HKSI Paper 5 cheat sheet

The Securities and Futures Ordinance (SFO, Cap. 571) came into force on 1 April 2003, consolidating the Securities Ordinance, Commodities Trading Ordinance, Protection of Investors Ordinance and related legislation; it is administered by the SFC.

The SFO creates 10 regulated activities (Types 1-10): dealing in securities; dealing in futures contracts; leveraged foreign exchange trading; advising on securities; advising on futures contracts; advising on corporate finance; providing automated trading services; securities margin financing; asset management; and providing credit rating services.

Part XIV defines market misconduct offences (including insider dealing, false trading, price rigging, disclosure of false or misleading information inducing transactions, and stock market manipulation) and gives the Market Misconduct Tribunal civil powers; parallel criminal offences sit in Part XIII.

Part XIII creates criminal offences for dealing in securities or futures while in possession of inside information, and for disclosure of inside information; the maximum penalty is 10 years' imprisonment and a fine of HK$10 million.

Part XV empowers the SFC to investigate, to require production of records, and to take disciplinary action against licensed persons (public or private reprimand, revocation or suspension of licence, fine up to the greater of HK$10 million or three times the profit gained or loss avoided).

Section 213 SFO allows the SFC to apply to the Court of First Instance for injunctions and other orders, including disgorgement, against any person who has contravened a provision; it is not limited to licensed persons.

The SFC's six core regulatory objectives under section 4 SFO include maintaining and promoting the fairness, efficiency, competitiveness, transparency and orderliness of the securities and futures industry, and protecting investors.

Section 399 SFO provides a statutory right for a person aggrieved by an SFC decision to apply to the Securities and Futures Appeals Tribunal (SFAT) for review; certain decisions are excluded (e.g. decisions under section 213).

The SFC's Guidance on Conduct and Supervision (including the Code of Conduct for Persons Licensed by or Registered with the SFC) sets conduct standards; the Code's 12 general principles apply to all licensed persons.

A corporation needs a licence for each regulated activity it carries on; an individual must be licensed as a responsible officer (RO) or a licensed representative (LR) and may be licensed for one or more regulated activities.

A licensed corporation must have at least two ROs, at least one of whom must be an executive director available at all times to supervise the regulated activity; an RO must be at least 18, fit and proper, and have at least three years' relevant industry experience in the past six years.

Fit and proper criteria under the SFC's Fit and Proper Guidelines cover financial status, education/qualifications, experience, criminal record, regulatory compliance, and reputation and character.

The SFC's competency requirement for a representative: academic/industry qualification plus relevant industry experience; recognised qualifications include degrees in accounting, business, economics, finance or law, or professional designations such as CFA, CPA, or CFP.

The Licensing Handbook sets out the application process; the SFC aims to process complete applications within 8 weeks for licences and 15 business days for temporary licences, but the statutory time limit is 6 months.

Licensed corporations must maintain minimum paid-up share capital and liquid capital: for Type 1 and Type 2 dealing, HK$5 million paid-up capital and HK$3 million liquid capital (adjusted by the Securities and Futures (Financial Resources) Rules); for Type 6 advising on corporate finance, HK$5 million paid-up capital and HK$3 million liquid capital.

Licence fees: a licence is valid for the period applied for (normally 2 years) and fees are set by the Securities and Futures (Fees) Rules; annual fees apply to licensed corporations.

Continuing obligations include notifying the SFC of changes (e.g. change of substantial shareholder, cessation of business, disciplinary action) within 7 business days, and submitting annual audited accounts and financial returns within 4 months of financial year end.

The SFC may impose licensing conditions (e.g. restricting a licence holder to institutional clients only) and may refuse or revoke a licence if the fit and proper criteria are not met.

Type 6 (advising on corporate finance) covers advising on the Listing Rules, the Takeovers Code, and the Companies Ordinance, including advising on offers, mergers, acquisitions and share issues.

A sponsor is a licensed corporation (Type 6) appointed by an applicant to advise on an IPO and to conduct due diligence; the sponsor must be formally appointed at least two months before the listing application (the 'two-month rule').

Under the SFC's Sponsor Guidelines, a sponsor must conduct reasonable due diligence, including a reasonable investigation of the accuracy of the listing document, and must ensure all material information is disclosed.

The sponsor's declaration in the listing application (Form A1) confirms it has completed all reasonable due diligence except matters that by their nature can only be dealt with later, and that it has a reasonable basis to believe the listing document is accurate.

The sponsor's engagement must be documented in a written agreement; the sponsor must have sufficient staff and resources and must not have conflicts of interest (e.g. also acting as underwriter may be permitted but conflicts must be managed).

Sponsors are subject to the SFC's Code of Conduct and the Sponsor Guidelines; breaches may lead to disciplinary action, including fines and licence suspension.

The 'sponsor coupling' prohibition: a sponsor must not be appointed for more than one listing application at the same time unless it has sufficient resources; the SFC may require the sponsor to demonstrate capacity.

Under the SFC's Guidance on Sponsor Coupling, a sponsor should not act on more than a limited number of IPOs concurrently; the SFC may object to an appointment if the sponsor cannot demonstrate sufficient resources.

The Listing Rules (Chapter 3A) set out the sponsor's role, including the requirement to provide a declaration and to assist the Exchange in vetting the listing application.

The Listing Rules (Main Board and GEM) are issued by the Stock Exchange of Hong Kong Limited (SEHK), a wholly owned subsidiary of HKEX; they are rules, not legislation, but are enforceable through the Exchange's disciplinary powers.

Main Board financial eligibility tests: profit test (profit of at least HK$35 million in the most recent year and aggregate HK$45 million in the two preceding years), market capitalisation/revenue test (revenue of at least HK$500 million in the most recent year and market cap of at least HK$4 billion at listing), and market cap/revenue/cash flow test.

Main Board minimum market capitalisation at listing is HK$500 million (for the profit test) and HK$4 billion (for the market cap/revenue test); GEM minimum market capitalisation is HK$150 million.

The Main Board requires a trading record period of at least three financial years; GEM requires two financial years.

Management continuity: the Main Board requires continuity of management for the three preceding financial years and continuity of ownership for the most recent financial year; GEM requires two years' management continuity.

Public float: at least 25% of the issuer's total issued share capital must be in public hands at listing; a lower percentage (normally 15%) may be accepted for issuers with a market capitalisation of over HK$10 billion at listing.

The Listing Rules require a minimum of 300 shareholders for a Main Board IPO (or 100 for GEM); the 'sufficient public interest' requirement applies.

Connected transactions rules (Chapter 14A) require independent shareholders' approval and/or announcement and reporting depending on the size of the transaction relative to the issuer's total assets, profits, revenue, consideration and equity capital.

Notifiable transactions (Chapter 14) are classified by percentage ratios: share transaction (<5%), discloseable transaction (5% or more but less than 25%), major transaction (25% or more but less than 100%), and very substantial acquisition (100% or more).

The Listing Committee is the governing body of the Exchange's listing function; it has 28 members, including the Chairman and two Deputy Chairmen, appointed by the Board of HKEX.

The Listing Committee's powers include approving and rejecting listing applications, disciplining issuers and directors, and making Listing Rules; it is supported by the Listing Division and the Listing Department.

The Listing Nominating Committee nominates candidates for the Listing Committee and the Listing Review Committee; members are appointed for a term of one year and may be reappointed.

The Listing Review Committee hears appeals from decisions of the Listing Committee; a further appeal lies to the HKEX Board and then to the Securities and Futures Appeals Tribunal (SFAT) in certain circumstances.

The Listing Division conducts the vetting of listing applications, including the review of listing documents and due diligence, and makes recommendations to the Listing Committee.

The Exchange has disciplinary powers under Chapter 2A, including private and public censures, and can require remedial action; it may also refer cases to the SFC.

The SFC has a statutory right under the SFO to object to a listing application (section 6 SFO) and may give directions to the Exchange; the SFC's 'dual filing' regime requires listing documents to be filed with the SFC.

The Listing Rules are subject to the SFC's approval; the SFC may direct the Exchange to amend the Listing Rules.

An IPO applicant must submit a listing application (Form A1) to the Exchange, together with the listing fee and a sponsor's declaration; the application is published on the HKEX website.

The listing document (prospectus) must comply with the Companies Ordinance (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) prospectus regime and the Listing Rules; it must contain all information necessary for investors to make an informed assessment.

The vetting process includes a review by the Listing Division, the Listing Committee hearing, and SFC review; the SFC may object to a listing application within a specified period.

The public offer structure: at least 10% of the total offer shares must be offered to the public (subject to clawback), and the offer is normally subject to a minimum subscription level.

The clawback mechanism: if the public tranche is oversubscribed, shares are reallocated from the placing tranche to the public tranche (e.g. 20% if oversubscribed 15 times or more, 30% if 50 times or more, 40% if 100 times or more).

The offer price is determined after book-building; the final offer price must be disclosed in the prospectus and the shares are allotted and listed on the Exchange.

Stabilisation activities are permitted under the Securities and Futures (Price Stabilising) Rules; a stabilising manager may support the price for up to 30 days after listing.

The 'dual filing' regime requires the listing document to be filed with the SFC and the Exchange; the SFC has powers to object to a listing application under section 6 SFO.

After listing, the issuer must comply with continuing obligations, including publication of annual and interim results (within 3 months and 2 months respectively) and the Model Code for Securities Transactions by Directors.

Annual results must be published within 3 months of the financial year end; interim results within 2 months of the half-year end; a quarterly results announcement is required for GEM issuers.

The Model Code for Securities Transactions by Directors (Appendix C3) sets out dealing restrictions, including blackout periods from the end of the financial period until the publication of results.

Connected transactions (Chapter 14A) require independent shareholders' approval if the transaction exceeds certain percentage ratios; de minimis exemptions apply (e.g. below 0.1% of the issuer's total assets).

Continuing connected transactions require an annual cap, independent shareholders' approval, and annual review by the independent non-executive directors and the auditors.

Notifiable transactions are classified by the highest percentage ratio: share transaction, discloseable transaction, major transaction, and very substantial acquisition.

A major transaction (25% or more but less than 100%) requires shareholders' approval; a very substantial acquisition (100% or more) also requires shareholders' approval and is treated as a reverse takeover if it involves a change of control.

The issuer must publish an announcement for a discloseable transaction as soon as practicable; for a major transaction, a circular must be sent to shareholders within 45 days of the announcement.

Directors' dealings in the issuer's securities are restricted during blackout periods and require disclosure under Part XV of the SFO (Disclosure of Interests).

Inside information must be disclosed as soon as reasonably practicable under Part XIVA SFO; a listed corporation must have a written inside information policy.

The Takeovers Code (Hong Kong Code on Takeovers and Mergers) applies to takeovers of public companies listed in Hong Kong and to certain unlisted companies; it is administered by the SFC's Takeovers Executive.

The mandatory general offer rule (Rule 26) is triggered when a person acquires 30% or more of the voting rights of a company, or when a person holding between 30% and 50% acquires more than 2% in any 12-month period.

The mandatory offer must be at a price not less than the highest price paid by the offeror (or persons acting in concert) in the preceding 6 months.

The voluntary general offer rules (Rule 3) require the offeror to have sufficient financial resources and to make the offer at a fair price; the offer must be conditional on a minimum acceptance level (normally 50%).

The 'acting in concert' concept (Rule 26) treats persons who cooperate to obtain or consolidate control as a single person; presumptions of acting in concert are set out in the Code.

The offer period rules: an offer must remain open for at least 21 days and not more than 60 days; the offeror must publish an offer document within 21 days of the announcement.

The 'put up or shut up' (PUSU) regime (Rule 3.7) requires a potential offeror to announce a firm intention to make an offer or to withdraw within a specified period (normally 4 weeks) after the announcement of a possible offer.

The Takeovers Code is not legislation; it is enforced by the SFC through disciplinary action, including private and public censures, and the SFC may apply to the court for orders.

The Takeovers Executive may grant waivers from the Code; the Takeovers Appeal Committee hears appeals from decisions of the Takeovers Executive.

The Companies Ordinance (Cap. 622) came into force on 3 March 2014, replacing the predecessor Companies Ordinance (Cap. 32); it governs incorporation, capital, directors' duties, accounts and audits.

A company must have at least one director who is a natural person; a private company must have at least one shareholder; a public company must have at least two directors and two shareholders.

Directors' duties under the Companies Ordinance include the duty to act in good faith in the best interests of the company, to exercise reasonable care, skill and diligence, and to avoid conflicts of interest.

The Companies Ordinance requires companies to keep accounting records and to prepare annual financial statements; a private company must file annual returns with the Companies Registry within 42 days of the anniversary of incorporation.

Share capital: the Companies Ordinance abolished par value for shares; shares may be issued at any price and the concept of 'authorised share capital' was abolished.

A company may reduce its share capital by a court-free procedure (solvency statement) or by court order; a solvency statement must be made by all directors.

The Companies Ordinance prohibits financial assistance by a company for the acquisition of its own shares, subject to exceptions (e.g. distribution of assets in the ordinary course of business).

A prospectus issued by a company must comply with the prospectus regime in the Companies Ordinance (Cap. 32) (Winding Up and Miscellaneous Provisions Ordinance), which requires registration with the Companies Registry.

The Companies Ordinance requires companies to keep a register of members and a register of directors and secretaries, and to make these available for inspection.

A share buy-back by a listed company must comply with the Listing Rules (Chapter 10) and the Companies Ordinance; a general mandate must be approved by shareholders (normally at the AGM) for on-market buy-backs.

The general mandate for buy-backs is limited to 10% of the issued share capital; the mandate for issuing new shares is limited to 20% of the issued share capital (the '20% general mandate').

An on-market buy-back must be conducted on the Exchange and the buy-back price must not exceed the highest of the last independent trade price and the highest independent bid price.

An off-market buy-back requires shareholders' approval and is subject to the Takeovers Code if it results in a change of control.

A company may not buy back its shares if it would result in the company being unable to pay its debts as they fall due (solvency test).

Rights issues: a rights issue must be offered to existing shareholders on a pro rata basis; the subscription price is normally at a discount to the market price; the offer must be open for at least 14 days.

Placing of new shares: a placing must be conducted at a price not less than the benchmarked price (the higher of the closing price on the date of the placing agreement and the average closing price over the preceding 5 trading days), unless a waiver is obtained.

Open offer: an open offer is similar to a rights issue but the offer is not necessarily pro rata and may be underwritten; shareholders' approval may be required if it exceeds the general mandate.

Consideration issue: shares issued for non-cash consideration require shareholders' approval if the consideration exceeds the general mandate; the Listing Rules require an independent valuation in certain cases.

Insider dealing is defined in section 270 SFO (civil) and section 291 SFO (criminal); it covers dealing in securities while in possession of inside information, and disclosure of inside information to another person.

Inside information is specific information about a listed corporation that is not generally known to the market and would, if generally known, be likely to materially affect the price of the securities.

Part XIVA SFO requires a listed corporation to disclose inside information as soon as reasonably practicable; a breach is a civil offence enforced by the SFC before the Market Misconduct Tribunal.

The Market Misconduct Tribunal (MMT) hears civil market misconduct cases; it may impose disqualification orders, cold shoulder orders, cease and desist orders, and fines of up to HK$10 million.

Criminal proceedings for insider dealing are brought in the Court of First Instance; the maximum penalty is 10 years' imprisonment and a fine of HK$10 million.

False trading (section 274 SFO) includes wash sales, matched orders and transactions that create a false or misleading appearance of active trading or price.

Price rigging (section 275 SFO) includes transactions that stabilise or maintain the price of securities at an artificial level, subject to the price stabilising safe harbour.

The SFC's Enforcement Division investigates breaches; the SFC may issue warning letters, take disciplinary action against licensed persons, or refer cases to the MMT or the police.

The SFC may seek disqualification orders against directors under section 214 SFO for misfeasance or other misconduct; the maximum disqualification period is 15 years.

The Companies Ordinance (Cap. 622) came into force on 3 March 2014, replacing the predecessor Companies Ordinance (Cap. 32); it governs incorporation, capital, directors' duties, accounts and audits.

A company must have at least one director who is a natural person; a private company must have at least one shareholder; a public company must have at least two directors and two shareholders.

Directors' duties under the Companies Ordinance include the duty to act in good faith in the best interests of the company, to exercise reasonable care, skill and diligence, and to avoid conflicts of interest.

The Companies Ordinance requires companies to keep accounting records and to prepare annual financial statements; a private company must file annual returns with the Companies Registry within 42 days of the anniversary of incorporation.

Share capital: the Companies Ordinance abolished par value for shares; shares may be issued at any price and the concept of 'authorised share capital' was abolished.

A company may reduce its share capital by a court-free procedure (solvency statement) or by court order; a solvency statement must be made by all directors.

The Companies Ordinance prohibits financial assistance by a company for the acquisition of its own shares, subject to exceptions (e.g. distribution of assets in the ordinary course of business).

A prospectus issued by a company must comply with the prospectus regime in the Companies Ordinance (Cap. 32) (Winding Up and Miscellaneous Provisions Ordinance), which requires registration with the Companies Registry.

The Companies Ordinance requires companies to keep a register of members and a register of directors and secretaries, and to make these available for inspection.

A share buy-back by a listed company must comply with the Listing Rules (Chapter 10) and the Companies Ordinance; a general mandate must be approved by shareholders (normally at the AGM) for on-market buy-backs.

The general mandate for buy-backs is limited to 10% of the issued share capital; the mandate for issuing new shares is limited to 20% of the issued share capital (the '20% general mandate').

An on-market buy-back must be conducted on the Exchange and the buy-back price must not exceed the highest of the last independent trade price and the highest independent bid price.

An off-market buy-back requires shareholders' approval and is subject to the Takeovers Code if it results in a change of control.

A company may not buy back its shares if it would result in the company being unable to pay its debts as they fall due (solvency test).

Rights issues: a rights issue must be offered to existing shareholders on a pro rata basis; the subscription price is normally at a discount to the market price; the offer must be open for at least 14 days.

Placing of new shares: a placing must be conducted at a price not less than the benchmarked price (the higher of the closing price on the date of the placing agreement and the average closing price over the preceding 5 trading days), unless a waiver is obtained.

Open offer: an open offer is similar to a rights issue but the offer is not necessarily pro rata and may be underwritten; shareholders' approval may be required if it exceeds the general mandate.

Consideration issue: shares issued for non-cash consideration require shareholders' approval if the consideration exceeds the general mandate; the Listing Rules require an independent valuation in certain cases.

Insider dealing is defined in section 270 SFO (civil) and section 291 SFO (criminal); it covers dealing in securities while in possession of inside information, and disclosure of inside information to another person.

Inside information is specific information about a listed corporation that is not generally known to the market and would, if generally known, be likely to materially affect the price of the securities.

Part XIVA SFO requires a listed corporation to disclose inside information as soon as reasonably practicable; a breach is a civil offence enforced by the SFC before the Market Misconduct Tribunal.

The Market Misconduct Tribunal (MMT) hears civil market misconduct cases; it may impose disqualification orders, cold shoulder orders, cease and desist orders, and fines of up to HK$10 million.

Criminal proceedings for insider dealing are brought in the Court of First Instance; the maximum penalty is 10 years' imprisonment and a fine of HK$10 million.

False trading (section 274 SFO) includes wash sales, matched orders and transactions that create a false or misleading appearance of active trading or price.

Price rigging (section 275 SFO) includes transactions that stabilise or maintain the price of securities at an artificial level, subject to the price stabilising safe harbour.

The SFC's Enforcement Division investigates breaches; the SFC may issue warning letters, take disciplinary action against licensed persons, or refer cases to the MMT or the police.

The SFC may seek disqualification orders against directors under section 214 SFO for misfeasance or other misconduct; the maximum disqualification period is 15 years.