On 8 February 2021, The Securities and Futures Commission (SFC) published a consultation paper on (i) the proposed code of conduct on bookbuilding and placing activities in equity capital market (ECM) and debt capital market (DCM) transactions (Proposed Code) and (ii) the “sponsor coupling” proposal (together, the Proposals).

There are currently no specific requirements governing the conduct of bookbuilding or placing activities in Hong Kong by intermediaries in either ECM or DCM.

The Proposals were formulated based on recent reports issued by the International Organization of Securities Commissions (IOSCO) to address conflicts of interest and associated conduct risks in equity and debt capital raisings, as well as on the SFC’s observations from a thematic review of selected licensed corporations involved in these activities which identified substandard practices and control deficiencies in various areas, including bookbuilding and allocation.

Consultation will end on 7 May 2021.

Overview of the Proposals

The Proposed Code sets out the obligations and standards of conduct expected of intermediaries conducting bookbuilding and placing activities in Hong Kong (such intermediaries being defined as “capital market intermediaries” (CMIs) under the Proposed Code). Syndicate CMIs which conduct activities such as the overall management of an offering, coordination of bookbuilding or placing activities conducted by other CMIs, exercising control over bookbuilding activities and making allocation recommendations to the issuer are defined as “overall coordinators” (OCs) under the Proposed Code, and they would be subject to additional conduct requirements.

The Proposed Code would cover:

• in the case of ECM, IPOs and placing of shares of a class new to listing or new shares of a class already listed under a general or special mandate (including top-up placings); and
• in the case of DCM, all types of debt offerings involving bookbuilding or placing activities conducted by intermediaries in Hong Kong.
  
  

The Proposed Code would not however cover bilateral agreements or arrangements between the issuer and the investors (club deals), transactions which involve one or several investors with pre-agreed terms of the offering and transactions where shares or debt securities are allocated to investors on a pre-determined basis.

The SFC also proposes “sponsor coupling” which, in broad terms, would require that for IPOs at least one OC, which is either within the same legal entity or the same group of companies, also acts as a sponsor.

The Proposed Code would be set out in a new paragraph 21 in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct). The “sponsor coupling” proposal would be reflected as an amendment to paragraph 17 of the Code of Conduct.

Salient points of the Proposals

Some of the salient points of the Proposals are summarised below:

Early formal appointment of CMIs and OCs 

• Before conducting any bookbuilding or placing activities, a CMI should ensure that it has been formally appointed by the issuer (or another CMI in the case of a non-syndicate CMI) under a written agreement which clearly specifies the roles and responsibilities of the CMI as well as the fee arrangements (including the fixed fees and the fee payment schedule).
  
  
• In the case of an IPO, an OC should, before accepting an appointment, either (i) ensure that it (or one of its group companies) is also appointed as a sponsor, which is independent of the issuer client, and that both appointments are made at the same time and at least two months before the submission of the listing application; or (ii) obtain a written confirmation from the issuer client that at least one sponsor, which is independent of the issuer client, or a group company of that sponsor, has been appointed as an OC, in which case its appointment as an OC should be made no later than two weeks after the submission of the listing application.
  
  

Assessment of the issuer and the offering

• Before engaging in an offering, a CMI should take reasonable steps to:

• obtain an accurate understanding of the issuer (including a sufficient understanding of its history, background, business and performance, financial conditions and prospects, operations and structure); and

• establish a formal governance process to review and assess the structure of the offering, any actual or potential conflicts of interest between the CMI and the issuer client as well as the associated risks involved in participating in the offering.

• An OC should share information about the issuer with syndicate CMIs, and this information should, in turn, be shared with non-syndicate CMIs.
  
  

Assessment of investor clients

• A CMI should take reasonable steps to assess whether its investor clients, based on their profiles, such as investment preferences and past investment histories, fall within the types of investors targeted in a marketing and investor targeting strategy.
  
  
• In the case of a share offering, a CMI should take all reasonable steps to identify investor clients to whom the allocation of shares will be subject to restrictions or require prior consent from The Stock Exchange of Hong Kong Limited (SEHK) under the Rules Governing the Listing of Securities on SEHK (Listing Rules) and other regulatory requirements or guidance issued by SEHK from time to time (SEHK Requirements), and inform the OC before placing an order on behalf of such clients.
  
  
• In the case of a debt offering, a CMI should take all reasonable steps to identify whether its investor clients may have any associations with the issuer client, the CMI or a company in the same group of companies as the CMI and provide sufficient information to an OC to enable it to assess whether orders placed by these investor clients may negatively impact the price discovery process.
  
  
• An OC should provide relevant information to CMIs to enable them to identify investor clients to whom allocations of shares are either subject to restrictions or require prior consent from SEHK in share offerings or who have associations with the issuer in debt offerings.
  
  

Rebate and preferential treatment

• A CMI should not offer any rebates to its investor clients or pass on any rebates provided by the issuer.
  
  
• In the case of an IPO, a CMI should not enable any of its investor clients to pay, for each of the shares allocated, less than the total consideration as disclosed in the listing documents.
  
  
• In the case of a debt offering, a CMI should not enter into any arrangements which may result in investor clients paying different prices for the debt securities allocated.
  
  
• A CMI should disclose to the issuer client, OCs, all of its targeted investors and the non-syndicate CMIs it appoints, any rebates offered by the issuer to CMIs and any preferential treatment of any CMIs or targeted investors (such as guaranteed allocations):
  
  
• in the case of a share offering, upon becoming aware of any such rebates or preferential treatment; and

• in the case of a debt offering, no later than the dissemination of the deal “launch message” to targeted investors.
  
  

Allocation, order placement and order book management

• An OC should develop and maintain an allocation policy which sets out the criteria for making recommendations to the issuer, taking into account the issuer’s objectives or preferences, prevailing market conditions, types and characteristics of targeted investors, spread of investors and the overall subscription rate for the offer.
  
  
• A CMI should take reasonable steps to ensure that all orders placed in an order book represent bona fide demand of its investor clients, itself and its group companies.
  
  
• A CMI should: (i) always give priority to satisfying investor clients’ orders over its own proprietary orders and those of its group companies (include orders placed on behalf of funds and portfolios in which a CMI or its group company has a substantial interest); (ii) only be the price taker in relation to its proprietary orders and those of its group companies and ensure that these orders would not negatively impact the price discovery process; and (iii) segregate and clearly identify its own proprietary orders and those of its group companies (whether directly or indirectly) in the order book and book messages.
  
  
• A CMI should disclose the identities of all investor clients in an order book, except for orders placed on an omnibus basis, and an OC should ensure that such disclosures are made. For orders placed on an omnibus basis, a CMI should provide information about the underlying investor clients (whether directly or indirectly) to the OC and the issuer when placing the orders.
  
  
• A CMI should make enquiries with its investor clients about orders which appear unusual (e.g., an order which is not commensurate with the investor client’s financial profile) before placing the order. An OC should make enquiries with CMIs if any orders appear to be unusual or irregular (e.g., an order which appears to be related to the issuer).
  
  
• An OC should properly consolidate orders in the order book by taking reasonable steps to identify and eliminate duplicated orders, inconsistencies or errors; and segregate and clearly identify in the order book and book messages any proprietary orders of CMIs and their group companies.
  
  

Disclosure of IPO fee arrangements to the SFC

• The sponsor which is also appointed as the OC should provide the following information to the SFC:

Four clear business days prior to the Listing Committee hearing:

• information about the syndicate membership, indicating roles (i.e. whether appointed as OCs or not);

• the total fees to be paid to all syndicate CMIs participating in the offering (as a percentage of the gross amount of funds raised);

• the ratio between the fixed and discretionary portions of the fees to be paid to all syndicate CMIs participating in the offering (in percentage terms);

• the allocation of the fixed portion of the fees paid by the issuer to each syndicate CMI participating in the offering;

No later than listing:

• confirmation that the issuer has determined the allocation of discretionary fees to each syndicate CMI and the fee payment schedule;

Within two weeks after the first day of dealings:

• total monetary benefits (including fixed and discretionary fees and any bonuses) paid by the issuer to each syndicate CMI.

Advice to the issuer

• An OC should provide advice to the issuer on syndicate membership, fee arrangements, marketing strategy as well as pricing and allocation.
  
  
• An OC which participates in a share offering should advise and guide the issuer client and its directors as to their responsibilities under the SEHK Requirements which apply to placing activities and take reasonable steps to ensure that they understand and meet these responsibilities.
  
  
• For debt offerings, OCs and CMIs should be aware of and ensure compliance with the specific requirements for an offering of debt securities listed on the SEHK (e.g., bonds listed on the SEHK via Chapter 37 of the Listing Rules should only be offered to Professional Investors).
  
  

Record keeping

• A CMI should maintain books and records which are sufficient to demonstrate its compliance with legal and regulatory requirements as well as internal policies and procedures (including maintaining audit trails from the receipt of orders, the placing of orders in the order book through to final allocation and documenting the basis of allocation decisions with justifications).
  
  
• An OC should document, among other things, all changes in the orders in the order book throughout the bookbuilding process and all key discussions with, and key advice or recommendations provided to, the issuer.
  
  

Separately, in light of the introduction of the Proposed Code and to avoid duplicating requirements, the SFC proposes to make consequential changes to the guideline to sponsors, underwriters and placing agents involved in the listing and placing of GEM stocks issued in January 2017.

To facilitate the implementation of the Proposed Code, subject to the responses to this consultation, the SFC and SEHK will work together to implement changes to the Listing Rules.