The Sponsor With a 9.8% Stake
You are the head of compliance at Silverline Capital Limited, a Type 6 licensed sponsor. Silverline is the sole sponsor of the Main Board IPO of MedTech Group, a PRC medical device company. Silverline's parent, Silverline Group, holds 9.8% of MedTech through a private equity fund that it manages and controls. The stake was acquired 18 months ago by a different team, and the group CFO sits on MedTech's investment committee but not its board. MedTech's largest customer, which accounts for 32% of 2022 revenue, is controlled by the founder's brother. The customer was not disclosed as a connected person in the draft listing document. During due diligence, a junior analyst finds that HK$40 million of 2022 sales were recorded in December with no delivery and no subsequent cash receipt; the CFO says the goods were 'held for the customer' and asks the sponsor to 'trust the audit'. The reporting accountants have signed off the 2022 accounts. Silverline's fee is HK$8 million, of which HK$5 million is payable only on listing. The A1 filing is due in two weeks.
1. Can Silverline act as sponsor? Analyse the independence issue and the effect of the group stake, the team separation and the contingent fee.
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Independence. A sponsor must be independent of the listing applicant. The SFC's Guidelines for Sponsors treat a sponsor as not independent where the sponsor or its group holds 5% or more of the listing applicant. Silverline Group's 9.8% stake is almost double that threshold. Independence is assessed at the sponsor-group level, so the fact that a different team made the investment and that Chinese walls exist does not cure the conflict. The group CFO's involvement in MedTech's investment committee reinforces the connection. The contingent HK$5 million listing fee is not itself disqualifying, but it adds a financial incentive to complete the listing. Silverline should not act as sponsor. It should notify MedTech and the Stock Exchange immediately, withdraw, and ensure a replacement sponsor is appointed before any A1 filing. Acting while not independent would breach the Sponsor Guidelines and expose Silverline to disciplinary action.
2. What due diligence is required on the inflated revenue and the related-party customer, and can Silverline rely on the reporting accountants' audit?
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Due diligence and reliance. A sponsor must conduct reasonable due diligence on the listing applicant and cannot simply rely on the reporting accountants' audit or the underwriter. The December sales are a red flag: HK$40 million recorded with no delivery and no cash receipt, plus a 32% related-party customer that is not disclosed. The sponsor must verify the substance of the transactions: obtain delivery documents, shipping records, customer confirmations, bank statements and subsequent cash receipts; interview the CFO and the customer; check whether the customer is controlled by the founder's brother; and assess whether the revenue is fictitious or the customer should be disclosed as a connected person. If the explanations are unsatisfactory, the sponsor should escalate to MedTech's board and audit committee, require correction of the draft listing document, and consider whether the applicant is unsuitable for listing. The sponsor must not file an A1 until the issues are resolved. If the applicant refuses to correct a material misstatement, the sponsor should withdraw and consider reporting to the SFC and the Exchange.