New IPO sponsor regulatory regime
From the beginning of this month (1 October 2013), all listing applications will need to comply with Hong Kong’s new IPO sponsor regulatory regime. Law firm Mayer Brown JSM discusses seven major changes under the new sponsor regime and gives practical tips on compliance.
Amaterial milestone of the Hong Kong IPO process, the new IPO sponsor regulatory regime was implemented on 1 October 2013. The new requirements under the regime will apply to all listing applications subject to certain exceptions. There are two major limbs to the regime.
1. Pursuant to the Consultation Conclusions on the Regulation of IPO Sponsors published by the Securities and Futures Commission (SFC) on 12 December 2012 to implement the new sponsor regime, the key obligations of IPO sponsors will be consolidated and centralised in a new paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct).
2. To cope with the implementation of the new sponsor regime, Hong Kong Exchanges and Clearing (HKEx) has implemented various measures including amending the listing rules, streamlining the listing vetting process, issuing/ revising various guidance letters on logistics, disclosure and other requirements and revising certain IPO sponsor rules, undertakings and declarations.
This legal update discusses seven major changes under the new sponsor regime.
1. Appointment of sponsor(s)
Under the new regime, sponsors need to be appointed at least two months before the filing of a listing application. Moreover:
• a written engagement letter containing prescribed provisions is required, and
• once appointed (regardless of whether an application will be or has been submitted), the IPO sponsor must notify HKEx with a copy of the engagement letter.
To avoid delays, a listing applicant should consider carefully which sponsor and how many sponsor(s) are to be appointed beforehand, as the two-month period starts to run when the replacement sponsor (if the sole original sponsor resigns or is being terminated) or last sponsor (for multiple sponsors), as the case may be, is formally appointed If an IPO sponsor has already been appointed or will be appointed before the effective date of the new regime (1 October 2013), it should still notify HKEx of its appointment as soon as practicable to facilitate processing of an application when it is submitted. The engagement letter submitted as a means of notification must contain the prescribed provisions of paragraph 17.11(b) of the Code of Conduct and listing rule 3A.05.
If an application lapsed on or before 30 September 2013 is re-submitted on or after 1 October 2013, the two-month notification is not applicable if there is no change in the IPO sponsor and the IPO sponsor is only required to submit a copy of its engagement letter to HKEx when the application is re-submitted.
It is not clear whether the two-month notification exception applies to an application submitted before 1 October 2013 but lapsed on or after 1 October 2013 and resubmitted thereafter, and the IPO sponsor should notify HKEx of its appointment pursuant to listing rule 3A.02 as soon as practicable.
2. The Application Proof
Under the new sponsor regime, the draft prospectus (the ‘Application Proof’) and all other relevant documents to be submitted with listing application Form A1 should be substantially complete except for information which, by its nature, can only be finalised and included at a later date. HKEx has issued/ revised various guidance letters to explain the extent of disclosure required for an Application Proof to be considered ‘substantially complete’. These are available on the HKEx website (www.hkex.com.hk).
The working parties should assist the applicant to review the Application Proof and the application accompanying documents referred to in the amended listing rules 9.11(1) to 9.11(17c) carefully and check against the guidance letters
as any non-compliance may result in the application Form A1 being returned. It is recommended that, as a minimum, the working parties should carry out a check based on the three-day checklist (See Table B in guidance letter HKEx-GL56-13) immediately prior to Form A1 submission.
Disclosure of material non-compliance incidents in the Application Proof, such as the reasons, charges/ penalties and rectification actions taken, is also required. For material non-compliance matters identified during the due diligence process and which may be caused by systematic defects of an applicant’s internal controls, an internal control consultant should be engaged to carry out an initial review of the internal control system. A follow-up review should be conducted to confirm the implementation and effectiveness of the enhanced internal control measures recommended by the internal control consultant. The IPO sponsor(s) should be closely involved in the internal control review as their opinion on the applicant’s enhanced internal control measures will be required to be disclosed in the prospectus.
An expert (other than reporting accountants) giving an expert opinion must provide a confirmation to the applicant (with a copy to the IPO sponsor, HKEx and SFC) when the Application Proof is submitted to state that no material change is expected to be made to the expert opinion in the Application Proof based on the work done. A suggested template of an expert’s confirmation is attached as an appendix to the HKEx guidance letter HKEx-GL60-13.
A signed copy or an advanced proof of each of the accountants’/ reporting accountants’ reports on historical financial information, pro forma financial information and profit forecast (if any) are also required when the Application Proof is submitted. If only an advanced form is available, the reporting accountants must provide a confirmation to the IPO sponsor, HKEx and SFC to state that no significant adjustment is expected to be made to the advanced draft report based on the audit procedures and/ or reviews done. A suggested template of the reporting accountants’ confirmation is attached as the appendix to guidance letter HKEx-GL58-13.
HKEx has issued guidance letter HKEx- GL6-09A specifying a new set of revised administrative practices on accepting early filings of applications and the expected financial information in the Application Proof at different times of the year.
Effective from 1 October 2013, guidance letter HKEx-GL6-09A will supersede guidance letter HKEx-GL6-09. IPO sponsors should be aware of the differences in the revised administrative practices and work with the applicants and their reporting accountants to ensure that financial information for the relevant period will be included in the Application Proofs for applications submitted on or after 1 October 2013.
3. Vetting and publication of the Application Proof
A set of the Application Proof documents (English version only) will be submitted to HKEx for vetting, and another set of the Application Proof (both English and Chinese versions) will be submitted to the HKEx for publication on the HKEx website at the same time the applicant files A1 with HKEx.
From 1 October 2013 to 30 September 2014, the Vetting Application Proof will be subject to a three-day check according to the three-day checklist (see Table B, HKEx-GL56-13). Only limited qualitative assessment will be carried out – HKEx will then decide whether to return the application or accept it for detailed vetting.
1. During the suspension period (1 October 2013 to 31 March 2014), applicants will not need to submit a Chinese version. The names of the applicant and the IPO sponsor and return date will not be published in the event of a returned application.
2. Confidential filing will be available if the applicant has already been listed on a recognised overseas exchange for not less than five years and has a market capitalisation of not less than US$200,000,000.
Waivers will be considered on a case-by- case basis for cases such as spin-offs. For spin-offs from an overseas listed parent, upon application by an applicant two months before A1 filing, HKEx or the SFC will consider a waiver of the publication requirements on a case-by-case basis taking into account the non-exhaustive list of factors set out in HKEx-GL57-13. For spin-offs from an HKEx-listed parent, upon application by an applicant two months before A1 filing, HKEx or the SFC will only consider a waiver in light of the relevant application of the inside information requirement as applicable to that case.
Information in the Vetting Application Proof and the Publication Application Proof should be the same, except that some information in the Vetting Application Proof should be redacted to the extent necessary for the Publication Application Proof not to constitute a prospectus or an advertisement under the Companies Ordinance or an invitation to the public in breach of the Securities and Futures Ordinance (the Prospectus and Offering Provisions).
Application Proofs will not be subject to any pre-vetting or clearance from HKEx or the SFC before publication and so the working parties should ensure that they are satisfied with the Application Proof before A1 submission. Table A of HKEx-GL56-13 sets out the disclosure requirements for a Vetting Application Proof and the information which can be redacted for a Publication Application Proof.
IPO sponsors must first obtain a company case number from the Listing Division IPO team by filing a request at least one business day before A1 filing.
4. Document submission
Under the new sponsor regime, document submission has been accelerated and 15-day document submission is no longer applicable. A majority of the documents previously required to be submitted in stages will now have to be submitted together with Form A1, such as finalised or advanced drafts of the profit forecast and cash flow forecast memoranda and advanced draft of the IPO sponsor’s letter on working capital statement sufficiency.
Acceleration of document submission means more preparation work before the submission of an application. An applicant should commence preparation of the profit forecast and cash flow forecast in communication with its IPO sponsor and reporting accountants well in advance to produce the documents required after management due diligence while they have an understanding of the business nature and financial status of the applicant.
5. The eight-week moratorium
All returned applications will be subject to an eight-week moratorium. An applicant can only submit a new application together with a new Application Proof eight weeks after the date of return of the application by the Listing Division (the Return Decision). The expiry dates of the relevant documents such as the expert opinion and the accountants’/ reporting accountants’ reports should be checked carefully before resubmission to avoid breaching the listing rules.
6. The right to request a review
An applicant and/ or its IPO sponsor(s) have the right to request a review of the Return Decision and the Listing Committee’s decision that endorses the Return Decision Review. Upon request, a Return Decision will be reviewed by the Listing Committee. If the Listing Committee endorses the Return Decision, upon request, it can be further reviewed by the Listing (Review) Committee. The decision of the Listing (Review) Committee is conclusive and binding.
A Return Decision can be made during the three-day check or after the application has been accepted for detailed vetting following the period and so passing the three-day check does not mean that the application is safe. A written review request (including grounds and reasons for the review) and payment of review fee must be submitted within five business days after receipt of the Return Decision.
A review by the Listing Committee could potentially take place within a week of submission of the written review request. The eight-week moratorium starts from the date of the Return Decision, not from the date of the review decision.
7. The Post-Hearing Information Pack
The requirement to publish a Web Proof Information Pack will be replaced with a new requirement to publish a Post- Hearing Information Pack (PHIP) (both English and Chinese versions) on the HKEx website. An applicant should submit a PHIP for publication after receipt of a post-hearing letter from HKEx together with a publication request, and after the material comments from the regulators have been addressed, but before the first occurrence of:
• the distribution of red herring documents
• the commencement of the book- building process, and
• in case of dual listing, simultaneously with any overseas publication of similar information.
A PHIP must not contain any information regarding the proposed offering or other information that would result in the violation of the Prospectus and Offering Provisions. If a PHIP complies with the relevant guidelines (in relation to warning and disclaimer statements and redactions of documents) set out in HKEx-GL57-13, then it would not be regarded as breaching the Prospectus and Offering Provisions.
To the extent practicable and except for offer-related information, bracketed or omitted information in an Application Proof should be updated or included upon the publication of the related PHIP.
James Fong, Jeckle Chiu, Juliana Lee and Jeremy Hsu – Mayer Brown JSM
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