Analysts working at underwriting banks are
permitted to write research reports on IPOs.
But Hong Kong’s sponsor regulations
and Due Diligence Guidelines include confusing provisions
on analysts receiving material information;
A lawyer has set out a proposal for improving
uncertainty related to analyst reports in HK
Hong Kong’s sponsor regulations have caused
increased concern over pre-deal reports by underwriting
Analysts working for a bank underwriting a Hong Kong IPO can
cover the company via pre-deal research reports – a
practice that’s banned in the US. While there has
been some scrutiny over these analyst reports, new guidelines
in the sponsor regulations might need further
Although analysts at a bank underwriting an IPO cannot give
recommendations or pricing targets for the client, they are
seen as an important marketing tool for the offering; one of
the key aspects issuers consider when choosing underwriters is
the bank’s analyst capabilities.
"When the law firms review pre-deal research, they typically
ask the analyst not to include any factual information that
isn’t in the prospectus," said David Neuville of
Cadwalader Wickersham & Taft. "But that’s not
what the standard calls for, as the analyst could use
information that is not material."
Analysts and their employers don’t always
accept these comments, and take a more pragmatic view, he
The SFC implemented a
regulatory framework on pre-deal research in 2011. But
requirements were expanded under
Chapter 30 of the Sponsor Due Diligence Guidelines, which
states that a sponsor should take reasonable steps to ensure
that all material information concerning a listing application
disclosed or provided to analysts is contained in the relevant
This is because the SFC has been concerned about the
so-called equality of information flow. It also prohibits
pre-deal research reports from being used by the listing
applicant as a way to distribute material information without
This is redundant though, because the sponsor regulations
stipulate that all material information must be in the
"There is no need to prohibit giving material information to
analysts if that information is not in the prospectus, because
regardless of whether the analyst gets it, it needs to be in
the prospectus," Neuville said in a
Neuville added that the market might be reading the concept
of materiality too narrowly. Instead, information that is not
to be given to analysts if not in the prospectus actually falls
somewhere between 'material’ and
That substantive information is essential for the analyst to
provide the scrutiny needed to market the IPO.
There’s no legal basis for denying analysts
factual information that is not material, and, so far there has
been no action from the regulator.
"We haven’t seen any litigation related to
analyst reports in Hong Kong and I’m not aware
that the regulators have taken any position with respect to a
particular case," Neuville said.
However, he commented, there are a great deal of opinions in
Time for change?
Neuville’s note included four proposals to
clarify the regulatory regime in this area. One was to restore
the previous regime, in which analysts could seek information
on the basis that all information not included in the
prospectus is not material. But that seems unlikely.
Other suggestions were to establish processes for the
provision of information to analysts; to make pre-deal research
publicly available in Hong Kong or follow the US model by
banning pre-deal research completely.
He predicted that the second option – to focus on
the provision of information – was workable for the
Hong Kong market. That would involve requiring issuers to keep
records of all written information provided to research
analysts, and ensure that copies of that information were also
given to the parties involved in preparing the prospectus.
"Nine times out of ten, it’s likely that
particular information given to the analyst isn’t
material, but having a record of providing that information to
the working group shows that they received the information and
decided not to include it in the prospectus," he added.
This proposal would be line with requirements under the Due
Diligence Guidelines, which require that sponsors consider
appropriate steps to exercise reasonable control over and
understand the content of information from the listing
applicant to research analysts. A similar suggestion within the
guidelines is that all information provided to research
analysts must be passed through the applicant’s
However keeping records of information sent to analysts
would add yet another process to the
already-onerous Hong Kong IPO process. Under the sponsor
regulations, they now require underwriting banks to track
transaction teams, due diligence matters and other issues that
arise in the course of a listing.
Neuville tried to account for this under the
information-based regime. In formulating the proposal, he
added, he tried very carefully to ensure that information
provided to research analysts in writing – if not the
substance of every oral conversation – needs to also
go to the banks and law firms doing the diligence.
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