To prevent information asymmetry and ensure a fair market during an IPO process, regulators like the SFC impose strict controls on pre-deal research. According to paragraph 21 of the SFC’s Code of Conduct, information provided to analysts must not be material and non-public. The distribution of pre-deal research reports, which are typically provided only to institutional investors, must be carefully managed to prevent leaks. Standard industry practice, often guided by legal advisers, includes implementing robust tracking and control mechanisms. These measures involve uniquely identifying each copy of the report (e.g., through numbering), maintaining a precise record of who receives it, and using explicit disclaimers and cover letters to forbid any further copying or distribution. This creates an audit trail and reinforces the confidential nature of the information. Other practices, such as involving the issuer’s marketing team in the approval process or allowing analysts to trade in the shares, would introduce serious conflicts of interest and undermine the independence and integrity of the research and the IPO process itself. The principle of fair disclosure applies to the prospectus, which is made available to all investors, not to restricted pre-deal research.

A sponsor’s due diligence must be comprehensive and tailored to the specific nature of the listing applicant. Statement I is correct as assessing the background, experience, and integrity of directors and senior management is a fundamental part of due diligence under the Code of Conduct for Persons Licensed by or Registered with the SFC and the Listing Rules. Statement II is correct because for an issuer incorporated in the PRC, verifying property titles, including land use right certificates, is a critical due diligence step, as highlighted in Chapter 19A of the Listing Rules and associated HKEX guidance. Statement III is correct as Chapter 18 of the Listing Rules sets out special requirements for mineral companies, which includes the mandatory preparation of a Competent Person’s Report to validate and disclose information about mineral resources and reserves. Statement IV is incorrect because the specific pre-revenue requirements for biotech companies are detailed in Chapter 18A of the Listing Rules and do not apply to a mineral company, which is subject to the rules in Chapter 18. Therefore, statements I, II and III are correct.

Statement I is correct. According to the Securities and Futures (Licensing and Registration) (Information) Rules, disciplinary actions taken by the SFC, other than minor ones like private reprimands, are made public. This information is placed on a public register to ensure transparency and serve as a deterrent. Statement II is correct. The Stock Exchange of Hong Kong Limited (SEHK) is the frontline regulator for all listing-related matters. Sponsors are subject to the Listing Rules, and the SEHK has the power to discipline them for any breaches of these rules, independently of any action taken by the SFC. Statement III is incorrect. While the SFC has oversight powers over the SEHK, particularly through the dual filing regime established by the Securities and Markets Listing Rules (SMLR), it does not have the authority to unilaterally and directly reverse a specific listing approval decision made by the SEHK’s Listing Committee. The SFC’s power is primarily exercised by its right to object to a listing application before it proceeds. Statement IV is correct. Under the Securities and Futures Ordinance (SFO), the SEHK, as a recognised exchange company, is under a statutory duty to ensure an orderly and fair market and to act in the interests of the investing public, prioritising these interests over its own if a conflict arises. Therefore, statements I, II and IV are correct.

According to the Code of Conduct for Persons Licensed by or Registered with the SFC, particularly the specific requirements for sponsors in Paragraph 17, a sponsor firm must have robust internal controls for accepting new mandates. A critical part of this process is vetting for potential conflicts of interest and ensuring the firm’s independence. This involves a formal internal procedure before the mandate is formally accepted. Information about a potential listing applicant is highly sensitive and constitutes inside information. Therefore, its dissemination must be strictly controlled. The principle of ‘need-to-know’ is paramount, and information should only be shared with personnel who are on the correct side of the firm’s Chinese wall (i.e., the private side, such as corporate finance) and are essential to the vetting process. Broadcasting sensitive information to public-side departments like research or sales would be a serious breach of these controls. The conflict check itself should be a structured process, often involving circulating a high-level summary to a pre-defined group of senior individuals to identify any existing relationships or mandates that could create a conflict. This entire process, from the initial check to the committee’s decision, should be properly documented to demonstrate compliance.

According to the Hong Kong Main Board Listing Rules, the Profit Test requires the calculation of ‘profit attributable to shareholders’ to be based on profits derived from the ordinary and usual course of business. Statement I is correct because profits from associated companies (where ownership is less than 50%) accounted for by the equity method must be excluded. Statement II is correct as a one-off gain from selling a property, when the applicant’s principal business is not property investment, is considered an extraordinary item and must be excluded. Statement III is incorrect; profits from a wholly-owned subsidiary are part of the group’s consolidated results and are permitted to be included. Statement IV is correct because in a 50/50 joint venture where unanimous consent is required for key decisions, the listing applicant is deemed to lack sufficient control, and therefore the profits from such a venture should be excluded from the calculation. Therefore, statements I, II and IV are correct.

This question assesses the understanding of the over-allotment option and price stabilization mechanism in a Hong Kong IPO, governed by the SEHK Listing Rules and the Securities and Futures (Price Stabilizing) Rules.

Statement I is correct. The over-allotment option, commonly known as the ‘greenshoe’ option, typically allows underwriters to issue up to 15% more shares than the original number set for the offering. This is a standard market practice and is permitted under the Listing Rules.

Statement II is correct. The primary purpose of the over-allotment option is to facilitate price stabilization. Underwriters create a short position by allocating more shares to investors than the base offer size. If the share price falls below the IPO price after listing, the stabilizing manager can buy shares in the market to support the price and cover the short position. If the price rises, the underwriters can exercise the over-allotment option at the offer price to acquire the shares needed to cover the short position, thus avoiding a loss.

Statement III is incorrect. The price stabilization period is not 90 days. According to the Securities and Futures (Price Stabilizing) Rules, the period during which a stabilizing manager may take stabilizing action must end no later than 30 days after the closing date of the offer.

Statement IV is correct. A key feature of the over-allotment option is that it is exercisable at the initial public offer price. This allows the underwriters to acquire the additional shares without being exposed to market price fluctuations above the offer price when covering their short position. Therefore, statements I, II and IV are correct.

According to HKEX Guidance Letter GL68-13, the SEHK scrutinises listing applicants for certain characteristics that may be inconsistent with the interests of the investing public or create opportunities for market misconduct. Sponsors must provide a robust analysis to substantiate the applicant’s suitability if such characteristics are present. Statement I describes an asset-light business where a majority of assets are liquid, which is a specific concern listed in the guidance. Statement II points to a lack of external, third-party funding pre-listing, another key characteristic that raises suitability questions. Statement III illustrates a superficial delineation of business from a parent, a method that can be used to artificially create a listing vehicle. Statement IV highlights listing expenses that are disproportionate to the funds being raised, which questions the commercial rationale of the listing. All four statements describe characteristics explicitly identified by the HKEX as requiring enhanced justification from the sponsor. Therefore, all of the above statements are correct.

The Corporate Governance Code (CG Code) under the Hong Kong Listing Rules operates on a ‘comply or explain’ basis for its code provisions. This means a listed issuer must disclose and provide considered reasons in its Corporate Governance Report for any deviation from a code provision. However, the CG Code also contains ‘recommended best practices’ which are for guidance only, and issuers are not required to explain any deviations from them.

Statement I describes a situation where the roles of chairman and chief executive are performed by the same individual. This is a deviation from a specific code provision (A.2.1 of the CG Code), and therefore must be disclosed and explained.

Statement II relates to executive remuneration not being linked to performance. While linking a significant portion of remuneration to performance is a ‘recommended best practice’ (E.1.2 of the CG Code), it is not a mandatory code provision. Therefore, deviation does not require an explanation.

Statement III describes the board holding four meetings at quarterly intervals. This is in full compliance with a code provision (A.1.1 of the CG Code) which requires at least four regular board meetings a year at approximately quarterly intervals. As the company is compliant, no explanation is needed.

Statement IV describes a newly appointed director not receiving a formal, tailored induction. This is a deviation from a specific code provision (A.5.1 of the CG Code) which requires such an induction. This deviation must be disclosed and explained. Therefore, statements I and IV are correct.

According to Paragraph 17 of the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, sponsors must exercise professional scepticism and perform critical due diligence. Statement I is a significant red flag; a profit margin substantially exceeding industry peers may indicate unsustainable practices, aggressive accounting, or even fraudulent activities, and warrants deep investigation into the business model and revenue recognition policies. Statement II describes a pre-listing transaction with a connected person at a potentially inflated valuation, which lacks apparent commercial justification and raises concerns about related-party transactions and potential window dressing. Statement IV indicates a vague use of proceeds, which is a concern for sponsors and regulators as it suggests a lack of clear business strategy or that the primary purpose of the listing might be an exit for existing shareholders rather than funding genuine growth. Statement III, while a change of auditor can sometimes be a red flag, the move from a smaller firm to a reputable international firm is a common and often positive step for companies preparing for an IPO to enhance credibility and governance. In this context, it is the least likely of the four to be considered a primary red flag requiring heightened scrutiny. Therefore, statements I, II and IV are correct.

This question assesses the understanding of the procedures and consequences following a ‘Return Decision’ by the SEHK’s Listing Department for an IPO application.

Statement I is correct. According to the Listing Rules, a returned application is subject to a mandatory moratorium period of 8 weeks from the date of the return letter, during which the application cannot be resubmitted. This is to ensure that the sponsor and applicant take sufficient time to address the deficiencies properly.

Statement II is correct. To enhance transparency and accountability, the SEHK will publish the names of the listing applicant and the sponsor involved in a Return Decision, along with the date of the return, on the HKEXnews website.

Statement III is incorrect. The right to request a review of a Return Decision is not limited to the listing applicant. The Listing Rules explicitly state that both the listing applicant and the sponsor have the right to request that the decision be reviewed by the Listing Committee.

Statement IV is correct. The appeal process has a clear hierarchy. An initial review is conducted by the Listing Committee. If this committee upholds the Return Decision, a further and final appeal can be made to the Listing (Review) Committee. The decision of the Listing (Review) Committee is final and binding within the Exchange’s framework. Therefore, statements I, II and IV are correct.

Statement I is correct. For the institutional placing tranche, the underwriting agreement (or placing agreement) is typically signed after the book-building process is complete and the IPO has been priced. This is because the final allocation to institutions is determined after assessing demand at a specific price point. Statement II is correct. For the public offer tranche, the underwriting agreement must be signed before the prospectus can be registered with the Companies Registry. This provides certainty that the offer is fully underwritten before it is presented to the public. Statement III is correct. As per Practice Note 18 of the Listing Rules, a claw-back mechanism is mandatory for IPOs with both public and placing tranches. If the public offer tranche is significantly oversubscribed, a pre-determined portion of shares from the placing tranche must be re-allocated to satisfy the retail demand. Statement IV is incorrect. The execution of the underwriting agreements for the placing tranche and the public offer tranche are normally conditional upon one another. This ensures that one part of the deal cannot proceed without the other, protecting the integrity of the overall offering. Therefore, statements I, II and III are correct.

This question assesses the understanding of regulatory requirements when a listing applicant appoints multiple sponsors, particularly concerning independence, responsibility, and communication with the Stock Exchange of Hong Kong (SEHK).

Statement I is incorrect. According to guidance from the SEHK, while a listing applicant with multiple sponsors must designate one as the primary channel of communication, the SEHK will normally expect the sponsor so designated to be independent. Designating the non-independent Sponsor A would be contrary to this expectation, regardless of its familiarity with the business.

Statement II is incorrect. The fulfilment of sponsor duties rests with each sponsor individually. As per Paragraph 17.4(d) of the Code of Conduct for Corporate Finance Advisers, a sponsor cannot delegate or otherwise abrogate its responsibilities. While sponsors may coordinate their work, one sponsor cannot avoid its responsibilities or be relieved of its obligations simply because other sponsors are appointed.

Statement III is correct. The SEHK Listing Rules and Paragraph 17.11(3) of the Code of Conduct for Corporate Finance Advisers explicitly require that the independence status of each appointed sponsor must be disclosed in the listing document. This includes setting out the basis on which a sponsor is not independent.

Statement IV is correct. This reflects the SEHK’s expectation that the primary channel of communication should be an independent sponsor. Since Sponsors B and C are independent, it is expected that one of them would be appointed as the primary liaison with the SEHK. Therefore, statements III and IV are correct.

According to Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a Principal in a sponsor firm holds ultimate responsibility for the supervision and management of a listing assignment. When a Transaction Team member identifies a potential issue, such as conflicting information or suspicious circumstances, they must report it to the Principal. The Principal’s duty is to take charge, guide the team in resolving the issue, and ensure that a satisfactory resolution is reached before the listing application proceeds. This involves actively leading further due diligence, not dismissing the concern or prematurely halting the process. While the compliance department may be consulted, the Principal cannot abdicate their direct responsibility for overseeing the resolution of due diligence matters critical to the transaction.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, particularly the specific requirements for sponsors, maintaining comprehensive records is a fundamental obligation. These records must be sufficient to demonstrate to the SFC that the sponsor has diligently fulfilled its duties. A critical component of these records is a clear and up-to-date list detailing the sponsor work being undertaken. For each specific listing assignment, this includes maintaining a record of the composition of the Transaction Team. This log should identify the names, titles, and roles of all staff assigned to the project. Crucially, it must also document any variations or changes to the team’s composition throughout the engagement. This allows the SFC to assess whether the team was adequately staffed, supervised, and possessed the necessary experience to conduct the sponsor work effectively. While financial data and marketing materials are part of the overall transaction, the record of the personnel responsible for the due diligence is a primary document for demonstrating procedural compliance and accountability.

This question assesses the understanding of a sponsor’s internal management controls and procedures during an IPO process, as required by the SFC’s Code of Conduct. Statement I is correct because the Principal in charge of a transaction holds ultimate responsibility for its overall conduct and must be satisfied with the resolution of any material issues before proceeding. Statement II is also correct; the Code of Conduct explicitly requires that when a Transaction Team encounters suspicious circumstances or conflicting information, they must immediately bring it to the attention of the Principal for guidance. Statement IV is correct as establishing dedicated communication channels, such as project-based email lists, is a recommended practice to ensure effective and timely information flow among all relevant team members, including senior management, facilitating proper oversight. Statement III is incorrect because it describes a serious breach of the ‘Chinese Wall’ policy. There must be a strict separation between the investment banking (sponsor) team and the research department to prevent the leakage of non-public, price-sensitive information. Consulting a research analyst about a live deal would compromise this separation. Therefore, statements I, II and IV are correct.

Under Section 194 of the Securities and Futures Ordinance (SFO), the Securities and Futures Commission (SFC) is empowered to take disciplinary action against a ‘regulated person’ who is found to be guilty of ‘misconduct’ or is not considered fit and proper. A Responsible Officer (RO) of a licensed corporation falls under the definition of a ‘regulated person’. The range of disciplinary sanctions is broad and can be applied separately or in combination. These sanctions include revoking or suspending the person’s licence or approval, issuing a public or private reprimand, and prohibiting the person from re-entering the industry for a specified period. Furthermore, the SFC has the authority to impose a significant financial penalty. This penalty is capped at the greater of two amounts: a fixed sum of HK$10 million, or an amount equivalent to three times the profit gained or loss avoided as a direct result of the misconduct. This provision ensures that the penalty can be scaled to the severity and financial impact of the transgression.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission and the specific requirements for sponsors, a sponsor’s due diligence must be ‘substantially complete’ at the time of submitting a listing application (Form A1). A cornerstone of this duty is to identify and assist the listing applicant in resolving material deficiencies. However, the regulations acknowledge that not all deficiencies can be fully remedied before the application is submitted. In such cases, the sponsor’s primary obligation is transparency with the regulator. The sponsor must ensure that the listing application includes a full disclosure of the material deficiency. This disclosure should detail the nature of the issue, provide a clear reason why it has not been resolved, and outline the concrete steps and timeline for its remediation. This approach allows the SEHK to make a fully informed assessment of the applicant’s suitability for listing, balancing the existing deficiency against the committed plan for resolution. Simply delaying the application is not always necessary if the issue can be appropriately disclosed and managed. Documenting the issue internally is insufficient as it fails the transparency requirement with the regulator. Seeking a waiver is generally not the correct procedure for an operational or governance deficiency that has a clear path to resolution.

Under the Hong Kong Main Board Listing Rules, the profit test requires a careful examination of the sources of a listing applicant’s ‘profit attributable to shareholders’. The core principle is to assess the sustainability and quality of profits derived from the applicant’s principal business activities. Therefore, certain items must be excluded from the calculation. Item I, profit from the sale of a warehouse by a software company, represents a gain from an activity outside the ordinary course of business. Such extraordinary or non-recurring items must be excluded. Item III, the share of profit from an associated company (where ownership is less than 50%), is also required to be excluded as the applicant does not have full control over the source of these profits. Item IV, unrealised gains from a revaluation exercise, are considered ‘book transactions’ and do not represent actual cash-generating profits from operations; hence, they must be excluded. In contrast, Item II, profit from a 65%-owned subsidiary, is correctly included. Profits from subsidiary undertakings, over which the listing applicant has control, are a legitimate part of the group’s consolidated results for the profit test. Therefore, items I, III, and IV must be excluded.

Under the Securities and Futures Ordinance (SFO), the SFC has extensive powers to conduct investigations. Statement I is correct because under section 183 of the SFO, an authorised investigator can require a person under investigation (or a person believed to have relevant information) to produce records and documents. Statement II is also correct; the SFO explicitly grants the investigator the power to require a person providing an answer to verify it by way of a statutory declaration. Statement IV is correct as the SFC’s investigation into a sponsor’s conduct can naturally extend to all relevant documents in the sponsor’s possession, including those prepared by third parties like the listed company’s lawyers, as these are crucial for assessing the sponsor’s due diligence and role in the listing process (ss. 182 and 183, SFO). Statement III is incorrect. While the SFC can suspend a licence, this is a disciplinary sanction taken under Part IX of the SFO after due process, not an on-the-spot power exercised by an investigator during the evidence-gathering phase. Therefore, statements I, II and IV are correct.

Statement I is correct. According to Listing Rule 9.10A(1), an undertaking and statement of independence from each sponsor, in the form prescribed in Appendix 17 of the Listing Rules, is a required document to be submitted together with the Form A1 at the initial application stage. Statement II is correct. Listing Rule 9.11(22) specifies that a confirmation from the listing applicant’s legal advisers that the articles of association conform with the Listing Rules must be submitted at least four clear business days prior to the hearing date. Statement III is incorrect. While most publicity materials must be reviewed by the SEHK before release under Listing Rule 9.08, the Application Proof is explicitly exempted from this requirement. Statement IV is incorrect. The initial application requires a draft letter from the sponsor confirming the sufficiency of working capital, not the final signed version. This distinction is crucial in the application timeline. Therefore, statements I and II are correct.

A sponsor’s due diligence responsibilities are comprehensive and require independent professional judgment. Statement I is correct because under Paragraph 17 of the SFC’s Code of Conduct for Corporate Finance Advisers, a sponsor must exercise professional skepticism and cannot simply accept the conclusions of the listing applicant or its advisers. The sponsor must form its own view on the materiality of issues like legal proceedings. Statement II is correct as assessing key operational risks, such as supply chain vulnerabilities, and the adequacy of mitigating measures like insurance, is a critical component of commercial due diligence to evaluate the sustainability of the business. Statement III is incorrect because while sponsors work with legal advisers, they cannot exclusively rely on their reports. The sponsor must retain overall control of the due diligence process, understand the scope of the legal review, and probe the findings concerning critical assets like intellectual property. Statement IV is incorrect as due diligence on human resources, particularly a key R&D team in a technology company, must extend beyond a simple verification of qualifications. It should include an assessment of their experience, track record, stability, and the company’s ability to retain such critical talent. Therefore, statements I and II are correct.

Statement I is correct. A fundamental duty of a sponsor, as outlined in Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC, is to conduct reasonable due diligence. Relying solely on management representations for material information without independent verification (e.g., checking bank statements, contracts, or third-party confirmations) is a significant failure to meet this standard and a common finding in SFC enforcement cases.

Statement II is also correct. The quality of a sponsor’s pre-listing due diligence has a direct impact on the issuer’s readiness and ability to comply with its continuing obligations under the Listing Rules after it becomes public. If a sponsor fails to identify and address fundamental issues with an issuer’s systems, controls, or business model, it is highly likely the issuer will struggle with compliance post-listing, a connection the SFC often highlights.

Statement III is incorrect. The SFC has a wide range of disciplinary powers under the Securities and Futures Ordinance (SFO). For serious failures in sponsor work, the SFC can, and has, imposed sanctions that include not only public reprimands and fines but also the partial or full suspension, or even revocation, of a firm’s license to advise on corporate finance (Type 6 regulated activity), which includes acting as a sponsor.

Statement IV is correct. Professional skepticism is a core element of a sponsor’s duty of care and integrity. Sponsors are expected to critically assess information provided by the listing applicant and not take it at face value, especially when encountering red flags like unusually complex or circular transactions. A failure to apply professional skepticism is a serious breach of a sponsor’s professional obligations. Therefore, statements I, II and IV are correct.

According to the Hong Kong Listing Rules, a listing document must disclose the particulars of every material contract (not being a contract entered into in the ordinary course of business) entered into by any member of the group within the two years preceding the issue of the listing document. A contract is generally considered ‘material’ if it is significant to the issuer’s business, financial position, or prospects. While contracts entered into in the ‘ordinary course of business’ are typically excluded, this exemption does not apply if the contract contains provisions that are unusual or impose significant obligations or liabilities on the group. Therefore, agreements such as significant acquisitions, service contracts with key directors containing special terms, and financial arrangements with related parties are almost always deemed material and require disclosure. In contrast, a standard supply or sales agreement, even if for a large value, is often considered to be in the ordinary course of business and may not require disclosure unless its terms are highly unusual or create exceptional liabilities for the listing applicant.

Under the Hong Kong Listing Rules, there is a critical distinction between a ‘profit forecast’ and a ‘profit estimate’. A profit forecast pertains to a future financial period and is based on projections and expectations. Because of its forward-looking nature, it must be accompanied by a clear statement of the principal assumptions upon which it is based. These assumptions, such as projected interest rates, market conditions, and exchange rates, allow potential investors to evaluate the reasonableness and reliability of the forecast. In contrast, a profit estimate relates to a financial period that has already concluded but for which the final, audited results have not yet been published. Since the events of that period have already occurred, the factors influencing the results are known historical facts, not assumptions about the future. Therefore, the requirement to state principal assumptions does not apply to a profit estimate, even though it is generally treated as a type of profit forecast for other regulatory purposes.

According to Paragraph 17 of the Code of Conduct for Corporate Finance Advisers and Practice Note 21, a sponsor has a primary responsibility to conduct reasonable due diligence. This duty is non-delegable. While sponsors can and should engage third-party professionals like legal advisers, they cannot exclusively rely on their work. The sponsor must retain overall management and control of the due diligence process. This involves actively participating in the work, understanding the scope of the review conducted by advisers, probing and challenging their findings, and forming an independent view. Simply accepting a report from a reputable firm, forwarding it without review, or delegating the review to another party would be a failure to discharge the sponsor’s duties. The sponsor must critically assess the information provided by experts to ensure the accuracy and completeness of the information disclosed in the listing document.

Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO), sections 40, 40A, 342E, and 342F establish both civil and criminal liability for material misstatements or omissions in a prospectus. This liability applies to persons who authorise the issue of the prospectus. While the directors of the listing applicant are clearly liable, the applicability to sponsors has been a subject of discussion. The Securities and Futures Commission (SFC) has publicly stated its position that sponsors are indeed among the persons who authorise the issue of a prospectus and are therefore subject to this statutory liability. However, it is important to note that this specific point regarding sponsor liability under the CWUMPO has not been definitively tested or confirmed by the Hong Kong courts. Furthermore, the issuance of a certificate of authorisation by the Stock Exchange of Hong Kong (SEHK) is a procedural requirement for the prospectus to be registered with the Companies Registry; it does not serve as a confirmation of the prospectus’s compliance with the law nor does it absolve any party, including the sponsor, from potential liability.

Under Paragraph 17.4 of the SFC Code of Conduct and Practice Note 21 of the Hong Kong Listing Rules, a sponsor must be independent of the listing applicant. When assessing independence in the context of commercial arrangements, regulators focus on the substance and materiality of the relationship. A key consideration is whether the arrangement is conducted on ‘normal commercial terms’ and in the ‘ordinary and usual course of business’. If a sponsor, or a company within its group, has a material commercial interest in the applicant, its objectivity could be compromised. For instance, if the continuation or profitability of a significant business arrangement (like a large loan or service contract) depends on the successful listing of the applicant, the sponsor might be incentivised to overlook issues during due diligence to ensure the IPO proceeds. Therefore, the assessment hinges not just on the existence of a relationship, but on its terms, its materiality to the sponsor’s group, and whether it creates a dependency on the outcome of the listing.

According to Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC and Practice Note 21 of the Listing Rules, a sponsor’s due diligence obligations are continuous and do not cease upon the submission of the listing application. This ongoing duty, often referred to as ‘bring down’ due diligence, extends through the publication of the listing document up to the date of listing. When new, potentially material information arises concerning a key aspect of the listing, such as the integrity of a director, the sponsor has an independent duty to conduct further inquiries. The sponsor must assess the nature of the allegations, the potential impact on the director’s suitability, and whether the information renders any part of the listing document inaccurate or misleading. Simply relying on the director’s own statement is insufficient, as the sponsor must form its own independent view. Proceeding without investigation or immediately withdrawing the application would be inappropriate responses. The primary responsibility is to investigate and assess the materiality of the new development.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a sponsor must adopt an attitude of professional scepticism. This requires the sponsor to critically assess all information provided by the listing applicant and be alert to anything that contradicts or questions the reliability of such information. When a discrepancy arises, such as an observation during a physical site inspection that conflicts with management’s representations, the sponsor cannot simply accept the management’s claims or delegate the issue. The sponsor has a primary responsibility to investigate the inconsistency. The appropriate professional response involves seeking independent, third-party corroboration of the claims and directly challenging the applicant’s management to reconcile the conflicting information. This proactive verification is a fundamental aspect of the due diligence process and is essential for the sponsor to discharge its duties to the regulators and the investing public.

According to the GEM Listing Rules, an applicant is generally expected to possess Title Certificates for any PRC property that is substantial in terms of asset value or profit contribution, or is otherwise significant to its operations. However, the Stock Exchange of Hong Kong (SEHK) provides a degree of flexibility. In situations where the issuance of a Title Certificate is pending, the SEHK may, at its discretion, accept alternative documentation. This typically includes the submission of the contract related to the property in question, supplemented by a formal legal opinion from a qualified PRC legal adviser. This legal opinion should confirm that there are no legal impediments to the applicant ultimately obtaining the Title Certificate. Simply disclosing the issue without supporting documents is insufficient. Postponing the listing application is an overly cautious approach and may not be necessary if the required alternative documents can be provided. A valuation report, while important for financial disclosure, does not address the legal ownership issue, and the term ‘Competent Evaluator’ is specifically associated with mineral companies under Chapter 18 of the Listing Rules, not general property matters.