SFC to Investigate, Punish Misconduct in ‘Problematic’ IPOs

In a joint statement with the stock exchange, the SFC says it will not hesitate to take enforcement action against intermediaries for IPO-related misconduct.

The SFC (Securities and Futures Commission) and SEHK (Stock Exchange Of Hong Kong) have issued a joint statement setting out the general approach being taken to address regulatory issues in recent new listings.

These issues mainly involve suspected arrangements to artificially satisfy the initial listing requirements or facilitate market manipulation of the shares at a later date, such as through ramp-and-dump schemes.

“This may undermine the development of an open, orderly and fair market and call into question the existence of genuine investor interest in some IPOs,” the statement reads.

The statement highlights the following key issues of concern:

  • the market cap at listing barely meets the minimum threshold of HKD 500 million (Main Board) or HKD 150 million (GEM)
  • very high price-to-earnings ratios compared to listed peers
  • unusually high underwriting commissions (averaging 12% in 2020 compared to 4% in 2017) for IPOs with market cap below USD 600 million, and listing expenses, raising the possibility of rebates to controlled placees
  • high concentration of shareholders

Both the SFC and SEHK have concerns about the impact these issues may have on the quality and integrity of Hong Kong’s capital market and its reputation as an international financial centre.

As such, the SFC and SEHK are intensifying efforts to tackle misconduct and improper behaviour related to new listings. The statement outlines the measures that will be taken to address.

The SFC will work closely with SEHK to critically review each listing applicant’s valuation, such as comparing its price-to-earnings ratio against listed peers, to assess compliance with the minimum market cap and other initial listing requirements.

If questions raised regarding the share placement and price discovery process are not satisfactorily addressed, SEHK may outright reject a listing application. The SFC may also use its powers to object to a listing on ‘public interest’ grounds.

The SFC and SEHK will investigate and take appropriate action, such as to suspend listings, in response to unusual price movements, high shareholdings concentrations after listing, false information in listing documents, or evidence of other misconduct.

Intermediaries involved in “problematic IPOs” may also be prioritised for more in-depth inspection to assess their compliance with the applicable legal and regulatory requirements.

“Upon detecting any apparent breaches and control deficiencies of a serious nature, the SFC will promptly investigate such matters,” the statement says. “The SFC will not hesitate to take enforcement action against intermediaries for IPO-related misconduct.”

The full statement is available here.

Among the other measures to uphold the quality of the stock market, SEHK has just finalised a decision to increase the Main Board profit requirement. The SFC said it supports the decision.

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