On 20 May 2021, the Securities and Futures Commission (“SFC”) and The Stock Exchange of Hong Kong Limited (the “HKEx”) issued a joint statement setting out the general approach taken by the SFC and HKEx to address regulatory issues formed in recent new listings. The statement also described how the regulators would deploy their respective powers under the Securities and Futures Ordinance (the “SFO”), the Securities and Futures (Stock Market Listing) Rules (the “SMLR”) and the Listing Rules to tackle recently-common issues. These issues mainly involved suspected arrangements to artificially satisfy the initial listing requirements, or facilitate market manipulation of the shares after the IPO.
Observations and regulatory concerns
The SFC and HKEx noted an increasing number of suspected “ramp-and-dump” schemes associated with IPOs launched in recent years. These schemes were orchestrated at an early state in the IPO process with the aim of later manipulation of the share price, typically conducted using social media platforms.
In some cases, shares were apparently allocated in the placing tranche to controlled accounts which were seemingly financed by funds diverted from the unusually high underwriting commissions or other listing expenses paid as part of the IPO process. Following an initial surge after listing, the share price often fell well below IPO price, and afterwards trading volume shrank to negligible levels.
Features of problematic IPOs which may lead to enquiries by regulators
In light of the problematic IPOs, the SFC and HKEx will make enquiries to ascertain whether there are sufficient genuine investors and an adequate spread of public shareholders for the securities, to enable an orderly market for the securities after listing.
The SFC and HKEx will make enquiries if they identify the following features:
- The applicant’s market capitalization barely meets the minimum threshold under the Listing Rules.
- Very high PE ratio taking into account the applicant’s fundamentals (including its profit forecast) and the valuations of its peers.
- Unusually high underwriting or placing commission or other listing expenses.
- Shareholding is highly concentrated in a limited number of shareholders, particularly where the value of the public float is small and the spread of shareholders barely meets the minimum thresholds set out in the Listing Rules.
HKEx may exercise its discretion to reject a listing application if it is not satisfied with the answers to its enquiries, or basic conditions for listing under the Listing Rules are not met.
Suspension of dealings and other regulatory action
The SFC and HKEx will investigate parties involved under the SFO, SMLR or the Listing Rules, if:
- there are any unusual movements in the share price or trading volume;
- there is a high concentrate of shareholdings after listing;
- it appears that a listing document may have included false, incomplete or misleading information; or
- there is evidence of other misconduct.
Contact us today for assistance with listed companies disclosures, regulatory issues under the SFO, SMLR, the Listing Rules or help with SFC and/or HKEx investigation matters.