Hong Kong's SFC Tightens Up On IPO Marketing Rules

by Mary Swire, Investors Offshore, Hong Kong

25 February 2003

Last Friday, Hong Kong's Securities and Futures Commission (SFC) announced three new sets of guidelines dealing with information released by companies ahead of share and debt offerings. The SFC claimed: 'The guidelines are made in response to market requests after taking into account investor protection considerations.'

But investment banking executives fear that yet more regulation can only hinder the recovery of a market which is already struggling to recover from plunging global equity values and Hong Kong's property downturn.

SFC spokesman C K Chan said the guidelines "will make it easier for the market to issue bonds and shares". The three new guidelines, which take effect immediately, "relate to the content and manner of publication of certain materials which may be issued to the public in Hong Kong in connection with an offer of shares or debentures made by a prospectus", the SFC said.

The first Guideline deals with materials issued publicly alongside a prospectus:

'The SFC considers that certain publicity materials that are issued by the issuer of a prospectus and designed only to raise investor awareness of a public offer of shares or debentures will not constitute a prospectus or an extract from or abridged version of a prospectus within sections 2 and 38B, respectively, of the Companies Ordinance (CO), or a prohibited advertisement within section 4(1) of the Protection of Investors Ordinance.

'Such materials may assist the issuer in the efficient conduct of the offer and facilitate greater retail investor participation. Potential investors would have more time to arrange their financial and other affairs in order to participate in an offer.

'In the guidelines, the SFC specifies requirements concerning the form and manner of publication for such publicity materials. They must be strictly limited to giving procedural and administrative information regarding the offer, and should not promote the issuer or the offer. Certain legends clarifying that the publicity material does not constitute an offer and warning potential investors to read the prospectus for detailed information before making an investment decision will be required.

'The guidelines recommend that publicity of this kind should not be issued earlier than 14 days before the launch of an offer.

'Materials that comply with the prescribed requirements will constitute "offer awareness materials" for the purposes of the guidelines. The SFC does not intend to pre-vet such materials.

'The SFC also considers that disclosure materials issued by the issuer of a prospectus that summarise or highlight key information concerning a public offer should be encouraged. These materials, commonly described as mini-prospectuses or fact sheets, are likely to help investors understand the information contained in the prospectus.

'The SFC considers that these documents will normally amount to an extract from or abridged version of a prospectus, rather than a full prospectus. They therefore will not need to be registered with the Registrar of Companies. However, such documents must be expressly authorised by the SFC prior to issue.'

The second set of Guidelines deals with "dual prospectus" structures used for offers of shares or debentures on a "repeat" or "programme" basis with separately registered programme and issue prospectuses:

'The CO does not expressly provide for repeat or programme offering structures which enable offers to be made on a continuous basis or through successive tranches. It makes no concession for offers where prospectuses may be issued frequently or in the ordinary course of a company's business (and in particular by the financial industry). It does not expressly contemplate the filing of an offer-specific "issue" section of a prospectus, which updates a document (namely, the "programme" section of the prospectus containing, among other things, financial and other generic information on the issuer, the mechanics of the programme and risk factors) that was previously registered.

'The guidelines describe a "dual prospectus" structure which allows registration of the programme section and issue section as separate prospectuses, referred to as the "programme prospectus" and the "issue prospectus".

'The structure will facilitate continuous offerings of shares and debentures, by removing the need to re-register the document containing the programme information. This reduces administrative hurdles, such as the need to obtain a fresh copy of an expert's consent to a report appearing in a programme prospectus.'

The third set of Guidelines amounts to a relaxation of some existing rules covering the format and mechanical construction of a prospectus.

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