The correct answer is that the sponsor must be satisfied that the expert is qualified, experienced, and independent, and must critically review the key assumptions and methodologies used in the report to ensure they are fair and reasonable. According to the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (specifically Paragraph 17), a sponsor retains ultimate responsibility for the listing document. When relying on the work of a third-party expert, the sponsor cannot simply accept the report without scrutiny. The sponsor’s due diligence duty extends to assessing the expert’s suitability (qualifications, independence) and performing a critical review of the expert’s work. This involves understanding the basis, assumptions, and scope of the work to form a reasonable opinion that the information presented is not misleading. This process is a fundamental aspect of exercising professional scepticism. The assertion that the sponsor’s role is limited to accurate reproduction of the report is incorrect because it ignores the sponsor’s overarching due diligence obligations. The sponsor acts as a primary gatekeeper and must take reasonable steps to verify information, not just passively include it. The suggestion that the sponsor must conduct its own independent geological survey is also incorrect. This sets an impractical and unnecessary standard; the sponsor’s role is to reasonably review the expert’s work, not to replicate it, as they are not expected to be experts in every technical field. Finally, while managing costs is part of a project, stating that the primary focus is on negotiating the expert’s fee is wrong. The sponsor’s regulatory priority is to ensure the quality, integrity, and reliability of the disclosure to protect investors, which far outweighs commercial considerations like fees.

According to the Main Board Listing Rules (LR), the Stock Exchange of Hong Kong (SEHK) has the discretion to modify certain standard listing requirements for specific applicants. Statement I is correct; LR 8.08(1)(d) allows the SEHK to accept a lower public float percentage, between 15% and 25%, for issuers with an expected market capitalisation over HK$10 billion. Statement II is also correct; while LR 8.12 requires sufficient management presence in Hong Kong (typically two executive directors), this is often waived for large Mainland China or overseas issuers. Statement III is correct as the SEHK may consider the specific industry sector and growth profile of a company when assessing the continuity of management requirement under LR 8.05. Statement IV is incorrect; the requirement for a minimum of 300 shareholders (LR 8.08(2)) is a fundamental rule to ensure a sufficient spread of shareholders and an open market, and it is not typically waived based on the monetary value of the public float. Therefore, statements I, II and III are correct.

According to paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, a sponsor has extensive due diligence obligations. Statement I is correct because paragraph 17.6(e) explicitly requires a sponsor to directly interview major business stakeholders, such as key customers and suppliers, to independently verify the listing applicant’s business relationships and operational reality. Statement II is correct as the same paragraph mandates the inspection of key physical assets, like production facilities, to confirm their existence, condition, and operational capacity. Statement III is incorrect; while management representations are a source of information, a sponsor cannot solely rely on them for profit forecasts. The sponsor must conduct its own independent assessment and verification of the assumptions and calculations underlying any forecast. Statement IV is incorrect because the Code of Conduct stresses that inquiries with knowledgeable persons, including senior management, must be made directly by the sponsor. Arranging such interviews through the listing applicant could compromise the independence of the process and lead to filtered information. Therefore, statements I and II are correct.

The correct answer is that the sponsor must insist on interviewing the suppliers directly and without the presence of the listing applicant’s management. Paragraph 17.6 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission explicitly requires a sponsor to conduct its own independent inquiries. This includes interviewing major business stakeholders such as customers and suppliers directly. The purpose of this direct engagement is to obtain unfiltered and unbiased information to independently verify the representations made by the listing applicant. The presence of the applicant’s CEO could unduly influence the suppliers’ responses, thereby compromising the integrity and independence of the due diligence process. Accepting the CEO’s offer, even if it seems cooperative, would violate the core principle of independent verification. While obtaining written confirmations is a good practice, it does not substitute for a properly conducted independent interview; it should supplement, not replace, a direct and unchaperoned discussion. Relying solely on the applicant’s internal records for supplier contact details without independent verification is also insufficient, as the sponsor must take reasonable steps to ensure the information it relies upon is complete and accurate.

According to the Code of Conduct for Corporate Finance Advisers (CFCF), when a sponsor engages a third-party expert to assist with due diligence, the sponsor retains ultimate responsibility for the due diligence work. Statement I is incorrect because the sponsor’s duty is not solely to verify qualifications; assessing the expert’s independence is equally critical to ensure there are no conflicts of interest that could compromise the objectivity of their work. Statement II is correct as the appointment of an expert should be evidenced by a formal engagement letter that clearly defines the scope of work and terms of engagement. Statement III is correct and reflects a core principle of a sponsor’s duty. Sponsors must exercise professional scepticism and cannot simply accept an expert’s findings at face value; they must understand, question, and be satisfied with the expert’s work. Statement IV is correct because assessing the expert’s independence from the listing applicant is a fundamental prerequisite to their appointment to ensure their advice is impartial. Therefore, statements II, III and IV are correct.

This question assesses the understanding of a sponsor’s due diligence responsibilities, particularly concerning the use of questionnaires and the need for independent verification as required by the SFC’s Code of Conduct for Corporate Finance Advisers (Paragraph 17) and related practice notes. Statement I is correct because while using a previous questionnaire as a template is common practice for efficiency, it must be carefully adapted to the specific business context, industry, and regulatory environment of the new listing applicant. A ‘one-size-fits-all’ approach is unacceptable. Statement III is also correct as it highlights a core duty of the sponsor: not to take information from the listing applicant at face value. The sponsor must probe, challenge, and independently verify information against external sources to satisfy itself of the accuracy and completeness of the disclosures. Statement II is incorrect because it describes a passive, ‘tick-the-box’ approach to due diligence, which is explicitly discouraged. The sponsor has a duty to probe and ask follow-up questions beyond the written answers. Statement IV is incorrect because while questionnaires guide the process, sponsors should not be constrained by them. They must remain flexible and ask further questions as needed during interviews to clarify issues and explore new lines of inquiry that may arise, ensuring all key areas are covered. Therefore, statements I and III are correct.

Statement I is correct. The Securities and Futures Commission (SFC) is the primary statutory body responsible for regulating Hong Kong’s securities and futures markets. Under the Securities and Futures Ordinance (SFO), any corporation carrying out a ‘regulated activity’, such as Type 9 (asset management), must be licensed by the SFC.

Statement II is correct. The Hong Kong Monetary Authority (HKMA) is the central banking institution of Hong Kong. Its main functions include maintaining currency stability and ensuring the stability and integrity of the financial system, particularly the banking system. For banks that are ‘registered institutions’ conducting regulated activities, the HKMA acts as the front-line supervisor for their business conduct, applying the standards set by the SFC.

Statement III is incorrect. The Hong Kong Exchanges and Clearing Limited (HKEX) is a publicly listed company and operates the stock and futures markets in Hong Kong. It is a self-regulatory organization (SRO) that sets and enforces listing rules for issuers. It is not a government body. Furthermore, the SFC, not HKEX, is responsible for investigating and taking enforcement action against market misconduct such as insider dealing, often through proceedings in the Market Misconduct Tribunal (MMT) or criminal prosecution.

Statement IV is incorrect. This statement mischaracterizes the dual regulation framework. A bank conducting a regulated activity must register with the SFC as a ‘registered institution’. It is then subject to regulation by both the HKMA (as the front-line supervisor for conduct and prudential matters) and the SFC (which sets the conduct standards and retains back-stop and enforcement powers). Regulation is not ‘solely’ by the HKMA. Therefore, statements I and II are correct.

According to the Listing Rules and the SFC’s Code of Conduct for Corporate Finance Advisers, when a listing applicant appoints more than one sponsor, all sponsors share the same duties and are jointly and severally liable for the contents of the listing document and the due diligence performed. The designation of one sponsor as the primary channel for communication with the Stock Exchange of Hong Kong (SEHK) is a procedural requirement for administrative efficiency; it does not create a hierarchy of responsibility or liability. Similarly, a sponsor’s independence status is a critical factor, particularly in managing conflicts of interest, but it does not diminish the legal and regulatory obligations of a non-independent sponsor. All appointed sponsors, regardless of their specific roles, independence, or internal division of work, are held equally accountable by the regulators for the entirety of the sponsor’s work. Therefore, the correct statement is that all three sponsors share equal and joint liability for the due diligence and the accuracy of the listing application. The idea that the primary contact assumes principal liability is incorrect, as this role is purely for communication coordination. The notion that a non-independent sponsor has a lesser or different set of responsibilities is also false; all sponsors must fulfill the same comprehensive duties. Finally, while sponsors may divide tasks internally, they cannot legally limit their liability to specific areas of work; their liability to the public and regulators remains collective.

Under Listing Rule 8.04, a listing applicant and its business must be deemed ‘suitable for listing’ by the Stock Exchange of Hong Kong (SEHK). This is a qualitative assessment that goes beyond meeting the quantitative financial tests. The SEHK has provided guidance (e.g., HKEX Guidance Letter GL68-13) on factors that may raise suitability concerns. Statement I is a valid concern as a sharp, recent decline in financial performance, even after a strong track record, may indicate an unsustainable business model or deteriorating market conditions. Statement II highlights excessive reliance on a single major customer, which is a significant concentration risk and a well-established suitability concern. Statement III is also a major concern because the SEHK expects profits to be derived from the applicant’s core business operations; relying on non-recurring, unrealised fair value gains to meet the profit requirement suggests the underlying business may not be sustainable. Statement IV is incorrect; while a director’s compliance history is relevant, a single, minor historical breach that has been fully rectified and disclosed is not typically a decisive factor that would render an applicant unsuitable, especially when compared to systematic or intentional non-compliance. Therefore, statements I, II and III are correct.

The explanation clarifies the distinct regulatory responsibilities of a sponsor in an Initial Public Offering (IPO) compared to other roles an investment bank might undertake. The correct answer is that engaging with the Stock Exchange of Hong Kong (SEHK) on matters of listing eligibility is a core, non-delegable duty performed exclusively in the capacity of a sponsor. This role involves acting as the primary communication channel with regulators like the SEHK and the SFC, assessing the applicant’s suitability, and ensuring compliance with the Listing Rules. Other activities, while crucial to an IPO, fall under different functions. For instance, making recommendations on share allocation to investors is a primary responsibility of the bookrunner, who manages the demand and distribution of the shares. Coordinating the marketing efforts and roadshow logistics is a task typically handled by the global coordinator. Finally, managing the underwriting syndicate and its financial commitments is an underwriting function, distinct from the sponsor’s advisory and regulatory liaison role. While a single firm often performs all these roles, the duties associated with the sponsor title are specifically defined by regulations such as the Code of Conduct for Persons Licensed by or Registered with the SFC and the SEHK Listing Rules.

The correct answer is that at least 50% of their mandatory annual CPT hours must be dedicated to training relevant to their sponsor-related roles and responsibilities. The SFC requires that sponsors provide adequate initial and ongoing training to their staff. For individuals licensed for Type 6 (Advising on Corporate Finance) and engaged in sponsor work, this training must constitute at least half of their annual CPT requirement to ensure they remain current with the specific legal and regulatory obligations of their sponsor duties. The requirement is not to complete additional hours on top of the standard CPT; rather, it specifies how a portion of the existing hours must be allocated. There is no rule that all CPT must be administered directly by the SFC, as firms are responsible for arranging adequate training. Furthermore, ongoing CPT obligations are not waived based on past transaction experience; they are a continuous requirement for maintaining a licence.

Under the Securities and Futures Ordinance (SFO), an officer of a corporation can be held liable for market misconduct committed by the corporation if the misconduct is attributable to the officer’s recklessness. The Market Misconduct Tribunal (MMT) is a civil tribunal and has the authority to impose a range of non-criminal orders. Statement I is correct as the MMT can disqualify a person from being a director or taking part in the management of a corporation for up to five years. Statement II is also correct; the MMT can issue a ‘cold shoulder order’ which prohibits a person from trading in Hong Kong’s markets for up to five years. Statement IV is correct because the MMT can order the disgorgement of any profit gained or loss avoided as a result of the misconduct. Statement III is incorrect because the MMT does not have the jurisdiction to impose criminal sanctions such as imprisonment; such penalties are determined through separate criminal proceedings in the courts. Therefore, statements I, II and IV are correct.

Statement I is correct as the HKSI Institute explicitly states that the study manual and its subsequent updates are the only source of materials for setting examination questions. Statement II is incorrect because candidates are only tested on the content of the manual and its official updates; they are not required to independently research information not yet incorporated into the study materials. Statement III is correct, as the guidance places the responsibility on the candidate to visit the HKSI Institute website and download the latest version of the E-Study Manual to ensure they are preparing with the most current information. Statement IV is incorrect because Paper 16 is designed for representatives or relevant individuals engaged in sponsor work, while Paper 15 is the examination for Principals who manage sponsor firms. Therefore, statements I and III are correct.

A sponsor’s role is paramount in maintaining market quality and integrity. This duty extends beyond the client to the regulators, namely the Stock Exchange of Hong Kong (HKEX) and the Securities and Futures Commission (SFC). According to Paragraph 17 of the SFC’s Code of Conduct and Practice Note 21 of the Listing Rules, when a sponsor becomes aware of a material issue, its primary obligations are to investigate thoroughly and ensure full disclosure to the regulators.

Statement I is correct because the sponsor has an overarching duty to communicate all material information to the HKEX. The undisclosed patent dispute is a material fact that could affect the applicant’s suitability for listing. The sponsor must report this to the Exchange to fulfill its gatekeeping function.

Statement II is correct as it reflects the core principle of due diligence. A sponsor cannot simply accept the management’s assertions, especially when they are self-serving or downplay a significant risk. The sponsor must take reasonable steps to independently verify the facts and assess the materiality of the issue, which may involve engaging external experts.

Statement III is incorrect. While a settlement may resolve the underlying business issue, advising the client to do so ‘quietly’ to avoid regulatory scrutiny is a breach of the sponsor’s duty. The sponsor’s obligation is to ensure the regulators are fully informed of all material matters, not to help the applicant conceal them.

Statement IV is incorrect. While resignation is an option if the sponsor is ultimately not satisfied with the applicant’s integrity or the outcome of the due diligence, it is not the immediate required step. The primary duty is to investigate and report. Resigning without informing the HKEX of the material concerns would be a failure of the sponsor’s regulatory obligations. Therefore, statements I and II are correct.

This question assesses the understanding of various forms of market misconduct and disclosure obligations under the Securities and Futures Ordinance (SFO). Statement I describes a reckless misrepresentation. Under sections 277 and 298 of the SFO, disseminating information, including a forecast, that is false or misleading and is made recklessly, with the likelihood of inducing transactions, constitutes market misconduct. The CEO’s statement, made without a reasonable factual basis, falls into this category. Statement II illustrates stock market manipulation. Under sections 278 and 299 of the SFO, engaging in two or more transactions with the intention of creating a false or misleading appearance of active trading or affecting the stock price to influence others’ investment decisions is prohibited. The coordinated buying by friendly investors is a classic example of such manipulation. Statement III relates to the specific safe harbour for price stabilization. The Securities and Futures (Price Stabilizing) Rules provide a defence against market manipulation allegations, but only for actions taken within a prescribed period (typically 30 days after dealings commence). Any stabilizing action taken outside this period is not protected by the safe harbour and would likely be considered market manipulation. Statement IV describes a breach of the statutory disclosure requirements under Part XIVA of the SFO. The cancellation of a key grant is likely to be price-sensitive ‘inside information’. A listed corporation must disclose such information to the public as soon as reasonably practicable after it has come to its knowledge. Delaying the announcement for internal reasons is a violation of this obligation. Therefore, all of the above statements are correct.

This question assesses the candidate’s understanding of a sponsor’s core responsibilities regarding due diligence and disclosure in a listing application, as stipulated by the SFC’s Corporate Finance Adviser (CFA) Code of Conduct and the Listing Rules.

Statement I is incorrect. While the CFA Code requires a sponsor to obtain confirmation from the listing applicant regarding the accuracy of information, this does not replace the sponsor’s own duty. The sponsor must maintain an attitude of professional scepticism and conduct its own independent due diligence to satisfy itself of the truth and accuracy of the information presented. Sole reliance on the applicant’s confirmation is a failure of this duty.

Statement II is incorrect. Providing material information, such as a more optimistic internal profit forecast, to select parties like cornerstone investors that will not be available to the public creates information asymmetry. This is a serious regulatory concern. All material information provided to any investor group must be included in the public offer document to ensure a fair and orderly market.

Statement III is correct. This action demonstrates the sponsor fulfilling its obligation under Listing Rule 2.13(2), which prohibits the omission of material facts of an unfavourable nature. A pending lawsuit, regardless of the perceived strength of the claim, is a material risk factor that must be disclosed to enable potential investors to make an informed decision. The sponsor is correct to insist on its inclusion.

Statement IV is incorrect. Regulatory guidance explicitly warns against using previous prospectuses as templates. Each listing applicant’s business and circumstances are unique. The sponsor is responsible for ensuring the disclosure is tailored and specific to the applicant, not a generic copy of another company’s document. This practice risks overlooking material information specific to the new applicant. Therefore, statement III is correct.

Statement I is incorrect. The Securities and Futures (Keeping of Records) Rules require records, including those related to sponsor work, to be kept for a minimum period of seven years following the completion of the transaction or termination of the assignment, not five years. Statement II is incorrect. While records must be kept in Hong Kong to ensure they are readily accessible to regulators like the SFC, they are permitted to be stored in electronic form or in off-site storage facilities. The key requirement is accessibility, not the specific physical location at the primary office. Statement IV is incorrect. The proper procedure upon discovering material non-compliance is not immediate termination. The Transaction Team and the Principals should escalate the matter back to the relevant internal committee to report the developments and seek a decision on whether to continue with the mandate. Statement III is correct. It is considered good practice and essential for proper governance that minutes of the client acceptance committee document key details of the deliberation. This includes the date, the members present, the transaction discussed, and any particular concerns or follow-up actions identified, forming a clear audit trail of the decision-making process. Therefore, statement III is correct.

Statement I is incorrect. While commercial success is an objective, a sponsor’s primary duty is to ensure compliance with regulatory requirements and ethical standards. Advising a delay in disclosing negative news to manipulate the share price would be a serious breach of the SFC Code of Conduct and could damage the long-term reputation of both the issuer and the sponsor. Statement II is correct. Under Part XIVA of the Securities and Futures Ordinance (SFO), listed companies have a statutory obligation to disclose inside information (which includes material deviations from prospectus statements) as soon as reasonably practicable. The sponsor has a professional and ethical duty to advise the client to comply with these continuous disclosure obligations to ensure a fair and informed market. Statement III is incorrect. The prospectus serves as a foundational disclosure document that investors may refer to well beyond the initial listing period. A material deviation from statements made in the prospectus, such as a change in the use of proceeds, is a significant event that can impact investor decisions and confidence, regardless of whether the ‘quiet period’ has ended. Statement IV is correct. The commercial success and reputation of a sponsor are not solely determined by the successful completion of the IPO. They are also judged by the post-listing performance and corporate governance of the companies they bring to market. Providing sound and ethical advice on matters like continuous disclosure is integral to building a sponsor’s long-term credibility and commercial viability. Therefore, statements II and IV are correct.

This question assesses the understanding of the distinct roles and obligations of sponsors and financial advisers in an IPO process, particularly in the context of a competitive appointment. Statement II is correct because the Corporate Finance Adviser Code of Conduct explicitly requires a financial adviser to cooperate fully with the sponsor and not impede the sponsor’s access to the listing applicant. Statement IV is also correct; a key characteristic of a ‘beauty parade’ or competitive tender is that potential sponsors may not have a prior relationship with the company, meaning their initial knowledge may be more limited compared to a sponsor appointed through a long-standing advisory relationship. Statement I is incorrect because sponsors are subject to a much higher and more specific set of responsibilities, obligations, and potential liabilities under the SFC’s Code of Conduct for Sponsors and the Listing Rules than financial advisers, whose duties are primarily governed by the less stringent Corporate Finance Adviser Code of Conduct. Statement III is incorrect because when joint sponsors are appointed, they share the same responsibilities and liabilities. While one may act as a lead for coordination purposes, the authority of each sponsor to perform their duties remains absolute and is not subordinate to the other. Therefore, statements II and IV are correct.

The explanation teaches that a sponsor’s responsibility regarding the Sponsor’s Declaration (as per Appendix 19 of the Listing Rules) begins well before its formal submission. The correct answer is that prior to submitting the listing application, the sponsor must have already conducted sufficient due diligence to be confident in its future ability to sign the declaration. This declaration, which is submitted after the Listing Committee hearing but before the listing document is issued, contains critical confirmations. These include the applicant’s compliance with listing qualifications (like those in Chapter 8), the sufficiency and accuracy of the information in the listing document, and that the document provides enough detail for a reasonable person to form a justified view of the applicant’s financial health. The sponsor’s work must substantiate these future confirmations from the outset. One incorrect option suggests submitting the declaration with the initial application, which misrepresents the timeline; the declaration is a final confirmation submitted after the hearing. Another incorrect option wrongly implies that a primary listing on a recognized exchange, such as the SIX Swiss Exchange, lessens the sponsor’s due diligence burden for the Hong Kong listing. The sponsor’s duties to the SEHK are independent and cannot be delegated or substituted by the work of another regulator. A final incorrect statement incorrectly narrows the scope of the declaration to a procedural checklist, whereas it is a substantive confirmation of the applicant’s compliance and the quality of disclosure regarding its financial condition and profitability.

The correct answer is that a comfort letter’s purpose is to provide negative assurance on unaudited interim financial data and to verify that specific financial figures in the prospectus are accurately derived from the company’s accounting records. In the context of an IPO, sponsors and underwriters perform due diligence to protect themselves from liability for material misstatements in the listing document. The comfort letter, issued by the reporting accountant, is a key part of this process. It provides assurance on financial information that falls outside the scope of the formal audit report, such as financial data for the period after the last audited balance sheet date (the ‘stub period’). It does not provide a formal audit opinion, which offers positive assurance; instead, it offers a lower level of ‘negative assurance,’ stating that nothing has come to the accountant’s attention to suggest the information is materially misstated. It also confirms that numerical data in various sections of the prospectus correctly matches the company’s financial records. A comfort letter does not provide a formal audit opinion on the financial statements; that is the function of the Accountants’ Report. It also does not offer legal confirmation regarding compliance with securities laws like the US Rule 10b-5; that is the role of a disclosure letter from US legal counsel. Furthermore, accountants do not guarantee the company’s future financial performance or the accuracy of forward-looking statements; their work is focused on historical and interim financial information.

According to Section 194 of the Securities and Futures Ordinance (SFO), if a regulated person is found guilty of misconduct, the Securities and Futures Commission (SFC) has the authority to impose a range of disciplinary sanctions. One of these is a financial penalty. The correct answer is that the maximum penalty is calculated as the greater of HK$10 million or three times the amount of profit gained or loss avoided as a result of the misconduct. In the given scenario, the Responsible Officer gained a profit of HK$4 million. Three times this amount is HK$12 million. Since HK$12 million is greater than the statutory alternative of HK$10 million, the SFC can impose a maximum penalty of HK$12 million. A penalty limited to the profit gained would not serve as a sufficient deterrent. The statutory figure of HK$10 million acts as a base maximum, which can be exceeded if three times the illicit profit is a larger figure. The calculation is not based on multiplying the statutory HK$10 million limit.

Statement I is correct. According to paragraph 17.6(f) of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, if a sponsor encounters difficulties in obtaining information and no resolution can be found, the issue must be escalated to senior management. In extreme cases, if the sponsor cannot discharge its duties, it may need to resign. Statement II is incorrect. While checklists can be useful, the SFC and SEHK guidance emphasize that due diligence is not a ‘one size fits all’ exercise. Each listing applicant is unique, and sponsors must approach the investigation with a fresh and critical mindset. Relying on a checklist from a completely different industry is inappropriate and fails to address the specific risks and business model of the technology firm. Statement III is incorrect. While clear reporting lines for escalating critical findings are mandatory, they must be established while ‘bearing Chinese wall issues in mind’. Reporting cannot be ‘independent of’ these considerations; rather, it must be structured to respect and manage potential conflicts of interest between different departments of the sponsor firm. Statement IV is incorrect. Due diligence is an ongoing and iterative process. A single round of interviews is insufficient. The sponsor has a duty to verify and cross-check information, often by asking the same questions to different parties or seeking third-party corroboration. Therefore, statement I is correct.

Under the Hong Kong Listing Rules, the Profit Test requires the calculation of ‘profit attributable to shareholders’ based on specific criteria to ensure the quality and sustainability of earnings. This calculation must exclude items that are not derived from the applicant’s ordinary and usual course of business.

Statement I is correct. A one-off gain from selling a commercial property, when the applicant’s business is technology, is considered an extraordinary item. Such profits are not part of the principal activities and must be excluded.

Statement II is incorrect. Profits from a wholly-owned subsidiary (an entity where the applicant typically owns more than 50% and exercises control) are consolidated into the group’s accounts and are permitted to be included in the profit test calculation, provided they arise from the subsidiary’s ordinary course of business.

Statement III is correct. The share of profits from an associated company (where ownership is generally between 20% and 50%) is accounted for using the equity method. The Listing Rules explicitly require the exclusion of such profits because the listing applicant does not have sufficient control over the associated company.

Statement IV is correct. An unrealised gain from the revaluation of intangible assets like trademarks is a non-cash, ‘book transaction’. It does not represent profit generated from the company’s principal activities and must be excluded from the calculation. Therefore, statements I, III and IV are correct.

According to the SEHK Listing Rules, a person is generally not considered independent if they are a director, partner, or principal of a professional adviser which has provided services to the listed issuer or its connected persons within one year immediately prior to the proposed appointment. In this scenario, Mr. Lau is a senior partner at a law firm that provided significant legal advisory services to a major subsidiary of Apex Logistics six months ago. This recent professional relationship directly impairs his independence. The correct answer is that Mr. Lau’s role at the law firm that recently advised a subsidiary of Apex Logistics compromises his independence. The other options are incorrect. His holding of 0.2% of the company’s shares is well below the 1% threshold where independence might be questioned. While his financial expertise is a desirable attribute for an INED, it does not override the strict independence criteria set out in the Listing Rules. The fact that the services were provided to a subsidiary, rather than the listed issuer itself, does not negate the conflict, as the rules apply to services provided to the issuer, its holding company, or any of their respective subsidiaries.

Under the Securities and Futures Ordinance (SFO), a corporation is not considered to have engaged in insider dealing if it can successfully invoke the ‘Chinese Wall’ defence. This defence applies when a corporation has established effective internal arrangements to prevent the flow of inside information from individuals who possess it to those who make trading decisions. The key elements are that the decision to deal in the securities was made by a person other than the one who possessed the inside information, and that arrangements were in place to ensure the information was not communicated to the person making the trading decision. In this scenario, the firm’s robust and enforced Chinese Wall policy effectively isolated the corporate finance team, which had the inside information about the takeover, from the asset management division. The employee who executed the trade did so based on independent analysis and without any knowledge of the confidential takeover plan. Therefore, the firm has a strong defence against an allegation of insider dealing. The concept of strict liability, where the firm is automatically guilty simply because it possessed information while an employee traded, is incorrect as the SFO provides for specific defences. Liability is not confined only to trades made by senior management like directors or responsible officers; the rules apply more broadly, but so do the defences. Finally, there is no requirement to seek pre-approval from the SFC for such a defence to be valid; its validity rests on the effectiveness of the internal controls themselves.

The correct answer is that the sponsor must instruct the analyst not to include any information that will not appear in the final prospectus. According to the SFC’s Code of Conduct, a key principle in the IPO process is to ensure information symmetry and prevent selective disclosure. Research analysts associated with the sponsor are strictly prohibited from accessing or using non-public information that is not intended for inclusion in the listing document. This rule ensures that the research report is based on the same verified, publicly available information as all other potential investors will receive, maintaining a fair and orderly market. Allowing the analyst to include the information with a disclaimer is incorrect because a disclaimer does not remedy the fundamental breach of using non-prospectus information. Suggesting an immediate update to the prospectus to accommodate the analyst is also incorrect; while the prospectus must be accurate and complete, the decision to amend it is a significant one for the issuer and sponsor, and it is not done simply to facilitate a research report. The primary duty is to control the information flow to the analyst. Restricting the report’s distribution to institutional investors does not solve the issue, as the prohibition on using non-public information applies regardless of the audience to prevent creating an unfair informational advantage.

According to the sponsor’s due diligence obligations, particularly in the context of managing third-party experts for a listing application, the sponsor must maintain comprehensive oversight. Statement I is correct because the sponsor needs to review correspondence between the listing applicant and the expert to ensure the expert’s work is conducted independently and to verify information. Statement II is correct as the sponsor must be aware of any and all communications between the expert and the regulators (SFC or SEHK) to understand any potential regulatory concerns or queries related to the expert’s report. Statement III is also correct; the SEHK explicitly expects that the sponsor should have the right to take copies of these documents without charge to ensure that access is not impeded. Statement IV is incorrect because relying on a summary provided by the expert would be an improper delegation of the sponsor’s due diligence duties. The sponsor must have direct and unfettered access to the primary correspondence to form its own critical assessment, rather than relying on the expert’s interpretation. Therefore, statements I, II and III are correct.

This question assesses the understanding of the distinct yet overlapping roles of Hong Kong’s key financial regulators in the context of an Initial Public Offering (IPO), particularly for a regulated entity like a bank.

Statement I is correct. Under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), a prospectus for a public offer of shares must be registered with the Companies Registry. However, the Securities and Futures Commission (SFC) must first grant its authorization before the prospectus can be registered. This is a critical step in the IPO process.

Statement II is correct. The Hong Kong Exchanges and Clearing Limited (HKEX), through its Listing Division, is the frontline regulator responsible for vetting listing applications. It reviews the application and supporting documents to ensure the applicant meets the eligibility criteria and continuing obligations stipulated in the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the Listing Rules).

Statement III is incorrect. While the Hong Kong Monetary Authority (HKMA) is the prudential supervisor for authorized institutions (i.e., banks), it does not grant the final approval for listing. The listing applicant must consult with the HKMA, and the HKMA’s ‘no objection’ to the listing is a practical prerequisite. However, the final decision to approve the listing rests with the HKEX’s Listing Committee.

Statement IV is correct. Under the dual filing regime established by the Securities and Futures (Stock Market Listing) Rules, the SFC has the power to object to a listing application if it deems the listing to be not in the public interest or if the prospectus contains false or misleading information. This power serves as a crucial backstop to the HKEX’s frontline review. Therefore, statements I, II and IV are correct.

The sponsor’s declaration, as required by the Hong Kong Stock Exchange (SEHK) under Appendix 19 of the Listing Rules, is a critical confirmation of the due diligence performed. Statement I is correct as it accurately reflects the sponsor’s responsibility to ensure that any forward-looking statements, such as profit forecasts, are made after due and careful enquiry and are founded on bases and assumptions that are fair and reasonable. Statement III is also correct; the sponsor must be satisfied that the directors of the listing applicant possess the requisite experience, qualifications, and competence not only to run the business but also to understand and comply with the ongoing obligations of a listed company under the Listing Rules. Statement II is incorrect because the sponsor’s role is to confirm the ‘adequacy’ of the applicant’s systems and controls, not to provide an absolute guarantee against any future failures, which would be an impossible standard to meet. Statement IV is incorrect because the sponsor’s declaration regarding full disclosure cannot be based solely on information provided by the applicant. A core duty of the sponsor is to conduct its own independent due diligence to verify information and form its own professional judgment. Therefore, statements I and III are correct.