Lawyers opposed to public A1 filings

Author: Ashley Lee | Published: 19 Nov 2012
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Morrison & Forester's Ven Tan
Capital markets lawyers in Asia have voiced concerns over Hong Kong's Securities and Futures Commission (SFC) proposals to make  initial public offering (IPO) A1 filings  public.

Traditionally A1 filings mark the first formal step in the Hong Kong listing process and  are thereby submitted at the beginning of the IPO process. 

It is feared that the move might delay A1 filings to later in the IPO process and that criminal liability may be applicable in the filing.

Speaking at IFLR’s Asia Capital Markets Forum, Morrison & Foerster’s Venantius Tan explained that the new rules required the sponsor to ensure that directors understood their responsibilities under the listing rules, that the issuer met the requirements under the listing rules and that the prospectus did not contain inaccurate statements.

Moreover they also suggest that sponsors have criminal liability for any untrue statements in the prospectus, Tan added.

Another panelist said that the A1 filing was considered a big milestone for the issuer, but that under these proposed regulations all sorts of things would need to be done. He predicted that the A1 filing was going to happen much later in the process, and it would take some time.

Tan commented that publicly releasing the A1 filing front-loads all the work for deal execution. The proposals suggest that the prospectus must be substantially complete when it’s submitted to the Hong Kong stock exchange (HKEx), rather than an advanced draft that may be subject to future changes.

“It’s how you would file a registration statement in the US: as a done deal ready to go effective,” he said.

Aside from adding criminal liability for statements in the A1 filing, the SFC’s proposed sponsor regulations say that a sponsor that steps out of a deal must act as a whistleblower and explain to the HKEx why they stepped out.

“Sponsors will be in a very difficult position when they choose not to proceed with a deal, especially since different banks have different levels of risk appetite,” Tan said. “What is acceptable for once sponsor may not be for another sponsor.”

Moreover Tan highlighted some disclosure issues that will need to be resolved.

Previously some issuers didn’t want certain matters disclosed in the prospectus, so counsel deferred. However they highlighted the issue in the listing application for the attention of the HKEx, who they knew would ask that the matter be disclosed in the prospectus.

That practice of relying on HKEx to force disclosure must stop after A1 filings are public.

But Mark Dickens, head of listing for HKEx said that he did not believe that HKEx would publish its comments on the A1 filing immediately; instead it will probably follow the SEC and release comments after the deal is complete.

“We’ll be over-commenting until the industry understands regulatory requirements, and some of these comments could be embarrassing in the middle of a deal,” Dickens added.

However Dickens also warned that the market will take time to adjust to the regulations. “There’s going to be an adjustment period,” he said. “I’m not an optimist that this will all work smoothly on day one.”

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