Scrutiny may end HK$100m offerings

A tough new stance to improve scrutiny and disclosure of initial public offerings (IPOs) may squeeze out smaller listings and smaller sponsors who do not have the money to pay hefty compliance fees, experts warned yesterday.

Joseph Lee, a partner with global law firm Jones Day Capital Markets, said Hong Kong was moving towards a regime of 'higher quality, higher standards, and larger deals' as part of a Securities and Futures Commission drive to regulate the listing market, which would inevitably raise costs and make smaller IPOs unfeasible.

'I don't know if you will see HK$100 million deals in Hong Kong in the future,' Lee said.

Patrick Rozario, director and head of risk advisory services for accounting firm BDO, said it was difficult for smaller banks and professional firms to negotiate higher fees from issuers because of intense competition for business, even though they would have to work longer to meet the tougher standards.

The SFC recently imposed a record HK$42 million fine on Taiwanese financial advisory firm Mega Capital (Asia), and revoked its licence in Hong Kong for poor due diligence when it sponsored the listing of Fujian-based sports-fabric maker Hontex International.

The markets watchdog is also strengthening its power by seeking to pass a consultation paper with the Legislative Council that would subject sponsors to heavy fines or even jail terms if they provided misleading information in the prospectus.

Jeffrey Maddox, another partner with Jones Day, expected smaller banks to leave the market. 'Some banks which don't have the resources to do the extra work will get out of the business,' he said.

'Higher quality deals are going to be done by higher quality banks, higher quality law firms, and higher quality accountants. Bad deals just simply won't be done any more because it won't be worth it.'

But Hong Kong would still be a listing magnet, Maddox said. Mainland companies would find it hard to list in the United States, where investors have grown cynical about mainland companies after negative reports on Chinese firms listed in the US. In one case, AutoChina International is being sued by the US Securities and Exchange Commission for alleged stock manipulation.

Market experts said it was uncertain whether Hong Kong investors would be able to sue sponsors even if legislation was approved unless Legco changed legal processes here to allow US-style class actions, which would allow an investor, or a lawyer, to file a lawsuit on behalf of a group of investors.

'Unless Hong Kong adopts some sort of class action derivative litigation mechanism, I doubt that one little guy can sue a big investment bank on his own and recover damages for his losses,' Maddox said. He also questioned how investors would benefit from the SFC's hard line on sponsors. In the US, damages for fraud go to affected investors, as well as plaintiffs' lawyers. But in Hong Kong, fines levied by the SFC do not.

Maurice Hoo, from global law firm Orrick, said class action law suits against sponsors might not be appropriate for Hong Kong. In the US, many such lawsuits are started by law firms rather than investors, and it is not uncommon for defendants to settle to avoid expensive litigation.

$997m

The amount, in HK dollars, raised by Hontex International when it listed in the city in 2009