SFC Releases Consultation Conclusions on the Proposed Code of Conduct on Hong Kong Bookbuilding and Placing Activities and HKEx Sponsor Coupling

On 29 October 2021, Hong Kong’s Securities and Futures Commission (the “SFC”) released its consultation conclusions1 (the “Consultation Conclusions”) on (i) the conduct requirements for Hong Kong bookbuilding and placing activities in equity capital market and debt capital market transactions; and (ii) the HKEx “sponsor coupling” rules to require at least one overall coordinator to also act as a sponsor (together, the “Bookbuilding Conduct Requirements”).

The Consultation Conclusions follow the SFC’s February 2021 consultation paper2 (the “Consultation Paper”) in which the SFC proposed requirements designed to clarify the roles played by intermediaries in equity capital market and debt capital market transactions and set out the standards of conduct expected of them in Hong Kong bookbuilding, pricing, allocation and placing activities.

For an overview of the SFC’s Consultation Paper on the proposed Code of Conduct on Hong Kong bookbuilding and placing activities and the “sponsor coupling” proposal, please see Charltons’ February 2021 newsletter.3

During the consultation period, the SFC received 41 written submissions from various industry associations, intermediaries, professional bodies and individuals, in which the respondents were generally supportive of the proposals.

The new Bookbuilding Conduct Requirements together with key discussions of the consultation will be examined in detail in this newsletter.

The key features of the new Bookbuilding Conduct Requirements are summarised below:

  • introduction of a new paragraph 21 in the Code of Conduct for Persons Licensed by or Registered with the SFC (the “SFC Code of Conduct”), which will set out the obligations and expected standards of conduct for intermediaries involved in bookbuilding and placing activities. These intermediaries will be defined as “capital market intermediaries” (“CMIs”);
  • the obligations and expected standards of conduct for CMIs will cover, among others, (i) ensuring transparency in the bookbuilding process and implementing an allocation policy to ensure a fair allocation of securities to investor clients; (ii) prohibition on offering rebates to investor clients or enabling any investor clients to pay at a price lower than that disclosed in the listing documents; and (iii) maintaining policies and procedures to identify, manage and disclose conflicts of interest and giving priority to satisfying investor clients’ orders over the CMI’s own proprietary orders;
  • prior to conducting any bookbuilding or placing activities, intermediaries will be required to be formally appointed under written agreements setting out their roles, responsibilities, fee arrangements and fee payment schedules;
  • introduction of a “sponsor coupling” requirement for Main Board IPOs, so that at least one overall coordinator (“OC”) must also be appointed as a sponsor (or be a member of the sponsor’s group of companies) and this sponsor must be independent of the issuer. OCs are the heads of syndicates and are a type of CMI. They must also provide advice to the issuer client on marketing strategy, pricing and allocation, and ensure transparency in the price discovery process; and
  • introduction of requirements for fee arrangements to be determined at an early stage and OCs to be appointed at an early stage.

The SFC will also update its guideline to sponsors, underwriters and placing agents involved in the listing and placing of GEM stocks, which was issued in January 2017. The revised guidelines, “Guidelines to capital market intermediaries involved in placing activities for GEM stocks”, will provide general guidance for OCs and guidance for CMIs when placing shares to their investor clients.

The new Bookbuilding Conduct Requirements will come into effect on 5 August 2022.