SFC pushes for tighter rules on IPO sponsors

Regulator will call on government to change law to make backers criminally liable for approving listing prospectuses with false information

PUBLISHED : Thursday, 13 December, 2012, 12:00am
UPDATED : Thursday, 13 December, 2012, 4:52am

The Securities and Futures Commission will propose making errant sponsors of initial public offerings criminally liable from October next year.

"The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well, which should in turn reduce risks for investors and all those involved in [initial public offerings]," SFC chief executive Ashley Alder said yesterday in announcing the commission's final proposals on regulating listing sponsors.

The proposals adopt most recommendations the SFC made in a consultation paper released in May. The key reform is criminal liability, with a maximum fine of HK$700,000 for sponsors that knowingly or recklessly approve a prospectus "containing an untrue statement [including an omission] which was materially adverse from an investor's perspective".

The proposals met opposition from investment bankers and lawyers but were welcomed by fund managers and institutional investors.

The SFC confirmed that it would propose the government change the law, which, if approved by legislators, will be enforced from October 1.

Under the law now, staff members of sponsors can be jailed if they are found to have colluded in the drafting of an untrue statement in a prospectus.

Christopher Cheung Wah-fung, the legislator for financial services, said: "This reform will enhance the quality of new listings and investor protection. However, we hope the SFC will only pursue criminal prosecution against financial firms on serious misconduct rather than minor breaches. It should also have a clear guideline on the new regulation."

Among other proposals, companies must appoint a sponsor at least two months before applying for a listing. Sponsors would have to check whether other participants in the listing process, including auditors and asset valuers, had done their job properly. The sponsors have to report to the regulator if they uncover malpractices in the due diligence process.

Sponsors' fees must be specified. The SFC also discouraged "no-deal, no-fee arrangements", Alder said.

The SFC dropped a proposal restricting the number of sponsors in each listing to just one.

The criminal liability reform for sponsors follows the new Companies Bill passed in July that added a criminal liability clause for accountants failing to disclose audit problems.

Criminal liability for sponsors and auditors is part of a broader drive to improve corporate governance and market transparency after problems emerged with several firms soon after listing.

The High Court in June ordered sports fabric maker Hontex International to repay investors more than HK$1 billion for overstating its revenue and profit in its listing prospectus.

Hong Kong Exchanges and Clearing head of listing Mark Dickens said: "We will work with the SFC and the financial community on the changes in listing rules needed to accommodate and complement some of the consultation conclusions."


The New Deal

Key points in new rules for sponsors of share listings:

  • Sponsors will face criminal liability for untrue statement in listing prospectus
  • Sponsors must be appointed at least two months before submission of listing application
  • Sponsors must inform regulators if they uncover any malpractices of companies they help go public
  • Sponsors' fees must be specified
  • "No deal, no fee arrangements" discouraged