IPO sponsors and how we help

By Melissa Tan

This week’s forecast from Hong Kong's stock exchange operator of an upturn in initial public offerings (IPOs) is welcome news for all involved in the field. In its half-year report, Hong Kong Exchanges and Clearing Ltd – better known as HKEX – notes sluggish trading volumes but says the outlook for listings is improving.

We at Headland Intelligence are happy to hear this, since a significant amount of our investigative work is done in this sector. But to understand exactly what we do, it helps to know the IPO process.

When a company decides to go public, it is required to be completely transparent about its business, finances and structure, plus it must demonstrate a clear strategy for what it will do post-listing. Further – in a feature unique to Hong Kong – it must appoint a sponsor or sponsors to assist with its initial listing application. A sponsor, typically an investment bank, plays the most important role in the entire listing and offering process, essentially acting as project manager. It advises the listing applicant, coordinates all parties and liaises with the Stock Exchange of Hong Kong (SEHK) and the city’s market regulator, the Securities and Futures Commission (SFC).

One of the sponsor’s key responsibilities is the conduct of due diligence on the listing company, its shareholders, and management, and ensuring it provides sufficient information for potential investors. In this regard, the sponsor is seen as a protector of standards. Indeed, the SFC, in a landmark 2012 consultation paper on the regulation of sponsors, stressed: “Investors rely on sponsors to act as key gatekeepers of market quality and at the heart of this lies the expectation that sponsors have conducted sufficient due diligence to properly understand and assess a company aspiring to join the market.”

The consequences of failing to do this can be severe, as illustrated by a series of problematic listings in Hong Kong by mainland companies some years ago. China Forestry raised US$216 million in its 2009 IPO but, just 14 months later, trading of its shares was suspended when its auditor discovered irregularities. The company was subsequently liquidated. Tianhe Chemicals raised US$654 million when it listed in 2014 but was later revealed to have claimed about US$1 billion in non-existent sales. Trading of its stock was halted in 2015 and the company was delisted in 2020. The regulatory fallout for the sponsors involved in these cases was both damaging to their reputation and eye-wateringly expensive.

This is where we can assist. Our pre-IPO background searches provide sponsor teams with a comprehensive overview of the listing company through the compilation of all publicly available information. Our report serves as a validation of the listing applicant’s corporate disclosures. It is an independent, impartial exercise undertaken by experienced investigators with knowledge of the listing rules and requirements as upheld by Hong Kong regulators.

Which brings me back to this week’s announcement by HKEX. It notes the number of IPOs rose to 33 from 27 in the first six months of 2023, although the aggregate amount raised was down 9% year over year. It says the IPO market showed “signs of good momentum” in the second quarter and there were 104 active applications for new listings as of 30 June. CEO Nicolas Aguzin talks of “a revival in our IPO market, matched by a very healthy pipeline”.

Good news all around. We look forward to a robust second half of the year.

Melissa Tan is Managing Director of Headland Intelligence, having founded the company in 2021. She takes pride in being the first port of call for many business-owners, not-for-profits and professional parties when problems arise.