Chapter 4

Due Diligence Guidelines –

Submission Readiness

3. Resolving Fundamental Compliance Issues

3.1 Standards

Before submitting an application on behalf of a listing applicant to the Stock Exchange a sponsor should come to a reasonable opinion that: (i) the listing applicant is in compliance with all relevant listing qualifications under Chapter 8 of the Listing Rules (except to the extent that waivers from compliance with those requirements have been applied for to the Stock Exchange in writing); [Paragraph 17.4(c)(i) of the Code of Conduct]

3.2 Guidance

3.2.1 Sponsors should come to a reasonable opinion on compliance with all relevant listing qualifications as set out in Chapter 8 of the Listing Rules having regard to all facts and circumstances available at the time of the listing application. The sponsor’s responsibility will not be affected by a change in or evolution of circumstances after the application is made. Where matters can only be ascertained or fulfilled at a later date, compliance with Paragraph 17.4(c)(i) of the Code of Conduct will be achieved where adequate measures have been taken to ensure that the listing applicant will be in compliance by the time of listing.17

3.2.2 The sponsor should consider the business and overall circumstances of the listing applicant based on its due diligence review to determine whether there is anything known to the sponsor which would affect the suitability for listing of the listing applicant. The Stock Exchange has considered aspects such as public interest concerns, over-reliance on third parties, non-compliance with laws and regulations, concerns over financial performance and sustainability, internal controls failings and unsubstantiated assertions, among other matters, as affecting the suitability of the directors or senior management or the suitability for listing of the listing applicant.18

3.2.3 The Stock Exchange also has concerns in respect of listing applicants whose size and prospects do not appear to justify the costs or purpose associated with a public listing. Exchange Guidance Letter GL68-13A sets out a non-exhaustive list of characteristics which the Stock Exchange has identified as bringing into question the suitability for listing of a listing applicant. These include (i) small market capitalisation; (ii) only marginally meet the listing eligibility requirements; (iii) involve fund raising disproportionate to listing expenses (i.e. a high proportion of the listing proceeds were used to pay listing expenses); (iv) involve a pure trading business with a high concentration of customers; (v) are asset-light businesses where a majority of the assets are liquid and/or current assets; (vi) involve a superficial delineation of business from the parent; and/or (vii) have little or no external funding at the pre-listing stage. The Stock Exchange focuses on a qualitative review of a listing applicant’s suitability. The listing applicant and the sponsor should provide a robust analysis in the listing document to substantiate the listing applicant is suitable for listing, covering among other things, the areas identified in the Guidance Letter.19

3.2.4 Each director and supervisor (where relevant) of the listing applicant is required to provide at the time of submission of the listing application a written confirmation that the information in the Application Proof is accurate and complete in all material respects and is not misleading or deceptive.20 Each director and supervisor (where relevant) is also required to submit a written confirmation and undertaking to the following effect: (i) that the Application Proof contains all the information about the biographical details of such director/supervisor or proposed director/supervisor as set out in Listing Rule 13.51(2) and that those details are true, accurate and complete; (ii) where, before dealings commence, there are any changes in the biographical details, to inform the Stock Exchange as soon as practicable of such changes; and (iii) to lodge with the Stock Exchange in accordance with Listing Rule 9.11(38) a declaration and undertaking, in the form set out in Form B/H/I in Appendix 5 to the Listing Rules, duly signed by each director/supervisor and proposed director/supervisor.21


17. Paragraph 122 of the Consultation Conclusions on the Regulation of Sponsors.

18. Exchange Guidance Letter GL68-13 provides guidance on factors considered by the Exchange in assessing whether a listing applicant and its business are suitable for listing. Examples of factors considered in that Guidance Letter in determining suitability for listing include:

(i) Non-compliances that involve fraud, deceit or dishonesty (such as tax evasion or bribery) (“Integrity Non-compliances”). Integrity Non-compliances will likely render the listing applicant unsuitable for listing and any culpable director unsuitable to be a director of a listed company. Where a controlling shareholder is culpable of Integrity Non-compliances, this could also impact the listing applicant’s suitability for listing depending on a number of factors including the extent of influence the controlling shareholder can exert over the listing applicant. See also Exchange Guidance Letter GL63-13 on disclosure of non-compliance incidents in listing documents;

(ii) Material Non-compliances that raise concerns regarding the competency of the directors involved may also affect a listing applicant’s suitability for listing where they cannot be addressed by disclosure. The Exchange may require the listing applicant to demonstrate that it meets the Listing Rule eligibility requirements after adjusting its trading record for the impact of any Material Non-compliances;

(iii) Sustainability of the business. The Stock Exchange considers the facts and circumstances of the listing applicant in determining the materiality and likelihood of the adverse factors. Non-exhaustive examples include:

• Deteriorating financial performance;

• Material reliance on various parties, such as high customer/supplier concentration; dependence on a limited number of distribution channels; or dependence on another party such as a controlling shareholder group;

• Financial assistance from a controlling shareholder group;

• Material changes that may adversely affect the listing applicant’s prospects; and

• Substantial reliance by property companies on fair value gains on investment properties.

(See also Exchange Guidance Letter GL26-12 in respect of businesses heavily reliant on forfeited income); and

(iv) Whether the listing applicant adopts contractual arrangements (VIEs) (see Exchange Listing Decision LD43-3).

Other factors that have been considered by the Regulators include:

(i) Whether the listing applicant is engaged in the gambling business; if so, whether it satisfies the requirements in Exchange Guidance Letter GL71-14 and the Exchange’s Listing Committee Report 2006;

(ii) Whether there are sanctions risks (see Exchange Guidance Letter GL101-19); and

(iii) Other suitability issues such as a lack of commercial rationale for the listing (with no genuine funding needs), unsupported valuations and packaging of companies (see Exchange Listing Decision LD121-2019).

19. Exchange Guidance Letter GL68-13A provides that the listing applicant and the sponsors should provide a robust analysis in the listing document to substantiate that the listing applicant is suitable for listing, including, among other things, in the following areas:-

(i) Use of proceeds – the listing applicant should disclose specific uses for proceeds commensurate with the past and future business strategy and observed industry trends and explain the commercial rationale for listing. Generic descriptions such as (a) using listing proceeds to increase reputation and brand awareness, (b) for potential acquisitions without identified target and specific selection criteria, and/or (c) for expansion through increase in headcount will not suffice;

(ii) Future objectives and strategies – the listing applicant should provide a comprehensive analysis to demonstrate a detailed strategic plan for its business operations and growth;

(iii) Profit and revenue growth – a comprehensive analysis is required to substantiate that the listing applicant’s business is sustainable where it (a) has experienced decreasing or low profit and revenue growth; and/or (b) is expected to record decreasing or low profit and revenue growth after listing;

(iv) Potential sunset industries – where a listing applicant is in a potential sunset industry or in an industry that has declining market prospects, the listing applicant must be able to demonstrate that it is feasible and it has both the ability and resources to modify its business to respond to the changing demands of the market; and

(v) Cost of listing – if a significant portion of the listing proceeds will be applied to listing expenses, the listing applicant should explain how the advantages of listing outweigh the cost of listing.

20. Listing Rule 9.11(3a).

21. Listing Rule 9.11(3b).


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.

Listing Applicant is in Compliance With All Relevant Listing Qualifications

Suitability for Listing of a Listing Applicant

Compliance Issues

Due Diligence Compliance

Relevant Listing Qualifications under Chapter 8 of the Listing Rules

Resolving Fundamental Compliance Issues

Hong Kong Regulatory Regime

Sponsors Responsibility

Hong Kong Securities and Futures Commission

Hong Kong Stock Exchange

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