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25 Mar 2019

SFC imposes largest ever fines for sponsor failures


On 14 March 2019, Hong Kong’s securities regulator, the Securities and Futures Commission (the “SFC”) imposed its largest ever fines for sponsor failures in IPOs. All of the failures arose from due diligence that the SFC considered inadequate.

The IPOs in question were China Forestry (listed in 2009; UBS and Standard Chartered acted as joint sponsors), Tianhe Chemicals (listed in 2014; UBS, Morgan Stanley and Merrill Lynch acted as joint sponsors) and another one which remains unnamed, as investigations against other parties involved in this one remain ongoing. UBS were reprimanded, fined HK$375million, and had its licence to act as sponsor suspended for one year, while its supervisor had his individual licence suspended for 2 years. Standard Chartered were reprimanded and fined HK$59.7 million. Morgan Stanley were reprimanded and fined HK$224 million.  Merrill Lynch were reprimanded and fined HK$128 million.

The IPOs took place a number of years ago, but it is worth highlighting inadequacies cited by the SFC and considering the implications for listing sponsors and their advisers.

The failures

China Forestry IPO

The SFC criticised UBS and Standard Chartered for failing to verify and examine China Forestry’s forestry assets, logging activities, adequacy of insurance coverage and customers.


  • Site inspections to verify forestry assets and records of such inspections were inadequate, particularly as there were no records as to the specific locations inspected.
  • When other professional parties made site inspections, the joint sponsors did not specifically instruct them to verify the existence of the forests.
  • There was no record of any visit to the site of significant forestry assets acquired in 2008 (which accounted for over 90% of China Forestry’s assets), nor of any assessment of the earthquake that hit Yunnan on 9 July 2009 on those forestry assets.
  • The joint sponsors failed to identify certain anomalies in the certificates evidencing foresting rights (namely in respect of the location of certain forests).
  • The joint sponsors failed to identify certain anomalies in the insurance documents (namely in respect of the location of certain forests) 
  • Customer interviews were conducted by telephone only, on numbers provided by China Forestry without verification of such telephone numbers. Records of the interviews were inadequate.

Tianhe Chemicals IPO

The SFC criticised the joint sponsors for allowing Tianhe to control the due diligence process and for failing to take appropriate steps to address red flags raised in customer interviews.


  • Six of the ten customer interviews took place either by telephone or at face-to-face interviews at Tianhe’s offices. The joint sponsors did not have direct contact with the customers in setting up the interviews but rather Tianhe took the lead in informing the joint sponsors which sponsors were unable to attend face-to-face interviews, and which customers refused to conduct interviews at their business premises. The joint sponsors did not take any steps to check with the customers as to why they were not amenable to be interviewed at their offices.
  • The joint sponsors did not make any follow up inquiries in light of a particular customer interview where the person who was interviewed refused to produce his identity and business cards. The joint sponsors also did not ascertain that that person had the appropriate authority and knowledge for the interview. Additionally, this interview was held at Tianhe’s office and the joint sponsors accepted Tianhe’s explanation that since an anti-corruption campaign in Mainland China was underway, that customer, a large state-owned enterprise, would normally turn down any third party request to visit its premises.
  • The interview questions were unclear. Some of the questions related to the customers’ business dealings with “Tianhe Group”, instead of specifically referring to the full name of the listing applicant. Both the listed group and private group carried the Tianhe name and therefore questions referring to Tianhe Group were insufficient. Indeed, one customer mistakenly answered some questions by reference to the private group rather than the listed group.

Implications for sponsors

These enforcement actions follow two other cases against sponsors taken in 2018 and highlight how seriously the SFC is tackling sponsor misconduct in IPOs. This is consistent with the SFC’s message that sponsor failure is one of its top enforcement priorities, and that it is investigating numerous other cases.

In light of the increasingly tough stance taken by the SFC, approaching due diligence as a box-ticking exercise is insufficient and dangerous. Sponsors should exercise their judgment as to the necessary steps to verify all claims made in a prospectus.  In line with the SFC’s drive for personal accountability of responsible individuals, responsibility is also placed personally on a sponsor’s principals. Principals are expected to be in charge of the supervision of the transaction teams. Principals are also expected to be involved in determining the breadth and depth of the due diligence review, resource allocation, making a critical assessment of the results and the adequacy of the due diligence review and ensuring that steps have been taken to properly resolve all issues arising out of such review.

Sponsors and principals cannot delegate away responsibility, as they remain ultimately responsible for the due diligence process. It is critical that sponsors remain in control and stand firm against any attempt to play down negative findings or to resist certain lines of inquiry. Sponsors should be mindful of their obligations under, amongst others, the Code of Conduct for Persons Licensed by or Registered with the SFC, the Corporate Finance Adviser Code of Conduct, the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the SFC and the Additional Fit and Proper Guidelines for Corporations and Authorised Financial Institutions applying or continuing to act as Sponsors and Compliance Advisers.