The price of due diligence failure

By Han Shih Toh

Sponsors of initial public offerings (IPOs) must ensure adequate due diligence is conducted on IPO applicants or risk suffering negative consequences from Hong Kong’s stock market regulator, the Securities and Futures Commission (SFC). This is the fate that has just befallen one Hong Kong financial services firm, which has been fined HK$20 million (US$2.55 million) and banned from acting as a sponsor on listing applications for at least a year.

The SFC holds sponsors to the highest standards and views them as key gatekeepers of market quality. In this regard, it is prepared to mete out stringent penalties to those who fail to comply with its robust regime. As an example, in early 2019 the regulator fined four international financial institutions a total of HK$786 million (US$100 million) for glaring failures concerning the IPOs of two mainland companies.

Those eye-watering fines were intended to send an emphatic message to the market, but sponsor transgressions have continued. This has led to a string of enforcement actions from the SFC, the latest being against Changjiang Corporate Finance (HK) Limited (CJCF) on 21 August 2023.

The aforesaid HK$20 million fine and one-year suspension have been dished out for “for serious and extensive failures” as the sponsor in six applications to list on the Stock Exchange of Hong Kong. These included a failure to perform reasonable due diligence on three of the IPOs and to maintain proper records of due diligence work on all six. The SFC said it needed “to send a strong deterrent message” that it “does not tolerate sponsor failures”.

In mitigation, the SFC did note the firm’s cooperation with the investigation, including its agreement to engage an independent reviewer to scrutinise its sponsor business, and its otherwise clean disciplinary record.

It is worth remembering that paragraph 17 of the SFC’s Code of Conduct states “a sponsor should complete all reasonable due diligence on a listing applicant except in relation to matters that by their nature can only be dealt with at a later date” and that “a sponsor should take reasonable steps to ensure that true, accurate and complete disclosure about a listing applicant is made to the public”.

Companies which sponsor listing applications in Hong Kong should avoid the negative fallout – typically, heavy fines and reputational damage – that comes from non-compliance. Headland Intelligence has an impressive track record in performing due diligence on listing applications on behalf of sponsors. In this way, we help listing sponsors to stay on the good side of the SFC.

Han Shih Toh is Chief Analyst with Headland Asia. Born in Singapore and living in Hong Kong, he is an experienced business journalist and author of a published book, Is China an Empire?, describing the rise of China's global economic influence. Among his various academic qualifications, he holds a doctorate in physics from Oxford University.