Since the early large public offerings and trading of securities that assisted to finance expeditions of discovery and trade from the West to the East, the capital markets have served as an important platform to raise funding for enterprises to grow and for savers to invest. As the role of intermediaries and service providers expanded, the financial services sector has in turn become a significant contributor to many countries’ national GDP as well as a direct and indirect source of employment globally.
According to EY, in 2013, the Asia-Pacific region (including Greater China, ASEAN, Japan and Australia) represented the largest volume of initial public offerings (IPOs) and second largest amount raised globally (49% and 34% respectively). Asia-Pacific’s role (including as a source of listings in the United States and elsewhere) is only expected to grow with its continued robust economic activity, the resumption of Mainland China’s IPO markets and the opening up of more frontier markets.
Hong Kong is one of the leading global financial centres. It consistently ranks with New York and London as the world’s top IPO jurisdictions in terms of number and value of deals, and from 2009-2011 raised the most IPO funds in the world.
At the heart of trust in the global capital markets and its integrity is transparency – investors relying on company owners, directors and officers, and corporate finance professionals who have conducted due diligence on the businesses and management of the corporate issuers to ensure disclosure of material price- sensitive information to enable informed investment decisions and efficient price formation. This disclosure-based regulatory philosophy is now also being applied to Mainland China’s equity capital markets.
Challenges and Regulatory Development
In recent years, many new financial and securities laws and regulations have been passed around the world to seek to address the fallout from the global financial crisis and bank improprieties, with the next wave of legislative and regulatory focus being on business conduct and culture. Some examples of this can be seen in the UK Parliamentary Commission on Banking Standards Final Report on Changing Banking For Good, the speeches of UK Financial Conduct Authority CEO Martin Wheatley as well as the key themes of the HK Securities & Futures Commission (SFC) Regulatory Forum in January 2014.
At the same time, as highlighted by the Kay Review on UK Equity Markets, there is also an increasing appreciation that information asymmetry cannot be addressed by the mere release of voluminous and noisy data. In the words of US Securities and Exchange Commission (SEC) Chairman Mary Jo White, “finding out what is on investors’ minds will improve the overall quality of the information we provide.”
In Hong Kong, General Principle 1 of the Hong Kong’s SFC Code of Conduct clearly states that all licensed or registered persons should act “in the best interests of its clients and the integrity of the market” (emphasis added).
Effective on October 1, 2013, the new SFC sponsor regime to improve IPO diligence and disclosure standards codified the Stock Exchange listing rule requirement that financial intermediary sponsors exercise “professional scepticism” in the exercise of their due diligence in preparation of IPO prospectuses, and subjects IPO bankers as market gatekeepers to increased civil liability. Criminal liability is to be considered in the Legislative Council this year.
Almost concurrently, effective on January 1, 2013, Hong Kong listed companies and their directors, officers and senior management became personally liable for not timely disclosing price sensitive information under the new SFC statutory regime. By analogy, the SEC’s Regulation FD requires US publicly traded companies to disclose material information to all investors at the same time to address the issue of selective disclosure.