Investment bankers have warned that the introduction of tougher regulations for sponsors of Hong Kong IPOs could put further pressure on deal flow in the city after a dismal year for new listings.
After a seven-month consultation, Hong Kong’s Securities and Futures Commission published the final rules for IPO sponsors last Wednesday. Despite tough opposition from the industry, the securities watchdog decided to stick to its proposal to hold IPO sponsors civilly and criminally liable for any untrue statements in prospectuses.
Bankers, as expected, are generally dissatisfied with the outcome of the consultation. They warn that the new rules will increase the cost of listing and, hence, prompt some candidates to turn to other markets.
“The consequences [of the new rules] may be much more serious than the regulators have thought. Due-diligence costs will be higher, and big banks like us may just skip smaller-scale IPOs, or advise those issuers to list in other markets, such as Singapore,” said a corporate finance banker at a foreign bank.
The controversial proposals attracted 71 written responses during the consultation period. In general, buy-side market participants supported the proposals, while sponsors and law firms were against them.
A group of 23 major investment banks operating in Hong Kong, including Goldman Sachs, JP Morgan, Morgan Stanley and UBS, hired law firms Clifford Chance and Davis Polk & Wardwell to represent them in the consultation.
Instead of backing down – as it had after tabling a similar proposal in 2005 – the SFC stood firm this time around. IPO sponsors will now be subject to existing laws on criminally liability if they “knowingly or recklessly” approve a prospectus containing an untrue statement (including an omission) that was materially adverse from an investor’s perspective, the SFC said.
That means individual bankers could face imprisonment of up to three years and a fine of as much as HK$700,000 (US$89,974).
“The changes, along with a streamlined regulatory process, will incentivise sponsors to raise standards, pick the right deals and manage them well, which should, in turn, reduce risks for investors and all those involved in IPOs,” said SFC CEO Ashley Alder. “Although we are now experiencing lower IPO volumes, these reforms will underpin market confidence during all market cycles.”
Outsourced
The regulator says the proposals will be beneficial for a healthy and quality market that will, in turn, enhance, rather than hamper, Hong Kong’s attractiveness as a premier listing venue.
Bankers, however, disagree. In order to lower the potential risk they face, some big banks are also considering the option of outsourcing the role of sponsors to specialist corporate finance advisers. A number of boutique businesses, such as Anglo Chinese and Somerley, already operate in the city.
“The sponsor fee only constitutes a small part of an IPO fee. It’s not worth taking so much risk to earn such a little fee. Outsourcing the sponsor work could minimise the risk we face and enable us to still keep the underwriting fee. It can be a solution,” said another banker.
To enhance the quality of IPO applications, the SFC also requires a listing applicant to appoint a sponsor formally for a minimum period of two months before the filing of a listing application. Also, fees are required to be specified in a sponsor’s terms of engagement.
Rival attack
To encourage the submission of quality listing documents and to enhance the efficiency of the vetting process, the SFC has also followed through with its proposal to make the first draft of the listing document available on the stock exchange’s website.
Bankers, however, say that move could also backfire, as it gives competitors of the listing candidate or its banks more opportunity to drum up anonymous complaint letters. A number of Hong Kong listings have been held up due to such letters in recent years, often with allegations that are subsequently turn out to be unfounded.
One small concession, however, may bring a little comfort to the city’s banks. The SFC has dropped proposals that would have required issuers to appoint a sole independent sponsor for a listing or limited the number of sponsors named.
The new requirements will apply to listing applications submitted on or after October 1 2013. The criminal prospectus liability, however, is expected to take longer to enforce as the relevant laws also needed to be amended.
