Due Diligence Guidelines –
Approach and Scope
3. Professional Scepticism
In undertaking its role a sponsor should examine with professional scepticism the accuracy and completeness of statements and representations made, or other information given, to it by a listing applicant or its directors. An attitude of professional scepticism means making a critical assessment with a questioning mind and being alert to information, including information from experts, that contradicts or brings into question the reliability of such statements, representations and information. [Paragraph 17.6(b) of the Code of Conduct]
3.2.1 In reviewing responses to due diligence questions a sponsor is therefore required to review responses with an appropriate degree of critical assessment and not simply in isolation but consider answers in the light of the relevant information received in the due diligence exercise.
3.2.2 The following examples were considered by the SFC to fall short of the standard required of sponsors. In one case, the sponsor accepted the listing applicant’s representation, without making any enquiries on its own, that some of its suppliers and customers refused to have face-to-face interviews with the sponsor and agreed to have telephone interviews with such suppliers and customers arranged by the listing applicant. The sponsor also failed to obtain confirmations from the listing applicant’s franchisees that they were independent from the listing applicant and only relied on the confirmations obtained through the listing applicant.10
10. SFC Press Release – “SFC fines and revokes the licence of Mega Capital (Asia) Company Limited” dated 22 April 2012. Mega Capital acted as the sole sponsor of the listing application of Hontex International Holdings Company Limited in 2009. It was later discovered that the prospectus of Hontex materially overstated the turnover and profit before tax of the group for the track record period as well as the value of cash and cash equivalent balances and the number of franchise stores.
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.