Hong Kong's Securities and Futures Commission's
(SFC) highly-anticipated conclusions to its consultation paper
on sponsor regulations provided details on controversial issues
such as sponsors' criminal liability and public disclosure of
But the reactions from the market were muted, as
most had expected the conclusions to contain many of the same
provisions as the consultation paper.
In an interview with SFC CEO Ashley Alder earlier this
month, Alder said that initial public offering (IPO)
sponsors are critical gatekeepers of listing quality. Counsel
agree that Hong Kong lacks a process to protect investors
analogous to the class-action system in the US, the sponsor
role becomes even more integral to maintaining the integrity of
the markets, as does the SFCs enforcement mandate.
However market participants agree that key elements
of the sponsor regulations require clarification. The following
points have generated the most questions.
The public A1 filing
Although other aspects of the sponsor regulations,
such as potential criminal liability for sponsors, have
garnered more press attention, lawyers have been paying close
attention to provisions for public A1 filings.
Counsel have been opposed to making the A1 listing
application public because it will completely change the
IPO process for all parties involved.
Moreover it could invite premature public scrutiny.
A comment letter by Davis Polk & Wardwell and
Clifford Chance representing the views of 23 banks said
that it could prove counterproductive, especially if the A1
filing includes stub financials or is missing other information
that will be updated in the final prospectus.
Another comment letter by Linklaters,
representing the views of five Chinese banks, agreed. It said
that public disclosure of A1 draft filings could confuse
investors: We are in an era of information
In the consultation paper, the SFC did not describe
the process for a public A1 filing in detail, and that it may
be worked out later between market participants and the
A lawyer commented that the SFC might just require
the first A1 filing draft to be public, with nothing in between
that and the final prospectus.
Thats very different from the US
process, he added. The importance of a public
filing system is to make the IPO process very transparent, and
investors should be able to see how the application progresses:
what changes have been made, what questions regulations have
asked and how the applicant has responded.
Although the process hasnt yet been set out,
it is important to note that the A1 public filing dovetails
from practices in Singapore and Australia. While initial public
filing was previously considered the standard position in the
US, the JOBS Act allows emerging growth companies to file IPO
registration statements to the SEC on a confidential basis.
The criminal liability provisions in the sponsor
regulations have received the most press attention. However
counsel stress that the rules are not yet concrete.
The counsel commented that theres been some
confusion in the press regarding criminal liability. Some
are reporting it as if its a done deal, but the
SFCs press release mentioned that there would be a
separate legislative process. Well waiting to see how
that will play out, he added.
Most are waiting to see how the bill passes through
Hong Kongs Legislative Council, especially whether there
will be any changes made during the lobbying process.
Sponsor appointment periods and
fees But the conclusions included a few new provisions
that havent previously been mentioned in the consultation
paper. Counsel largely welcomed with the minimum sponsor
appointment period, set at two months before an A1 filing. A
lawyer said that the pre-IPO period has become quite frenzied
with anywhere from 12 to 17 banks working on a deal. The sheer
volume of banks has led to tensions in the market, as
competition between sponsors is intense. As issuers lure
cornerstone investors, a lot of underwriters may squeeze in
before an application is made or before a deal launches.
That obviously means more banks sharing the
fee pie, and may erode quality because issuers understand they
can play one sponsor against each other, he said.
Logistically, I dont know how this will work, but
its a well-intended suggestion. The new sponsor fee
provisions in revised paragraph 17 require that issuers specify
the terms of the sponsor fee. The "no deal; no fee" arrangement
that has become the status quo will no longer be permitted.
Moreover, in the SFC's executive summary of its
conclusions, it says: "We consider that sponsor fees should
appropriately reflect the role and responsibilities to be
discharged by a sponsor and should not be confused with other
services... The sponsor fee should not be contingent on the
success or final size of the offering and any staged payments
should be proportional to the work done on that stage."
But an in-house counsel questioned how the SFC will
enforce fair sponsor fees. Common queries are whether the
regulator will intervene if it seems that a bank is
undercharging for sponsor work, and how fees for multiple
sponsors will be determined.
Why small firms suffer under SFC
sponsor rules http://www.iflr.com/Article/3132105/Regulatory/Why-small-firms-suffer-under-SFC-sponsor-rules.html
Paul Gillis: SFC should not regulate
Hong Kongs SFC CEO on the
citys future as a financial hub http://www.iflr.com/Article/3125118/Search/Results/Exclusive-Hong-Kongs-SFC-CEO-on-the-citys-financial-hub.html
Lawyers opposed to public A1 filings
Sophisticated investor must be
SFC sponsor regulation: the market
Exclusive: SFC reveals whats
next in IPO sponsor crackdown http://www.iflr.com/Article/3019073/Search/Results/Exclusive-SFC-reveals-whats-next-in-IPO-sponsor-crackdown.html