Sole sponsor appointed six weeks before the A1: timetable, due diligence and the Application Proof
Your firm has been engaged as sole sponsor of a Main Board IPO by a Hong Kong-incorporated specialty chemicals manufacturer whose operations are all in Guangdong. The engagement letter was signed on 2 May. The directors have fixed 15 June for submission of Form A1 because the reporting accountant's three-year track record period ends on 31 December and the accountant's report must be dated within six months of the listing document; a cornerstone investor's approval also expires in August. During due diligence the sponsor finds that: (i) a customer representing 18% of revenue refuses to provide a confirmation; (ii) a title defect over the company's largest land use right is described in a lawyer's memorandum but not in the draft Application Proof; and (iii) the internal control review is still in draft. The finance director says these points can be "fixed in the prospectus" after the A1. The engagement letter allows either party to terminate on 30 days' notice at any time.
1. Is the sponsor's appointment compliant with the Listing Rules, and can the A1 be submitted on 15 June?
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The key rule is that a new applicant must appoint a sponsor at least two months before the submission of the listing application. Counting from 2 May, two months runs to 2 July. A filing on 15 June is only about six weeks after engagement, so the appointment is not compliant and the Exchange should not accept the A1. The sponsor must tell the board immediately that the 15 June date cannot be met and that the earliest compliant filing date is 2 July (assuming all other conditions are satisfied).
The 30-day termination clause needs separate attention. A sponsor may resign, but the Listing Rules require the sponsor's engagement to cover at least the period up to one year after listing, and any resignation before listing must be notified to the Exchange with reasons and a replacement sponsor appointed. A clause allowing either party to walk away on 30 days' notice at any time is therefore inconsistent with the sponsor's role and should be renegotiated. The sponsor should also confirm its independence and that it has sufficient staff and resources before the engagement is treated as effective.
2. What must the sponsor do about the three due diligence findings before any A1 is filed?
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The sponsor cannot rely on management's assurance that matters can be fixed later. Under the sponsor due diligence regime (including Practice Note 21), the sponsor must conduct reasonable due diligence and satisfy itself that the listing document is accurate and complete in all material respects, and that the Application Proof is substantially complete when filed.
- Customer confirmation (18% of revenue): A refusal is not a reason to ignore the issue. The sponsor should perform alternative procedures: interview the customer's procurement staff, reconcile sales invoices, bank receipts, tax filings and shipping records, and consider whether the customer relationship is at risk. If the customer's confirmation cannot be obtained, the sponsor must assess whether the disclosure in the Application Proof is adequate and whether the revenue is properly recognised.
- Title defect: A defect over the largest land use right may be material to the business and to the valuation. The sponsor must obtain a legal opinion, quantify the risk, and ensure the defect and any remediation plan are disclosed. It cannot be left to a lawyer's memorandum that is not reflected in the Application Proof.
- Internal controls: The sponsor must complete its internal control review and be able to confirm to the Exchange that the applicant's internal controls are adequate. A draft report is not sufficient.
The sponsor should report the findings to the board, document its work, and refuse to file until the Application Proof is substantially complete.
3. If the sponsor files anyway and the Exchange returns the application, what are the consequences for the applicant and the sponsor?
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If the Application Proof is not substantially complete, the Exchange may return the application. The applicant then cannot re-file within eight weeks, which destroys the stated timetable and may also affect the cornerstone investor's commitment. The SFC also has power to object to a listing application under the Securities and Futures (Stock Market Listing) Rules if the listing would not be in the interest of the investing public or the listing document is false or misleading.
For the sponsor, filing an incomplete application is a serious regulatory matter. The SFC may investigate the sponsor's conduct and take disciplinary action under the SFO, including public censure, fines, suspension or revocation of the sponsor's licence, and disqualification. The Exchange may also question whether the sponsor remains independent and has discharged its obligations. The sponsor's reputation in the IPO market is directly at risk.
The practical answer is that the sponsor should not file. It should advise the board of the two-month rule and the due diligence gaps, consider whether it can continue to act if the board insists on filing, and document its advice. If the sponsor resigns, it must notify the Exchange and give reasons, and the applicant must appoint a replacement sponsor.