Sponsors, underwriters and advisers: who does what

A Hong Kong listing is prepared by a small group of firms whose duties are set down in writing, and it pays to know before the first meeting who answers for what. Chapter 3A of the Main Board Listing Rules governs the sponsor. Paragraph 17 of the SFC Code of Conduct sets the standard the sponsor's own regulator holds it to. Appendix 1A of the Listing Rules then requires the listing document to name every adviser and to disclose what the sponsor and the syndicate are paid. We take them in turn.

The sponsor comes first, and the clock runs from its appointment

A new applicant must appoint a sponsor under a written engagement agreement to assist it with its initial application for listing¹. A listing application must not be submitted by or on behalf of the applicant less than two months from the date of the sponsor's formal appointment¹. Where more than one sponsor is appointed, the two months run from the date the last sponsor is formally appointed¹. Adding a second sponsor late therefore moves the earliest filing date with it.

Once appointed, the sponsor must notify the Exchange in writing as soon as practicable, whether or not a listing application has yet been submitted¹. If the sponsor ceases to act at any time after its appointment, it must inform the Exchange in writing, as soon as practicable, of its reasons for ceasing to act¹.

Independence and impartiality

A sponsor must perform its duties with impartiality¹. At least one sponsor of a new applicant must be independent of it, and each must demonstrate its independence, or lack of it, to the Exchange and declare it under Appendix 17¹.

The SFC Code adds a condition for Main Board applications at the point of acceptance. Before accepting the appointment, a sponsor should either be independent of the applicant and ensure that it, or a company within its group, is appointed at the same time as an overall coordinator, or obtain written confirmation from the applicant that at least one independent sponsor, or a company within that sponsor's group, has been appointed as an overall coordinator². The firm that vouches for the listing document is in this way tied to the coordinator role within the syndicate⁴.

What the sponsor is obliged to do

Rule 3A.11 sets out the sponsor's obligations. A sponsor must:

• be closely involved in the preparation of the applicant's listing documents¹.
• conduct reasonable due diligence inquiries so that it is in a position to make the sponsor's declaration required by rule 3A.13 and Appendix 19¹.
• ensure the requirements in rules 9.03 and 9.05 to 9.08 are complied with¹.
• use reasonable endeavours to address all matters raised by the Exchange, including providing in a timely manner the information it reasonably requires to verify compliance with the Listing Rules¹.
• accompany the applicant to any meetings with the Exchange unless the Exchange requests otherwise, and attend any other meetings and discussions the Exchange requests¹.
• comply with the undertaking and statement of independence it gave to the Exchange under rule 3A.03 and Appendix 17¹.

In deciding what inquiries are reasonable, the sponsor must have regard to Practice Note 21 and the SFC Sponsor Provisions¹. The declaration itself is submitted by each sponsor as soon as practicable after the Listing Committee's hearing of the application, and on or before the date the listing document is issued¹. For management, the practical consequence is that the sponsor's questions are not optional: the declaration at the end rests on the inquiries made along the way¹.

Whom the assurance is owed to

Paragraph 17 of the SFC Code states the sponsor's primary role plainly. It is to provide assurance to the Stock Exchange and the market generally that the listing applicant complies with the Listing Rules and other relevant legal and regulatory requirements, and that the listing document provides sufficient particulars and information for investors to form a valid and justifiable opinion of the applicant's shares, financial condition and profitability². The sponsor also advises and guides the applicant on the Listing Rules and other regulatory requirements², but that is the second function. The applicant pays the sponsor. The assurance is owed to the Exchange and to investors.

The Commission has regard to paragraph 17 when assessing whether a sponsor remains fit and proper to carry out sponsor work². Where an applicant appoints more than one sponsor, the joint appointment relieves none of them of any responsibility, and each is responsible for ensuring the paragraph's requirements are fully discharged².

The reporting accountants

A listing document issued by a new applicant must include an accountants' report on the issuer's profits and losses, assets and liabilities and other financial information³. All accountants' reports must be prepared by professional accountants who are qualified under the Professional Accountants Ordinance for appointment as auditors of a company³. They must also be independent of the issuer, and of any other company concerned, to the same extent required of an auditor under the Companies Ordinance and in accordance with the Hong Kong Society of Accountants' independence guideline, Statement 1.203³.

The reporting accountants are therefore held to an auditor's standard of independence rather than an adviser's. A company whose existing audit firm may not meet that qualification should raise the point with its sponsor early³.

Underwriters and solicitors: named and priced in the document

Under Appendix 1A, an equity listing document must state the names and addresses of the issuer's principal bankers, sponsor, sponsor-overall coordinator, overall coordinator(s), any other syndicate members, authorised representatives, solicitors, registrars and trustees, and of the solicitors to the issue⁴. It must also state the name, address and professional qualifications of the auditors⁴. Every adviser is on the record in the document investors read.

Two further disclosures follow. The document must state the total amount of fees paid or payable to the sponsor⁴. It must also state the aggregate fees paid or payable to all syndicate members, as a percentage of the gross funds proposed to be raised in the subscription tranche and/or the placing tranche, together with the ratio of fixed and discretionary fees⁴. Underwriting economics are public, and are best negotiated with that in mind.

The document also carries the directors' responsibility statement: the directors collectively and individually accept full responsibility for it and confirm, having made all reasonable enquiries, that it is accurate and complete in all material respects and not misleading or deceptive⁴. The advisers assist. The directors answer for the document.

Where to begin

The order of appointments is fixed by the rules. The sponsor's written engagement agreement starts the two-month period before a listing application can be submitted¹, and the SFC Code expects a Main Board sponsor to have settled the overall coordinator question before it accepts the appointment². The next step for a company is therefore to select its sponsor, sign the written engagement agreement, and at the same time confirm in writing which independent firm, or group company, is appointed overall coordinator, so that the sponsor can notify the Exchange and the earliest filing date is known.

Next in this stage: Due diligence from the issuer's side

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