hksi_study_manual_l16_eng.pdf

Important Note

As of 3 March 2014, the Securities and Futures Commission has changed the terminology used in the Codes on Takeovers and Mergers and Share Repurchases (the Codes) from share repurchases to share buy-backs. As a result, the Codes have been renamed the Codes on Takeovers and Mergers and Share Buy-backs. The change in terminology applies to this study manual.

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STUDY MANUAL FOR

PAPER 15

SPONSORS (PRINCIPALS)

AND

PAPER 16

SPONSORS (REPRESENTATIVES)

of

the Licensing Examination

for Securities and Futures Intermediaries

First Edition, September 2013

Papers 15 & 16 Version 1.0 ii Hong Kong Securities and Investment Institute

Published by: Hong Kong Securities and Investment Institute First edition Hong Kong Securities and Investment Institute 2013

24/F, Wing On Centre, 111 Connaught Road Central, Hong Kong

Telephone: (852) 3120-6100

Examinations hotline: (852) 3120-6220

Membership hotline: (852) 3120-6170

Training hotline: (852) 3120-6200

Fax: (852) 2899-2611

Email: [email protected]

Website: www.hksi.org

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the copyright owner.

ISBN: 978-988-19913-4-8

Disclaimer This manual is for educational purpose only and does not form any legal and/or expert opinion or advice in whatsoever form by the Hong Kong Securities and Investment Institute (HKSI) and/or its consultants and shall not be so relied upon. While every effort has been made to ensure its accuracy, the HKSI and/or its consultants give no warranties and/or representations in relation to any materials in and/or contents of this manual. Under no circumstances shall the HKSI or its consultants be liable for any direct or indirect or implied loss or damage caused or alleged to be caused by reliance on any materials in and/or contents and/or omissions of this manual. Without prejudice to the generality of the foregoing, the HKSI and/or its consultants shall have no such liability regarding the fitness for purpose, quality or merchantability of the manual, whether express or implied, statutory or otherwise.

Papers 15 & 16 Version 1.0 iii Hong Kong Securities and Investment Institute

Papers 15 & 16 Version 1.0 iv Hong Kong Securities and Investment Institute

Papers 15 & 16 Version 1.0 v Hong Kong Securities and Investment Institute

A Note from the Consultants

The significant developments Hong Kong has undergone in the last several years as a venue for raising capital is largely a result of the increased number of mainland China enterprises seeking access to international capital and the status associated with listing on an open international exchange. Additionally, foreign companies with important markets in China may perceive the Hong Kong IPO market as a venue of choice by virtue of its geographical proximity to China and its standing as a sophisticated marketplace, as well as Hong Kongs reputation for upholding the rule of law. These developments have not come without associated challenges to maintain and develop standards.

This manual deals with one component of Hong Kongs overall success as an IPO market, namely, the role of the sponsor, a role that has come under greater scrutiny following incidents, some minor and some notably quite major, where sponsors failed to properly execute their functions.

The recent consultation on IPO sponsors undertaken by the regulators (HKEx and the SFC) and the industry seeks to strengthen and protect the market: the authority of sponsors and their ability to manage the listing process has been facilitated; the ways that sponsors can be licensed or registered have been expanded; and the process of assessing and handling sponsors work product has been streamlined.

Underlying these developments is an expectation of the regulators that sponsors must move toward higher quality work through the adoption of stronger attitudes to standards, ethics and professional integrity. A clarification as to the criminal liability of sponsors working on prospectuses under the Companies Ordinance has also been proposed and at the time of writing is expected to come into law in 2014, though no draft Bill has as yet been published.

In addressing the sponsor regime and these developments in this manual, we have taken a different approach to the construction of the syllabuses for Principals and representatives from the HKSIs other manuals: we have combined two syllabuses into a single manual, using a graphic device (shaded text) to differentiate the two. We have employed this combined approach:

to encourage representatives to read further into and gain a better understanding of the scope of the sponsor role, should they wish to do so; and

to assist representatives who have already studied the manual and passed the representatives exam to prepare for sitting the Principals examination should they wish to proceed to that status at a later time.

Our writing of the manual was greatly facilitated by the HKSIs development team, Ireen Yeung and Katherine Chan, whose commitment to the many detailed aspects of producing this manual undoubtedly improved the finished product.

Syren Johnstone University of Hong Kong

Philippe Espinasse P&C Ventures Limited

September 2013

Papers 15 & 16 Version 1.0 vi Hong Kong Securities and Investment Institute

Acknowledgements Mrs. Edith NGAN CHAN, the Chief Executive of the HKSI, would like to express her gratitude to the following people for their involvement, suggestions and support in the development of the study manual:

Consultants Mr. Syren JOHNSTONE of the University of Hong Kong, and Mr. Philippe ESPINASSE of P&C Ventures Limited

Working Group Members Mr. Allen TZE of Reorient Financial Markets Limited, and Mr. Nigel DAVIS of the University of Hong Kong

Board Members 2012-2013 Mr. Craig B. LINDSAY (Chairman for 2013), Mr. Anthony Y.T. MUH (Chairman for 2012), Mr. Bryan CHAN, Mr. Ringo K.K. CHIU, Prof. Michael A. FIRTH, Ms. Samantha S.Y. HO, Prof. Simon S.M. HO, Miss Angelina A. KWAN, Dr. Cynthia LAM, Mr. John M. MAGUIRE, Mr. Colin S. SHAFTESLEY, Mr. Derek SHEK, Mr. Trini TSANG, Mr. Philip A. TYE, Ms. Anna WONG, Mr. Peter S.H. WONG, Mr. Stephen Y.K. WONG, Mr. S.F. WONG and Mrs. Edith NGAN CHAN

Examinations Committee Members 2012-2013 Mr. Colin SHAFTESLEY (Chairman for 2013 and 2012), Mr. Bryan CHAN, Mr. Steve H.W. CHAN, Ms. Julia CHARLTON, Mr. Paul K.K. CHENG, Ms. Catherine CHEUNG, Mr. Gary CHEUNG, Mr. Thomas HULME, Prof. Vincent KWAN, Mr. Lionel KWOK, Prof. Kin LAM, Mr. Christopher LEE, Mr. Roger K.K. LEE, Mr. William LEUNG, Mr. Craig B. LINDSAY, Mr. Anthony Y.T. MUH, Mr. David C.K. NGAI, Ms. Barbara SHIU, Mr. Trini TSANG, Ms. Jill WONG, Mr. S.F. WONG and Mrs. Edith NGAN CHAN

HKSI Project Team (Development Team, Curriculum & Examinations Department) Ms. Ireen YEUNG (Director of Curriculum & Examinations), Ms. Katherine CHAN (Senior Manager), Mr. Trevor CHU (Manager), Mr. Hugo CHU and Ms. Rose Mary Chan

Papers 15 & 16 Version 1.0 vii Hong Kong Securities and Investment Institute

Summary syllabus To identify the distinction between the syllabus requirements of the two papers in the table below, the following highlighting system is used:

- no highlighting indicates the whole section is applicable to both Papers 15 and 16; - dark grey indicates the section contains materials exclusively for Paper 15; - light grey indicates the section is generally applicable to both Papers 15 and 16 but that

there are some subsections that contain more detailed information for Paper 15 only.

Topic 1: General framework 1 Background to the sponsor regulatory regime 2 Going public 3 The role of the sponsor in the marketplace 4 Legal considerations 5 Licensing and registration requirements 6 Applicable regulatory codes and rules 7 Compliance advisers 8 SFCs powers

Topic 2: The Listing Rules and the IPO listing process 1 Methods of listing and offering mechanisms

2 Specific listing requirements for equity securities

3 Corporate administration of the listing applicant

4 Specific issues in practice

5 The initial public offering process

6 Other important considerations

Topic 3: Preparation for an IPO assignment 1 Corporate administration of a sponsor 2 Preparation for managing an IPO

Topic 4: Preparation for a listing application 1 Obtaining assignments and working with third parties 2 Establishing the sponsor role 3 Advising the listing applicant 4 Conducting due diligence 5 Making a listing application

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6 Disclosure and communication

Topic 5: Due diligence 1 Preparation of the listing document-cum-prospectus 2 Conducting a due diligence exercise 3 Meaning of professional scepticism 4 Verification 5 Use of experts and other third parties 6 Management Discussion and Analysis of Financial Information and Condition

Topic 6: After prospectus issuance 1 Assessing the sponsor work 2 Compliance advisers 3 Case studies 4 Integrity and consequences

Papers 15 & 16 Version 1.0 ix Hong Kong Securities and Investment Institute

About the Licensing Examination for Securities and Futures Intermediaries The Licensing Examination for Securities and Futures Intermediaries (LE) has been designed to accord with the single licensing regime under the Securities and Futures Ordinance. Papers 1 to 12 have been approved by the Academic and Accreditation Advisory Committee of the SFC (AAAC) as a Recognized Industry Qualification and Local Regulatory Framework Paper for meeting the competence requirements of the SFC. Papers 15 and 16 have been approved by the AAAC for the purposes of the examinations under the sponsor eligibility requirements for Type 6 (advising on corporate finance) individuals wishing to engage in sponsor work as Principals and representatives, or relevant individuals respectively.

The LE comprises the following fourteen examination papers*:

Paper 1: Fundamentals of Securities and Futures Regulation

Paper 2: Regulation of Securities

Paper 3: Regulation of Derivatives

Paper 4: Regulation of Credit Rating Services

Paper 5: Regulation of Corporate Finance

Paper 6: Regulation of Asset Management

Paper 7: Financial Markets

Paper 8: Securities

Paper 9: Derivatives

Paper 10: Credit Rating Services

Paper 11: Corporate Finance

Paper 12: Asset Management

Paper 15: Sponsors (Principals)

Paper 16: Sponsors (Representatives)

* The LE does not comprise Paper 13 and Paper 14.

Papers 15 & 16 Version 1.0 x Hong Kong Securities and Investment Institute

About this study manual This manual has been designed to provide candidates with the information they need for the examination effective from 29 October 2013. Every effort has been made to ensure it is accurate at the time of publication.

The manual provides guidance on ethics, sponsor work, and the legal and regulatory requirements governing the conduct of IPO transactions in Hong Kong. It is relevant to responsible officers of Type 6 licensed corporations and executive officers of Type 6 registered institutions seeking approval as Principals via the examination route (i.e. Paper 15) and to Type 6 licensed representatives or relevant individuals intending to engage in IPO sponsor work (i.e. Paper 16).

The different topics in the manual review the laws, regulations, codes and guidelines that are relevant to undertaking the role of sponsor in Hong Kong. This includes the roles of the various regulators involved, the licensing, registration and supervision of intermediaries by the regulators, the requirements of the Listing Rules for sponsors and new listing applicants, as well as the regulatory codes issued by the SFC relevant to the conduct of sponsor work. In reviewing these subjects, the manual also discusses common industry practices and standards, as well as the importance of ethics. These subjects are divided into six Topics dealing with the general framework, the Listing Rules and the IPO listing process, preparation for an IPO assignment, preparation for a listing application, and due diligence. The final Topic discusses various case studies in the context of assessing sponsor work and the importance of ethics.

Given that the relevant legal and regulatory requirements and market practices covered by the syllabus of the Papers 15 and 16 examinations may be revised, amended or updated from time to time, no express or implied warranty is given by the HKSI that the content of this manual is up-to-date or accurately reflects the current position. For the avoidance of doubt, this manual does not amount to or constitute any legal advice given by the HKSI and shall not be so relied upon. Candidates are reminded to keep abreast of any updates or amendments of the relevant legal and regulatory requirements and market practices by making reference to the relevant information published by the relevant authorities.

For the purpose of the examination, however, unless updates on the relevant part of the manual are provided by the HKSI, examination questions will only be based on materials in the manual that are still current.

Each topic in the manual consists of an overview, the expected learning outcomes, the study text itself, revision questions and answers, a brief summary and a checklist.

Note: words carrying a masculine meaning are to be taken to include the feminine, and vice versa.

Important note to readers

This manual combines the study materials for two papers as follows:

Paper 15 Principals examination:

The whole manual (i.e. all text with or without any shading)

Paper 16 Representatives examination:

Only text without any shading. Representatives will not be examined on text which has been shaded.

Papers 15 & 16 Version 1.0 xi Hong Kong Securities and Investment Institute

Learning outcomes Candidates are advised to use the Learning Outcomes section of each topic as an indication of the way in which the topic material is to be studied. It indicates the key areas of knowledge which they are expected to master and on which examination questions will be based. However, they may be tested on any aspect of the study manual unless it is specifically ruled out in the manual.

Revision questions and checklists Revision questions and checklists are included in each topic to help reinforce candidates understanding of the material.

Module plan It is estimated that this study manual of Paper 15 will require a total of 70-80 hours while that of Paper 16 will require a total of 50-60 hours of study time for all six Topics, although candidates may need slightly less or more depending on their work experience and background.

Papers 15 & 16 Version 1.0 xii Hong Kong Securities and Investment Institute

Updating this study manual Updates are produced at appropriate intervals to reflect changes in applicable laws, rules, regulations, codes and market practices in Hong Kong. Once an update is released, an announcement will be made on the HKSI website and the latest version of the E-Study Manual will be available for candidates to download via the HKSI Online Registration and Enrolment System. Major updates made to the last version will also be placed at the end of the E-Study Manual for candidates reference. Candidates are advised to visit the HKSI website and log on to the HKSI Online Registration and Enrolment System regularly during their studies to ensure that they have the latest version of the E-Study Manual prior to taking the examination.

About the Papers 15 and 16 examinations Paper 15 is the special examination on ethics, sponsor work, and the legal and regulatory requirements governing the conduct of IPO transactions in Hong Kong for the purposes of the SFCs eligibility criteria for Principals. Paper 16 is the relevant examination for the purposes of meeting the SFCs eligibility criteria for representatives or relevant individuals engaged in sponsor work. Each of the Papers 15 and 16 examinations consists of 40 multiple-choice questions to be completed within 60 minutes. The pass mark is 70%.

The study manual and its subsequent updates are the only source of materials for the setting of the questions, and candidates therefore need to study only the manual and updates to prepare for the examinations. The purpose of the examinations is to test candidates understanding of sponsor work, in particular the legal and regulatory requirements governing the conduct of IPO transactions in Hong Kong, as well as their general understanding of related matters with which practitioners at a Principal level (for Paper 15) and representative level (for Paper 16) should reasonably be expected to be familiar, including the practice and ethics of undertaking sponsor work.

Since the securities and futures industry changes rapidly, the latest regulatory and market information may not be immediately included in this manual. Unless updates on the relevant information in the manual are provided by the HKSI, however, examination questions will only be based on the manual where the information is still current.

Papers 15 & 16 Version 1.0 xiii Hong Kong Securities and Investment Institute

List of useful websites Securities and Futures Commission

www.sfc.hk/

Hong Kong Monetary Authority www.hkma.gov.hk/

Hong Kong Exchanges and Clearing Limited

www.hkex.com.hk/

Department of Justice, HKSAR Government: Bilingual Laws Information System: www.legislation.gov.hk/

Hong Kong Legal Information Institute: Hong Kong Ordinances www.hklii.hk/eng/hk/legis/ord/

Companies Registry

www.cr.gov.hk/

Hong Kong Securities and Investment Institute www.hksi.org/

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Papers 15 & 16 Version 1.0 xv Hong Kong Securities and Investment Institute

Licensing Examination for Securities and Futures Intermediaries

Feedback on Study Manual for Paper 15 - Sponsors (Principals) & Paper 16 - Sponsors (Representatives)

To: Hong Kong Securities and Investment Institute Attn.: Curriculum and Examinations Department

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Topic 1: General framework

Table of contents Topic overview 1 Learning outcomes 1 1 Background to the sponsor regulatory regime 2

Brief introduction to the sponsor regime 2 2 Going public 5

The primary capital market and Hong Kong in the global context 5 3 The role of the sponsor in the marketplace 7

Core regulatory roles and responsibilities of a sponsor 7 Conceptual distinction from underwriter roles 7 The sponsors role and the integrity of the commercial marketplace 9 Multiple sponsors 9 Other aspects of primary equity capital market transactions 9

4 Legal considerations 11 Securities and Futures Ordinance 11 Companies Ordinance 16 Other legal considerations 17

5 Licensing and registration requirements 18 Sponsor Guidelines 18

6 Applicable regulatory codes and rules 22 Codes and guidelines issued by the Securities and Futures Commission (SFC) 22 Corporate Finance Adviser Code of Conduct 23 Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited 24

7 Compliance advisers 26 8 SFCs powers 27

Supervision and investigation 27 Investigations of possible offences, etc. 27 Offences 28 Discipline 28 SFC Disciplinary Fining Guidelines 29 Co-operation with the SFC 30 Public register 30

Topic summary 31 Checklist 31

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* Text that has been shaded is exclusively for Paper 15 Papers 15 & 16 Version 1.0 1 - 1 Hong Kong Securities and Investment Institute

Topic overview This Topic introduces the context of the work of a corporate finance adviser undertaking sponsor work on an initial public offering (IPO). It also introduces the general commercial, legal and regulatory framework within which a sponsor acts.

The Topic commences with an introduction to the sponsor regulatory regime and its importance in the context of Hong Kongs role as a primary capital market.

The major legal considerations are then introduced, including the core licensing and registration requirements as well as the core regulatory rules and codes that affect the undertaking of sponsor work.

The Topic concludes with a review of the powers of the Securities and Futures Commission (SFC) to supervise and investigate, and to apply disciplinary measures in cases of non-compliance with relevant regulations.

Learning outcomes At the end of this Topic, candidates should be able to:

(a) understand Hong Kongs primary capital market in the context of the global capital market; (b) understand the core regulatory roles and responsibilities of a sponsor and its relationship with

the integrity of the Hong Kong market;

(c) describe the roles and responsibilities of all parties involved in listings, especially sponsors, underwriters and compliance advisers;

(d) understand the process of underwriting/syndication in a public offering; (e) identify the specific laws, regulations, codes and guidelines that have an impact on sponsor

work;

(f) describe the core licensing and registration requirements that apply to persons engaged in sponsor work;

(g) demonstrate an understanding of the Corporate Finance Adviser Code of Conduct (CFA Code);

(h) realize the importance of the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules or LR) and the Rules Governing the Listing of Securities on the Growth Enterprise Market (GEM) of The Stock Exchange of Hong Kong Limited (GEM Listing Rules or GLR);

(i) understand the functions of compliance advisers; and (j) outline the powers of the SFC.


1 Background to the sponsor regulatory regime

Brief introduction to the sponsor regime 1.1 Sponsors effectively act as the principal gatekeepers of market quality in a listing exercise

and as such have a crucial role in the protection of investors. This is of particular importance in view of certain features of the Hong Kong market, including the unusually large proportion of listed companies and listing applicants whose domicile and main operations are located outside Hong Kong, the greater number of connected or related party transactions, and the extensive base of retail and institutional investors.

1.2 The listing of securities is primarily governed by the Listing Rules, which require all applicants seeking a listing on The Stock Exchange of Hong Kong Limited (SEHK) to appoint one or more sponsors for their listing application. A sponsor must be a licensed corporation or a registered institution holding a Type 6 licence or registration (advising on corporate finance) that is permitted under its licence or certificate of registration to undertake work as a sponsor (the licensing and registration requirements are discussed in section 5 below). A sponsor is expressly made responsible under the Listing Rules for preparing the company for listing, for lodging the formal listing application and all supporting documents with the SEHK and the SFC, and for dealing with the SEHK on all matters arising in connection with the application.

Note: The GEM Listing Rules tend to follow the structure and content of the Listing Rules, subject to some differences that reflect the different nature of the Main Board of the SEHK (Main Board) and GEM. References to the Listing Rules in this manual should be taken to cover the equivalent GEM Listing Rules. Where relevant, the differences in these two sets of rules will be indicated.

1.3 Sponsors play a unique role in leading and coordinating the entire process of a listing exercise. As personnel involved in sponsor work are expected to uphold high standards and to work in an ethical way and are subject to regulatory requirements above and beyond those that apply to corporate finance advisers not engaged in sponsor work. These are discussed in greater detail in sections 3, 5 and 6 below, and include:

(a) the Listing Rules; (b) the Additional Fit and Proper Guidelines for Corporations and Authorized Financial

Institutions applying or continuing to act as Sponsors and Compliance Advisers (Sponsor Guidelines) issued by the SFC;

(c) certain provisions of the CFA Code; and (d) certain provisions of the Code of Conduct for Persons Licensed by or Registered with

the Securities and Futures Commission (Code of Conduct), in particular, paragraph 17, which specifically applies to licensed corporations or registered institutions undertaking sponsor work.

1.4 The responsibilities and scope of the sponsor role have been developing in recent years as new challenges arise in connection with listing exercises, in particular, IPOs. With a view to, among other things, maintaining the integrity of the market and improving the standards and competitiveness of the Hong Kong IPO market, there has been an increased focus on certain shortcomings with respect to the perceived or actual competence and integrity of sponsor firms. A thematic review of IPO sponsors undertaken by the SFC between 2009 and 2011 revealed some common problems particularly in relation to the quality of due diligence work and the adequacy of internal systems and controls over sponsor work. Where sponsors fail to substantially complete their due diligence before making a listing application, draft listing documents also fail to contain adequate and balanced disclosure about listing applicants. Sponsors that allocate insufficient staff or staff without adequate experience and skills to


undertake sponsor work, or fail to properly supervise and review work undertaken by representatives, place themselves in an untenable position as regards meeting their regulatory obligations. In some cases, sponsors were unaware of their actual regulatory obligations. Topic 6 discusses these and other shortcomings that have led to problems in meeting the commercial objectives of listing applicants (such as delayed or cancelled IPOs), or to regulatory discipline in respect of the sponsors themselves.

1.5 As a result, regulatory changes to the IPO sponsor regime have been introduced to address such shortcomings. Their implementation should:

(a) provide sponsors with more authority over an IPO through a streamlined and shorter regulatory process;

(b) enable sponsors to manage the listing process more effectively, in particular leading to the production of a better quality first proof listing document, and better management of the overall deal risk; and

(c) enhance market confidence and investor protection. Note: For further information, see the SFCs Consultation Conclusions on the regulation of IPO sponsors issued on 12 December 2012.

1.6 Important reforms as of 1 October 2013 include the following: (a) publication of a substantially complete draft of the listing document (Application

Proof) must now be filed with a listing application. From 1 April 2014, the Application Proof will also (with a few exceptions) be simultaneously displayed on the website of the Hong Kong Exchanges and Clearing Limited (HKEx). In addition, from 1 October 2013, a near final prospectus (in the form of a Post Hearing Information Pack or PHIP) will need to be published after hearing by the SEHK, and no later than on the start of institutional book-building, on the website HKExnews.

Note: Further details about the publication of the Application Proof and requirement to publish a PHIP, including transitional arrangements, are set out in sections 5 and 6 of Topic 4.

(b) reliance on experts and meaningful Management Discussion and Analysis of Financial Information and Condition (MD&A); and Note 1: Sponsors should ensure that the scope of experts work adequately covers the reliability of the information provided to such experts and that it critically assesses expert reports against the totality of the sponsors knowledge of a company and its industry sector to ensure that overall disclosure to the public is coherent and consistent. The use of experts is discussed more fully in section 5 of Topic 5. Note 2: Sponsors should also work closely with company management to produce a relevant, adequate and comprehensible MD&A. MD&As are discussed more fully in section 6 of Topic 5.

(c) initiatives to enhance the sponsors role: any sponsor should be appointed by a listing applicant at least two months before a listing application.

Note 1: Sponsors should notify the SEHK of any instances of non-compliance with the Listing Rules as well as upon the occurrence of material developments requiring disclosure and explain why, if and when they cease to act for a listing applicant. Note 2: Sponsors should get the commitment of the listing applicant and other professional advisers to fully co-operate with the sponsors in discharging their duties and listing applicants have responsibilities to assist their sponsors. Note 3: Sponsor fees must be specified in a sponsors terms of engagement and be related solely to the sponsor role (other services such as underwriting should


accordingly be charged for separately). 1.7 The SFCs consultations in 2012 further developed earlier reforms of the IPO sponsor

regime. In October 2004, policy conclusions and rule amendments introduced changes and clarifications regarding the regulatory regime for sponsors that addressed, among other things:

(a) when a listing applicant must appoint a sponsor or compliance adviser; (b) the role and responsibilities of listed issuers in assisting sponsors; (c) undertakings and declarations required to be given by sponsors to the SEHK; (d) independence requirements for sponsors; and (e) the roles and responsibilities of sponsors including the due diligence the SEHK expects

sponsors should typically perform.

1.8 The SFC has powers to take action against sponsors that fail to discharge their duties properly. Examples of enforcement cases are provided in Topic 6.

Revision questions:

Question 1: What type of regulatory licence must a sponsor hold to engage in sponsor work?

Answer 1: A sponsor must be a licensed corporation or a registered institution holding a Type 6 licence or registration (advising on corporate finance) that is permitted under its licence or certificate of registration to undertake work as a sponsor.

Question 2: Is there any difference between the regulatory obligations of corporate finance advisers and sponsors?

Answer 2: Personnel involved in sponsor work are subject to regulatory requirements above and beyond the requirements that apply to corporate finance advisers that are not engaged in sponsor work.


2 Going public

The primary capital market and Hong Kong in the global context 2.1 There are a number of reasons why a company may choose to go public through a listing

exercise. Shareholders (whether those of a business initially founded by a family, or financial shareholders, such as private equity or venture capital firms) can achieve liquidity for their holdings, while corporates themselves can through a stock exchange listing raise funds for their development and capital expansion plans. Other reasons for conducting a listing exercise may include attracting international investors to a companys register, for example, in the case of listing of a state-owned enterprise in Peoples Republic of China on the SEHK.

2.2 The sale of existing shares (or offer for sale) and the issue of new shares (or offer for subscription) are frequently combined in an IPO. IPOs can also take the form of spin-offs or de-mergers from existing businesses (whether listed or unlisted). Companies may also secure a listing without offering any shares to investors, for example, when they are already listed on another stock exchange via a listing by way of introduction. Companies can choose to have the SEHK as the main exchange on which they list (a primary listing), or as a second marketplace for their securities (a secondary listing). A listing on the SEHK and another stock exchange may also happen simultaneously through a dual listing exercise. Methods of listing on the SEHK are further discussed in Topic 2.

2.3 According to the World Federation of Exchanges, Hong Kong has ranked as a top-5 global IPO market for a total of 11 years and was the No.1 IPO fund-raising centre globally between 2009 and 2011, ahead of the New York Stock Exchange, the London Stock Exchange, the NASDAQ Stock Market and Singapore Exchange Limited. In addition, according to HKEx, Hong Kong is an important venue for the raising of equity capital by listed companies, with the equivalent of US$327 billion raised in follow-on share offerings between 2003 and 2012.

2.4 At the end of 2012, HKEx ranked as the No.1 stock exchange in the world in terms of market capitalization relative to gross domestic product, emphasizing the importance of the exchange and the financial industry to the economy of Hong Kong. According to the Bank of New York Mellon, as at October 2011, US$544 billion in funds were invested in Hong Kong-listed equities.

2.5 According to the SEHK, as at the end of February 2013, a total of 1,554 companies were listed on the SEHK, representing a market capitalization of over HK$22,660 billion. For the month of February 2013, the average daily securities turnover on the exchange by value was over HK$70 billion, about 70% of which was made up by equity securities. As at the end of February 2013, a total of 736 H shares, red chips and mainland China private enterprises were listed on the SEHK.

2.6 Hong Kong differs from other major jurisdictions in several ways. First, as outlined above, the unusually large proportion of listed companies and listing applicants whose domicile and main operations are located outside Hong Kong lends particular importance to the role of sponsors. Second, historically, the participation of retail investors in IPOs has been significant, and explains the presence of claw-back triggers (which increase the size of the public offer relative to that of the institutional offer, depending on the level of oversubscription of the public offer) and which are unique to Hong Kong IPOs. Third, the China dimension is a unique characteristic of the SEHK. As at the end of February 2013, more than 47% of the companies listed on the SEHK were either H share companies, red chips or mainland China private enterprises. Such companies also accounted for more than 56% of the SEHKs market capitalization and for over 71% of the equities turnover by value.


2.7 Initially (although there have been a handful of exceptions in the past) only companies incorporated in Hong Kong, mainland China, Bermuda or the Cayman Islands could list on the SEHK. The list of jurisdictions accepted for listing in Hong Kong has since been expanded to include an additional 21 jurisdictions as at 29 April 2013. This development is relatively recent and was introduced partly in response to interest from international companies in a Hong Kong listing.

2.8 In addition to ordinary shares, issuers are now also able to list units in real estate investment trusts and business trusts on the SEHK, as well as to conduct IPOs denominated in offshore Renminbi under the dual counter structure. The exchange includes a number of companies that are also listed on exchanges in other jurisdictions, and which have chosen Hong Kong, as their primary or secondary place of listing, alongside other marketplaces. Another fairly recent development is the ability of companies (especially foreign issuers) to list Hong Kong Depositary Receipts (HDRs) rather than shares on the SEHK.

2.9 Companies can choose to list on the SEHK on the Main Board (on which both shares and HDRs can be listed) or on GEM, a second board that also acts as a stepping-stone towards the Main Board.

2.10 As a listing venue, Hong Kong upholds high standards in terms of disclosure and the process through which listing applicants are assessed prior to achieving a listing for their shares or units on the SEHK. Sponsors have a particularly important role in ensuring that Hong Kong maintains its reputation as a strongly regulated marketplace, especially in the light of the cross-border nature of the majority of listings on the SEHK. The IPO process in Hong Kong differs from purely disclosure-based regimes in other countries. In Hong Kong, one or more sponsors must be appointed by a listing applicant to assess its suitability for listing, effectively act as a guide in relation to the listing exercise, conduct due diligence, assist with the listing document and help the issuer and its shareholders navigate the Listing Rules and relevant regulatory requirements. As such, the SEHKs approval process places a particular focus on the critical role sponsors play in Hong Kong.

Note: The listing requirements for equity securities are discussed in Topic 2.

Revision question:

Question 3: In what ways does Hong Kong IPO market differ from other major jurisdictions?

Answer 3: See section 2.6 above.


3 The role of the sponsor in the marketplace

Core regulatory roles and responsibilities of a sponsor 3.1 The overarching market regulatory functions of a sponsor are set out in paragraph 17.1(b),

Code of Conduct as being the provision of:

(a) general assurance to the SEHK and the market that: (i) the listing applicant is in compliance with the Listing Rules and other relevant

legal and regulatory requirements;

(ii) the listing document offers sufficient particulars and information to allow investors to form a valid and justifiable opinion of the listing applicants shares, financial condition and profitability; and

(b) advice and guidance for the listing applicant in relation to the Listing Rules and other relevant regulatory requirements.

3.2 LR Chapter 3A dovetails with the above overarching regulatory functions in requiring a sponsor to:

(a) be closely involved in the preparation of the new applicants listing documents; (b) conduct reasonable due diligence inquiries (see Topic 5, which discusses due diligence

in detail, and section 5 of Topic 4 which discusses the declaration a sponsor is required to give to the SEHK regarding its due diligence exercise);

(c) ensure the SEHKs procedural requirements as regards submission of documents and publicity materials under LR 9.03 and 9.05 to 9.08 are complied with;

(d) use reasonable endeavours to address all matters raised by the SEHK in connection with the listing application and compliance with the requirements of the Listing Rules, including the provision of further information and documents at the SEHKs request in a timely manner;

(e) attend and accompany the listing applicant to such meetings as the SEHK may require; and

(f) comply with the terms of the sponsors undertaking and statement of independence given to the SEHK (discussed in section 2 of Topic 4).

3.3 How these various requirements are to be fulfilled in practice is introduced in subsequent topics of this manual. However, in one way or another, each of the above requirements set out the framework within which a sponsor should be executing its overarching responsibilities.

Conceptual distinction from underwriter roles 3.4 The sponsor has responsibility to assess the suitability of a listing candidate, and is also

responsible for due diligence and disclosure, liaising with the regulators, and coordination of the work of all other parties, including the reporting accountants, legal advisers, experts and other third parties, working on an IPO.

3.5 A sponsor firm can also have other roles when working on an IPO, essentially of an underwriting and marketing/selling nature. However, it is important to appreciate that the special regulatory status attached to the role of a sponsor is not relevant to the other roles a sponsor firm might play in connection with a listing exercise.

3.6 A sponsor firm is often (but not always) appointed as global coordinator (or joint coordinator or, more rarely, co-global coordinator), which is essentially a coordination role of the various aspects of an IPO, including documentation, valuation and marketing work.


There are a number of similarities between the work of a sponsor and that of a global coordinator, although the activities carried out by a sponsor differ in that it is also responsible for liaising and coordinating with the regulators (the SEHK and the SFC), whereas a global coordinator that is not acting as a sponsor has no such responsibility.

3.7 Another role commonly bundled with that of global coordinator is that of bookrunner (or joint bookrunner or, more rarely, co-bookrunner). This is a marketing function that is primarily concerned with the marketing of shares (or units) to investors through the building of a book of demand, and with making recommendations to the issuer on the allocation of shares (or units) to investors. This is a role that an investment bank which acts as a sponsor can also have (and generally has, or should have, in order to ensure allocations are properly conducted in compliance with the applicable rules and regulations), and which is often combined with that of global coordinator. Global coordinators are normally also appointed as bookrunners, however, bookrunners are not always also appointed as global coordinators.

3.8 Global coordinators and bookrunners are also usually appointed as lead managers, which, in some transactions (although rare nowadays), entitles them (as with the global coordinators role) to a praecipium from the management, underwriting and selling fees payable to the members of the syndicate in an IPO. As with the bookrunner role, lead managers are not necessarily appointed as bookrunners and global coordinators and, when this is actually the case, their role will usually be limited to writing pre-deal research report and underwriting a portion of the shares offered or sold. In particular, lead managers that do not also have other senior roles or titles will generally not sell stock to investors in an IPO. Some of these titles can also be further qualified or differentiated from those of other syndicate members through the addition of a fairly rare senior (or other) prefix, for example senior lead manager.

Note: A praecipium is a portion of the management and underwriting fees carved out for senior members of a syndicate of underwriters.

3.9 Other, more junior, underwriting and selling roles (again, usually limited to writing pre-deal research report and underwriting a portion of the shares offered or sold) include:

(a) senior co-lead manager; (b) co-lead manager; (c) senior co-manager; (d) co-manager; (e) sub-underwriter; and (f) selling group member. It is now rare for roles below co-lead manager to be included in underwriting syndicates. When this is the case, firms appointed in such roles are not usually also required to write pre-deal research reports.

3.10 There has been a recent trend, on the part of issuers from the mainland China in particular, to establish a large number of senior roles in large transactions in Hong Kong, for example, multiple houses in sponsor and especially global coordinator and bookrunner roles. This creates additional complexities in terms of coordinating the various aspects of such transactions, especially when some of these titles are only confirmed closer to launch.

3.11 A sponsor, when also appointed as a global coordinator, bookrunner and lead manager, may also be appointed as the stabilizing manager in the case that the IPO includes an over-allotment option (or Greenshoe option). Topic 2 discusses the role of the stabilizing manager.

3.12 Issuers must also appoint receiving banks alongside other underwriters for the collection of money and retail clients applications under public offer tranches. These are usually


commercial banks with branch networks, through which applications for shares (or units) in an IPO can be made by members of the public. A number of these also offer facilities to apply for such securities through dedicated, password-protected on-line portals.

3.13 Lastly, it is becoming increasingly common for issuers and their shareholders to appoint financial advisers (often with no equity research and securities distribution capabilities) to help safeguard their interests. Such financial advisers, who must be licensed or registered to carry out activities regulated by the Securities and Futures Ordinance (SFO), are often appointed ahead of sponsors and underwriters and indeed can play a role in the appointment of firms in such capacities. Financial advisers interaction with sponsors is discussed in Topic 4.

The sponsors role and the integrity of the commercial marketplace

3.14 As mentioned above, the role of sponsors includes assessing the suitability of applicants for listing and coordinating the entire listing exercise, from the appointment of other parties, to conducting due diligence, to liaising with the SEHK and the SFC with respect to the listing application. In this way, sponsors play an essential role in maintaining the integrity of the SEHK as a commercial marketplace and in safeguarding the interests of the investing public. Sponsors failing to properly discharge their duties affect not only any future business that might come their way, but also the reputation of sponsors more generally, and of Hong Kong as an international financial centre. Accordingly, sponsors are subject to significant scrutiny by the SFC, and may also face severe sanctions, in certain cases. Examples of enforcement cases are provided in Topic 6.

Multiple sponsors 3.15 While a listing applicant is only required to appoint one sponsor, there may be cases where

appointing additional sponsors becomes desirable. For example, this may be the case when the sponsor initially chosen by the listing applicant does not satisfy the independence test (see Topic 4). The issuer or listing applicant may also find it desirable to appoint more than one firm as joint sponsors with complementary strengths, for example in a particular jurisdiction or industry sector.

3.16 Where more than one sponsor is appointed (which remains solely a commercial decision on the part of the issuer), one sponsor must be designated as the primary channel for communication with the SEHK. The SEHK expects that this would normally be a sponsor that is independent of the listing applicant. However, all sponsors appointed owe the same duty of care to the listing applicant and share the same responsibilities under the Listing Rules, including with respect to the advice they provide, the due diligence they undertake, and their own potential liabilities.

3.17 Appointing more than one sponsor, however, calls for increased coordination to avoid inefficiencies in the execution process and, ultimately, any failures in uncovering issues pertaining to the applicant. All sponsors must work jointly to achieve these aims. Where one or more of the sponsors are not independent of the listing applicant, this necessarily gives greater importance to the role of sponsors that qualify as independent. The issue of impartiality and independence is discussed further in Topic 4.

Other aspects of primary equity capital market transactions 3.18 As mentioned above, a sponsor may also act in a (usually senior) underwriting and

marketing/selling capacity in an IPO. While these are distinct from sponsor duties in their strictest sense, it is important to avoid information asymmetries between such roles (when


not also carried out by a sponsor). Sponsors should also ensure there is no asymmetric information dissemination to potential investors.

3.19 Sponsors not involved in such roles should keep abreast of developments with respect to the involvement of other firms in the IPO through the syndication process, which will affect disclosure in various places in the offer document (among other areas, the cover of the listing document, the list of parties involved in the IPO and the underwriting sometimes referred to as the plan of distribution section).

3.20 They should also be kept informed of roadshow arrangements (and of the jurisdictions in which the IPO will be marketed). This will, for example, affect disclosure under the underwriting and selling restrictions sections of the listing document, for which the sponsor will be directly responsible. When an IPO is marketed in the United States (US) to qualified institutional buyers under a Rule 144A private placement, there may also be implications in terms of disclosure, including with respect to financial information and the MD&A.

3.21 Similarly, the allocation of stock to investors should be discussed among sponsors, as this will affect disclosure in announcements and other documents filed with the SEHK and published in the media.

3.22 Lastly, the stabilization of the share or unit price of a newly listed company through the use of an over-allotment option (or Greenshoe option) should also be discussed among sponsors as this also weighs on disclosure, both in the listing document and in announcements and filings made with the SEHK.

Revision questions:

Question 4: Can a sponsor firm appointed to an IPO have other roles in the IPO?

Answer 4: Yes, it will be common for a sponsor to be involved in underwriting and marketing/selling capacities.

Question 5: What are the requirements regarding how many sponsors a listing applicant may appoint?

Answer 5: At least one sponsor who is independent of the listing applicant must be appointed. Multiple sponsors may also be appointed.


4 Legal considerations 4.1 The two principal items of legislation of relevance to sponsor work are the SFO and the

Companies Ordinance (CO). In addition, sponsors, including staff engaged in sponsor work, should be aware of other potential liabilities under the general law and these are briefly reviewed in the final part of this section.

4.2 The SFO is the main piece of legislation specifically governing the securities and futures industry in Hong Kong. In particular, it defines what activities constitute the regulated activity of advising on corporate finance, regulates public offers of investments, establishes certain types of market misconduct, and contains important provisions regarding disclosure of interests in the voting capital of a listed issuer.

4.3 The CO is also relevant in the context of an IPO as it requires a prospectus to be prepared for every offer of shares (or debentures) to the public in Hong Kong for subscription or purchase. The listing document that is required to be prepared in compliance with the Listing Rules for an IPO will therefore also need to serve the dual purpose of satisfying the prospectus requirements of the CO.

Note: An IPO by its nature involves a public offering. However, a listing document would not need to satisfy the CO prospectus requirements if the listing does not involve any public offer. An example of this would be where shares are listed by way of an Introduction (methods of listing are discussed in Topic 2).

Securities and Futures Ordinance

Advising on corporate finance 4.4 A sponsor undertaking an IPO assignment will be engaged in the regulated activity of

advising on corporate finance (Type 6 regulated activity) and accordingly will need to be appropriately licensed or registered. The SFO defines this activity as giving advice:

(a) about compliance with or in respect of the Listing Rules; (b) about compliance with or in respect of the Code on Takeovers and Mergers or the Code

on Share Repurchases;

(c) about any offer to dispose of or acquire securities to or from the public (including advising holders of such securities concerning acceptance of the offers); or

(d) to a listed corporation or public company (or its subsidiary, officers or shareholders) about corporate restructuring in respect of securities.

4.5 A sponsor holding a Type 6 licence or registration will additionally need to be permitted to engage in sponsor work. The licensing and registration requirements for sponsors are discussed in section 5 below.

Provision of false or misleading information (s. 384, SFO) 4.6 As will be seen in the topics that follow, a sponsor in the course of undertaking its role is

required to provide information to the SEHK (and this will also be provided to the SFC under the arrangements of the dual filing system established by the SFO). Such information includes the sponsors disclosures as regards independence, the listing application together with the Application Proof, and the sponsors declaration (these issues are discussed further in Topic 4). The sponsor may also provide information in connection with seeking waivers from the Listing Rules, for example, LR Chapter 8, and this is discussed further in Topic 2.

Note: The Securities and Futures (Stock Market Listing) Rules (which is subsidiary legislation to the SFO), establishes the dual-filing system and requires that a copy of the


application documents filed with the SEHK also be filed with the SFC. Such documents are subject to the liability and enforcement framework of the SFO.

4.7 Any statements or information provided to the SEHK or the SFC by sponsors in connection with a listing that are false or misleading in a material particular constitute an offence under s. 384, SFO and are punishable by a fine and/or imprisonment. They also constitute a breach of the Listing Rules and may additionally result in the SFC calling into question the sponsors fitness and properness to act as a licensed corporation or registered institution. Accordingly, due care and attention must be given to the accuracy and completeness of any such statements or information provided. In this context, a very high standard is expected.

Market misconduct (Parts XIII and XIV, SFO) 4.8 The SFO defines 6 types of market misconduct (see section 4.14 below) that may lead to

either administrative proceedings before the Market Misconduct Tribunal (MMT) (Part XIII, SFO), or criminal proceedings conducted before a court of law (Part XIV, SFO).

4.9 Market misconduct may be pursued under either one of these routes, the route chosen depending on a number of factors including the nature of the wrongdoing and the strength of evidence. However, once proceedings have been commenced under one of these routes, no proceedings may be commenced under the other route in respect of the same misconduct, i.e. there is no double jeopardy.

4.10 Penalties that may be imposed by a court of law include a fine of up to HK$10 million and/or imprisonment for up to 10 years.

4.11 The penalties that may be imposed by the MMT include: (a) disqualifying a person from holding office as a director, liquidator or receiver or from

taking part in the management of a corporation for up to 5 years;

(b) prohibiting a person from investing or trading in Hong Kong markets for up to 5 years (a cold shoulder order);

(c) ordering a person to pay reasonable costs and expenses incurred by the Government and the SFC; and

(d) ordering a person to pay to the Government any profit gained or loss avoided, plus compound interest.

4.12 In addition to the foregoing, market misconduct may also result in liability to pay civil damages to any person who has suffered pecuniary loss as a result of the market misconduct.

4.13 Officers of a corporation (which includes responsible officers) are required to take all reasonable measures to ensure proper safeguards against the corporation engaging in market misconduct. Where a corporation has committed an act of market misconduct, an officer may also be liable to the same extent if (a) he has aided, abetted, counselled or procured the misconduct, or (b) the misconduct took place with his consent or is attributable to his recklessness.

4.14 The types of market misconduct are: (a) insider dealing; (b) disclosure of false or misleading information inducing transactions; (c) stock market manipulation; (d) false trading; (e) price rigging; and (f) disclosure of information about prohibited transactions.


The first three of these are likely to be of most relevance to the undertaking of sponsor work and will be briefly introduced below.

Insider dealing (ss. 270 and 291, SFO) 4.15 Insider dealing in relation to a listed corporation takes place:

(a) when a person connected with the corporation (see Note 1 below), and having information which he knows is inside information (see Note 2 below) in relation to the corporation, deals in the listed securities or their derivatives of the corporation or a related corporation, or counsels or procures another person to deal in such listed securities or derivatives; or

(b) when a person, who is contemplating or has contemplated making a takeover offer for the corporation and knows that the information is inside information in relation to the corporation, either deals or procures as above.

Note 1: Persons connected with a corporation include its directors, employees, substantial shareholders, those with a position of access to inside information (such as a corporate finance adviser advising a corporation) and connected persons of another corporation where the inside information relates to transactions between the two corporations. Note 2: The term inside information in relation to a corporation means specific information about the corporation, a shareholder or officer of the corporation, the listed securities of the corporation or their derivatives, which is not generally known to the persons who are accustomed or would be likely to deal in the listed securities of the corporation but which would, if it were generally known to them, be likely to materially affect the price of the listed securities.

4.16 There are a number of defences to insider dealing, of which the most relevant to sponsors acting as corporate finance advisers is the Chinese wall defence. Under this defence, a corporation would not be liable for insider dealing if an effective information barrier operated between the persons engaging in the dealing and the persons possessing the inside information.

Misrepresentation (ss. 107 and 108, SFO) 4.17 Both the directors of an issuer and sponsors may be liable under the provisions of ss. 107

and 108, SFO.

4.18 Under s. 107, SFO, it is a criminal offence punishable by fine and/or imprisonment for a person to make any fraudulent or reckless misrepresentation for the purpose of inducing another person to:

(a) enter into or offer to enter into (i) an agreement to acquire, dispose of, subscribe for or underwrite securities, or (ii) a regulated investment agreement; or

(b) acquire an interest in or participate in, or offer to acquire an interest in or participate in, a collective investment scheme (CIS).

See s. 107, SFO for definitions of fraudulent and reckless misrepresentation, and also section 4.21 below.

4.19 The civil remedies for misrepresentation are established under s. 108, SFO, which is similar to s. 107, SFO but in addition covers negligent misrepresentation. Section 108, SFO provides that where a person makes any fraudulent, reckless or negligent misrepresentation which induces another person to:

(a) enter into or offer to enter into (i) an agreement to acquire, dispose of, subscribe for or underwrite securities, or (ii) a regulated investment agreement; or


(b) acquire an interest or to participate in, or offer to acquire an interest in or to participate in, a CIS;

the person making the misrepresentation will be liable to pay compensation by way of damages in respect of any pecuniary loss incurred by the other person as a result of relying on the misrepresentation. A court may grant an injunction in addition to or as a substitute for damages.

4.20 The liability to civil remedies is extended to every director of a company which has made a misrepresentation, except to the extent it is proved that a director did not authorize the making of that misrepresentation.

4.21 These different types of misrepresentation are defined in the SFO as follows: (a) A fraudulent misrepresentation is any statement which is known to the person making

the misrepresentation, at the time it is made, to be false, misleading or deceptive.

(b) A reckless misrepresentation is any statement which, at the time it is made, is false, misleading or deceptive, and is made recklessly.

(c) A negligent misrepresentation is any statement which, at the time it is made, is false, misleading or deceptive, and is made without reasonable care having been taken to ensure its accuracy.

It should be noted that each of these definitions is extended to cover promises, forecasts and material omissions.

Disclosure of false or misleading information inducing transactions (ss. 277 and 298, SFO)

4.22 There are two key elements to this market misconduct: (a) disclosure of information that is false or misleading as to a material fact (or the

omission of a material fact) and knowing or being reckless as to the information being false or misleading; and

(b) the information is likely to induce a person to subscribe for or deal in securities or affect their prices.

4.23 Sponsors participating in such disclosures may be liable and so it is very important that all information is properly verified prior to its release (see Topic 5 for a discussion of due diligence and verification).

Stock market manipulation (ss. 278 and 299, SFO) 4.24 Executing two or more transactions in listed securities with a view to increasing, decreasing,

maintaining or stabilizing the price of those securities and with the intention of influencing the investment decisions of other persons may amount to stock market manipulation. This misconduct is highly relevant to persons (stabilizing managers) who may be engaged by a listing applicant to assist in stabilizing its share price in the period immediately following it being admitted to listing. However, such stabilizing actions will not constitute stock market manipulation provided that they are undertaken in accordance with the Securities and Futures (Price Stabilizing) Rules (stabilization is further discussed in sections 6.17 to 6.22 of Topic 2).

Other relevant provisions of the SFO 4.25 Once a company has become listed, it will be subject to additional legal obligations. While

the sponsor will not be directly involved in the issuers compliance concerns after listing, the sponsor does have an obligation to ensure that the issuer and its directors are aware of, and


capable of complying with, applicable legal and regulatory requirements. Parts XIVA and XV are two key areas and are briefly summarized below.

Note: However, the compliance adviser (a role sometimes undertaken by the sponsor after listing see section 7 below) will be involved in the issuers compliance with its regulatory announcement obligations pursuant to Part XIVA, SFO.

Disclosure of inside information (Part XIVA, SFO) 4.26 Part XIVA, SFO imposes on listed companies an obligation to disclose inside information to

the public as soon as reasonably practicable after the information has come to their knowledge, subject to specified exceptions (ss. 307B and 307D, SFO).

Note 1: See section 4.15 Note 2 above for the definition of inside information. Note 2: Part XIVA, SFO is a relatively new development (effective from 1 January 2013) that in effect gives statutory backing to certain obligations regarding disclosure of price sensitive information previously imposed on listed companies by the Listing Rules.

4.27 The main exceptions provided for are: (a) where the disclosure is prohibited under a restriction imposed by an enactment or a

court order; or

(b) the corporation takes reasonable precautions to preserve the confidentiality of the information and that confidentiality is in fact preserved, and:

(i) the information concerns an incomplete proposal or negotiation; (ii) the information is a trade secret; or (iii) the SFC grants a waiver on disclosure prohibited by overseas legislation or

restriction orders.

4.28 Officers are under a duty to take all reasonable measures to ensure proper safeguards exist to prevent a breach of a disclosure requirement. Where they have not done so, they may be in breach of Part XIVA, SFO.

4.29 Breaches of the disclosure requirements are subject to proceedings before the MMT, which has the power to impose a range of orders, including imposing a fine of up to HK$8 million (s. 307N, SFO).

4.30 Persons in breach of the disclosure requirements are also subject to civil liability to pay damages to any other person who has suffered pecuniary loss as a result of the breach, provided the court considers it fair, just and reasonable in the circumstances.

4.31 The SFC has issued the Guidelines on Disclosure of Inside Information (GDII) to assist corporations to comply with their obligations under Part XIVA, SFO. The GDII provide examples and discuss issues in particular situations to illustrate the SFCs views on how the relevant provisions of the SFO should be operated.

4.32 Accordingly, a sponsor should ensure that a listing applicant possesses appropriate and effective systems and procedures that (i) enable the timely identification, assessment and handling of inside information, and (ii) facilitate directors meeting their obligations in this regard.

Disclosure of interests (Part XV, SFO) 4.33 The following persons are obliged to disclose their interests in the relevant share capital of a

listed company:

(a) directors and chief executives, who are required to disclose all interests; and (b) persons interested in 5% or more of the companys voting shares.


4.34 What constitutes an interest is widely defined and includes both long and short positions, interests in equity derivatives (such as warrants, options, etc.), and attributed interests (for example, through trust arrangements or corporate shareholdings).

4.35 Disclosures must be made to the listed corporation and to the SEHK within the prescribed timeframe:

(a) on being admitted to listing, an initial disclosure obligation is triggered and interests must be disclosed within 10 business days; and

(b) all changes of interest after the initial listing must normally be disclosed within 3 business days after either (a) the relevant event or (b) the day on which the person comes to know about the occurrence of the relevant event.

Note: The SFC has released a useful guide, Outline of Part XV of the SFODisclosure of Interests which can be found on the SFCs website.

Companies Ordinance 4.36 In addition to the SFO, it will be necessary for sponsors to consider the requirements of the

CO. It is the CO that requires listing applicants conducting a public offer to issue a prospectus complying with the requirements of the CO, concerning both its content and registration under the CO (s. 38D for companies incorporated in Hong Kong and s. 342C for those incorporated elsewhere).

4.37 The SFC has been approved to review such prospectuses under the CO and to issue a certificate of exemption for registration under the CO.

4.38 In order to avoid duplication of regulation between the SFC, the SEHK and the Registrar of Companies, the SFCs functions under ss. 38B(2A)(b), 38D(3) and (5) and 342C(3) and (5), CO, to the extent that they relate to any prospectus that is concerned with any shares or debentures of a company that has been approved for listing on the SEHK, have been transferred to the SEHK.

4.39 The SEHK vets every such prospectus and has the power to authorize its registration by the Registrar of Companies under the CO.

4.40 The procedural requirements for the review of a prospectus by the SEHK for the purposes of the CO are set out in LR Chapter 11A. The SEHK will review a prospectus for compliance with the Listing Rules concurrently with reviewing it for compliance with the relevant provisions of the CO.

4.41 If the SEHK is satisfied that the prospectus delivered to it pursuant to LR 9.11(33) or 9.22(2) should be authorized for registration under the CO, it will issue a certificate under s. 38D(5) or s. 342C(5), CO. It is the responsibility of the issuer to deliver the prospectus and any ancillary documents to the Companies Registry for registration pursuant to s. 38D(7) or s. 342C(7), CO (as the case may be).

4.42 The issue of a certificate of authorization by the SEHK does not constitute a form of confirmation that the prospectus complies with the requirements of the CO.

Civil and criminal liability 4.43 The CO also provides for civil and criminal liability for material misstatements (including

both untrue statements and omissions) in a prospectus. Sections 40 (for Hong Kong incorporated issuers) and 324E (for all other issuers) provide for civil liability, and ss. 40A (for Hong Kong incorporated issuers) and 342F (for all other issuers) provide for criminal liability.


4.44 While it is clear that directors are potentially liable under these sections, other aspects of them are subject to some doubt. In particular, there has been a divergence of opinion as to the applicability of these provisions to sponsors. The SFC has proposed amending the provisions so that they state with certainty that sponsors do have statutory liability. However, such amendments have not as yet been made.

Other legal considerations 4.45 Both sponsor firms and individuals working at sponsor firms continue to be subject to the

general law. The following are of particular relevance to the financial community.

Prevention of Bribery Ordinance (PBO) 4.46 A sponsor and its staff may in the course of undertaking sponsor duties be regarded for legal

purposes as agents of the listing applicant. Section 9, PBO makes it an offence for an agent to solicit or accept unfair advantages that might induce him not to act in the best interests of his principal. It also makes it an offence to offer an advantage to an agent.

Conspiracy to defraud 4.47 Conspiracy to defraud is an offence under the common law. It involves two or more persons

acting dishonestly with a view to practising a fraud on one or more victims. It may also be effected via a series of dishonest acts. For example, the concealing of material information or the falsification of financial data in the course of undertaking a sponsor role may constitute this offence. It is clear that the acts involved in committing this offence fall well below the standards of integrity and honesty expected of licensed or registered persons.

General criminal law 4.48 Individuals (whether or not they are directors or senior management of the sponsor firm)

may also be criminally liable in connection with offences committed by the sponsor firm under any ordinance if they are found to have aided, abetted, counselled or procured the offence (s. 89, Criminal Procedure Ordinance).

4.49 Directors and other officers concerned in the management of a sponsor firm are also subject to criminal liability under s. 101E of the Criminal Procedure Ordinance if the sponsor firm has committed an offence with their consent or connivance.

Revision questions:

Question 6: Why is the CO of relevance to sponsors working on IPOs?

Answer 6: The CO requires a prospectus to be prepared for every offer of shares (or debentures) to the public in Hong Kong.

Question 7: Name three types of market misconduct.

Answer 7: See section 4.14 above.

Question 8: Who is required to disclose their interests in the relevant share capital of a listed issuer under the provisions of the SFO?

Answer 8: Directors, chief executives, and any person whose interest is 5% or more.


5 Licensing and registration requirements 5.1 As already mentioned, an intermediary wishing to undertake sponsor work must be (i)

licensed or registered to engage in Type 6 regulated activity (advising on corporate finance) and (ii) permitted under the terms of its licence or registration to engage in sponsor work. This section deals with the eligibility requirements for engaging in sponsor work, which are set out in the Sponsor Guidelines.

Note: While the provisions of the Listing Rules will also apply to sponsors, these provisions are dealt with in subsequent topics of this manual in the context of the requirements applicable to a sponsor when executing the sponsor role.

5.2 Although not having the status of laws, the SFCs codes are nevertheless of considerable importance, and compliance with them should be regarded as a necessary requirement in undertaking sponsor work in Hong Kong. The SFC will regard any breach of any of the SFCs codes (or the Listing Rule requirements) as casting doubts on the fitness and properness of the sponsor.

Sponsor Guidelines 5.3 The SFO requires all licensed or registered persons to be fit and proper. The Sponsor

Guidelines set out the specific competence requirements for persons licensed or registered for Type 6 regulated activity who wish to engage in sponsor work. The requirements are additional to those set out in the Fit and Proper Guidelines applying to all licensed and registered persons, and cover the sponsor firm itself, persons within the firm acting as Principals or representatives/relevant individuals of the firm, and the requirements for continuing professional training (CPT).

5.4 It is the responsibility of the sponsor and its senior management to ensure that staff undertaking sponsor work are appropriately licensed or registered, are competent and meet the criteria set out in the Sponsor Guidelines.

Note: In this Topic, and generally in this manual, the term senior management will mean a sponsors board of directors, managing director, chief executive officer, responsible officers, executive officers and other senior management personnel. This follows the approach taken by the SFC in its codes, although paragraph 17 of the Code of Conduct uses the term Management, which is equivalent to the term senior management as used herein.

The sponsor firm 5.5 In addition to the requirements imposed by the Securities and Futures (Financial Resources)

Rules, a sponsor is required to have a minimum paid-up capital of not less than HK$10 million.

Principals 5.6 A sponsor must appoint at least two Principals whose primary roles will be to supervise

Transaction Teams engaged in undertaking sponsor assignments, and to be involved in making key decisions as to how that work is undertaken. Each of them must satisfy the eligibility criteria and at least one of them must satisfy the Option 1 criteria (see section 5.14 below).

Note: The specific responsibilities of Principals and the formation of Transaction Teams are discussed further in section 2 of Topic 4.


5.7 The above is a minimum requirement and the senior management should assess the volume, size, complexity and nature of the sponsor work that it undertakes in determining how many Principals are required to properly discharge its role in supervising the Transaction Team(s).

5.8 The appointment of a Principal must be made by the senior management of the sponsor firm and a written endorsement provided to the SFC that gives information as to how the individual concerned satisfies the eligibility requirements (see sections 5.10 to 5.18 below). The SFC should be notified within 7 business days of any appointment or cessation of appointment. Upon receiving an endorsement, the SFC may require further details to be provided.

5.9 Records should be kept to demonstrate compliance with the Sponsor Guidelines. Such records should cover the appointments made, or ceased, as well as the associated decision-making process.

Eligibility criteria for Principals 5.10 To be eligible to act as a Principal, the individual must be:

(a) a responsible officer (for a licensed corporation) or executive officer (for a registered institution) of the sponsor firm; and

(b) satisfy one of the eligibility criteria under Option 1, Option 2 or Option 3 summarized below.

While these criteria are only concerned with initial eligibility, persons appointed as Principals must ensure that they remain competent in their role at all times.

5.11 An individual may only be appointed as a Principal under Options 2 or 3 if the sponsor to which he is being appointed already has at least one other Principal who is approved as a Principal under Option 1. In other words, there must always be at least one Principal qualifying under Option 1 for the other two options to become available as routes to appointment.

5.12 Each of the three options requires the individual to have corporate finance experience which would include providing advice on one or more of the following matters:

(a) IPO transactions; (b) notifiable or connected transactions (LR Chapters 14 and 14A); (c) rights issues or open offers governed by the Listing Rules; (d) takeovers and share repurchases governed by The Codes on Takeovers and Mergers and

Share Repurchases, and

(e) other significant transactions or equity-fund raising. Such experience may include experience in markets other than Hong Kong that have comparable legal and regulatory requirements for listings and public offers.

5.13 A sponsor should be aware of avoiding duplication when attributing experience gained from a specific transaction to multiple Principals.

5.14 Option 1 is based on having at least 5 years of corporate finance experience in respect of companies listed on the SEHK, which must include a substantial role in advising a listing applicant as a sponsor in at least two completed IPO transactions on the SEHK.

5.15 Option 2 requires a high level of experience gained in recognized jurisdictions (Australia, the United Kingdom, or the US) through undertaking corporate finance work on listed companies and undertaking due diligence as a result of leading IPO transactions, and the completion of a refresher course or special examination on ethics, sponsor work, and the


legal and regulatory requirements governing the conduct of IPO transactions in Hong Kong within the 6 months preceding the appointment as a Principal.

5.16 Option 3 requires an active and substantial participation in due diligence work in at least four completed IPO transactions in Hong Kong, at least 5 years of corporate finance experience in respect of companies listed on the SEHK, and the completion of a special examination on ethics, sponsor work, and the legal and regulatory requirements governing the conduct of IPO transactions in Hong Kong within the 6 months preceding the appointment as a Principal.

5.17 When assessing whether an individual has played a substantial role in an IPO, the SFC will consider the extent to which the individual has been involved in the roles required of a Principal, for example leading and supervising, and making key decisions in relation to, a due diligence exercise (for further examples, see paragraph 1.4.2 Note (2) of the Sponsor Guidelines).

5.18 The SFC may exercise its discretion to grant a dispensation from strict compliance with the Option 1 eligibility requirement if there are valid and justifiable grounds (see paragraph 1.4.2 Note (2) of the Sponsor Guidelines).

Representatives and relevant individuals 5.19 Persons wishing to engage in sponsor work as representatives or relevant individuals will

need to pass the relevant examination for Type 6 licensed representatives and relevant individuals engaging in sponsor work within the period 3 years prior to and 6 months after their first engagement in such work.

5.20 Persons who have engaged in sponsor work on at least one completed IPO transaction as a Type 6 licensed representative or relevant individual within the 3 years prior to 1 October 2013 are exempted from the above requirement.

5.21 A representative or relevant individual who ceases to be licensed or registered for more than 3 years will need to pass the examination as described in section 5.19 above.

5.22 It is an obligation of a sponsor firm to ensure that its staff engaged in sponsor work have satisfied the relevant examination requirements. A sponsor should be able to demonstrate this to the SFC upon request.

Standard of information provided 5.23 Individuals and firms submitting information to the SFC in connection with the eligibility

criteria should ensure the accuracy and completeness of the information provided as such submissions are also subject to the provisions of s. 384, SFO, which may entail criminal penalties in respect of false information (see sections 4.6 to 4.7 above).

Continuing professional training (CPT) 5.24 A sponsor must ensure that adequate training is provided both initially and on an ongoing

basis. Such training should be sufficient to ensure compliance with the sponsors operational and internal control policies and procedures, as well as all applicable legal and regulatory requirements.

5.25 Training should be relevant to the skills required by responsible officers, executive officers, licensed representatives and relevant individuals to carry out their respective roles in relation to sponsor work. Such training should constitute at least 50% of the 5 CPT hours (or any other amount of CPT hours as required by the SFC from time to time) that such persons are required to undertake annually as holders of a Type 6 licence/registration (advising on corporate finance).


Revision questions:

Question 9: How many Principals must be appointed by a sponsor firm?

Answer 9: At least two.

Question 10: Is it sufficient that a representative engaged in sponsor work holds a Type 6 licence?

Answer 10: No, they must also meet the other eligibility requirements for sponsor work. See sections 5.19 to 5.22 above.


6 Applicable regulatory codes and rules

Codes and guidelines issued by the Securities and Futures Commission (SFC)

6.1 All sponsors are required to hold a Type 6 licence or registration and accordingly are subject to the codes and guidelines issued by the SFC that apply to all holders of such licences/registration. While this section will introduce the regulatory rules of specific relevance to sponsor work, sponsors nevertheless need to be aware of all regulatory rules that affect the conduct of their business, including the provisions of the Code of Conduct and the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the Securities and Futures Commission (ICG).

6.2 The Code of Conduct applies, with limited exceptions, to all persons licensed by or registered with the SFC. It sets out the conduct requirement to which they must adhere to ensure they remain fit and proper. The Code of Conduct is based around nine general principles in

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