The Securities and Futures Commission (SFC), in collaboration with the Stock Exchange of Hong Kong Limited (SEHK), is intensifying its efforts to tackle misconduct and improper behaviour related to new listings. An SFC-SEHK joint statement released today notes some problematic issues in recent initial public offerings (IPOs) which suggest the lack of genuine investor interest and call into doubt the existence of an open, orderly and fair market in the shares (Note 1).
In some IPOs, the initial listing requirements may only have been satisfied by artificial means, such as allocating shares to controlled placees at an inflated IPO price to satisfy the minimum market capitalisation requirement of $500 million under the Main Board Listing Rules. Other questionable arrangements were apparently designed to enable market manipulation of the shares at a later date, such as through ramp and dump schemes (Note 2).
The SFC also notes the publication today of SEHK’s conclusions paper on the increase in the Main Board profit requirement and supports SEHK’s initiative to uphold the quality of the stock market in Hong Kong by setting appropriate profit thresholds in line with the positioning of the Main Board under its market segmentation strategy.
“Listing applicants and firms involved in the IPO process have important roles to play in upholding the quality and integrity of the stock market in Hong Kong,” said Mr Ashley Alder, the SFC’s Chief Executive Officer. “Today’s joint statement signals our determination to combat market misconduct in new listings and we will not hesitate to act if there are red flags indicating a lack of genuine investor interest in an IPO. In the run-up to the effective date of the new profit thresholds, we will place particular focus on new listing applications which rely on aggressive profit forecasts to justify their expected valuations.”
As part of the regulatory response to address improper behaviour, problematic applications with red flags are now subject to heightened scrutiny. If necessary, the regulators will use their regulatory powers to object to or reject an application.
In addition, the SFC works closely with SEHK to critically review each listing applicant’s valuation, such as comparing its price-to-earnings ratio against listed peers, to assess compliance with the minimum market capitalisation and other initial listing requirements.
The SFC has also stepped up its supervision of firms taking part in IPO bookbuilding and placing activities. It will conduct in-depth inspections of those involved in problematic new listings and will take enforcement action against any IPO-related misconduct.
Notes:
1. Today’s joint statement describes common issues noted in recent IPOs which may be “red flags”, including:
- the market capitalisation at listing barely meets the minimum threshold of $500 million under the Main Board Listing Rules or $150 million under the GEM Listing Rules;
- very high price-to-earnings ratios compared to listed peers;
- unusually high underwriting commissions—averaging 12% in 2020 (4% in 2017) for IPOs with market capitalisation below $600 million—and other listing expenses, raising the possibility of rebates to controlled placees; and
- high concentration of shareholders.
2. In a ramp and dump scheme, fraudsters “ramp” up the price of a stock and use social media to lure unwary investors to buy at an artificially high price. The fraudsters then sell or “dump” the stock to take profits causing the price to collapse. The SFC explained how the schemes operate and provided tips for avoiding them in its Enforcement Reporter issued in September 2020.
