Enhanced Collaboration Between Hong Kong’s Securities Regulators to Combat IPO-Related Misconduct

The Stock Exchange of Hong Kong and the Securities and Futures Commission continue to step up their collaboration in enforcing regulatory compliance. This Update considers the latest disciplinary actions in relation to initial-public-offering-related misconduct and provides practical tips for issuers and directors facing such regulatory investigations.

In recent years, Hong Kong’s securities regulators have increasingly recognized the need for cross-collaboration in their enforcement efforts and the potential benefits that coordinated investigations may bring. The recent joint enforcement action by the Stock Exchange of Hong Kong Limited (HKEX) and the Securities and Futures Commission (SFC) against two former executive directors of Global Uin Intelligence Holdings Limited (Company) is a good example of such cross-collaboration. This case and the enhanced regulatory cooperation serve as a timely reminder to senior managers and directors of Hong Kong–listed companies that initial-public-offering (IPO)-related misconduct remains one of the key enforcement priorities. There will be close scrutiny of any inconsistencies in the use of IPO proceeds against the issuers’ expenditure plans.

Background

Global Uin is a company listed on the GEM board since May 2020, and Aris Goh Leong Heng (Goh) and Anita Chia Hee Mei (Chia) were the former executive directors and controlling shareholders. During Global Uin’s preparation of its 2020 annual report, it was discovered that the Company’s actual listing expenses were materially higher than the estimated listing expenses disclosed in the prospectus. This was due to a substantial payment (Payment) being procured by Goh and Chia to an IPO consultant for purported IPO consultancy services. Goh and Chia had not disclosed the Payment to the board, and the Payment was not disclosed in the Company’s listing documents. It was later found that the Payment had been re-routed from the IPO consultant to Goh and Chia, who then used it to repay amounts they owed to the Company prior to the listing (Re-Routing Arrangement).

During the Company’s independent investigation, Goh and Chia attempted to obfuscate the truth by providing misleading information to hide their misappropriation of funds. The independent investigation therefore concluded there was no evidence to support the Re-Routing Arrangement. Only on further investigation by the SFC were previously withheld transfer records and other evidence uncovered, which then proved the Re-Routing Arrangement. The SFC shared this relevant evidence with the HKEX in aid of its investigation.

Sanctions imposed by the HKEX

Having considered all relevant evidence, the HKEX found that Goh and Chia had breached their fiduciary duties to the Company, GEM Listing Rule (GLR) 5.01 (i.e., requirement to fulfill fiduciary duties and act with skill, care and diligence) and GLR 17.55B (i.e., requirement to provide accurate and complete information in responding to regulatory enquiries of the HKEX and the SFC), as well as their directors’ undertakings under the then Appendix 6A of the GLR (including to cooperate in any HKEX investigation).

Both Goh and Chia were publicly censured, and the HKEX additionally imposed a Director Unsuitability Statement against them, indicating that they are unsuitable to act as directors or within senior management of the Company or its subsidiaries. The HKEX took into account the following key factors:

1. Through the Re-Routing Arrangement, Goh and Chia had, in blatant breach of their fiduciary duties, misappropriated the Company’s funds for their own purposes and had acted dishonestly against the Company’s interests. They also misled the Company’s investors and the public by failing to disclose relevant information as part of the Company’s investigation, leading to a false conclusion.
2. Goh and Chia failed to cooperate with the investigations and enquiries conducted by, among others, the HKEX and the SFC and were deliberately evasive in refusing to disclose key bank statements while providing false or misleading information.

While the HKEX has already imposed sanctions against Goh and Chia, the SFC’s investigation remains ongoing, and the SFC may take further enforcement action against Goh and Chia.

Other recent HKEX enforcement actions on IPO-related misconduct

Some other relevant enforcement actions by the HKEX on IPO-related misconduct include:

Regulatory guidance

IPO-related misconduct is increasingly becoming a key area of focus for the securities regulators. In particular, the use of IPO proceeds is a common aspect regularly monitored by the regulators. A major pitfall for newly listed issuers lies in executing transactions that changed the intended use of the IPO proceeds without making proper disclosure.

It is worth noting that both the HKEX and the SFC have repeatedly placed a strong emphasis on tackling potential IPO-related misconduct. Some of the relevant guidance include:

1. On May 20, 2021, the SFC and the HKEX issued the Joint Statement on IPO-related Misconduct, which pointed to regulatory concerns regarding the recently launched IPOs being associated with ramp-and-dump schemes or involving some unusually high underwriting commissions, other listing expenses, and suspicious arrangements.
2. In the March 2023 edition of the HKEX’s Enforcement Bulletin, the HKEX placed emphasis on disclosure misconduct by newly listed issuers, particularly around concerns that significant changes in the use of IPO proceeds were material to the investing public but not properly disclosed. The HKEX reminded issuers, directors, and professional advisers to ensure adequate and timely disclosure of material commitments and expenditures occurring around the time of listing or shortly after.
3. In January 2024, the HKEX published the Review of Issuers’ Annual Reports 2023, which reported, inter alia, on the thematic review on newly listed issuers (listed in 2021 and 2022). The HKEX, in particular, highlighted the following regulatory concerns:

1. inconsistencies in the use of IPO proceeds with stated business plans and the lack of proper disclosure, including what the IPO proceeds were being used for, including wealth management projects, upfront payments to consultants or promoters, and loans to related parties or as pledged bank deposits to guarantee third-party liabilities; the HKEX noted that these arrangements may lack commercial rationale and may result in substantial losses for the issuers; and
2. directors of some newly listed issuers, in breach of their fiduciary duties, failing to properly safeguard corporate assets and shareholders’ interests, while the issuers were also in breach of disclosure rules for notifiable and/or connected transactions; there are cases where issuers lack sufficient internal controls. 

Commentary

Based on our experience in handling regulatory investigations involving use of IPO proceeds of newly listed issuers, some of our key observations and lessons learned are as follows:

1. It is imperative that the issuer and the directors maintain good recordkeeping to enable them to be in a position to demonstrate to the regulators that they have discharged their duties and responsibilities to ensure compliance with the Listing Rules or other relevant regulatory requirements in respect of the use of IPO proceeds.
2. Some directors may misunderstand that if they were not personally involved in the relevant transactions leading to the misuse of IPO proceeds or if they were not primarily responsible for the financial affairs of the issuer, they would not be liable for the wrongdoings. It is important to bear in mind that the regulators expect that each and every director (including the company’s independent nonexecutive directors (INEDs)) to be collectively and individually responsible to ensure regulatory compliance, and they are required to, inter alia, take an active interest in the company’s affairs and be answerable to the issuer for the application or misapplication of its assets.
3. As expressly provided for in the Listing Rules, directors do not satisfy the requirements only by paying attention to the issuer’s affairs at formal meetings. They must also demonstrate, with supporting documents, that they have taken active steps to make inquiries and monitor the use of the IPO proceeds, procure the company to consult its compliance adviser regarding the use of the IPO proceeds, and ensure that the company maintains effective and adequate internal controls to safeguard assets of the company.
4. It is a misconception that because there was no loss as a result of the transactions / application of the IPO proceeds in question, disciplinary sanctions are not warranted. Disciplinary actions and public sanctions are not contingent on a loss being suffered. The mere fact that the IPO proceeds were used in a way that was inconsistent with the intended use disclosed in the prospectus suggests potential deficiencies of the internal controls and noncompliance with the relevant regulatory requirements, which may necessitate disciplinary action.
5. INEDs are subject to the same duties of skill, care, and diligence as other directors of an issuer. Furthermore, INEDs are expected to exercise independent judgment on matters put forward for the board’s consideration, and they will be scrutinized by the regulators against such standard.
6. The case of Goh and Chia further serves to highlight the strategic coordination between the securities regulators on cases of mutual concern, whereby the HKEX refers relevant misconduct matters to the SFC for investigation, while the SFC may share the available evidence obtained in the course of its own investigation, for example through dawn raids or interviews, with the HKEX. It is recommended to adopt a coordinated approach in handling parallel investigations by the HKEX and the SFC to avoid providing inconsistent information and submissions made to the regulators.