Executive Summary: Hong Kong’s prospectus law provides for statutory civil and criminal liability in respect of material misstatements for specified categories of persons, including those who “authorized the issue of the prospectus”. Since the introduction of these provisions the mechanisms of control and liability in the securities market have undergone quantum changes, in particular, via the development of an overarching regulatory architecture.

The manner in which a prospectus is now produced and issued in connection with an initial public offering (“IPO”) is guided by non-statutory regulations as well as potential statutory liabilities.

The concept of the sponsor, as a person who assists a company seeking a listing, predates relatively recent regulatory developments that affect the undertaking of sponsor work, with notable changes being introduced in 2001 through to the most recent developments in October 2013. There is now a significant regulatory emphasis on the role of the sponsor as an important gateway mechanism intended to ensure the quality of disclosures made in IPO prospectuses.

In tandem with the evolving sponsor concept, an issue that has been extensively debated in the industry, including through a series of public consultation exercises undertaken by the SFC between 2003 and 2014, is the question of whether sponsors undertaking IPO work are or should be subject to statutory prospectus liability, and whether the existing law needs to be amended.

In August 2014 the SFC published its conclusion that IPO sponsors are persons who authorize the issue of a prospectus within the meaning of Hong Kong’s prospectus law. While previous consultation exercises had pointed to the lack of clarity in the existing law and the need to make changes to it, the SFC also stated that no legislative amendments are required. The SFC’s position implies that a court would not need to make any
determination of whether a sponsor has in fact “authorized the issue of the prospectus” – if it were so, it would be open to a court to make a determination in the usual manner, possibly finding that some sponsors have engaged in the authorization act whereas others have not.

Appropriate law-based accountability, in addition to a sponsor’s regulatory obligations, may be desirable in a well-developed marketplace. However, as the sponsor is a creature borne out of regulatory requirements and is not specifically referred to in Hong Kong’s prospectus law, or in any other statutory law, it is equally important to clearly establish the basis for any legal liability. Whereas the SFC has referred to the specific duties and acts of an IPO sponsor and its central role in relation to the production and issue of an IPO prospectus, these are essentially driven by non-statutory regulatory requirements – accordingly, the precise source of a sponsor’s statutory liability remains somewhat opaque.

This paper, authored by Syren Johnstone Syren Johnstone Principal Lecturer, Faculty of Law AIIFL Profile › , Antonio Da Roza and Nigel Davis, can be downloaded: here .