The Hong Kong Securities and Futures Commission, in a consultation paper issued today, is proposing to put beyond doubt that IPO sponsors will have civil and criminal liability for untrue statements, including a material omission, in a prospectus.
As the consultation paper states (starting at paragraph 116):
“It has been argued that sponsors may already be subject to civil and criminal liability under the Companies Ordinance for untrue statements in prospectuses. This is because:
(a) sponsors might fall under the definition of “promoters”, who are subject to civil liability. A promoter is defined as a party who is involved in the preparation of the prospectus but not including any person by reason of his acting in a professional capacity for persons engaged in procuring the formation of the company.
(b) some market participants take the view that a sponsor is a person “who has authorized the issue of the prospectus”. As noted above, a person who authorizes the issue of a prospectus is subject to civil and criminal liability under the Companies Ordinance for untrue statements in a prospectus.
There is however no Hong Kong case law on whether sponsors are subject to these provisions. As the position is unclear the SFC believes there is merit in removing this ambiguity by clearly identifying sponsors as also being liable for untrue statements in prospectuses.”
The SFC has:
“concluded that making it clear that a sponsor also has liability for untrue statements in a prospectus is likely to further encourage sponsors to prepare and review disclosures in a prospectus critically so as to provide a high level of assurance that the information disclosed is accurate, relevant, concise and meaningful for investors. Certainty as to the meaning and scope of any liability regime is essential and is in the public interest.
This would make it clear that public investors would be able to take legal action against sponsors (among others) in connection with untrue statements in a prospectus. It would also enable prosecutions of sponsors to take place in serious cases. In addition, since the prospectus liability provisions are also “relevant provisions” as defined in the SFO, the SFC would also be in an unambiguous position to take action such as conducting investigations and making applications to the Court of First Instance for remedial orders.”
“International practice varies on the issue of whether sponsors have statutory liability for untrue statements in a prospectus. The concept of holding sponsors (and other specified persons) liable is largely in line with the philosophy in many major markets that a person who is involved in formulating the disclosures in a prospectus is to be held liable for errors or omissions. However, there is considerable variation across jurisdictions and laws have been developed over time that are tailored to the particular structure of each market: in some markets sponsors are not required44 and in other markets there may be persons playing a similar role but who are not called sponsors45. Therefore, Hong Kong needs to develop its own approach in light of the particular characteristics of its IPO market.”
Other sponsor measures
Other proposals on the role of sponsors are summarised in paragraphs 10 to 24 of the consultation paper.