After a series of public consultations, the Hong Kong Securities and Futures Commission (‘SFC’) has stated its view that sponsors of initial public offerings (‘IPO’s’) are subject to criminal liability in respect of material misstatements in a prospectus. While the SFC’s view has no standing in law, it is highly influential in the industry, and may affect the undertaking of sponsor work. However, a detailed analysis of the prospectus regime suggests that the law does not support the SFC’s position.
The long-standing concept of the sponsor in an IPO has evolved in tandem with the development of the modern regulated market. Only a few jurisdictions now employ the sponsor concept – the UK, Hong Kong, Singapore and Canada. In each of these jurisdictions, sponsors are subject to clear regulatory obligations intended to foster the quality of the listing disclosure. However, a sponsor’s legal liability under prospectus law remains untested in any court, and Singapore is the only jurisdiction where statute expressly imposes criminal and civil liability on sponsors.
The SFC’s position is based on their view that sponsors fall within a category of persons subject to Hong Kong’s prospectus law, namely, persons who authorize the issue of a prospectus. According to the SFC, this appears to arise by virtue of the sponsor’s specific duties and its other functions and obligations. This is, in various ways, an odd assertion.
First, previous SFC consultation exercises pointed to the lack of clarity in the existing law, and indicated that changes were needed to bring sponsors within the scope of statutory liability.
Second, the SFC’s reliance on duties and acts of a sponsor that are created by non-statutory regulatory requirements is prima facie insufficient to establish statutory liability, given that the sponsor concept is created by non-statutory requirements (ie, the sponsor concept is not referred to in Hong Kong’s prospectus law, nor in other statutes). Accordingly, the precise source of sponsor liability asserted by the SFC remains opaque.
Third, the SFC leaves unanswered the question of whether the sponsor is to be regarded as engaging in the authorization act because of the nature of the sponsor role itself, because of certain acts normally engaged in by sponsors, or because of some combination of the foregoing.
Setting aside issues in the legislative drafting and policy considerations as to whether sponsors should be liable, we have examined the basis of the SFC’s position in our paper ‘IPO Sponsors and Prospectus Liability: The Bridge Too Far?’.
In the absence of relevant case law, three lines of enquiry were pursued: (1) the presence of other legal mechanisms that recognize the regulatory functionality of the sponsor, (2) the scope of the phrase ‘authorized the issue of the prospectus’, and (3) whether other matters of practice arising out of legal, regulatory or commercial considerations may be relevant.
Analysis suggests that the acts normally undertaken by sponsors to discharge regulatory obligations do not give rise to any authorisation of the issue of the prospectus. Nor does the special nature of the sponsor role in executing its regulatory obligations provide any other basis for statutory liability. Non-statutory regulations governing IPO sponsors operate in a different sphere from that of prospectus law, and no sound argument is identified that clearly bridges the two; in fact, it is noteworthy that over a decade of consultation exercises on the issue has not identified any such bridge.
An unexpected finding was that the elements underlying the SFC’s position could potentially also capture underwriters. Under the SFC’s position, underwriters that are not sponsors may therefore need to reconsider their prospectus liability in Hong Kong IPOs.
The observations made in our analysis highlight that prospectus law has not kept pace with the evolution of the regulated marketplace and market expectations. The continuing lack of clarity of the sponsor’s legal position in the face of the SFC’s position places sponsors at a disadvantage, particularly as regards the problems inherent in the current legislative drafting, including absence of mens rea and the reversal of the usual burden of proof.
Finally, it is noted that the SFC has a number of significant powers over sponsors that may provide more effective mechanisms in terms of sanctions and remedies than existing prospectus law.
Syren Johnstone is an Adjunct Associate Professor at the Faculty of Law, University of Hong Kong (‘HKU’), a Fellow of the Asian Institute of International Financial Law (‘AIIFL’), and a Director of Keel Consulting and a Solicitor (non practising), Antonio Da Roza is a Barrister-at law, and Nigel Davis is a Principal Lecturer in the Department of Professional Legal Education at HKU, a Fellow of AIIFL, and a Former Member of the Listing Committee of The Stock Exchange of Hong Kong Limited (2010 to 2014).