Chapter 19

Due Diligence Guidelines –

Foreign Lawyers

4. US “10b-5” Letters

4.1 Guidance

4.1.1 In the case of initial public offerings on the Stock Exchange which have a Rule 144A component, the sponsor will typically require a 10b-5 letter, also known as a negative assurance letter or a disclosure letter, from the sponsors’ or listing applicant’s lawyers that practise US law22 addressed to the sponsors, providing negative assurance regarding the contents of the offering document.

4.1.2 Although the exact form of assurance varies from firm to firm, the 10b-5 letter effectively states that nothing has come to the law firm’s attention to give it reason to believe that the offering document contains any untrue or inaccurate statements or omits any material facts required to be stated in the offering document or necessary to make the statements in the offering document, in light of the circumstances under which they were made, not misleading. The 10b-5 letter typically tracks the language of Rule 10b-5 of the US Securities Exchange Act of 1934, as amended. Unlike a legal opinion, the 10b-5 letter is a factual statement that expresses no legal conclusions or legal analysis. The 10b-5 letter helps the sponsors establish their due diligence defence to liability under sections 11 and 12(a)(2) of the US Securities Act of 1933, as amended, and Rule 10b-5 of the Securities Exchange Act of 1934, as amended. As such, it is applicable only to the international offering document of a Hong Kong listing with a Rule 144A component, and is not intended to provide a regulatory due diligence defence to sponsors in Hong Kong.

4.1.3 The SFC has made it clear that sponsors should not give undue weight to 10b-5 letters.23

4.1.4 The regulatory obligation in Hong Kong to conduct due diligence rests with the sponsor and the SFC will not regard the issue of a 10b-5 letter as lessening the scope or extent of that obligation in any way.

4.1.5 Notwithstanding the foregoing, the 10b-5 letter should be accorded some level of importance. In general, law firms which practise US law take the issuance of 10b-5 letters very seriously and will only issue them after completing significant due diligence and pursuant to rigorous internal policies and procedures.
When a reputable and experienced law firm which practises US law is willing to provide a 10b-5 letter, it indicates that these professionals are sufficiently comfortable with the disclosure contained in the offering document. In some circumstances, this can serve as an independent check on the sponsor’s due diligence. In many cases, the law firm which practises US law may have even participated in the drafting of the offering document. While the onus remains on sponsors to perform their due diligence, the 10b-5 letter serves to supplement this task.


22. Sponsors will usually request a “10b-5” letter from the listing applicant’s lawyers as well, because not only are the listing applicant’s lawyers heavily involved in the due diligence process and the preparation of the offering documents, but they may also have more extensive knowledge of, and familiarity with, the listing applicant’s business.

23. The SFC states at paragraph 170 of the Consultation Conclusions on the Regulation of Sponsors:

“…as we made clear in the Consultation Paper, we were concerned that undue reliance may be placed on comfort letters from lawyers following the US practice of obtaining “10b-5” letters, where it is customary not to retain records of due diligence work. We do not consider that the existence of such a letter can have any bearing on whether a sponsor has in fact met its obligations given that the regulatory obligation in Hong Kong to conduct due diligence rests with the sponsor. Giving undue weight to such letters might give rise to concerns that a sponsor has over-relied on legal counsel during the due diligence process, and as a result has not met its obligations to conduct reasonable due diligence.”


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.

Initial Public Offering Rule 144A

US 10b-5 Letters

Hong Kong Stock Exchange Listing Rule 144A

10b-5 Letter Helps Sponsors Establish Their Due Diligence Defence to Liability

Listing Rules Rule 144A

Negative Assurance Letter

Disclosure Letter

Rule 10b-5 of the US Securities Exchange Act of 1934

10b-5 letter expresses no legal analysis

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