HKSI Paper 15 & 16 (Sponsors Principals & Representatives) English Free Trial Set Two

The sponsor regulatory regime in Hong Kong plays a crucial role in maintaining investor confidence and market integrity. Sponsors act as gatekeepers in the IPO process, ensuring that listed companies meet all regulatory requirements and disclose accurate information to investors. By enforcing stringent standards for sponsors’ due diligence and ongoing obligations, the regime aims to safeguard investors against fraud, misrepresentation, and other market abuses. Therefore, option b is correct.

Option a is incorrect because while the sponsor regime does aim to ensure fair competition, its primary objective is investor protection rather than competition among sponsors.

Option c is incorrect because the sponsor regime enhances the role of sponsors in the IPO process by holding them accountable for their due diligence and advisory responsibilities.

Option d is incorrect because the sponsor regime does not limit the number of companies eligible for IPOs; instead, it focuses on ensuring that companies seeking listing meet the necessary regulatory standards and disclosure requirements.

In the IPO process in Hong Kong, sponsors play a critical role in ensuring the integrity and quality of the offering. One of the key responsibilities of a sponsor is to conduct thorough due diligence on the issuing company and its offering documents. This includes reviewing the company’s financial statements, business operations, management team, and any potential risks associated with the offering. By performing this due diligence, sponsors help to ensure that investors receive accurate and reliable information before making investment decisions. Therefore, option b is correct.

Option a is incorrect because sponsors do not typically provide financial support to the issuing company; instead, they assess the company’s financial viability and compliance with regulatory requirements.

Option c is incorrect because while sponsors may assist in marketing the IPO, their primary role is to conduct due diligence rather than promotional activities.

Option d is incorrect because sponsors do not set the IPO price; instead, they advise the issuing company on pricing strategies based on market conditions and valuation considerations.

According to the sponsor regulatory regime in Hong Kong, sponsors are obligated to conduct thorough due diligence on the issuing company and its offering documents. In cases where sponsors identify discrepancies or inaccuracies in the financial statements or other disclosures, they should promptly notify the company’s management and request clarification or correction. This ensures transparency and accuracy in the IPO process, ultimately safeguarding investor interests. Therefore, option c is the correct course of action for Mr. Wong in this scenario.

Option a is incorrect because proceeding with the IPO without addressing the discrepancies would violate regulatory requirements and could expose investors to undue risks.

Option b is incorrect because ignoring the discrepancies to expedite the IPO process would be unethical and could lead to potential legal consequences for Mr. Wong and the sponsoring firm.

Option d is incorrect because sponsors are responsible for conducting due diligence and providing accurate information to investors, rather than shifting the burden of investigation onto investors themselves.

As a sponsor representative, Ms. Lee is responsible for conducting thorough due diligence on behalf of the sponsoring firm. This includes accurately assessing the company’s operations, facilities, and compliance with regulatory requirements. When discrepancies are identified during site visits or other due diligence activities, it is essential for Ms. Lee to document her observations and report them to her supervising sponsor. This ensures transparency and integrity in the IPO process, allowing the sponsoring firm to address any issues before proceeding with the listing. Therefore, option b is the appropriate course of action for Ms. Lee in this scenario.

Option a is incorrect because overlooking the discrepancies would compromise the integrity of the due diligence process and could lead to inaccurate disclosures to investors.

Option c is incorrect because adjusting the company’s production capacity figures without proper justification would constitute misleading disclosure and violate regulatory standards.

Option d is incorrect because advising the company to proceed with the IPO without addressing the discrepancies would be irresponsible and could expose investors to undue risks.

As a sponsor principal, Mr. Chan has a duty to conduct thorough due diligence on behalf of the sponsoring firm. When discrepancies or inconsistencies are identified in the prospectus, particularly regarding financial projections, it is crucial to request additional information and clarification from the issuing company. This ensures that investors receive accurate and reliable information necessary for making informed investment decisions. Therefore, option d is the appropriate course of action for Mr. Chan in this scenario.

Option a is incorrect because proceeding with the listing without addressing the discrepancies could lead to potential investor harm and regulatory violations.

Option b is incorrect because disregarding the inconsistencies as minor discrepancies undermines the due diligence process and regulatory standards.

Option c is incorrect because adjusting the revenue forecasts without proper justification or clarification from the company would constitute misleading disclosure and violate regulatory requirements.

As a sponsor representative, Ms. Lam is responsible for conducting comprehensive due diligence, including assessing the company’s management team and corporate governance structure. The resignation of a key executive such as the CTO could have significant implications for the company’s operations and future prospects, which must be disclosed to investors. Therefore, Ms. Lam should document the resignation and its potential impact on the company’s operations in her due diligence report. This ensures transparency and allows investors to make informed decisions regarding the IPO. Therefore, option b is the appropriate course of action for Ms. Lam in this scenario.

Option a is incorrect because advising the company to conceal the resignation of the CTO would be unethical and could lead to legal and regulatory consequences.

Option c is incorrect because while recommending the appointment of a new CTO may be advisable, it does not address the need for transparency and disclosure regarding the resignation.

Option d is incorrect because disclosing the resignation of the CTO as a minor issue could mislead investors and violate regulatory requirements regarding disclosure of material information.

When evaluating investment opportunities in an IPO, investors like Mr. Wong should consider a variety of factors to make informed decisions. These factors include the company’s historical financial performance, growth prospects, the reputation and track record of the sponsoring firm, as well as the broader economic outlook and market conditions in the relevant sector. By analyzing these factors comprehensively, investors can assess the risks and potential returns associated with the investment opportunity. Therefore, option d is the correct answer in this scenario.

Option a is correct because assessing the company’s historical financial performance and growth trajectory provides insight into its financial stability and future prospects.

Option b is correct because the reputation and track record of the sponsoring firm can influence investor confidence in the IPO process and the quality of due diligence conducted.

Option c is correct because understanding the overall economic outlook and market conditions in the technology sector helps investors gauge the industry’s growth potential and associated risks.

As a sponsor principal, Mr. Yip has a duty to ensure the integrity and transparency of the IPO process, including assessing the company’s corporate governance practices. Undisclosed conflicts of interest among board members pose significant risks to investors and could violate regulatory requirements. Therefore, Mr. Yip should report the conflicts of interest to the Securities and Futures Commission (SFC) and seek guidance on the appropriate course of action. This demonstrates Mr. Yip’s commitment to upholding regulatory standards and protecting investor interests. Therefore, option d is the correct course of action for Mr. Yip in this scenario.

Option a is incorrect because proceeding with the listing without addressing the conflicts of interest would be unethical and could lead to potential legal and regulatory consequences.

Option b is incorrect because while advising the company to terminate directors with conflicts of interest may be advisable, it does not address the immediate need for disclosure and regulatory compliance.

Option c is incorrect because ignoring the conflicts of interest would compromise the integrity of the IPO process and could expose investors to undue risks.

As a sponsor representative, Ms. Ng is responsible for ensuring the accuracy and completeness of the company’s disclosures in the IPO prospectus. Discrepancies between the disclosed IP portfolio and actual patents registered with relevant authorities raise concerns about the company’s credibility and regulatory compliance. Therefore, Ms. Ng should request clarification and additional documentation from the company regarding its IP portfolio to resolve the discrepancies. This demonstrates Ms. Ng’s commitment to upholding regulatory standards and protecting investor interests. Therefore, option b is the correct course of action for Ms. Ng in this scenario.

Option a is incorrect because proceeding with the IPO without addressing the discrepancies could lead to potential investor harm and regulatory violations.

Option c is incorrect because disregarding the discrepancies undermines the integrity of the due diligence process and regulatory standards.

Option d is incorrect because while advising investors to conduct independent research is important, it does not address the immediate need for clarification and disclosure regarding the discrepancies in the IP portfolio.

The role of a sponsor primarily involves conducting due diligence on the issuer and the offering to ensure compliance with relevant regulations and standards. This includes verifying information provided by the issuer, assessing risks, and preparing the prospectus, which is a key document for potential investors. Option b) Providing financial advice to the issuer is incorrect because sponsors are not typically involved in providing financial advice; they focus on regulatory compliance and due diligence. Option c) Marketing the securities to potential investors is not within the sponsor’s responsibilities; this task usually falls to underwriters or other professionals. Option d) Facilitating secondary market transactions is unrelated to the sponsor’s role in primary market transactions.

Sponsors have a legal obligation to ensure the accuracy and integrity of the information disclosed in the prospectus. If discrepancies are discovered during due diligence, it is crucial to inform the regulators to maintain the integrity of the commercial marketplace and protect investors. Option a) Proceeding with the IPO despite the discrepancies would violate regulatory standards and could lead to legal consequences. Option c) Advising Company ABC to conceal the discrepancies is unethical and illegal. Option d) Ignoring the discrepancies compromises the sponsor’s integrity and could result in regulatory sanctions.

Maintaining the integrity of the commercial marketplace is essential for fostering investor confidence and ensuring fair and transparent trading. By conducting thorough due diligence and disclosing accurate information in the prospectus, the market can function efficiently, allowing investors to make informed decisions about pricing and risk. Option b) Maximizing profits for the issuer and underwriters is not the primary objective of maintaining marketplace integrity; rather, it focuses on protecting investors’ interests. Option c) Minimizing regulatory oversight and compliance requirements would undermine market integrity and investor protection. Option d) Facilitating speculative trading activities is contrary to the goal of maintaining a fair and transparent marketplace.

Underwriting involves the purchase of securities from the issuer at a predetermined price, with the intention of reselling them to investors at a higher price. This process helps the issuer raise capital while transferring the risk of selling the securities to the underwriter. Option b) Underwriters assisting the issuer in due diligence and prospectus preparation is typically the role of sponsors, not underwriters. Option c) Underwriters providing financial advice to investors is inaccurate; their role is to facilitate the offering, not provide advice. Option a) Facilitating secondary market transactions is not part of the underwriting process but rather involves market makers or brokers.

Underwriters have a duty to advise issuers on the timing and terms of offerings to maximize the likelihood of success. In adverse market conditions, proceeding with the offering could result in poor pricing and investor reluctance, potentially undermining the issuer’s objectives. Postponing the offering until market conditions improve allows for better pricing and increased investor confidence, benefiting both the issuer and investors. Option a) Proceeding with the offering regardless of market conditions ignores the risks associated with unfavorable market dynamics. Option c) Lowering the offering price could signal weakness and erode investor confidence. Option d) Increasing the offering size without regard to market conditions may exacerbate the problem and lead to oversupply.

Underwriters often engage in stabilization activities to support the price of newly issued securities during the aftermarket period. This may involve purchasing shares from investors at a predetermined price to prevent excessive price declines, thereby providing liquidity and confidence in the market. Option a) Underwriters purchasing shares from the secondary market is inaccurate; stabilization typically involves repurchasing shares from investors. Option b) Underwriters selling additional shares could exacerbate selling pressure and destabilize prices. Option d) Underwriters issuing price targets is unrelated to stabilization activities and could be considered market manipulation.

Mr. Chan, as a licensed securities dealer, is subject to strict regulations regarding insider trading and market manipulation. Receiving a tip about non-public information constitutes insider information, and trading on such information is illegal and unethical. Mr. Chan should report the tip to the SFC to maintain market integrity and avoid legal repercussions. Option a) Immediately buying shares would be considered insider trading and is unlawful. Option b) Sharing the information with clients could also constitute insider trading and is prohibited. Option d) Ignoring the tip may not absolve Mr. Chan of liability if he is aware of material non-public information.

According to the Companies (Winding Up and Miscellaneous Provisions) Ordinance, when a company is being wound up voluntarily, the directors have the responsibility to convene a meeting of shareholders to propose the winding-up and obtain their approval. This ensures that shareholders, who are the owners of the company, have a say in this significant decision. Option b is incorrect because unilateral decision-making by the board without shareholder involvement is not in line with corporate governance principles. Option c is incorrect as seeking approval from the Companies Registry is not a requirement for initiating voluntary winding-up. Option d is incorrect because the decision for winding-up cannot be solely made by the majority shareholders; it requires proper procedures involving all shareholders.

During voluntary winding-up, the priority of payments is established by the Companies (Winding Up and Miscellaneous Provisions) Ordinance. Secured creditors are paid first, followed by unsecured creditors. After settling all creditor claims, any remaining assets are distributed among the shareholders. Option a is incorrect because shareholders are last in line for payment, not first. Option b is incorrect because shareholders do not have priority over creditors. Option c is incorrect because creditors and shareholders are not paid simultaneously; creditors are paid first, and shareholders are paid afterward if there are remaining assets.

According to the Companies (Winding Up and Miscellaneous Provisions) Ordinance, directors are generally not personally liable for the debts and obligations of the company during voluntary winding-up. However, if a director breaches his fiduciary duties, acts fraudulently, or engages in wrongful trading during the winding-up process, he can be held personally liable. Option a is incorrect because directors are not automatically personally liable for all debts during voluntary winding-up. Option b is incorrect because acting in good faith does not absolve a director of liability if there are breaches of fiduciary duties or fraudulent behavior. Option d is incorrect because director liability is not limited to their shareholding; it depends on their actions during the winding-up process

During voluntary winding-up, assets are distributed among shareholders based on their shareholding percentages in the company. This ensures fairness in the distribution process and reflects each shareholder’s proportionate ownership interest in the company. Option a is incorrect because distributing assets based on original investment amounts disregards any changes in shareholding over time. Option c is incorrect because there is no seniority among shareholders in terms of asset distribution during winding-up. Option d is incorrect because equal distribution among all shareholders may not reflect their respective ownership interests in the company.

According to the Companies (Winding Up and Miscellaneous Provisions) Ordinance, if a director engages in wrongful trading during voluntary winding-up, they may be disqualified from acting as a director for a specified period. Wrongful trading refers to continuing to trade while knowing that the company cannot avoid insolvency. Option a is incorrect because imprisonment is not typically a consequence of wrongful trading, though it may apply in extreme cases of fraud. Option b is incorrect because while directors may be required to repay certain losses, it is not the typical consequence of wrongful trading. Option d is incorrect because the consequence of wrongful trading is typically related to director disqualification, not loss of shareholding.

According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, licensed representatives like Mr. Lee are required to notify their employing licensed corporations in writing before engaging in any private securities transactions. This is to ensure transparency and prevent conflicts of interest. Failure to notify the employer may lead to disciplinary action. Thus, option b is the correct answer.

Option a is incorrect because regardless of whether the transactions interfere with Mr. Lee’s duties, he is still required to notify his employer.

Option c is incorrect because there are no exemptions based on timing; notification is necessary regardless of when the transactions occur.

Option d is incorrect because while Mr. Lee is required to notify his employer, he is not necessarily prohibited from engaging in private securities transactions. However, he must ensure compliance with regulations and obtain approval from his employer before proceeding.

Insider trading regulations prohibit trading securities based on material non-public information. Option b is the correct answer because selling shares based on confidential information obtained during a client meeting constitutes insider trading and is a violation of securities laws.

Option b is incorrect because purchasing shares before public disclosure of information, even if based on thorough research, constitutes insider trading.

Option c is incorrect because trading based on publicly available information is generally permissible, as long as it is not misleading or deceptive.

Option d is incorrect because trading based on tips from industry contacts, especially if the information is material and non-public, would still constitute insider trading.

SFC guidelines prohibit licensed representatives from accepting gifts, entertainment, or other benefits from clients or potential clients if it may create a conflict of interest or compromise their integrity. Option b is the correct answer because Mr. Wong should politely refuse the gift and explain that accepting it violates company policy and regulatory guidelines.

Option a is incorrect because even if Mr. Wong discloses the gift to his employer, accepting it may still create a conflict of interest.

Option c is incorrect because there is no threshold value for accepting gifts; all gifts should be refused to avoid conflicts of interest.

Option b is incorrect because reporting the gift to the SFC is not necessary unless it is part of a larger regulatory investigation.

SFC guidelines emphasize the importance of transparency and disclosure when providing investment advice. Option c is the correct answer because Ms. Chan should disclose any conflicts of interest and ensure the client fully understands the risks associated with the derivative product before making any recommendations.

Option a is incorrect because providing advice based solely on personal opinion without considering potential conflicts of interest or risks is not in line with regulatory requirements.

Option b is incorrect because simply referring the client to another advisor without offering any guidance may not fulfill Ms. Chan’s responsibilities to her client.

Option d is incorrect because recommending the derivative product without disclosing potential risks would be misleading and may violate regulatory standards.

SFC guidelines allow licensed corporations to provide margin financing services to both retail and institutional investors, but such services must be subject to specific conditions and risk disclosures to ensure clients are aware of the associated risks. Option b is the correct answer as it aligns with regulatory requirements.

Option a is incorrect because margin financing is not limited to institutional investors; retail clients can also access these services under certain conditions.

Option c is incorrect because while margin financing is indeed high-risk, it is not prohibited outright. Instead, it is regulated to mitigate risks for investors.

Option d is incorrect because margin financing is not exclusively limited to retail clients; institutional investors can also utilize these services.

SFC regulations require licensed representatives to conduct trading activities in a manner that avoids market manipulation and maintains market integrity. Option b is the correct answer because executing the trade in small portions over an extended period helps minimize the impact on the market price of the security, reducing the risk of market manipulation.

Option b is incorrect because proceeding with the trade without considering its potential impact on the market may violate regulatory requirements.

Option c is incorrect because informing other clients about the impending trade may lead to front-running or other market abuse practices.

Option d is incorrect because advising the client against executing the trade without considering alternative strategies may not be in the client’s best interest. Instead, Mr. Lam should find a suitable approach to execute the trade while minimizing market impact.

The Corporate Finance Adviser Code of Conduct requires corporate finance advisers to disclose any conflicts of interest to all relevant parties involved in a transaction and obtain their informed consent before proceeding. Option b is the correct answer as it aligns with regulatory standards aimed at ensuring transparency and fair dealing.

Option a is incorrect because proceeding without disclosing the conflict of interest violates ethical and regulatory standards.

Option c is incorrect because benefiting financially from a conflict of interest without disclosure and consent is unethical and may lead to regulatory sanctions.

Option d is incorrect because while seeking approval from the Securities and Futures Commission may be necessary in certain cases, obtaining informed consent from relevant parties is the primary requirement for managing conflicts of interest.

During the due diligence process, corporate finance advisers like Ms. Wong should thoroughly assess the target company’s financial health, including identifying any undisclosed liabilities or risks that could impact the transaction. Option b is the correct answer as it reflects the importance of conducting comprehensive due diligence to mitigate potential risks.

Option a is incorrect because while considering the impact on the stock price is relevant, it is secondary to assessing the target company’s financial condition and risks.

Option b is incorrect because prioritizing deal value over assessing risks may lead to unfavorable outcomes for the acquiring company.

Option d is incorrect because expediting the due diligence process without thorough examination may result in overlooking critical issues and exposing the parties to unnecessary risks.

Corporate finance advisers are required to conduct due diligence on both parties involved in a transaction to identify potential conflicts of interest and ensure fair dealing. Option b is the correct answer as it reflects the importance of thorough due diligence in compliance with regulatory standards.

Option a is incorrect because proceeding without conducting due diligence may lead to undisclosed conflicts of interest and regulatory violations.

Option c is incorrect because advising the client to withhold material information violates ethical and regulatory standards of transparency and fair dealing.

Option b is incorrect because recommending the merger without disclosing risks associated with the competitor’s operations would be misleading and may lead to legal and reputational consequences.