Due Diligence Guidelines –
2. Completeness of Information in an Application Proof
Before submitting an application on behalf of a listing applicant to the Stock Exchange a sponsor should come to a reasonable opinion that the information in the Application Proof is substantially complete except in relation to matters that by their nature can only be dealt with at a later date. [Paragraph 17.4(b) of the Code of Conduct]
2.2.1 A listing applicant is required to submit a listing application form, an application proof of the listing document and all other relevant documents under Listing Rule 9.10A(1), and the information in these documents must be substantially complete except in relation to information that by its nature can only be finalised and incorporated at a later date. If the Stock Exchange decides this information is not substantially complete, the Stock Exchange will not continue to review any documents relating to the application and will return the application. The listing applicant will only be able to re-file the listing application eight weeks after the letter returning the listing application.5
2.2.2 Information included in a listing application that is liable to be amended or updated in light of subsequent changes or developments should not, however, render the document incomplete.6
2.2.3 The listing applicant and the sponsor should ensure that the listing document filed with the listing application clearly and adequately discloses information which a reasonable investor would require to make a fully informed investment decision. The information contained in the listing document must be accurate and complete in all material respects and must not be misleading or deceptive. The sponsor should independently assess the standard of disclosure and not rely on the vetting process by the regulators as a catalyst for disclosure.7
2.2.4 The listing applicant is required to submit with the listing application: (i) an Application Proof of the listing document for vetting by the Stock Exchange (“AP-Vetting”); and (ii) an Application Proof of the listing document to be published on the Stock Exchange’s website (“AP-Publication”).
2.2.5 The AP-Vetting is required to clearly and adequately disclose information which a reasonable investor would require to make a fully-informed investment decision. The information contained in the AP-Vetting must be accurate and complete in all material respects and must not be misleading or deceptive. The sponsor should, in conjunction with the listing applicant and the other advisers engaged in the listing application process, assess the standard of the disclosure in the AP-Vetting to determine whether the disclosure meets the required standard and is suitable for submission to the Stock Exchange.
2.2.6 The Stock Exchange has provided guidance as to its expected disclosure requirements for the AP-Vetting to be substantially complete which is contained in Table A of Exchange Guidance Letter GL56-13 (“GL56-13”). The sponsor should review the draft AP-Vetting against Table A to ensure that all matters set out in Table A have been adequately addressed in the AP-Vetting, unless there are matters which are not applicable to the listing application (e.g., not relevant to the listing applicant). If there are any aspects of GL56-13 applicable to the listing application that the listing applicant is not able to follow, the sponsor should include in the listing application detailed submissions with detailed reasoning explaining the position.
2.2.7 In particular, the sponsor should note that Table A to GL56-13 sets out certain limited information which the Stock Exchange will permit to be included in the AP-Vetting in square brackets where such information will be updated later in the vetting process (e.g., profit forecast figure and financial information as at the latest practicable date). In respect of such information included in square brackets, the Stock Exchange expects the information included in the AP-Vetting to be current at the date of or shortly before submission of the AP-Vetting. Sponsors may consider including a statement in the AP-Vetting providing that such information is expected to be updated in subsequent draft listing documents or the final listing document. Additionally, there is certain limited information listed in Table A to GL56-13 which the Stock Exchange permits to be omitted from the AP-Vetting where such information is unavailable at the time of filing the listing application (e.g., stock code and offer-related information). If any of the information permitted to be omitted is actually available at the time of filing the listing application, it should be included in the AP-Vetting.
2.2.8 The sponsor should ensure that the listing applicant complies with all relevant Listing Rules or, where the listing applicant is unable to comply with any particular rule, the sponsor should ensure that an appropriate waiver has been sought.
2.2.9 The sponsor should also consider, and include in the AP-Vetting if relevant, the following:
(a) any matters required to address all applicable Guidance Letters and Listing Decisions published by the Stock Exchange relevant to the listing applicant;
(b) any comments raised at any preliminary hearing with the Listing Committee or comments from the Listing Department during any pre-IPO enquiries; and
(c) any outstanding comments, including from the Listing Department or Listing Committee, where a lapsed listing application is re-submitted.8
2.2.10 In particular, the Exchange expects listing applicants to follow the specific guidance issued by the Stock Exchange in respect of the content of the Application Proof. A listing document that does not follow such guidance may be considered not substantially complete as required by the Listing Rules. In addition to GL56-13 discussed above, key guidance letters issued by the Stock Exchange in this regard, which sponsors should refer to when reviewing and preparing listing documents, include the following:
(a) Exchange Guidance Letter GL98-18 Guidance on disclosure in listing documents – listing applicants’ names; statistics and data quoted; listing document covers; non-disclosure of confidential information; and material changes after trading record period;
(b) Exchange Guidance Letter GL86-16 Guide on Producing Simplified Listing Documents Relating to Equity Securities for New Applications;
(c) Exchange Guidance Letter GL43-12 Guidance on Pre-IPO investments and Exchange Guidance Letter GL44-12 Guidance on Pre-IPO investments in convertible securities;
(d) Exchange Guidance Letter GL37-12 Guidance on disclosure on financial information and prospects of new applicants;
(e) Exchange Guidance Letter GL102-19 Guidance on accounting policies and stock-taking procedures performed by reporting accountants;
(f) Exchange Guidance Letter GL32-12 Guidance on the accounting and disclosure requirements for acquisitions of subsidiaries and businesses conducted during or after the trading record period;
(g) Exchange Guidance Letter GL103-19 Guidance for applicants on the presentation of the non-GAAP financial measures in a listing document and any relevant documents pursuant to the Exchange’s Listing Rules;
(h) Exchange Guidance Letter GL45-12 Guidance on trading record and financial eligibility requirements and disclosure of certain financial information;
(i) Exchange Guidance Letter GL19-10 Guidance on disclosure of: (1) Land use right certificates and/or building ownership certificates for properties in the PRC; (2) Properties with defective titles in the PRC and Hong Kong; (3) Idle land in the PRC; (4) Civil defense projects in the PRC; and (5) Land resettlement operations in the PRC;
(j) Exchange Guidance Letter GL73-14 Guidance on pricing policies for continuing connected transactions and their disclosure; and
(k) Exchange Guidance Letter GL81-15 Guidance on Mixed Media Offers.
2.2.11 In addition to the guidance letters referred to in paragraph 2.2.10 above, sponsors should also refer to the guidance on disclosure issued by the Stock Exchange in respect of listing applicants engaged in specific industries or business models, including Mineral Companies (Exchange Guidance Letter GL52-13), applicants in the internet technology sector or that have internet-based business models (Exchange Guidance Letter GL97-18), applicants with a distributorship business model (Exchange Guidance Letter GL36-12), applicants engaged in the restaurant business (Exchange Guidance Letter GL28-12), where gambling activities are undertaken by the listing applicant (Exchange Guidance Letter GL71-14), applicants whose business model includes significant forfeited income from pre-paid packages (Exchange Guidance Letter GL26-12), business trusts and stapled securities (Exchange Guidance Letter GL40-12), listing applicants with biological assets (Exchange Guidance Letter GL46-12) and listing applicants that are Chapter 21 companies (Exchange Guidance Letter GL17-10). The sponsors should also refer to guidance on the suitability for listing of companies with a weighted voting rights structure (Exchange Guidance Letter GL93-18) and biotech companies (Exchange Guidance Letter GL92-18 and Exchange Guidance Letter GL107-20)9.
2.2.12 The sponsor should ensure that the financial information included in the listing application complies with the Listing Rule requirements. Please refer to Chapter 12 “Due Diligence Guidelines – Financial” for further details. Where the sponsor is proposing to file the listing application early in accordance with paragraph 3.9 of Exchange Guidance Letter GL56-13, the sponsor should ensure that all of the requirements of paragraphs 3.9 to 3.15 of GL56-13 have been met.
2.2.13 The sponsor should also refer to Exchange Guidance Letter GL35-12 for guidance on profit forecasts and special dividends, Exchange Guidance Letter GL34-12 for disclosure in respect of hard underwriting, Exchange Guidance Letter GL31-12 for guidance on disclosure of emergency arrangements in case of bad weather or extreme conditions which may disrupt the listing timetable, Exchange Guidance Letter GL91-18 for guidance on reallocation of shares from placing tranche to the public subscription tranche, Exchange Guidance Letter GL90-18 for guidance on pricing flexibility, Exchange Guidance Letter GL89-16 on issues related to “controlling shareholder”, Exchange Guidance Letter GL11-09 for listing applicants with pre-IPO share option schemes, Exchange Guidance Letters GL29-12, GL44-12 and GL43-12 for listing applicants with pre-IPO investments, Exchange Guidance Letter GL53-13 for liquidity arrangements for listing applicants seeking to list by introduction where the securities are already listed on another stock exchange and Exchange Guidance Letter GL7-09 where a listing application is re-filed.
2.2.14 The Stock Exchange expects the following for Application Proofs:
(a) the latest practicable date in an Application Proof is a date no more than 10 calendar days before the date of the Application Proof. Financial information as at the latest practicable date can be in brackets to indicate it will be updated in the Post Hearing Information Pack (to the extent practicable) and the final listing document; and
(b) the latest date for Liquidity Disclosure in an Application Proof is a date no more than two calendar months before the date of the Application Proof. Financial information disclosed here can be in brackets to indicate it will be updated in the Post Hearing Information Pack (to the extent practicable) and the final listing document.10
2.2.15 Before filing the listing application, the sponsor should work with the listing applicant and its lawyers to ensure that the information required to be redacted from the AP-Vetting is properly removed from the AP-Publication so that the AP-Publication does not constitute a prospectus under section 2(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance, or an advertisement under section 38B(1) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance or an invitation to the public in breach of section 103(1) of the SFO.11 Table A to Exchange Guidance Letter GL56-13 sets out information that should be redacted from the AP-Vetting for these purposes and the sponsor should review the AP-Publication to ensure that the redaction follows the guidance in Table A. Redaction should only be made to the extent necessary to avoid the Companies (Winding Up and Miscellaneous Provisions) Ordinance and SFO implications.12
Where the listing applicant proposes to redact additional information other than that specified in Table A, the listing applicant should apply to the Stock Exchange prior to submitting the listing application (allowing sufficient time for the Stock Exchange to consider the request) giving detailed reasons for the proposed additional redacted information.13
2.2.16 The sponsor should also ensure that the AP-Publication (and the Stock Exchange’s website) includes appropriate disclaimer and warning statements to advise readers of the legal status of this document to the effect that:
(a) it is not an offer to sell or an invitation to induce/solicit an offer to acquire, purchase or subscribe for securities;
(b) it is not in a final form and is subject to change;
(c) no investment decision should be based on the information contained in the AP-Publication;
(d) there is no guarantee that there will be an offering; any offer of securities will require a final listing document which is the only document investors should rely on to make investment decisions; and
(e) there is no indication that the application to which the document relates has been approved for listing.
Minimum warning statements and disclaimer statements are included in Appendix 1 to Exchange Guidance Letter GL57-13. The listing application is also required to include a confirmation letter from the listing applicant’s legal advisers that the listing applicant has complied with the Stock Exchange’s guidance on redactions in the AP-Publication and has included the appropriate warning and disclaimer statements.14
2.2.17 Where the listing applicant has been listed on a recognised overseas exchange for not less than five years and has a significantly large market capitalisation (as determined by the Stock Exchange from time to time) or a new applicant applying for secondary listing under Chapter 19C of the Listing Rules at the time of filing its listing application, the listing applicant is entitled to make a confidential filing of its listing application and draft listing document. The listing applicant is not subject to the publication requirements for the AP-Publication unless requested to comply with them by the Stock Exchange or the SFC (as the case may be). The Stock Exchange or the SFC may also waive or modify the publication requirements for an AP-Publication in a spin-off from an overseas listed parent upon application by the listing applicant. The sponsor should consider with the new applicant whether the confidential filing criteria are met or whether a waiver may be sought and should consult the Stock Exchange or the SFC if it envisages any difficulties in complying with the publication requirements at least 2 months before submission of the listing application.15
2.2.18 The sponsor should ensure that the listing application contains all of the documents required to be included in the listing application as specified in Listing Rules 9.03, 9.10A and 9.11. As a useful checklist, the sponsor should refer to Exchange Guidance Letter GL55-13 (“GL55-13”) which contains as Attachments I and II checklists of the documents to be submitted to the Stock Exchange at various times during the listing application, including at the time of filing the listing application.16 The sponsor should ensure all such documents specified are included in the listing application.
2.2.19 Attachment I to GL55-13 refers to the following documents required at the time of submission of the listing application:
(a) a sponsor’s confirmation that the listing applicant has submitted the Application Proof for publication on the Stock Exchange’s website in accordance with Listing Rule 12.01A;
(b) documents under Listing Rules 9.03 and 9.11(1) to 9.11(17c) together with additional information set out in Form M104;
(c) completed checklists on: (i) basic qualifications for new listing under the Listing Rules (Form M105); (ii) basic requirements for the contents of listing documents under the Listing Rules and Companies (Winding Up and Miscellaneous Provisions) Ordinance (Form M106); (iii) rules on valuation of and information on properties (Form M107); and (iv) rules on accountants’ reports (Form M108); and (v) for applicants incorporated in an acceptable overseas jurisdiction, the relevant CCASS admission form for new listings;
(d) a written confirmation to the listing applicant from the reporting accountants that no significant adjustment is expected to be made to historical and pro forma financial information and any profit forecast, and from each of the experts that no material change is expected to the relevant expert opinion;
(e) for listing applicants seeking an exemption from the prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, a final or advanced draft of the applications to the Stock Exchange and the SFC;
(f) a final or draft legal opinion on the listing applicant’s Chinese name if a Chinese stock short name is required for a non-Hong Kong or non-PRC applicant;
(g) in the event of a reverse takeover, a legal opinion on the “1997 Red Chip Guidelines”; and
(h) for a listing applicant incorporated in an acceptable overseas jurisdiction, the required sponsor confirmations and accompanying legal opinions.
2.2.20 In respect of Form M104, the sponsor should review the additional information to ensure that it is substantially complete, except in relation to information that by its nature can only be finalised and incorporated at a later date. Form M104 (paragraph 11) requires a confirmation from the reporting accountants that no significant adjustment is expected to be made to the draft accountants’ reports on historical financial information, the pro forma financial information and profit forecast (if any) which are included in the Application Proof based on the work done as at the date of confirmation. The sponsor should refer to Form M116 and Exchange Guidance Letter GL58-13 for details on the requirements for, and content of, such confirmation letter.
2.2.21 Similarly, Form M104 (paragraph 21) requires a confirmation from each expert (other than the reporting accountants who are subject to Exchange Guidance Letter GL58-13 as referred to in paragraph 2.2.20 above) who is named in the listing document that no material change is expected to be made to the relevant expert opinion included in the Application Proof based on the work done as of the date of the confirmation. The sponsor should refer to Form M117 and Exchange Guidance Letter GL60-13 for details on the requirements for, and content of, such confirmation letter.
2.2.22 Note 3 in Appendix 1, Section H to Exchange Guidance Letter GL86-16 requires that all executive directors and non-executive directors must be appointed when an applicant submits its listing application. All independent non-executive directors must be identified when an applicant submits its listing application, but their actual appointments may take place closer to the time the listing document is issued.
6. Paragraph 114 of the Consultation Conclusions on the Regulation of Sponsors.
7. Paragraph 3.1 of Exchange Guidance Letter GL56-13 – Guidance letter on (i) disclosure requirements for substantially complete Application Proofs; and (ii) publication of Application Proofs and Post Hearing Information Packs (“PHIPs”) on the Exchange’s website.
In addition, Listing Rule 2.13 sets out the general principles under which information in the listing document must be presented. Similarly, Listing Rule 11.07 sets out the overriding principle by which particulars and information must be included in the listing document, being information which “is necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer and its profits and losses and of the rights attaching to such securities”.
8. Paragraph 3.7 of Exchange Guidance Letter GL56-13.
9. Sponsors should also refer to the Frequently Asked Questions on Listing Regime for Companies from Emerging and Innovative Sectors for further details on required disclosures.
10. Exchange Guidance Letter GL37-12.
11. Paragraph 5 of Practice Note 22 to the Listing Rules.
12. Paragraph 5 of Practice Note 22 to the Listing Rules.
13. Paragraph 4.3 of Exchange Guidance Letter GL56-13.
14. Paragraph 7 of Practice Note 22 to the Listing Rules.
15. Paragraphs 18 and 19 of Practice Note 22 to the Listing Rules.
16. Attachment I applies to new listing applications (excluding GEM Transfers and Eligible Transfers (as defined in Exchange Guidance Letter GL55-13)) and Attachment II applies to GEM Transfers and Eligible Transfers.
HKCFEF Limited and the contributing law firms, accountants and sponsors are not offering these due diligence guidelines as legal, financial or professional advice or services and they should not be relied upon as such. These due diligence guidelines should not be used as a sole basis for any decision, action or inaction and are not meant to serve as a substitute for the advice of qualified professionals. See here for the full terms and conditions.