Background

On 29 October 2021, the Securities and Futures Commission (the “SFC”) published consultation conclusions introducing new conduct requirements for bookbuilding and placing activities as set out in a new paragraph 21 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code”) and sponsor coupling requirement as reflected in the amended paragraph 17 of the Code, which have come into effect on 5 August 2022 (collectively, the “New Requirements”).

On 22 April 2022, The Stock Exchange of Hong Kong Limited (the “HKEx”) published an information paper outlining the consequential amendments to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (the “Listing Rules”), dovetailing the New Requirements in relation to the conduct of issuers1and intermediaries in bookbuilding and placing activities in equity capital markets (the “Rule Amendments”). The Rule Amendments apply to listing applications submitted (or re-filed) on or after 5 August 2022, subject to certain transitional arrangements. In addition, the HKEx has published Frequently Asked Questions No.077-2022 (the “FAQ”) to provide market participants with more guidance on compliance with the Rule Amendments.

No amendments have been made to the Listing Rules relating to the placing of debt securities. Intermediaries engaged in debt capital market transactions are however reminded to abide by applicable standards of conduct under the Code.

Scope of coverage

The New Requirements only target offerings that involve bookbuilding activities (as defined below), which include:

• share (including depositary receipts, stapled securities and REITs) offerings, comprising:
  • placing in connection with a new listing of shares issued by a new applicant (both primary and secondary listing, including reverse takeover) (the “IPOs”);
  • placing of shares of a class new to listing, or new shares of a class already listed under a general or specific mandate; and
  • top-up placing; and
• debt offerings, namely an offering of debt securities listed or unlisted, and offered in Hong Kong or otherwise.

Offerings which do not involve bookbuilding activities are excluded, such as (i) club deals, (ii) private placements, (iii) transactions where securities are allocated to investor clients on a pre-determined basis at a pre-determined price, (iv) selling of listed equity securities by existing holders (other than top-up placing), and (v) offering of equity securities which has been subscribed by an intermediary as principal deploying its own balance sheet for onward selling to investors (excluding back stop arrangement).

The HKEx has also clarified that placing and bookbuilding activities do not include market sounding that is conducted to gauge investors' interest before an issuer has decided to pursue an offering.

The New Requirements apply to the following types of activities:

• bookbuilding activities, namely collating investors’ orders (including indications of interest) in a share or debt offering to facilitate the price determination and the allocation or the process of assessing demand and making allocations (but excluding market sounding);
• placing activities, namely marketing or distributing shares or debt securities to investors pursuant to the bookbuilding activities; and
• advising, guiding and assisting the issuer in bookbuilding and placing activities.

The New Requirements regulate persons licensed by or registered with the SFC who conduct any of the activities specified above (referred to as capital market intermediaries (“CMI”)), whether or not they have been formally appointed by the issuer . A CMI which is engaged by the issuer for a share or debt offering is referred to as a “syndicate CMI”, while a CMI which is not engaged by the issuer is referred to as a “non-syndicate CMI”.

An overall coordinator (“OC”) is a syndicate CMI which, solely or jointly, conducts,

• in the case of a share offering, any of the following activities:
  • overall management of the offering, coordinating the bookbuilding or placing activities conducted by other CMIs, exercising control over bookbuilding activities and making allocation recommendations to the issuer;
  • advising the issuer of the offer price and being a party to the price determination agreement with the issuer; or
  • exercising the discretion to reallocate shares between the placing tranche and public subscription tranche, reduce the number of offer shares, or exercise an upsize option or over-allotment option; and
• in the case of a debt offering, the overall management of the offering, coordinates the bookbuilding or placing activities conducted by other CMIs, exercises control over bookbuilding activities and makes pricing or allocation recommendations to the issuer.

Customary labels such as “global coordinators”, “bookrunners” and "lead managers" may continue to be used and disclosed in the listing document. However, as the definitions under the New Requirements relate directly to the specified activities performed, intermediaries should approach with caution being awarded titles that appear to be inconsistent with how their roles are defined under the New Requirements.

Key Rule Amendments relevant to IPO

The following provides an overview of the key changes brought by the Rule Amendments in connection with an IPO involving bookbuilding activities from a procedural point of view:

In addition to the timing requirement set out in the table above, the appointment by an applicant of CMI or OC must be made under written engagement agreement before the relevant CMI or OC conducts any activities specified under section B above (as the case may be).

Such written engagement agreement must specify (a) the roles and responsibilities of the relevant CMI or OC, (b) the fee arrangement including the fixed fees payable to the CMI or OC as a percentage of the total fees payable to all syndicate CMIs, which can be expressed in other forms as long as not contradicting the requirement, e.g. as an absolute amount, as a percentage of the total gross proceeds to be raised in the share offering, or a sliding scale depending on the final pricing of the shares, (c) the payment schedule, (d) the obligations of the applicant and its directors to assist the syndicate members in identifying the Restricted Investors under Listing Rule 3A.464 and (e) in the case of a sponsor-OC only, the obligation of the applicant and its directors to provide requisite information under Listing Rule 9.11(23a) to the sponsor-OC for its submission to the HKEx four clear business days prior to the Listing Committee Hearing (see the table above).

Key Rule Amendments relevant to placing of shares other than IPO

The issuer should appoint CMI or OC under written engagement agreement before the relevant CMI or OC conducts any activities specified under section B above (as the case may be). Such written engagement agreement must specify (a) the roles and responsibilities of the relevant CMI or OC, (b) the fee arrangement including the fixed fees payable to the CMI or OC as a percentage of the total fees payable to all syndicate CMIs, and (c) the payment schedule.

Where the issuer has appointed more than one OCs, arrangements should be made for one designated OC to provide the requisite information to the HKEx, unless otherwise specified.

The issuer should disclose the names of syndicate members and principal terms of the underwriting/placing arrangements in the announcement required to be published in relation to the proposed placing pursuant to Listing Rule 13.28.

Where applicable, the issuer should disclose the names of syndicate members in the formal notice under Listing Rule 12.04(5).

In the case of placing of shares of a class new to listing under Listing Rule 9.23(2), OCs, any other syndicate members, any other distributors and exchange participants involved in the offering should submit a copy of placing letter, marketing statements under Form D and placee lists to the HKEx before dealings commence.

Key Rule Amendments relevant to all share offerings involving bookbuilding activities

An OC is liable for ensuring the information provided by it to the HKEx is accurate and complete and within the required timeframe. Where more than one OC is appointed, all OCs are jointly and severally liable for ensuring the same.

Upon termination of engagement of an OC, the issuer and the OC should notify the HKEx in writing as soon as practicable of such termination together with reasons therefor and a confirmation on whether such OC had any disagreement with the issuer.

OCs, any other syndicate members, any other distributors and exchange participants should comply with the requirements relating to, and restrictions on placing activities set out in the Listing Rules as applicable.

The issuer must ensure a bookbuilding process is carried out to assess demand for the shares in a placing of shares. The issuer should document the rationale behind its decision on allocation and pricing, in particular where the decision is contrary to the advice, recommendation and/or guidance of the OCs. OCs should inform the HKEx if decisions made by the issuer amount to non-compliance with the Listing Rules relating to, among others, the placing activities conducted by the OCs or the issuer.

Key obligations and standards required of intermediaries under the Code

Pursuant to paragraph 21.3 of the Code, key obligations and standards required of CMIs include:

• assessment of the issuer and the offering before engaging in a share or debt offering: a CMI should take reasonable steps to obtain an accurate understanding of the history, background, business and performance, financial condition and prospects, operations and structure of the issuer, and establish a formal governance process to review and assess any actual or potential conflicts of interest between the CMI and the issuer or other associated risks;
• appointment of CMI: appointment under written engagement agreement before a CMI conducting any  activities specified under section B above;
• assessment of investor clients (i.e. clients of the CMIs which are potential placees in the offerings): a CMI should take reasonable steps to determine whether its investor clients are targeted investors according to the marketing and investor strategy formed (see key obligations and standards required of OCs below). In the case of a share offering, a CMI should take all reasonable steps to identify the Restricted Investors and inform the OC before placing an order on behalf of such clients;
• marketing: a CMI should only market the shares or debt securities to its investor clients which are targeted investors. In the case of a share offering, where the shares are only marketed to selected investor clients, the CMI should be further satisfied that the shares have been marketed to a sufficient number of clients to prevent concentration of holdings. Targeted investors who have indicated an interest in an offering should be allowed to participate in the offering;
• management of order book: a CMI should ensure the price discovery process is credible and the order book is transparent and incorporates only bona fide orders. Identities of all investors are required to be disclosed in the order book, with the exception of orders placed on an omnibus basis, in which case information about the underlying investors (i.e. the investor client’s name and unique identification number) should be provided to the OC and the issuer;
• allocation policy: establishment and implementation of an allocation policy to ensure fair allocation of shares or debt securities to investor clients. CMIs are only required to address or take into account certain factors, principles and requirements in developing their allocation policies which are expected to be general and broadly suitable for most share and debt offerings, which may be modified as needed on a case-by-case basis;
• no rebate or preferential treatment to investor clients: a CMI should not offer any rebate to its investor clients or pass on any rebates provided by the issuer5. A CMI should disclose to the issuer, OCs, all of its targeted investors and the non-syndicate CMIs it appoints, any rebates offered to CMIs and any other preferential treatment of any CMIs or targeted investors (such as guaranteed allocations). In the case of a share offering, a CMI should make the above disclosure upon becoming aware of any such rebates or preferential treatment;
• disclosure of information: a CMI should disclose complete and accurate information it receives on the status of the order book and other relevant information to OCs, non-syndicate CMIs and targeted investors in a timely manner;
• record keeping: a CMI should maintain books and records which are sufficient to demonstrate its compliance with all applicable requirements, including audit trails from the receipt of orders, the placing of orders in the order book through to the final order allocation, all key communications with the issuer and information provided to OCs, other CMIs or investor clients;
• conflicts of interest policies: a CMI should establish, implement and maintain policies and procedures to identify, manage and disclose actual and potential conflicts of interest with investor clients, and govern the process for generating proprietary orders as well as making allocations to such orders. In particular, a CMI should always give priority to satisfying investor clients’ orders over its own proprietary orders and those of its group companies6;
• resources, systems and controls: a CMI should maintain sufficient resources, systems and controls to discharge obligations and responsibilities, including implementation of Chinese walls, risk assessment of orders and allocations, appointment of non-syndicate CMIs, surveillance and monitoring, etc.; and
• communication with regulators: a CMI should deal with the SFC and the HKEx in an open and cooperative manner.

Execution-only non-syndicate CMIs are only required to comply with requirements on assessment of investor clients, management of order books and no rebate or preferential treatment to investor clients.

Pursuant to paragraph 21.4 of the Code, additional key obligations and standards required of OCs include:

• terms of appointment: appointment under written engagement agreement before an OC conducting any activities specified under section B above. For Main Board IPOs, an OC which is not a sponsor-OC should obtain a written confirmation from the applicant that at least one sponsor-OC has been appointed before accepting the appointment;
• advice to the issuer: an OC should provide advice, recommendations and guidance to the issuer throughout the offering with due skill, care and diligence, which includes engaging the issuer at various stages to understand its preferences and objectives with respect to pricing and desired shareholder base. In a share offering, an OC should provide guidance to the issuer on market practices for the split ratio of fees payable to syndicate CMIs (which the SFC currently believes to be 75% fixed and 25% discretionary), and should advise and guide the issuer and its directors as to their responsibilities under the Listing Rules and other applicable regulatory requirements which apply to placing activities and take reasonable steps to ensure they understand and meet these responsibilities. Further, if the issuer's decision may lead to a lack of open market, an inadequate spread of investors or negatively affect the orderly and fair trading of shares, the OC should explain and advise the issuer against such decision;
• marketing, rebates and preferential treatment offered: an OC should devise a marketing and investor targeting strategy for order generation after consultation with the issuer and advise the issuer of the disclosure of any rebates and preferential treatment;
• bookbuilding: an OC should ensure the price discovery process is credible and transparent, the order book is properly managed with identities of all investor clients disclosed therein (except for orders placed on an omnibus basis) and allocations are made on a proper basis according to the allocation policy developed and maintained that sets out the criteria for making allocation recommendations to the issuer. An OC should strike a balance between the interests of the issuer and investor clients and act in the best interest of the integrity of the market. Special attention should be paid to orders placed by CMIs which appear unusual or irregular (e.g. orders which appear to be related to the issuer);
• assessment of investors: in an IPO, an OC should advise the issuer to provide to all syndicate CMIs a list of the Restricted Investors, and take all reasonable steps to identify investors on that list and ensure they will only be allocated shares in accordance with the applicable requirements laid down by the HKEx;
• disclosures to syndicate CMIs and targeted investors: an OC should inform other syndicate CMIs of the issuer’s marketing and investor targeting strategy and disseminate material information related to the offering (e.g. information which may affect the prices, orders received per investor type, proprietary orders and known preferential treatments and rebates) in a timely manner to all syndicated CMIs;
• record keeping: an OC should maintain proper record of, among others, all changes in the order book throughout the bookbuilding process, all key discussions with, and key advice or recommendations provided to, the issuer and final decisions of the issuer which deviate materially from the advice or recommendations provided by the OC; and
• communication with the SFC: an OC should report and provide requisite information to the SFC in a timely manner, including any instances of material non-compliance with regulatory requirements, any material changes to the information previously provided to the SFC and the HKEx, reasons for ceasing to act as an OC in share offerings (if  applicable), and other information as the SFC may require from time to time.

Transitional arrangements

The Rule Amendments apply to listing applications submitted (or re-filed) on or after 5 August 2022 (the “Effective Date”), subject to transitional arrangements as detailed in the FAQ and illustrative examples in appendix to the FAQ). Applicants who have submitted listing applications prior to the Effective Date are not required to comply with the Rule Amendments before their applications lapse, withdrawn or otherwise terminated, even if the bookbuilding, placing and/or other related activities conducted in connection with their proposed offerings take place on or after the Effective Date.

If an applicant intends to make use of the transitional arrangements, the sponsor should notify the HKEx in writing of the appointment of the OC as soon as practicable after such appointment is made.

Key takeaways

Intermediaries should have established adequate and effective systems, controls, protocols and policies to ensure compliance with the New Requirements and the Rule Amendments. It is worth noting that the CMI will remain responsible for complying with the Code in the performance of any bookbuilding or placing activity delegated to an overseas affiliate or a group company of a CMI (e.g. where orders from investor clients in an overseas market are collated by the CMI's overseas affiliate or group company).

Under the new regulatory regime, all CMIs should be appointed by the issuer under written engagement before any bookbuilding or placing activities can take place; therefore, the issuer and intermediaries should factor in sufficient time for negotiation with and engagement of OCs and other CMIs when designing the transaction timetable. Importantly, since the written engagement with OC or CMI needs to specify fixed fees payable to the relevant OC or CMI as a percentage of the total fees payable to all syndicate CMIs under the New Requirements, fee arrangement with syndicate members should now be determined at an early stage of an offering, notwithstanding that subsequent changes are possible provided that notification of such changes is made to the regulators. Nevertheless, it is not permissible to increase the total fees payable to all syndicate CMIs in an offering unless the nature and amount of such fees have been disclosed in the listing document.

It is also important to remind the intermediaries that CMIs and OCs are required to maintain books and records which are "sufficient" to demonstrate their compliance with all applicable requirements under paragraph 21 of the Code. As such, in order to create audit trails, CMIs and OCs may consider communicating both externally with the issuer and investor clients and internally through emails to the extent practicable and, where communication is conducted over the phone (including decisions made and the basis thereof), it will subsequently be documented in minutes or emails. In an example of documenting the rationale for the allocation of share or debt securities, it is the view of the SFC that OCs cannot discharge their record keeping obligations by simply providing the allocation policy to the issuer without documenting the justifications for the allocation recommendation or simply obtaining the issuer's sign-off on the final allocation, and the OCs are expected to keep sufficient documentation explaining the basis of the allocation to each category of investors as well as any deviations within a single category.

Please do not hesitate to contact us if you require assistance on the above matters.

Authored by Nelson Tang and Angel Shi.