Hong Kong’s Securities and Futures Commission has launched a two-month consultation on proposals to enhance the regulatory regime of listing sponsors, in a bid to ensure proper due dilligence when a company publicly lists its shares.  

"Sponsors play a lead role in coordinating an initial public offering. They advise and guide directors and are centrally involved in ensuring that prospectuses contain reliable and relevant information for potential investors,” said Ashley Alder, the SFC's chief executive officer.

“Our proposals are aimed at encouraging best practice across all sponsor firms whom investors rely on as key gatekeepers of market quality.”

Over the last decade Hong Kong has experienced a boom of IPOs, and many investors were burned by some of the deals that came towards the end of the glut. Many companies had their stock overpriced and have since underperformed. A heavy pipeline of initial public offerings awaits Hong Kong's stock markets, but with the added factor of global economic uncertainty, this time around many investors may be more skeptical. The new SFC guidelines go towards trying to reassure investors of due dilligence carried out by an IPO sponsor. 

As proposed, the sponsor requirements would become part of the code of conduct.

The proposals state that a sponsor "should have completed the vast majority of due diligence, that the first draft of the prospectus should be published on the website of Hong Kong Exchanges and Clearing, and that a sponsor should have resolved key issues concerning the operation, governance and structure of the company, and issues affecting the suitability for listing," said a statement on the SFC website.

A sponsor should gain thorough knowledge and understanding of a company, adopt an open and questioning approach and should not accept statements at face value; and collaborate and discuss with auditors, lawyers, directors and other experts to assess all information available to it about the company, said the SFC.

The sponsor has responsibility for disclosure, and must be reasonably satisfied that information in the prospectus is true, accurate and complete. They must be able to demonstrate that it is reasonable for it to rely on accountants, valuers’ and other experts’ reports in the prospectus.

Also, they should be closely involved in the preparation of the management discussion and analysis section of a prospectus to ensure that sufficient qualitative information explaining the company’s track record is communicated clearly to potential investors, said the SFC.