The Securities and Futures Commission (SFC) has reprimanded and fined Yi Shun Da Capital Limited (YSD Capital) $3 million for failing to discharge its duties as the sponsor in the listing application of Imperial Sierra Group Holdings Limited (Imperial Sierra) in 2017 (Notes 1 to 3).
The disciplinary action followed a review of the SFC’s decision to sanction YSD Capital by the Securities and Futures Appeals Tribunal (SFAT) (Note 4). The Hon Mr Justice Hartmann, the chairman of the SFAT, upheld the SFC’s decision but varied the fine from $4.5 million to $3 million, taking into account YSD Capital’s financial straits (Note 5).
The SFC found that YSD Capital had failed to perform all reasonable due diligence on Imperial Sierra before submitting the listing application and to ensure that all material information obtained was included in the Application Proof and that the information was accurate and substantially complete (Note 6).
Specifically, YSD Capital’s failings related to:
Failure to perform all reasonable due diligence
Third party payments
Imperial Sierra received payments from customers through third parties during the three years ended 31 December 2014, 2015 and 2016 (track record period). These third party payments represented 67.5%, 67.8% and 39.7% of the company’s revenue during the track record period.
The SFC’s investigation found that YSD Capital:
- did not verify with Imperial Sierra’s customers their relationships with 23 third party payers and the reasons for the third party payments;
- did not take any steps to follow up on four of the seven third party payers who showed in interviews that they apparently did not know the reasons for such payments;
- simply relied on Imperial Sierra’s representation as reasons for the third party payments made by the rest of the third party payers without conducting any independent enquiries; and
- failed to make appropriate follow-up enquiries to address a number of red flags concerning the third party payments when conducting due diligence on Imperial Sierra.
Loan and investment arrangements
Imperial Sierra recorded an “amount due from a shareholder” of $6.3 million, $16.5 million and $18.8 million during the track record period, and the amount rose to $35.1 million as of January 2017.
It consisted of withdrawals made by Imperial Sierra’s chairman cum controlling shareholder to facilitate various loan and investment arrangements between himself and 11 of his acquaintances (finance arrangements).
The SFC’s investigation found that:
- YSD Capital did not obtain and review the agreements and the bank transaction records in relation to the finance arrangements before submitting the listing application;
- three out of the six acquaintances were unable to explain the reasons or purposes of the finance arrangements when interviewed by YSD Capital, but it did not follow up on the matter;
- four of the acquaintances were third party payers or entities connected with Imperial Sierra’s customers, but such relationships were not disclosed in the Application Proof; and
- there were potential connections between three of the acquaintances and Imperial Sierra’s customers, but YSD Capital did not take appropriate steps to verify their relationships.
Suspicious transactions
The SFC’s investigation also found that there were various suspicious transactions which should have called into question as to whether Imperial Sierra and/or its chairman had provided financial support to some of the customers’ payments.
For instance, Imperial Sierra transferred RMB2 million to a third party payer as a personal loan advanced by the company’s chairman two days after the same third party payer made a payment of RMB2.3 million to Imperial Sierra on behalf of a top five customer. However, YSD Capital performed nil or minimal due diligence on these suspicious transactions.
Incomplete disclosure in the Application Proof
The SFC’s investigation further found that YSD Capital had failed to ensure disclosure of all material information in Imperial Sierra’s Application Proof prospectus, including:
- details and particulars of the relationships between Imperial Sierra’s customers and their third party payers, and the reasons for the third party payments;
- a third party payer was the spouse of Imperial Sierra’s deputy general manager;
- the significant increase in the “amount due from a shareholder” was primarily attributable to withdrawals made by Imperial Sierra’s chairman to facilitate the finance arrangements between himself and his acquaintances, and some of the latter were third party payers or entities connected with Imperial Sierra’s customers; and
- the explanation for the suspicious transactions.
As a matter of principle guiding the duties of sponsors, Justice Hartmann said in the SFAT’s determination that “when seeking to verify information that on its face may be problematic, undue reliance on management representations, especially those that are bland and without detail, cannot be regarded as a proper discharge of reasonable due diligence”.
With respect to YSD Capital’s claim that it had been entitled to rely on the view expressed in the accountant’s report annexed to the draft prospectus that the financial statements gave a true and fair view of Imperial Sierra’s financial affairs, Justice Hartmann stated that YSD Capital could not “wash its hands of the matter on the basis that the reporting accountant had found nothing that required it to qualify its report”.
Notes:
- YSD Capital was known as Well Link International Capital Limited from 16 December 2017 to 12 August 2018 and as Zhaobangji International Capital Limited from 4 November 2015 to 15 December 2017. It was licensed to carry on business in Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities from 4 November 2015 to 10 September 2021. It is currently not licensed by the SFC.
- YSD Capital was the sole sponsor of Imperial Sierra’s application to list on the Main Board of The Stock Exchange of Hong Kong Limited (SEHK). The application lapsed six months after submission.
- The SFC has also prohibited Mr Fabian Shin Yick, a former responsible officer and chief executive officer of YSD Capital from re-entering the industry for 20 months. Shin was the sponsor principal in charge of supervising the execution of the listing application of Imperial Sierra. Please see the SFC’s press release dated 16 September 2020.
- The SFAT’s determination is available on its website at www.sfat.gov.hk.
- The SFC originally proposed to fine YSD Capital $14 million. Having considered YSD Capital’s financial position, the SFC decided to impose a fine of $4.5 million against it.
- Application Proof, referring to a draft listing document that is required to be substantially complete, is submitted to the SEHK with a listing application form for the listing of equity securities under SEHK’s Listing Rules.
