New Hong Kong bookbuilding, setting requirements
JThe Hong Kong Securities and Futures Commission (SFC) is introducing new rules on the expected conduct of capital markets transactions which will come into effect on August 5, 2022.
The SFC requirements adopt the main proposals of the consultation process for its draft code of conduct on bookmaking and investment activities in equity and debt markets transactions, and the proposal for coupling sponsors, announced in October 2021. Here the author highlights some important new requirements.
CODE OF CONDUCT
Only licensed or registered persons may engage in regulated activities in Hong Kong, including sponsoring IPOs and creating books/placing in equity or debt offering. In conducting these activities, they must comply with the Revised Code of Conduct for Persons Licensed or Registered with the Securities and Futures Commission.
CAUSE OF CONCERN
As members of the Hong Kong IPO Syndicate are given more leadership titles, responsibilities over key activities are becoming less defined among the many leaders.
In addition, the SFC notes growing concern about the behavior of intermediaries engaged in IPOs that are not consistent with maintaining a healthy capital market, or possible conflicts of interest. For example, companies market the offer to investors without a mandate from the issuer and then convince the issuer to accept them as members of the syndicate.
In this case, the issuer offers fee incentives at a late stage, which further leads to last-minute scrambles for orders and fees. Union leaders thus have much less control over the entire exercise of bookbuilding and the allocation of shares during the last critical phase of the IPO.
For IPO sponsorship, the SFC also notes that fees are currently not aligned with sponsor costs and responsibilities. Based on its analysis of 99 listed IPOs from January to September 2020, the average sponsorship fee was 6.3 million HKD (804,000 USD) and the average fixed underwriting fee was 43.9 million HKD. This raises concerns about sufficient efforts by sponsors to perform due diligence on issuers.
The SFC will adopt the proposals set out in the conclusions of the consultation by introducing new paragraphs 17.1A and 21 in the code. The new requirements specify:
- Regulated activities include: (1) bookbuilding; (2) marketing and distribution of shares or debt securities (investment activities); and (3) advise, guide and assist questions for the above. Simple market sounding and settlement are not included.
- The requirements apply to both equity and debt issuances, ie equity and debt market transactions. They cover IPOs with offers of new and issued shares, as well as offers of new shares from listed issuers (including by way of additional subscription and placement) in the event of bookbuilding. Debt securities, whether listed in Hong Kong or not, are covered if the bookbuilding is carried out in Hong Kong.
- A “general coordinator” (OC) is defined as a syndicated capital market intermediary (CMI) ensuring the overall management of the offer, coordinating bookbuilding and placement activities, advising the issuer on the price of the offering and exercising its discretion with respect to shares. reallocation and over-allocation options.
- Each CMI syndicate must be appointed by the issuer in a written agreement (including the fixed fee payable to the CMI and the payment schedule) before it engages in any bookbuilding or placement activity.
- At least two months prior to submitting a listing application for a primary IPO, the issuer must appoint at least one CB (or its group company) to act as an independent IPO sponsor. This “sponsor pairing” requirement can help ensure quality sponsor work.
- No later than two weeks after submission of the listing application (GEM or main board), the issuer must name all CBs (including their fixed fees and payment schedules). The CO must submit to the SFC the list of all COs with fixed fees payable to each, the total fees and the ratio of fixed and discretionary fees at least four clear working days before the hearing of the registration committee , and inform the SFC if there are any hardware changes.
- There is no specific deadline for the appointment of CBs in a non-IPO transaction.
- The CB is required to provide guidance to the issuer on market fee sharing practice.
- A CMI should not offer or pass on any rebates to an investor. He must disclose the details of the rebate to the issuer, the CB, his target investors and the non-union MICs he has appointed.
- When placing orders, a CMI should provide the CB with the name and a unique identification number (identity card number) of each investor for orders placed on an omnibus basis and the identity of all other investors, to ensure transparency in the bookbuilding process and to help eliminate duplicate orders.
- Stocks and debt securities must be distributed on an equitable basis. Priority should always be given to fulfilling orders from investor clients over CMI’s own orders (including orders placed for funds and portfolios in which CMI or a member of its group has a substantial interest).
The SFC has also issued guidance for capital market intermediaries involved in GEM share placement activities, which will also come into effect on August 5, 2022.
KEY TO GO
There are many types of equity and debt offerings in terms of nature and complexity. A CMI can play different roles in different offerings. An accredited or registered institute, assuming the role of CMI syndicate, should put in place sufficient resources and effective controls to comply with the new requirements and deal with conflicts of interest.
Rossana Chu is the Managing Partner of LC Lawyers
LLP is an independent law firm,
and the Hong Kong law firm member of the EY global network,
in collaboration with other members of the law firm.
Suite 3106, 31/F One Taikoo Place
979 King’s Road, Quarry Bay, Hong Kong
Tel: +852 2629 1768
Fax: +852 2956 1980