that the

issuer of securities should not be involved in the stabilisation of its own securities.

Primary and ancillary stabilising actionsUnder the PS Rules, a stabilising manager may stabilise the price of securities by effecting

transactions prescribed in the PS Rules in the same type of security.

Stabilising actions under the PS Rules are divided into primary stabilising actions and ancillary

stabilising actions. Purchases of securities (or offers for or attempts to purchase securities) by

a stabilising manager in the secondary market for the sole purpose of preventing or minimising

any reduction in the market price of those securities are categorised in the PS Rules as primary

stabilising actions. A stabilising manager may also, in connection with any primary

stabilisation, carry out ancillary stabilising actions which include:

• over-allocation (up to the number of shares as may be issued on a full exercise of an over-

allotment option) for the purpose of preventing or minimising any reduction in the market

price of those securities.

• subscribing for shares on an exercise of an over-allotment option; or

• selling shares so as to liquidate any “long position” created as a result of primary stabilising

actions.


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In order to facilitate over-allocation, the lead manager will either enter into stock borrowing

arrangements (typically with a controlling shareholder taking advantage of the exemption from

the lock up requirements in LR 10.07(3)) or enter into delayed settlement arrangements, for

instance with cornerstone investors.

Even if there is no over-allocation in relation to the share offer, under the PS Rules, the

stabilising manager may still engage in market purchases of the shares in order to stabilise the

market price of the shares so as to create a “net long” position in the shares.

Restrictions applicable to stabilising actionsIn order to qualify for the safe harbour under the PS Rules, primary stabilising actions are

subject to pricing restrictions and may only be carried out for a limited period of time.

Pricing Restrictions – under the PS Rules only upward stabilisation is permitted and various

restrictions apply to the price at which primary stabilising actions may be carried out:

a. no stabilising actions may be taken at a price greater than the offer price excluding

brokerage and fees (“Offer Price”).

b. the stabilising manager is allowed to make a stabilising bid (“Price B”) which is at or below

the Offer Price. Once an initial stabilising bid has been made the stabilising manager may

subsequently make further stabilising bids at or below Price B.

c. if a deal is done on the Exchange by a party other than the stabilising manager for the

shares at a price (“Price C”) which is higher than Price B but below the Offer Price, the

stabilising manager will then have a new maximum Price C, so that it may stabilise at or

below Price C.

d. the pricing restrictions under Section 11 of the PS Rules only apply to primary stabilising

actions and do not apply to ancillary stabilising actions.

Stabilising period – primary stabilising actions must be carried out during the period from the

date of commencement of trading in the shares on the Exchange until the 30th day after the

date on which the application lists under the public offer closed.

Provided ancillary stabilising actions are carried out in connection with primary stabilising

actions, they need not be carried out within the stabilising period. However, the SFC indicated

in the consultation paper and related consultation conclusions that it expected such actions to

be carried out as soon as possible after the end of the stabilising period and did not expect

any “net long” position to be held for an unduly long period of time, which it considered would

affect market liquidity. The SFC has acknowledged that the stabilising manager should be

given the discretion to determine when to unwind any “net long” position created as a result of

primary stabilising actions, so long as the liquidation is executed in a way that minimises

market impact. As a result, where the stabilising manager holds a net long position in the

shares as a result of purchasing shares in the secondary market in order to stabilise the market

price of the shares, it has a discretion to determine when market conditions are sufficiently

favourable to dispose of such shares. However, the stabilising manager would not be

expected to hold onto such shares for an unduly long period.

Prohibition on principal transactions between the stabilising manager and its agent(s) –

the stabilising manager shall not, as principal, enter into any dealing with any agent appointed

pursuant to the PS Rules to act on its behalf. The PS Rules will not prevent proprietary trading


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activities of the stabilising manager and its agent as long as their transactions are executed

through the normal order matching mechanism in the open market and neither the stabilising

manager nor the agent concerned know, or ought reasonably to have known, the identity of

the counterparty. The PS Rules will not prohibit client transactions for which the stabilising

manager is merely an agent of its clients.

Other restrictions under the PS Rules – the stabilising manager is prohibited from taking any

stabilising action in relation to the Relevant Securities where at the time the market price of the

Relevant Securities was or could reasonably be expected to be an artificial price and the

stabilising manager knew or ought reasonably to have known that the artificiality in the market

price was attributable in whole or in part to any conduct which constitutes market misconduct

or an offence under Part XIV of the SFO.

No restrictions on the size of any “net long” position created as a result of primarystabilising actions – the PS Rules do not impose any limit on the size of any “net long”

position which may be created as a result of primary stabilising actions. The number of shares

which may be purchased pursuant to primary stabilising actions can thus exceed the number

of shares under the over-allotment option. However, in practice, other regulatory requirements,

such as the public float requirement under the Listing Rules and the disclosure of interests

requirements under the SFO, would limit the size of the “net long” position.

Disclosure obligationsThe PS Rules impose prior, interim and post-stabilisation disclosure obligations.

Prior disclosure requirement – the stabilising manager may not take any stabilisation actions

in relation to the Relevant Securities unless, from the date of the first public announcement

indicating (or which might reasonably be understood as indicating that) that a public offer of

the Relevant Securities is intended to be made, adequate disclosure is made in relevant

documents, including any announcement, invitation or prospectus, that stabilising action may

take place in relation to the offer.

Interim disclosure requirement – as soon as reasonably practicable after any exercise or

partial exercise of an over-allotment option, the stabilising manager is required to ensure that

a public announcement is made by or on behalf of the issuer or the stabilising manager stating

(i) the number of the Relevant Securities to be subscribed for or purchased on such exercise

or partial exercise; and (ii) the number of Relevant Securities remaining available thereafter

under any unexercised portion of the option.

Other than in relation to an exercise of the over-allotment option, the PS Rules do not impose

any other obligation on a stabilising manager to ‘flag’ any stabilisation bid in the market in the

course of its stabilising actions by way of simultaneous public announcement.

Post stabilisation disclosure – within seven days after the end of the stabilising period the

stabilising manager is obliged to ensure that a public announcement is made (whether by or

on behalf of the offeror company or the stabilising manager) setting out the following:

• the date of the end of the stabilising period;

• whether or not stabilising action was undertaken;

• the price range between which stabilising purchases were undertaken;


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• the date and price of the last stabilising purchase; and

• where applicable, the extent to which any over-allotment option was exercised.

There is no obligation under the PS Rules to disclose the volume of stabilising purchases

undertaken.

Role of the stabilising managerThe stabilising manager is responsible for overseeing compliance with the PS Rules and, in

particular, the disclosure requirements referred to above and the record keeping requirements

referred to below. The stabilising manager may appoint agents, local and overseas, to

undertake stabilising actions, but remains ultimately responsible to the issuer and for

compliance, including by its agents, with the PS Rules.

Record keeping requirementsThe stabilising manager is obliged to establish and keep a register in respect of each offer of

Relevant Securities to which the PS Rules apply, which should be kept for seven years from

the end of the stabilisation period and made available for inspection by the SFC upon notice.

Certain information in the register (the items under the first bullet point below, other than details

of the counterparty) should be made available for inspection by the issuer upon notice at any

time within three months after the end of the stabilising period.

The register (which should be kept in Hong Kong) should include the information set out in

section 13 of the PS Rules, summarised below, and should be updated immediately or on a

daily basis:

• details of each transaction effected in the course of the stabilising action in question

including:

– the type of the Relevant Securities;

– the unit price of the Relevant Securities;

– the quantity or total value of the Relevant Securities in the transaction;

– the date and time of the transaction; and

– details of the counterparty to the transaction;

• details of the allocation of the Relevant Securities (name of offeree and amount allotted);

and

• details (so far as is known to the stabilising manager) of transactions other than those

which are effected by or in accordance with the instructions of the stabilising manager at

a price above the current stabilising price for the purposes of determining the maximum

stabilising price (referred to as “Price C” in the section “Pricing restrictions” above).

In addition details of any agents appointed by the stabilising manager together with the terms

and general parameters of their appointment must be included in such register.

The SFC expects the stabilising manager to properly separate its activities as stabilising

manager and its other trading activities, including proprietary trading, to avoid committing

market misconduct not covered by the safe harbour under the PS Rules. All stabilising actions

should be recorded in the register in order to be eligible for the safe harbour under the PS

Rules.


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US considerations as to anti-manipulation rules: Regulation MRegulation M under the US Securities Exchange Act generally prohibits distribution

participants in the offering from purchasing, or attempting to induce any person to purchase,

the securities that are the subject of a distribution for a certain period. The SEC has issued

releases confirming that some book-building processes, such as tie-ins (agreements to

purchase shares in the aftermarket in exchange for receiving an allocation in an IPO), are

prohibited, as is the solicitation and subsequent confirmatory tracking of such activities by the

parties involved. Under Regulation M, when any element of a “distribution” occurs in the US,

the restrictions of Regulation M apply globally, even to activities conducted outside the US by

non-US persons.

Regulation M is applicable to private offerings (eg, transactions pursuant to Section 4(2) or

Regulation D) where the indicia of a distribution are present, determined by the magnitude of

the offering and the presence of special selling efforts and methods. Regulation M, however,

contains specific exemptions for distributions of Rule 144A-eligible securities, if such securities

are offered or sold in the US only (i) to “Qualified Institutional Buyers” (or “QIBs”) in transactions

exempt from registration under Section 4(2), Rule 144A or Regulation D under the Securities

Act, or (ii) to persons in the US not deemed to be “US persons” for purposes of Regulation S

under the Securities Act. Rule 144A-eligible securities are securities that satisfy the fungibility

and information delivery requirement under Rule 144A. In addition, there are exceptions to the

restrictive rules under Regulation M for ordinary course transactions, actively traded securities

and certain stabilisation activities by the underwriters.


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31. Exempt US offerings

Exemptions from the registration requirements

The basic premise of the US federal securities laws is that disclosure of allfacts that are material to an investment decision is the best way to protectinvestors. To that end, the laws provide that public offers and sales ofsecurities in the US or to US persons outside the US must either be registeredwith the SEC (which must declare the registration statement effective beforesales proceed) or exempt from the registration requirements.

Exemptions generally restrict publicity about the offering and limit the class of permitted

offerees to those meeting certain sophistication thresholds in order to allow issuers to avoid

registering capital raising transactions with the SEC.

If an issuer sells securities in violation of this registration requirement, a buyer of the issuer’s

securities will have the right to rescind its purchase and recover from the issuer the

consideration paid for the securities, even if the buyer is unaffected by the issuer’s failure to

register. As a result, it is important for all offerings of securities not being registered with the

SEC, including offers and sales outside the US, pre-IPO offerings, and IPOs, to be crafted such

that they are made subject to an exemption from registration, or are not subject to registration

with the SEC.

US counsel should be consulted to confirm the availability of an exemption from registration.

A US legal opinion, termed a “no registration” opinion, may be requested from US counsel

expressing the opinion of such counsel that the subject securities are sold in a manner exempt

from the registration requirements of the Securities Act.

For purposes of offerings to strategic investors prior to, or as part of, an IPO, several possible

exemptions from registration may be considered:

Section 4(2) offeringsSection 4(2) of the Securities Act exempts from the registration requirements transactions by

an issuer not involving any public offering. Although the term public offering is not defined in

the Securities Act, the SEC and US courts have interpreted the exemption to be available for

offerings conducted in a non-public manner. Generally, the number of persons who are offered

the securities, the sophistication of both offerees and purchasers of the securities and the type

of disclosure provided to offerees will be considered in determining whether the issuer has

engaged in a public offering.

Because of the uncertainty in determining whether a public offering has occurred, the SEC has

adopted Regulation D as a safe harbour for offerings made under Section 4(2), as discussed

further below. Failure to comply with Regulation D does not, however, preclude issuers from

relying on the exemption under Section 4(2).


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Regulation D private placementsRegulation D allows sales to an unlimited number of “Accredited Investors”. Accredited

Investors include banks, insurance companies, registered and small business investment

companies, certain business development companies, certain employer benefit plans,

organisations with total assets in excess of $5 million and certain wealthy individuals.

In connection with a Regulation D private placement, “general solicitation” and “general

advertising” may not be undertaken. General solicitation and general advertising include, with

respect to the offering:

• publishing any advertisement, article or notice in any US newspaper, magazine or similar

media in the US or broadcasting such over US television or radio; or

• any seminar or meeting in the US whose attendees have been invited by any general

solicitation or general advertising.

Examples of marketing activities or publicity that could be deemed to be directed selling

efforts, general solicitation or general advertising include:

• the promotion of feature articles about the issuer or management interviews in US

publications by representatives of the issuer;

• advertisements for the offering in any US publication; and

• meetings between representatives of the issuer and research analysts or brokers in which

the offering is discussed, if such analysts or brokers then distribute such information in the

US.

An issuer offering securities under Regulation D must file with the SEC five copies of a notice

on Form D no later than 15 days after the first sale of securities in the Regulation D offering

(typically considered to be the receipt of the first subscription agreement or acceptance of

subscription funds). The Form D, a fairly short form requiring only general information about the

issuer and the offering, is a notice filing only; it does not subject the offering to review by the

SEC. In practice, however, most issuers do not file the Form D in connection with their private

placements on the theory that compliance with all other requirements of Regulation D would

suffice to ensure that the exemption under Section 4(2) would be available. However, a Form

D may nonetheless need to be filed to meet state exemption requirements.

Rule 144A offeringsIn Rule 144A offerings, the securities offered must be sold only to QIBs, or those whom the

seller reasonably believes are QIBs. Generally, QIBs are entities that in the aggregate own and

invest on a discretionary basis at least $100 million in securities of non-affiliated issuers. Rule

144A securities are considered “restricted securities” and cannot be freely resold into the US.

In connection with a Rule 144A offering, similar to a Regulation D private placement, “general

solicitation” and “general advertising” may not be undertaken.

Regulation S offeringsIn a Regulation S offering, two general conditions must be satisfied: (i) any offer/sale must have

occurred in an “offshore transaction,” and (ii) there must have been no “directed selling efforts”

into the US by the issuer, any distributor or any of their respective affiliates. “Directed selling

efforts” are activities undertaken to, or that reasonably could be expected to, condition the US

market for the securities.


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Additional restrictions apply if US holdings (for debt securities) or trading volumes (for equity

securities) indicate the presence of “substantial US market interest,” or “SUSMI”. In such

cases, the following additional restrictions apply:

• sales may not be made to “US persons”, as defined for purposes of Regulation S;

• offering restrictions must be complied with (ie, distributors must agree that offers and sales

during a distribution compliance period will be made under Regulation S); and

• notice requirements applicable to inter-dealer sales will apply during a 40-day distribution

compliance period.

State law (Blue Sky) requirementsAn offering exempt from registration under federal securities laws may still be subject to

registration or qualification requirements imposed by state securities laws in the US. US states

are not prevented from imposing filing and fee requirements on issuers.

Liability on disclosureAlthough the above exemptions provide for exemption from the securities registration

requirement of Section 5 of the Securities Act, they do not provide exemption from US anti-

fraud rules, in particular Rule 10b-5.


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32. Hong Kong and US dual listings

Some issuers will seek to simultaneously list their securities both in the USand Hong Kong. Perceived benefits of dual listings in the US and Hong Konginclude a positive pricing impact, an increased investor base, greater liquidityand enhanced disclosure, greater transparency for investors and increasedprestige and coverage in the US markets. Such dual listings may also appealin particular to technology-related issuers, as NASDAQ offers such issuerslistings alongside many other technology-related companies.

Timing and coordination issues may arise in connection with submitting draft offering

documentation to multiple regulators in connection with such offerings. Among other things,

securities regulators in Hong Kong and the US may provide inconsistent comments, or may

impose potentially conflicting requirements on issuers.

Perceived drawbacks associated with listing securities in the US include enhanced potential

legal liability and disclosure and diligence in connection with the offering, a potentially

lengthened timetable for the capital raising exercise, on-going reporting obligations in the US

under the Securities Exchange Act of 1934, and various on-going compliance obligations in

the US under the Sarbanes-Oxley Act of 2002.

US and Hong Kong dual listingsIn order to complete an IPO with a dual listing on the Exchange and a US exchange, such as

the New York Stock Exchange (the “NYSE”) or NASDAQ, the securities to be listed in the US

must be registered with the SEC pursuant to a registration statement and declared effective by

the SEC. Registration statements must be signed by the issuer, its principal executive officer,

its principal financial officer, its principal accounting officer, at least a majority of its board of

directors and a duly authorised representative in the US.

This section discusses the procedure for, and several consequences arising from, listing

securities in the US.

SEC comment and reviewIn order to register securities with the SEC, a registration statement must be filed with the SEC

and be declared effective by the SEC. A prospectus forms the bulk of the registration

statement under the Securities Act and contains substantive disclosures to investors regarding

the issuer, the securities being offered, and the manner of distribution. Registered offerings are

usually marketed to investors using a preliminary or “red herring” prospectus, which omits

certain pricing information. The prospectus is subject to extensive review and comment by the

SEC, as are the accompanying financial statements of the issuer.

SEC rules require issuers, and their legal counsel, to present information in certain sections of

prospectuses in a clear, concise and understandable manner. These rules, which must be

observed by all issuers filing registration statements under the Securities Act, encourage the

use of short sentences, bullet lists and descriptive headers and sub-headers, wherever

possible. In addition, the rules discourage excessive reliance on glossaries and defined terms

and the use of legalistic, overly complex presentations, vague boilerplate language, excerpts

from legal documents and repetitive concepts. Failure to follow these plain English rules can

lead to delays in the approval of the prospectus and registration statement by the SEC.


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Financial statementsDisclosure documents for SEC registered offers require the issuer to provide five years of

selected financial data1, three years of audited income statements and two years of audited

balance sheets. Furthermore, issuers making an initial public offering generally must use

audited financial statements (which may cover a period of less than a full year) not older than

12 months at the time the registration statement is filed. If the registration statement is dated

more than nine months after the end of the last audited financial year, it should contain

consolidated interim financial statements (which may be unaudited) covering at least the first

six months of the financial year and comparative statements for the same period in the prior

financial year. Moreover, if at the date of the registration statement the issuer has published

interim financial information that is more current than required under this standard, the more

current information must be included in the document. An additional consideration that may

influence the parties’ decision regarding the financial statements to be included is the

unavailability of negative assurance comfort from the auditors with respect to subsequent

changes in financial statement items as of a date more than 135 days after the most recent

period for which the accountants have performed an audit or interim review.

Prior to certain rule revisions in November 2007, financial statements of non-US private issuers

reporting under the Exchange Act had to be prepared in accordance with US GAAP, or contain

reconciliations of key items to US GAAP and a discussion of material variations between home

country and US GAAP. Although the revised rules will allow foreign private issuers filing Form

20-F to continue to provide a full reconciliation to US GAAP if desired, they may instead provide

IFRS financial statements, if (a) the issuer also states in a prominent footnote to its financial

statements that such financial statements are in compliance with IFRS (as published by the

International Accounting Standards Board (ISAB)) and (b) the issuer’s independent auditor

delivers an opinion stating that the issuer’s financial statements comply with IFRS (as published

by IASB).

Timetable for a registered offeringDue DiligenceThe due diligence process is meant to facilitate the drafting process and to provide protection

from both Sections 11 and 12 and Rule 10b-5 liability, as described below. The due diligence

process is a wide-ranging investigation of the business and legal affairs of the issuer of

securities in connection with the sale of such securities. The process generally consists of

presentations by the issuer’s management about its business to the bankers and lawyers,

document review by lawyers of the issuer’s material documents (such as board minutes,

contracts, loan agreements, governmental authorisations, and litigation records), and

interviews with outside accountants, customers and suppliers. Another part of the process is

the production by the lawyers of the 10b-5 letter and the comfort letter by the accountants

(see Chapter 9 – Comfort letters and US legal opinions).

To reduce the risk of potential criminal or civil liability, therefore, each person responsible for the

prospectus should satisfy himself, on all reasonable grounds, (and) having made such

enquiries as were reasonable prior to the publication of the prospectus:


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1 FN – Data for either or both of the earliest two years of the five year period may be omitted if the issuer represents to

the SEC that it cannot provide the information without unreasonable effort or expense.

• that each material statement of fact or of opinion in the offering circular is not only accurate

but is not misleading in its context;

• that nothing has been omitted which would affect the import of the information in the

offering circular;

• that, taken as a whole, the document gives, so far as possible, a true and fair impression

of the history, business and prospects of the issuer (as part of this exercise the offering

circular must clearly cover the risks as well as the attractions of the investment); and,

• that nothing has been omitted so as to make the document misleading.

Pre filing periodIn connection with an IPO by a foreign private issuer, during the period before the registration

statement is filed no one may offer, either orally or in writing, to sell the securities to be

registered in the US. In this context, the term “offer” is broadly construed to include acts that

may stimulate market interest in the issuer even if the securities are not mentioned. Rule 135

under the Securities Act allows the publication of very limited information about the offering

before the registration statement is filed (provided it does not contain any of the underwriters’

names).

Improper communications during this period are called “gun-jumping” violations. The penalty

for such violations is a SEC imposed “cooling off” period which is meant to reduce the effect

on the market of the improper communication. The cooling off period may last anywhere from

a few weeks to several months. The SEC may also require the issuer to include the information

that was improperly communicated in the prospectus, thus increasing the potential liability of

all parties to the offering. Gun-jumping is also considered to be a violation of Section 5’s

registration requirement which allows the purchaser to rescind his purchase for up to one year

following the sale.

Filing the registration statementFiling fees must be paid to the SEC in connection with filing a registration statement. As of

November 2002, non-US issuers are required to file registration statements electronically with

the SEC by means of its EDGAR (Electronic Data Gathering and Retrieval System) system.

A non-US issuer may request a confidential review of its registration statement prior to making

a formal public filing. This confidential treatment is only available for first-time filers. A formal

public filing is usually made after responding to the SEC’s comments on the confidential filing.

The comment (“waiting”) periodThe initial public filing with the SEC marks the beginning of a “waiting period,” during which

time the SEC staff may issue comments on the registration statement, and the issuer and the

managing underwriter conduct preliminary marketing efforts in order to ascertain the level of

interest in the transaction within the investment community.

Review by the SEC staff for legal and accounting compliance during this period may take from

30 to 60 days (or longer if novel issues are present or staff workload is intense), although a

shorter period is possible if the issuer has submitted a draft registration statement for

confidential review and the issues raised by the SEC staff have been substantially resolved

prior to the public filing. The managing underwriter should receive some word from the


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National Association of Securities Dealers (the “NASD”) and the Blue Sky administrators within

four to five weeks following the filing. The SEC will contact the issuer with comments, orally

or in writing, and may then schedule meetings to discuss necessary revisions. The SEC may

require an “interim amendment” to the registration statement prior to declaring it effective.

During this period oral selling efforts, such as a roadshow, are permitted.

In connection with an IPO by a foreign private issuer, preliminary prospectuses which contain

substantially all of the information required by the Securities Act are the only permitted written

offering materials during this period and no sales may be made or confirmed during this period.

The roadshowIn order to market the securities to be sold, the issuer and bankers will visit potential investors

during the SEC comment period, making presentations to them about the issuer and the

securities, as part of a so-called “roadshow”. The roadshow typically covers several cities over

a relatively short time frame (one to three weeks). The presentation is prepared in advance with

information drawn from the offering circular and is often followed by a question and answer

section. No written materials may be distributed at a roadshow other than the preliminary or

“red herring” prospectus.

Interim amendmentDepending on the extent to which SEC staff concerns can be resolved in any confidential

review process, an issuer making its initial filing may be required to file amendments to its

registration statement with the SEC before the registration statement becomes effective. If an

amendment reflects material changes that ought to be known by public investors before they

receive their sale confirmations after the effective date, a full “re-circulation” of the revised

preliminary prospectus must be made to all persons to whom the underwriters expect to send

confirmation not less than 48 hours prior to the mailing of such confirmations. If the changes

are not of the type that would require re-circulation, but the SEC staff still wish to review the

revised language, the staff may accept a printer’s proof of the final “pricing amendment,” or a

letter containing the proposed language. On some occasions, insignificant changes can be

discussed over the telephone with the examiner, and be included in the pricing amendment

without formal review by the SEC staff.

PricingOn the day prior to the effective date of the registration statement, the issuer and the managing

underwriter will conduct a “pricing meeting” to determine the IPO price, based on demand for

the securities. Once the price is decided upon, the final underwriting agreement is signed.

Effective dateOnce the SEC receives the amended registration statement and approves the disclosure, the

staff will declare the registration statement effective and public trading may commence.

ClosingWithin three days of commencement of public trading, the ‘closing’ will generally take place.

This is the point at which the underwriters receive the securities and required documents,

comfort letters and opinions set forth in the underwriting agreement in exchange for remitting

the proceeds of the offering to the issuer and any selling shareholders.


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DTC tradingThe Depository Trust Company (“DTC”) is a clearing agency which holds securities for its

participants and facilitates the clearance and settlement of securities transactions between

participants through electronic book-entry changes in the accounts of its participants, thereby

eliminating the physical movement of certificates. Securities which are registered with the SEC

are eligible to be cleared through the facilities of DTC. Investors hold the beneficial interests in

securities directly through DTC if they are participants or through their accounts with

participants such as securities firms, banks and other institutions. The European clearing

agencies Euroclear and Clearstream also participate in DTC through their nominees.

Consequences of registrationAs a result of registering securities in the US, issuers will become subject to a number of

requirements under US law.

Sarbanes-Oxley Act of 2002The Sarbanes-Oxley Act of 2002 imposes significant requirements on US-listed issuers relating

to corporate governance, composition of board and audit committees, internal financial control

reviews and financial statement certification requirements. The Act also creates specific

ethics-based requirements for issuers, including a prohibition on personal loans from the issuer

to its executives.

Under the Sarbanes-Oxley Act, an issuer that has a class of securities registered under Section

12 of the Exchange Act must maintain controls and procedures that are designed to ensure

that information required to be disclosed by the issuer under the Exchange Act is recorded,

processed, summarised and reported within the time periods specified in the SEC’s rules and

forms. The required controls and procedures include procedures designed to ensure that such

information is accumulated and communicated to the issuer’s management as appropriate to

allow timely decisions regarding required disclosure. The SEC encourages creation of a

disclosure committee to ensure that methods of gathering, analysing and disclosing all

information about the issuer are as comprehensive as the methods used for disclosing financial

information.

Pursuant to Section 404 of the Sarbanes-Oxley Act, the principal executive officer and principal

financial officer of an issuer are required to publish information in their annual periodic reports

to the SEC concerning the scope and adequacy of the internal financial control structure and

procedures for financial reporting. This management report is also required to assess the

effectiveness of such internal financial controls and procedures. Section 404 further requires a

registered accounting firm provide an auditor’s attestation to and report on the assessment on

the effectiveness of the internal financial control structure and procedures for financial reporting

of the company. This financial controls auditor attestation requirement has imposed significant

compliance costs upon issuers listing on US securities exchanges.

The SEC recognised non-US issuers’ resistance to these compliance costs by announcing on

August 9, 2006 that it had approved extending the Sarbanes-Oxley Section 404 auditor

attestation compliance deadline for certain foreign private issuers by one year, and that it

proposed extending the Section 404 management report and auditor attestation for certain

other foreign private issuers, in terms of the fiscal years to which they first relate. The Section

404 auditor attestation and management report compliance deadlines for foreign private


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issuers that are large accelerated filers (ie, seasoned issuers with a public float of at least

US$700 million) was proposed to remain unchanged (first applying to fiscal years ending on or

after July 15, 2006). However, the SEC approved extending the Section 404 auditor

attestation compliance deadline for foreign private issuer accelerated filers that are not large

accelerated filers from fiscal years ending on or after July 15, 2006 to fiscal years ending on or

after July 15, 2007. The SEC also approved extending the Section 404 auditor attestation

compliance deadline for foreign private issuers that are not accelerated filers from fiscal years

ending on or after December 15, 2009 and the Section 404 management report deadline for

such filers to December 15, 2007.

Periodic Reporting under the Securities Exchange Act of 1934Section 12 of the Securities Exchange Act of 1934 (the “Exchange Act”) requires any non-US

private issuer with more than $10 million in assets worldwide and more than 500 global

securities holders (of which 300 or more are US residents) to register as a reporting company

under the Exchange Act, or seek an exemption from registration. Registration under the

Exchange Act is also required before a class of debt or equity security can be listed on any US

stock exchange. Registration under the Exchange Act invokes its periodic reporting

requirements, which for foreign issuers include the filing of an annual report with the SEC,

known as a Form 20-F, which is roughly similar to the initial registration statement in content.

The Exchange Act’s periodic reporting requirements apply to all non-US private issuers that

have either registered securities under the Exchange Act or registered a public offering under

the Securities Act. A non-US private issuer subject to these requirements must submit an

annual report on Form 20-F and interim reports on Form 6-K.

Form 20-FForm 20-F must be filed annually, within six months of the end of the reporting company’s fiscal

year. The information required to be disclosed is similar to that provided in the registration

statement and is intended to provide the SEC and the public with annual updates of the

information that was provided during the initial offering.

The Sarbanes-Oxley Act requires that Form 20-F be accompanied by two written statements,

each signed by the chief executive officer and the chief financial officer certifying that the CEO

or CFO has reviewed the disclosure and that in the view of the officer the information is not

misleading, that it fairly presents the condition of the issuer in all material respects and that the

report complies with the Exchange Act. The certification must also include statements with

respect to the quality and the effectiveness of an issuer’s disclosure controls and procedures.

A CEO or CFO who knowingly or wilfully certifies a report that does not meet the requirements

of the Exchange Act faces fines and/or imprisonment.

Form 6-KForm 6-K requires information to be filed with the SEC and any stock exchange on which the

issuer’s securities are listed if such information is (i) required to be made public pursuant to the

law of the issuer’s country of domicile or incorporation, (ii) filed with a non-US stock exchange

and made public by such exchange, or (iii) distributed to the security holders of the issuer.

Information meeting one of the above tests is only required to be disclosed on Form 6-K if it is

material to the issuer’s business.


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Ownership reporting requirements under the Securities Exchange Act of1934Sections 13(d) and 13(g) require persons acquiring more than 5% of any class of voting

securities registered under Section 12 of the Exchange Act to file reports with the SEC.

Schedule 13D, if applicable, must be filed within 10 days of a person crossing the 5%

threshold. The acquirer must disclose, among other things, its identity, the source of the funds

used to acquire the securities and the purpose of the acquisition (including any plans for future

purchases). A prompt amendment of the schedule must be filed if there is a material change

to the information disclosed on the form.

Persons that acquired their securities prior to the issuer becoming a reporting company and

certain institutional investors that acquire securities in the ordinary course of business and do

not change or influence control of the issuer may qualify to file a short form report on Schedule

13G. Schedule 13G must be filed within 45 days of the end of the calendar year in which the

acquisition occurred. If the acquirer’s level of ownership falls below 5% prior to the deadline,

no filing is necessary. In addition to the more favourable filing deadlines of Schedule 13G, less

information is required to be disclosed.

National Exchanges’ and Automated Quotation Services’ RulesUS National Exchanges, such as the NYSE and the American Stock Exchange (the “Amex”)

and NASDAQ (to date the only automated quotation service in the US) impose certain notice

and reporting obligations as well as certain listing standards which are discussed in greater

detail below.

NASD RulesThe rules of the NASD will apply to the underwriters involved in a registered offering. Primarily,

the rules focus on the fairness of the underwriting compensation. The SEC will not declare a

registration statement effective until it receives from the NASD a letter which states that it does

not object to the compensation arrangements. Offerings of investment grade debt securities

are exempt from the NASD fair compensation rules.

The Foreign Corrupt Practices ActThe Foreign Corrupt Practices Act contains two important requirements for issuers that have

registered securities under the Exchange Act or the Securities Act. The first prohibits the

bribery of foreign officials. Issuers may not use “means or instrumentality of interstate

commerce corruptly in furtherance of” improper payments to foreign political parties or officials

for the purpose of influencing any act or decision in order to obtain business. The second

requirement is that issuers maintain their accounts in a way that will deter bribery. Issuers must

(i) keep books, records and accounts that accurately reflect the transactions and assets of the

issuer and (ii) maintain an adequate system of internal accounting controls.

Violations of either requirement of the Foreign Corrupt Practices Act can result in criminal fines

and/or imprisonment. Also, the SEC may bring civil suit against issuers or individuals that can

result in additional fines. If civil or criminal fines are imposed on individuals, they may not be

paid by the issuer directly or indirectly.


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Regulation M: anti-manipulation rulesWith regards to US-listed securities, the rules under Regulation M generally prohibit

participants in the offering from purchasing, or attempting to induce any person to purchase,

the securities offered in the market for a certain period. There are exceptions to these rules for

ordinary course transactions, actively traded securities and certain stabilisation activities by the

underwriters.

NYSE and NASDAQ requirementsThe ongoing requirements of NASDAQ and NYSE are similar to those of the Exchange Act but

are in some ways more demanding. In addition, new SEC rules formulated under the

Sarbanes-Oxley Act reforms direct national securities exchanges and associations such as

NASDAQ to prohibit the listing of any security of an issuer that does not have an audit

committee composed entirely of independent directors. Moreover, issuers with an audit

committee must disclose whether or not their audit committee has at least one member who

fits the SEC’s criteria of a “financial expert” and, if not, why. The audit committee is responsible

for the appointment, compensation, and oversight of the auditor, for establishing complaint

procedures and for resolving disagreements between the auditor and management.

NYSE requirementsThe NYSE requires issuers to provide security holders with annual reports within three months

of the close of their fiscal year and at least 15 days in advance of their annual meeting.

Quarterly reports must be provided as soon as they become available. Non-US issuers may

be able to obtain waivers of these requirements.

Issuers are also required to promptly release information that could materially affect the market

for their securities. Material negotiations do not need to be disclosed so long as discussions

are limited to members of top management and their confidential advisors. Once it becomes

necessary to involve outsiders, however, public disclosure must be made.

Issuers must provide prompt written notice to the NYSE upon the occurrence of certain events.

These events include changes to the charter or by-laws, a change of auditors, changes in

directors or officers, increases in the outstanding amount of securities and other changes

affecting the issuer’s securities.

NASDAQ requirementsThe disclosure requirements are similar to those of NYSE. Issuers must (i) file annual reports,

(ii) provide NASDAQ with any information filed with the SEC on Form 6-K, and (iii) disclose any

information that could materially affect the value of their securities.

Liability issuesVarious potential legal liabilities exist for issuer’s failing to comply with the registration

requirement under the US securities laws.

Section 12(a)(1)In terms of the consequences of a failure to register, Section 12(a)(1) of the Securities Act

creates a private cause of action for purchasers of securities that were required to be

registered under the registration requirement of Section 5 of the Securities Act but were not

registered by the seller. Purchasers may bring civil suits against the seller to have the sale


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rescinded. Recovery is limited to the purchase price plus interest (less any income received

on the security) but this may be a significant amount for purchasers if the share value has fallen

from its initial offering price.

Section 20Section 20 of the Securities Act empowers the SEC to bring an action in a US district court

when it discovers a violation of the registration requirements. The SEC may seek the

disgorgement of any profits resulting from the prohibited acts and the imposition of a fine. If

the violation was wilful, criminal proceedings may be instituted.

Section 10(b) and Rule 10(b)(5)The antifraud provisions of the Exchange Act are contained in Section 10(b) and its

accompanying Rule 10b-5, both for the SEC and for private litigants. Section 10(b) and Rule

10b-5 are broadly written: Section 10(b) proscribes the use of “any manipulative or deceptive

device or contrivance” in connection with the purchase or sale of any security, and Rule 10b-

5 specifies three categories of conduct that qualify as violations. These are (i) employing any

“device, scheme, or artifice to defraud”, (ii) making any untrue statement of material fact or

failing to state a material fact “necessary in order to make the statements made, in the light of

the circumstances under which they were made, not misleading”, and (iii) engaging in any “act,

practice, or course of business” which operates as a “fraud or deceit”. US courts have long

held that buyers or sellers of securities have an implied right to recover damages based on

violations of Section 10(b) and Rule 10b-5.

Information is deemed material for these purposes if there is a substantial likelihood that a

reasonable investor would consider it important in deciding whether to purchase or sell

securities. In a private right of action the plaintiff must show that the defendant acted with

“scienter”, that is, some intent to defraud or manipulate. Courts have ruled that recklessness

may constitute scienter, but mere negligence will not suffice.

The remedies for violations of Rule 10b-5 differ depending on whether the action was initiated

by the SEC or by a private litigant (or group of private litigants). The SEC has a number of

remedies under Section 10(b) and Rule 10b-5, including: injunctive relief, prohibiting

(permanently or temporarily) any person who has violated these provisions from acting as an

officer or director of any public company, civil penalties and referral to the Department of

Justice, which may seek criminal sanctions for wilful violations of the anti-fraud provisions of

the Exchange Act.

A private person can recover their out-of-pocket loss, which is generally the difference

between the price paid for the security and the “true” value of the securities, which will normally

be deemed to be the market price of the security at the time of the suit. The plaintiff may also

seek to rescind the transaction and return the securities to the defendant in exchange for the

money originally paid by the plaintiff.

Section 11Section 11 of the Securities Act applies when a registration statement contains a material

misstatement or omission. Purchasers, whether they bought the security in the initial offering

or the secondary market, may bring civil suits to recover monetary damages. The issuer,

underwriters, signers of the registration statement, directors, accountants and others are all

potential defendants.


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Section 12(a)(2)Under the civil liability provisions of Section 12(a)(2) of the Securities Act, liability attaches to

any person who offers or sells a security, “by the use of any means or instruments of

transportation or communications in [US] interstate commerce or of the [US] mails, by means

of a prospectus or oral communication, which includes an untrue statement of a material fact

or omits to state a material fact necessary in order to make the statements, in the light of the

circumstances under which they were made, not misleading...and who shall not sustain the

burden of proof that he did not know and in the exercise of reasonable care could not have

known, of such untruth or omission.”

Section 15Under Section 15 of the Securities Act, liability may be extended to any person who “controls”

any person liable under Sections 11 or 12, as described above. Under the Securities Act

“control” is defined in terms of the power to, directly or indirectly, direct or cause the direction

of the management and policies of a person, whether through the ownership of voting

securities, by contract, or otherwise. There is an exception for controlling persons if the person

“had no knowledge of or reasonable ground to believe in the existence of the facts by reason

of which the liability of the controlled person is alleged to exist.” Section 20(a) of the Exchange

Act imposes similar liability on persons who directly or indirectly control any person who has

violated any provision of the Exchange Act. An exception is available to a controlling person

who can demonstrate good faith and a lack of positive action to encourage the violation.

Section 18Under Section 18 of the Exchange Act, filers of Exchange Act reports (such as Form 20-F) are

potentially liable for material misstatements and omissions contained in their filings. A

purchaser or seller of securities who acted in reliance on the misstatement or omission may

bring a suit against any person responsible for the misleading statements. Plaintiffs must

demonstrate that they actually relied on the misleading information. The defendant can avoid

liability by showing that he acted in good faith and had no knowledge of the misstatement or

omission.


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33. Hong Kong and Shanghai dual listings

Whilst there are now a significant number of companies with dual Hong Kong(H share) and Shanghai (A share) listings, simultaneous H and A shareofferings are one of the recent phenomena.

A consequence of current regulatory restrictions in the PRC on the investment by PRC persons

in H shares and by non-PRC persons in A shares (with certain exceptions such as the PRC

Social Security Fund and Qualified Domestic Institutional Investors for H shares and PRC

Qualified Foreign Institutional Investors for A shares) is that H and A shares are not fungible.

For so long as A and H shares are not fungible it is likely that simultaneous H and A share

offerings (or staggered offerings conducted in close proximity) will be conducted as

independent offerings. However, even if they are structured as independent and not mutually

conditional offerings, the conduct of A and H share offerings simultaneously by the same issuer

will almost certainly result in their being mutually material to the other. This will impact upon the

disclosure in the respective offering documents as well as the regulator vetting and offering

timetables.

Relevant listing rulesLR 8.08(1)(a) requires companies to have a public float of at least 25% of their issued share

capital. LR 8.08(1)(b) recognises that, where an issuer has more than one class of shares, other

than the class for which listing is sought, the public float on all regulated markets, including the

Exchange, should be not less than 25%, provided that those listed on the Exchange (the H

shares) should not be less than 15%. LR 8.08(1)(d) states the Exchange may, at its discretion

allow a public float of between 15% to 25%, where the market capitalisation of the issuer is

expected to be over HK$10 billion at the time of listing. For dual A and H offerings, this means

that for issuers with a total market capitalisation of less than HK$10 billion, if the H shares in

public hands represent less than 25%, in the absence of a waiver from the Exchange (which

may be very difficult to procure) a 25% public float will need to be satisfied by a combination

of A and H shares, provided that H shares representing at least 15% are held in public hands,

and the H share offering will effectively be conditional upon the A share offering. Where the

issuer is expected to have a capitalisation in excess of HK$10 billion upon listing, the exercise

of the Exchange’s discretion may be sought under LR 8.08(1)(d) if it is intended that the

number of H shares to be issued would result in a public float of less than 25% in Hong Kong.

LR 19A.42 — where a PRC issuer’s share issue plan approved in an inaugural meeting of its

shareholders includes an initial placing or issue of securities other than the H shares,

simultaneously with the H shares for which listing is sought on the Exchange, LR 19A.42

supplements the information to be disclosed in the H share prospectus under Part A of

Appendix 1 of the Listing Rules. The supplemental information required to be disclosed

includes information concerning the securities other than the H shares, the issue timetable and

intended use of proceeds of such other issue and the exchange on which listing is sought for

the securities to be issued. In addition a statement is required as to whether or not the H share

issue is conditional on the other issue of securities and, among other things, the description of

the effect on the PRC issuer’s future plans, prospects and financial condition if such other issue

does not proceed as described.


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Offering timing and disclosureOther than as prescribed by LR 19A.42, given that the offering documents for each of the H

and A share offerings will relate to the same issuer with the same underlying assets, each

prospectus should contain the same material information. However, differences may arise

through disclosure arising from regulatory requirements that are specific to a particular market

or regulatory regime and not otherwise material to investors as a whole. This may mean, for

example, that the A share and H share prospectuses may differ in the description of connected

transactions owing to different definitions of connected person under relevant A share and H

share listing regimes and intended use of proceeds as a result of different disclosure

requirements.

As well as the likely materiality of one offering on the other with regard to disclosure, the co-

ordination of the vetting and offering timetables are important so that pre-marketing and

marketing and the actual public offerings can be conducted not only in a manner that is

mutually complimentary but also that does not infringe upon the securities laws and regulations

of the other jurisdiction. For example, the practice in A share offerings of the early publication

by way of posting on the CSRC website of an advanced (“pre-disclosure”) proof of the A share

prospectus before the A share listing hearing and the final prospectus shortly afterwards as

well as prescribed A share announcements is alien to the Hong Kong practice which does not

typically see any publication of the H share offering document, either in advanced or in final

form in the absence of registration. To provide equality of disclosure to the Hong Kong

investors, the Exchange will require the applicant to publish an Info Pack containing material

information relating to the applicant after the Listing Committee hearing.


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34. Post-IPO restrictions on shareholdersand company

Controlling shareholders (being persons who together control 30% or more ofthe shares of the issuer) are subject to restrictions on the disposal of theirinterests in the issuer following listing. Issuers are also subject to restrictionson their ability to issue new shares.

Controlling shareholdersLR 10.07 provides that in the six months following listing the controlling shareholders cannot

dispose of or enter into any agreement to dispose of, or otherwise create any options, rights,

interests or encumbrances in respect of their shares.

Furthermore, in the period from six months to twelve months after listing, the controlling

shareholders shall not dispose of any shares or any interest therein if as a result such persons

would cease to be controlling shareholders.

No issues of new shares for six monthsLR 10.08 provides that an issuer may not issue, or enter into any agreement to issue, any

shares or securities convertible into shares within six months of listing except for:

• issues of shares under an approved share option scheme;

• conversion of warrants offered as part of the IPO;

• any capitalisation issue, capital reduction, consolidation of sub-division of shares; and

• the issue of shares under an agreement entered into before listing and disclosed in the

prospectus.

In addition, an exemption applies for the issue of shares by a company which has transferred

from GEM to the Main Board pursuant to Chapter 9A of the Listing Rules. In listing decision

68-1, a company listed on a foreign exchange which sought a dual primary listing by way of

introduction on the Main Board was also granted a waiver from compliance with LR 10.08,

subject to compliance with various conditions.


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