HKSI Paper 15 & 16 English Preview Set Two

The correct answer is ‘I & II only’.

Statement I is correct because the SFC mandates that individuals and firms providing information related to eligibility criteria must ensure its accuracy and completeness. This requirement is reinforced by Section 384 of the Securities and Futures Ordinance (SFO), which imposes criminal penalties for providing false information. This underscores the importance of truthful and accurate submissions to maintain the integrity of the regulatory process.

Statement II is also correct. Sponsor firms are obligated to ensure that their staff involved in sponsor work meet the necessary examination requirements. This obligation is a critical component of maintaining standards and competence within the industry. The sponsor must be prepared to demonstrate compliance with these requirements to the SFC upon request, ensuring accountability and adherence to regulatory standards.

Statement III is incorrect because while CPT is required, the stipulation that it must constitute at least 50% of the five CPT hours specifically for Type 6 license holders is accurate. The training should be relevant to the skills required for their roles in sponsor work.

Statement IV is incorrect because individuals who have ceased to be licensed or registered for more than three years are required to pass the examination again to ensure their knowledge and skills are up-to-date with current regulations and practices. This requirement helps maintain a consistent level of competence among professionals in the field.

The question addresses the responsibilities of a sponsor in a listing application, particularly concerning the accuracy and completeness of information provided. According to LR 2.13(2) (GLR 17.56(2)), the listing document must be accurate and complete in all material respects and not be misleading or deceptive. This aligns with statement I. Sponsors are expected to ensure that the listing application provides a true, accurate, complete, and not misleading disclosure to the public, including forward-looking information, as highlighted in the provided text, making statement II correct. The text also emphasizes the importance of including all information obtained from due diligence in the offer document, unless updates are needed closer to publication or if the information is commercially sensitive, thus statement III is also correct. Finally, the text explicitly mentions that cornerstone investors and research analysts should not receive information exceeding what will be disclosed to public investors, making statement IV correct. Therefore, all statements are correct.

The question addresses the measures taken to prevent information asymmetry during an IPO process, particularly concerning research analysts and pre-deal research reports. Statement I is correct because research guidelines typically restrict analysts’ access to information beyond what’s in the offer document to maintain fairness and prevent selective disclosure. This aligns with the principles of the Securities and Futures Ordinance (SFO) regarding insider dealing and market misconduct. Statement II is also correct; legal advisors often review draft research reports to ensure factual accuracy and compliance with disclosure requirements, which is a standard practice to avoid misleading information being disseminated, reinforcing the due diligence obligations of sponsors under the Listing Rules. Statement III is correct as pre-deal research reports distributed to institutional investors should have disclaimers, legends, and numbered copies with recipient records. This is to control the dissemination of potentially market-sensitive information and mitigate leaks, reflecting the SFC’s guidelines on handling confidential information. Statement IV is correct because a letter accompanying pre-deal research reports highlighting restrictions on disclosure is a common practice to ensure recipients are aware of their obligations regarding the information’s confidentiality and use. This is in line with the sponsor’s duty to manage confidential information appropriately, as emphasized in the Listing Rules and related guidance. Therefore, all statements are correct.

Statements I and II are correct. The SFC’s enforcement actions against sponsors highlight the critical importance of thorough due diligence and adherence to regulatory standards. Sponsors are expected to conduct independent verification of information provided by listing applicants and to ensure the accuracy and completeness of prospectuses. Failure to do so can lead to disciplinary actions, including fines and suspension of licenses, as outlined in the Securities and Futures Ordinance (SFO). The integrity of the IPO process relies heavily on sponsors fulfilling their gatekeeper role effectively. Statement III is incorrect because while compliance advisers play a crucial role in ensuring ongoing compliance for listed issuers, they do not replace the sponsor’s responsibilities during the IPO process. The sponsor’s role is specifically focused on the initial listing application and due diligence. Statement IV is incorrect because the SFC’s enforcement actions are not solely focused on intentional misconduct. Negligence and lack of due diligence, even without malicious intent, can also result in disciplinary actions if they lead to breaches of regulatory requirements. The SFC emphasizes the importance of sponsors maintaining high standards of competence and diligence to protect the interests of investors and maintain market integrity, as detailed in various circulars and guidelines issued by the SFC.

The key to assessing the independence of a sponsor when a connected person relationship exists lies in scrutinizing the commercial arrangements. According to paragraph 17.6 of the Corporate Finance Advisor Code of Conduct, the sponsor must demonstrate that the connected person relationship does not compromise their ability to act independently and in the best interests of the new applicant and the investing public.

Statement I is correct because the sponsor must meticulously document and justify the commercial arrangements to demonstrate independence. Statement II is correct because the sponsor’s internal control procedures must be robust enough to ensure that the connected person relationship does not unduly influence the sponsor’s advice or actions. Statement III is incorrect because while disclosure is important, it is not sufficient on its own to ensure independence. The sponsor must take active steps to manage the conflict of interest. Statement IV is correct because the sponsor must be able to demonstrate that the commercial arrangements are on arm’s length terms and do not provide any undue benefit to the connected person. Therefore, the correct combination is I, II & IV only.

A sponsor’s primary duty is to rigorously assess a listing applicant’s suitability, ensuring compliance with the Listing Rules. This involves thorough due diligence on critical aspects such as the competence of directors and the adequacy of compliance systems. The sponsor must form an opinion, based on reasonable due diligence, that the listing application adheres to legal and regulatory requirements regarding quality and completeness. This assessment is a prerequisite for the sponsor to provide the necessary declarations to regulators, as mandated by the Listing Rules. The sponsor also plays a crucial role in managing information obtained during its engagement, preventing information asymmetries in the market, and maintaining open communication with regulators. The sponsor’s responsibilities extend to understanding the nuances of working with multiple sponsors, identifying other parties involved in an IPO, and appreciating the corporate, environmental, and social governance standards expected by the HKEX. Furthermore, the sponsor must be adept at handling special rules applicable to PRC issuers and mineral companies. The sponsor’s role is not merely procedural; it is integral to maintaining the integrity and transparency of the Hong Kong securities market, ensuring that only suitable companies are listed and that investors are adequately protected. This includes a commitment to continuous assessment and adaptation to evolving regulatory landscapes and market dynamics.

The claw-back mechanism, as outlined in Practice Note 18 of the Listing Rules, is a critical component of IPOs in Hong Kong that involve both a public offer and a placing tranche. This mechanism is designed to ensure that excess demand from the public offer is met by re-allocating shares from the placing tranche. This re-allocation is not discretionary but follows a pre-determined formula, ensuring fairness and transparency in the allocation process. The primary goal is to satisfy the demand from retail investors in Hong Kong, reflecting the regulatory emphasis on protecting their interests and ensuring broad participation in IPOs. This mechanism is triggered when the public offer is oversubscribed, indicating strong demand from retail investors. The claw-back mechanism ensures that a portion of the shares initially intended for institutional investors in the placing tranche are redirected to fulfill the excess demand in the public offer. This helps to balance the interests of both retail and institutional investors and promotes a more equitable distribution of shares. The specific formula for the claw-back is detailed in the IPO prospectus and is based on the level of oversubscription in the public offer. The claw-back mechanism is a standard feature of Hong Kong IPOs with both public offer and placing tranches, providing a structured approach to address oversubscription in the public offer and ensuring that retail investors have a fair opportunity to participate in the IPO.

Statements I and II are correct.

Statement I is correct because a primary rationale for a company to pursue listing on the Hong Kong Stock Exchange (HKEX) is to gain access to a broader capital base. This allows the company to raise funds more efficiently than through private channels, facilitating expansion, debt repayment, or other strategic initiatives. Listing provides increased visibility and credibility, attracting a wider range of investors, including institutional investors, who may be restricted from investing in private companies.

Statement II is correct because, upon listing, shareholders of the company must accept a degree of loss of control. This is because certain transactions may require the prior approval of the company’s independent shareholders, post-listing. This requirement is in place to protect the interests of minority shareholders and ensure that major decisions are made in a transparent and equitable manner. The need for independent shareholder approval introduces a check and balance on the power of controlling shareholders.

Statement III is incorrect because the legal status of properties located in Mainland China is a significant consideration for PRC listing applicants, particularly regarding the requirement for Title Certificates (long-term land use right certificates and/or building ownership certificates). The HKEX has specific guidelines, such as the 1998 Announcement and subsequent amendments in GL19-10, outlining the requirements for Title Certificates depending on the type of company (infrastructure, property, or other). These guidelines aim to ensure that the listing applicant has clear and verifiable ownership or usage rights over its properties, mitigating potential risks related to land use rights.

Statement IV is incorrect because, while transparency in compliance and valuation is crucial, the prohibition of asymmetric dissemination of information is particularly important when introducing potential cornerstone investors in connection with an IPO. Cornerstone investors are typically large, reputable investors who commit to purchasing a significant portion of the IPO shares. The introduction of cornerstone investors can boost investor confidence and increase the likelihood of a successful IPO. However, it is essential that all investors have access to the same information to ensure fairness and prevent insider trading.

The sponsor’s due diligence exercise is crucial for assessing the suitability of a listing applicant and its directors. According to the Securities and Futures (Stock Market Listing) Rules, particularly section 3, the listing application must contain information that enables investors to make an informed assessment of the applicant’s activities, assets, liabilities, financial position, profits, losses, and the rights attached to the securities. The sponsor must form a reasonable opinion on the ability of the listing applicant’s directors, both collectively and individually, to understand and comply with the legal and regulatory requirements applicable to directors of a listed company in Hong Kong, including the Listing Rules and the disclosure provisions of Part XIVA of the Securities and Futures Ordinance (SFO). This assessment involves considering the directors’ experience, qualifications, and competence to manage the business compliantly. Material deficiencies identified but not remedied must be disclosed to the SEHK with explanations and proposed remedies. The sponsor must declare compliance with these requirements to the SEHK. A clear and realistic IPO timetable, agreed upon by the sponsor, issuer, and other parties, is essential, allowing sufficient time for due diligence and the inclusion of all material information in the listing document. Progress must be reported to the SEHK fortnightly, and any timetable changes require SEHK agreement.

The Hong Kong Exchanges and Clearing Limited (HKEX) mandates specific procedures and timelines for the disclosure of information related to listing applications to ensure transparency and investor protection. The Application Proof, a preliminary document, is displayed on the HKEX website to provide early visibility to potential investors. Following a successful hearing and before institutional book-building commences, a near-final prospectus, known as the Post Hearing Information Pack (PHIP), must be published on HKEXnews. This requirement ensures that investors have access to comprehensive and updated information before making investment decisions. Sponsors play a crucial role in this process, ensuring the accuracy and completeness of the information disclosed. They are expected to work closely with the company management to produce a relevant, adequate, and comprehensible Management Discussion and Analysis of Financial Information and Condition (MD&A). Sponsors must also exercise professional skepticism when relying on experts and ensure that the scope of experts’ work adequately covers the reliability of the information provided. These measures are designed to enhance the integrity of the listing process and protect the interests of investors. The sponsor’s fees must be transparent and related solely to the sponsor role, separate from other services such as underwriting.

Sponsors play a crucial role in the IPO process, extending beyond formal underwriting appointments to encompass various activities that could influence disclosure accuracy and investor perception. Their involvement in syndication, roadshow arrangements, allocation, and stabilization is vital because these activities directly impact the information disseminated to the public and the market’s understanding of the offering. The Securities and Futures Ordinance (SFO) is particularly relevant, addressing key areas such as advising on corporate finance, preventing the dissemination of false or misleading information, and guarding against market misconduct, including insider dealing and stock market manipulation. The Sponsor Guidelines further define competence requirements for sponsor firms and their personnel, ensuring they possess the necessary expertise to fulfill their responsibilities. The CFA Code of Ethics also provides guidance on ethical conduct, competence, managing conflicts of interest, maintaining Chinese walls, and communicating with regulators. The SEHK and its Listing Committee oversee the listing process, and the SFC has broad powers to supervise and investigate potential offenses. Sponsors must adhere to these regulations and guidelines to ensure the integrity of the IPO process and protect investors. Even if not formally underwriting, their actions in these areas can significantly affect the transparency and fairness of the offering, making their involvement subject to regulatory scrutiny and potential liability under the SFO, CWUMPO, and general law, including the PBO and conspiracy to defraud.

Section 185 of the Securities and Futures Ordinance (SFO) empowers the SFC to seek court orders compelling individuals to comply with requests made by authorized persons or investigators. This provision is crucial for ensuring cooperation during investigations into potential breaches of securities laws. The court order reinforces the SFC’s investigative powers and provides a legal mechanism to address non-compliance. Failing to comply with such a court order can result in further legal consequences for the individual. The SFO also outlines offenses related to obstructing investigations, such as destroying or falsifying documents. These provisions are designed to maintain the integrity of the regulatory process and ensure that individuals and corporations are held accountable for their actions in the securities market. The SFC’s ability to obtain court orders and pursue offenses related to non-compliance is essential for effective enforcement of securities regulations and protecting the interests of investors in Hong Kong. The powers granted to the SFC under the SFO are balanced by safeguards to ensure fairness and proportionality in the exercise of these powers. The SFC must demonstrate reasonable grounds for its requests and act within the bounds of the law when conducting investigations.

The scenario highlights a critical failure in the sponsor’s due diligence and disclosure obligations during a listing application, directly contravening the principles outlined in the Listing Rules and the Securities and Futures Ordinance (SFO). The sponsor’s awareness of the trust arrangements, which would classify a major supplier as a connected person, and their subsequent failure to disclose this information to the SEHK, represents a significant breach of their duty to ensure the accuracy and completeness of the listing document. This directly impacts the SEHK’s ability to make informed decisions regarding the listing application.

Maintaining proper due diligence records is crucial, as it enables sponsors to demonstrate the work undertaken and the basis for their declarations. The failure to keep adequate records makes it difficult to justify the sponsor’s actions and can lead to regulatory scrutiny. Furthermore, the allocation of inadequate staff, both in terms of number and experience, to the transaction team, as illustrated by the case notes, is a common problem that undermines the quality of sponsor work. The Principal’s excessive workload and the limited number of licensed representatives engaged in multiple IPOs simultaneously indicate a lack of resources and supervision, increasing the risk of errors and omissions.

The sponsor’s declaration to the SEHK regarding the adequacy of due diligence, when not supported by the actual work undertaken, constitutes a breach of the Listing Rules and raises serious questions about the sponsor’s integrity and fitness and properness to remain licensed. This can lead to regulatory sanctions and potential criminal liability under s. 384, SFO. The dual-filing regime further reinforces the importance of accurate and complete submissions, as deficiencies identified by the SFC can result in delays or suspension of the listing process. The sponsor’s failure to fulfill its regulatory obligations ultimately reflects failures in the conduct of the sponsor and its Transaction Team, potentially leading to questioning of the sponsor’s competence and fitness and properness to continue engaging in sponsor work.

Sponsors in an IPO have several responsibilities related to disclosure and coordination, as outlined in regulatory guidelines. Statement I is correct because sponsors must stay informed about the involvement of other firms in the IPO syndication process. This knowledge is crucial for ensuring accurate and complete disclosure in the offer document, including the cover, list of parties, and underwriting section. Statement II is also correct. Sponsors are responsible for the ‘underwriting’ and ‘selling restrictions’ sections of the listing document, which are directly affected by roadshow arrangements and the jurisdictions where the IPO is marketed. This includes understanding and disclosing any marketing activities in the United States under Rule 144A. Statement III is correct. The allocation of stock to investors is a key area for discussion among sponsors because it directly impacts disclosures in announcements and documents filed with the SEHK and published in the media. Statement IV is correct. The stabilization of the share price using an over-allotment option (Greenshoe option) requires discussion among sponsors due to its impact on disclosure in the listing document and subsequent announcements and filings with the SEHK. All these aspects ensure transparency and compliance with regulatory requirements, as emphasized by the Securities and Futures Ordinance (SFO) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO).

A sponsor’s due diligence is paramount in an IPO. Thorough verification of the applicant’s financial health, business operations, and regulatory compliance is essential. This involves scrutinizing financial statements, assessing the viability of the business model, and confirming adherence to relevant laws and regulations. Independence and objectivity are crucial to ensure unbiased assessment. The sponsor must avoid conflicts of interest and maintain an arm’s-length relationship with the applicant. This includes disclosing any potential conflicts and implementing measures to mitigate their impact. Adequate resources and expertise are necessary to conduct a comprehensive IPO. The sponsor should have a dedicated team with the requisite skills and experience to handle the complexities of the IPO process. This includes legal, financial, and regulatory expertise. Internal controls and compliance procedures are vital to ensure adherence to regulatory requirements and ethical standards. The sponsor should have robust internal controls to prevent misconduct and ensure compliance with applicable laws and regulations. This includes establishing clear lines of responsibility, implementing monitoring mechanisms, and providing training to employees. According to the Securities and Futures Ordinance (SFO) and related guidelines, sponsors are held to a high standard of conduct and are responsible for the accuracy and completeness of the information disclosed in the prospectus. Failure to meet these obligations can result in regulatory sanctions and reputational damage.

Professional skepticism, as mandated by regulatory bodies like the Hong Kong Securities and Futures Commission (SFC) in the context of sponsor work for IPOs, necessitates a questioning mind and a critical assessment of evidence. This is especially crucial when dealing with management’s representations, related party transactions, and complex financial instruments. Verification, a core component of due diligence, involves corroborating information obtained from the listing applicant with independent sources. This includes reviewing contracts, bank statements, and correspondence with regulatory bodies. The use of experts, such as valuers or industry specialists, is often necessary to assess specific aspects of the business, but sponsors must exercise caution in relying solely on their opinions. They should independently assess the expert’s qualifications, methodology, and assumptions. The Management Discussion and Analysis (MD&A) section of the listing document requires careful scrutiny to ensure it accurately reflects the company’s financial condition and prospects. Sponsors must challenge any overly optimistic or unsubstantiated claims. The sponsor’s role is to protect investors by ensuring the accuracy and completeness of the information disclosed in the listing document. This requires a proactive and diligent approach to due diligence, with a focus on identifying and addressing potential risks and red flags. The sponsor should maintain detailed records of all due diligence procedures performed, including the rationale for any judgments made.

The Hong Kong Exchanges and Clearing Limited (HKEX) mandates that the Application Proof be simultaneously displayed on its website to enhance transparency and accessibility of information for potential investors. This requirement ensures that the public has access to key details about a listing applicant from an early stage. Following a successful hearing and before institutional book-building, a near-final prospectus, known as the Post Hearing Information Pack (PHIP), must also be published on HKEXnews. This PHIP provides a comprehensive overview of the listing applicant’s business, financial condition, and future prospects. Sponsors play a crucial role in ensuring the accuracy and completeness of the information disclosed in both the Application Proof and the PHIP. They are expected to exercise professional skepticism when relying on experts and critically assess expert reports against their overall knowledge of the company and its industry sector. Sponsors must also work closely with company management to produce a relevant, adequate, and comprehensible Management Discussion and Analysis of Financial Information and Condition (MD&A). Furthermore, sponsors are required to notify the SEHK of any non-compliance with the Listing Rules or material developments requiring disclosure. The sponsor’s role is governed by regulations and guidelines aimed at protecting investors and maintaining market integrity.

The disclosure of material contracts is crucial for investors to understand the obligations and potential risks associated with the listed company. These contracts can significantly impact the company’s financial health and future prospects. Listing Rules mandate comprehensive disclosure to ensure transparency and informed investment decisions. The MD&A (Management Discussion and Analysis) section provides further insights into the company’s performance and financial condition, often referencing and elaborating on the implications of disclosed contracts. Contracts involving directors, controlling shareholders, or other related parties require particularly close scrutiny due to potential conflicts of interest. The disclosure should include the nature of the relationship and the terms of the transaction to allow investors to assess the fairness and reasonableness of the arrangement. The Listing Rules aim to prevent insider dealing and ensure that all shareholders are treated fairly. The prospectus must contain all information necessary to enable investors to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and of the profits and losses attributable to such activities and assets of the issuer and the rights attaching to the securities. The disclosure of material contracts is a key component of this requirement, providing investors with a clear understanding of the company’s contractual obligations and potential risks.

Statements I and II are correct. The CFA Code mandates that a corporate finance advisor, when acting as a sponsor, must maintain an effective compliance function. This function should be independent of other business functions and report directly to senior management, or be assumed by senior management if necessary. This ensures unbiased oversight and adherence to regulatory standards. The compliance function must possess the competence, resources, and experience to monitor compliance with internal policies, procedures, and applicable laws and regulations, as outlined in the CFA Code. This is crucial for maintaining integrity and preventing conflicts of interest. Statement III is incorrect because while the CFA Code emphasizes the need for adequate resources, competence, and staff suitability, it does not explicitly require the compliance officer to have a minimum of ten years of experience. The requirement is based on competence and experience, which may be acquired in less than ten years. Statement IV is incorrect because while the CFA Code requires the implementation of a watch list and restricted list system for monitoring personal account dealings and proprietary trading, it does not mandate that these lists be publicly accessible. The purpose is internal monitoring and prevention of insider trading, not public disclosure. According to the Corporate Finance Adviser Code of Conduct, breaches of the CFA Code will reflect adversely on the fitness and properness of a sponsor.

Paragraph 17.6 of the Code of Conduct outlines the general due diligence framework expected of a sponsor in an IPO. It emphasizes the need for sponsors to establish the completeness and accuracy of information in the listing document, enabling reasonable investors to make informed decisions. This involves thorough investigation and verification of the listing applicant’s affairs. Practice Note 21 of the Listing Rules further elaborates on the sponsor’s responsibilities, requiring a professionally skeptical approach to information provided by the applicant and its directors. Sponsors must ensure that the listing document contains sufficient particulars, considering the applicant’s circumstances, as per s. 3(c) of the Securities and Futures (Stock Market Listing Rules), LR Appendix 19, paragraph 17.5 of the Code of Conduct, and paragraph 3 of the Third Schedule, CWUMPO. The sponsor’s role is to provide assurance to the SEHK and the market, necessitating a deeper consideration of the company’s affairs and its stakeholders. The sponsor must comply with the higher standard where there is an overlap in the requirements of Paragraph 17.6 of the Code of Conduct and Practice Note 21, Listing Rules. The sponsor’s due diligence process is crucial for mitigating potential legal and regulatory liabilities. The sponsor must adopt an attitude of professional skepticism when considering the accuracy and completeness of statements and representations made, or other information given, to them by a new applicant or its directors.

Statements I and II are correct. The sponsor’s role, as outlined in the Listing Rules, is to thoroughly understand the listing applicant’s business, encompassing its background, controlling shareholders, shareholding structure, and financial circumstances. This understanding is crucial for advising the applicant effectively. The sponsor must also ensure the listing applicant comprehends the relevant regulatory requirements and their implications throughout the listing process. This includes advising on Chapter 8 of the Listing Rules, which sets out the basic conditions for listing eligibility. Statement III is incorrect because while sponsors must conduct reasonable due diligence, they should not depend on the SEHK’s comments to complete it. Sufficient due diligence steps need to be undertaken well in advance of making a listing application. Statement IV is incorrect because while sponsors need to be satisfied that the placing agent’s work allows an adequate spread of shareholders to be formed, the Code of Conduct requires a placing agent to undertake “know your client” (“KYC”) procedures to establish for each placee the origin of instructions and the true identity of the ultimate beneficiaries and, if different, the identity of the person who will bear the economic risks or rewards of the transaction.

The Listing Rules mandate sponsors to have a meaningful and detailed involvement in the preparation of the listing applicant’s listing application. This involvement extends to ensuring the accuracy and completeness of the listing document-cum-prospectus. The sponsor’s role is crucial in verifying the information provided by the listing applicant and conducting thorough due diligence to identify any potential risks or misstatements. The sponsor must act with professional skepticism, independently verifying information and not solely relying on the applicant’s representations. The MD&A section requires careful consideration, ensuring it provides a balanced and informative overview of the applicant’s financial condition and prospects. The sponsor must ensure that the MD&A complies with all relevant regulatory requirements and provides investors with a clear understanding of the applicant’s business. The sponsor’s responsibilities also include ensuring that the listing document-cum-prospectus complies with all applicable laws and regulations, including the Securities and Futures Ordinance and the Listing Rules. Failure to fulfill these responsibilities can result in disciplinary action by the SEHK and the SFC. The sponsor’s involvement is not merely procedural but requires active engagement and critical assessment of the information presented by the listing applicant.

Chapter 19A of the Listing Rules specifically addresses additional requirements for issuers incorporated in the PRC, acknowledging the unique legal and regulatory environment they operate within. This chapter covers aspects such as corporate governance, accounting standards, and disclosure requirements that may differ from those applicable to companies incorporated in Hong Kong or other jurisdictions. Sponsors play a crucial role in guiding PRC-incorporated issuers through these requirements, ensuring compliance with Hong Kong’s listing standards. HKEX Guidance Letter GL19-10 provides further clarification on specific issues, such as land use rights and building ownership certificates, which are particularly relevant for PRC companies due to the distinct property ownership system in mainland China. Sponsors are expected to conduct thorough due diligence to verify the authenticity and validity of these certificates, as they are essential for establishing the issuer’s legal rights to its properties. The sponsor’s due diligence responsibilities extend to ensuring that the issuer’s directors and key management personnel fully understand their obligations under Hong Kong law and are capable of meeting them. This includes providing training and guidance on corporate governance practices, disclosure requirements, and other relevant aspects of being a listed company in Hong Kong. The sponsor must also assess the issuer’s internal controls and risk management systems to ensure they are adequate for a listed company environment. Failing to adhere to these requirements can result in regulatory action and reputational damage for both the issuer and the sponsor.

Statements I and II are correct. The SFC’s powers extend to supervising and investigating potential non-compliance with regulations, including those related to sponsor work. This is crucial for maintaining market integrity and protecting investors, as outlined in the Securities and Futures Ordinance (SFO). The SEHK also plays a vital regulatory role, particularly in enforcing the Listing Rules and ensuring listed companies adhere to disclosure requirements and corporate governance standards. This dual oversight by the SFC and SEHK is designed to provide a comprehensive regulatory framework for the Hong Kong securities market. Statement III is incorrect because while the SFC does have disciplinary powers, they are not limited to only issuing warnings. The SFC can impose a range of sanctions, including fines, suspensions, and revocation of licenses, depending on the severity of the non-compliance. Statement IV is incorrect because the Listing Rules are indeed crucial for sponsor work. They set out the requirements for listing applicants and ongoing obligations for listed companies, which sponsors must ensure are met. The Listing Rules are a key reference point for sponsors in conducting due diligence and advising on IPOs.

Statements I and II are correct. A sponsor’s due diligence process, as outlined in the Listing Rules, must include an assessment of the capabilities of the directors and the adequacy of the compliance systems of the listing applicant. This is crucial to ensure the applicant’s suitability for listing. The sponsor must form an opinion based on reasonable due diligence that the information in the listing application complies with legal and regulatory requirements. This includes assessing the quality and completeness of the information. Statement III is incorrect because while sponsors need to avoid information asymmetries, they are not required to publicly disclose all information obtained during the due diligence process. Instead, they must communicate relevant information to the regulators. Statement IV is incorrect because the sponsor’s primary duty is to the regulators and the market, not to the listing applicant. While they work closely with the applicant, their ultimate responsibility is to ensure compliance with the Listing Rules and protect the interests of investors. The sponsor’s role is governed by the Securities and Futures Ordinance (SFO) and the Listing Rules of the Hong Kong Stock Exchange.

According to paragraph 17.9 of the Sponsor Guidelines issued by the Securities and Futures Commission (SFC) in Hong Kong, when a member of the transaction team identifies suspicious circumstances related to a listing applicant, the immediate and correct course of action is to escalate the issue to the Principal in charge. This ensures that senior management is promptly informed and can take appropriate action, including further investigation and potential reporting to regulatory authorities. The Principal has the responsibility to assess the situation, determine the necessary steps, and ensure compliance with relevant regulations and internal policies. Delaying the reporting or attempting to resolve the issue independently without involving the Principal could lead to serious regulatory breaches and compromise the integrity of the IPO process. The Sponsor Guidelines emphasize the importance of a robust internal control system and clear lines of reporting to address potential issues effectively. The Principal’s involvement ensures that the matter receives the appropriate level of attention and expertise, and that decisions are made in accordance with the firm’s policies and regulatory requirements. Failing to report suspicious circumstances promptly could result in disciplinary action by the SFC and damage the firm’s reputation. Therefore, option (a) is the most appropriate course of action. Statements I and II are correct, as immediate reporting to the Principal and documenting the concerns are crucial steps. Statement III is incorrect because bypassing the Principal is not advisable. Statement IV is incorrect because external reporting is typically the Principal’s responsibility after internal assessment.

The correct answer is I & II only.

Statement I is correct because the Principal’s role is to guide the Transaction Team, especially when difficult issues arise. According to the guidelines, the Transaction Team must immediately bring suspicious circumstances, difficult or sensitive issues, conflicting information, or material non-compliance to the attention of the Principal in charge. The listing application should only proceed if the Principal in charge is satisfied with the resolution of these issues.

Statement II is correct because establishing dedicated, project-based email lists is a recommended practice to facilitate information flow among the Transaction Team members, including senior executives. This ensures that all relevant individuals are kept informed of developments and can monitor various aspects of the sponsor’s work.

Statement III is incorrect because while Chinese walls are essential, they primarily concern the separation between investment banking activities and research/sales/trading activities. Physical separation is recommended, but the primary concern is the flow of information between these departments, not necessarily within the Transaction Team itself.

Statement IV is incorrect because the guidelines emphasize that experience should not lead to a standardization of due diligence and disclosure. Each listing applicant is unique, and the Transaction Team must tailor its approach accordingly. Therefore, standardization is discouraged.

The Main Board Listing Rules require controlling shareholders to provide undertakings not to dispose of or charge their shares for a specified period after the company’s admission to listing. This is to ensure stability in the company’s shareholding structure and to prevent controlling shareholders from quickly cashing out after the IPO, which could negatively impact investor confidence. Statement I is correct because the SEHK mandates these undertakings to maintain market integrity. Statement II is also correct, as these restrictions generally apply for a defined period post-listing to ensure continuity and stability. Statement III is incorrect because while the GEM listing rules focus on other aspects such as trading record and management continuity, the specific undertaking requirements for controlling shareholders regarding share disposal are more emphasized in the Main Board Listing Rules. Statement IV is also correct as the specific duration of the restriction period is determined by the Exchange, ensuring a standardized approach across listings. Therefore, the correct combination is I, II & IV only.

The Securities and Futures Commission (SFC) is the principal regulatory body overseeing the securities and futures markets in Hong Kong. Its primary objective is to maintain and promote the fairness, efficiency, competitiveness, transparency, and orderliness of these markets. Statement I is correct because the SFC is indeed responsible for administering the Securities and Futures Ordinance (SFO), which is the cornerstone legislation governing the industry. Statement II is also correct as the SFC authorizes intermediaries, including corporations and individuals, to conduct regulated activities. This licensing process ensures that only fit and proper persons are allowed to operate in the market. Statement III is incorrect because while the HKMA regulates financial institutions, it does not directly oversee the licensing of securities and futures intermediaries; this falls under the SFC’s purview. Statement IV is correct because the SFC has the power to investigate suspected misconduct and take disciplinary action against licensed intermediaries and other market participants who violate the SFO or other relevant regulations. This includes imposing fines, suspending licenses, or even revoking licenses in severe cases. Therefore, the correct combination is I, II & IV only.

The sponsor’s role is pivotal in guiding a listing applicant through the intricate process of preparing for listing on the Hong Kong Stock Exchange. This involves a comprehensive understanding of the applicant’s business, financial standing, and adherence to the Listing Rules. The sponsor must conduct thorough due diligence to ensure the applicant meets the eligibility criteria outlined in Chapter 8 of the Listing Rules, advising on potential waivers if necessary. Furthermore, the sponsor is responsible for ensuring the applicant’s directors understand their obligations under Chapter 3 of the Listing Rules, including their ability to manage the business and comply with regulatory requirements. In the context of GEM listings, the sponsor must also address specific concerns related to the method of listing, the profile of target investors, and any preferential treatment given to placees. The sponsor must ensure compliance with paragraph 5.4 of the Code of Conduct, which requires placing agents to undertake KYC procedures to establish the origin of instructions and the identity of the ultimate beneficiaries. If material non-compliance with applicable regulations arises and the listing applicant is unwilling to disclose it to the SEHK, the sponsor should consider ceasing to act, taking into account their obligations under Appendix 17 and their ability to provide the declaration in Appendix 19 of the Listing Rules. The sponsor is also obligated under the CFA Code to cooperate truthfully with any inquiries from the SEHK or SFC regarding potential breaches of regulations.