HKSI Paper 5 common mistakes
HKSI Paper 5 · Understand the traps and how to avoid them.
Treating the SFC and the Stock Exchange as interchangeable regulators, so the candidate answers that the SFC approves listing applications or that the Exchange grants licences to corporate finance advisers.
Both bodies appear together in almost every chapter, and candidates memorise 'SFC regulates the securities market' without mapping each function to the correct body. The dual filing regime makes the overlap feel total.
What to do instead
Build a two-column table and force every function into one column: the Exchange (through the Listing Division and the Listing Committee) vets and approves listing applications, administers the Listing Rules and rules on listing eligibility; the SFC licenses intermediaries, administers the SFO, approves the Takeovers Code and the Corporate Finance Adviser and Sponsor regimes under it, and is the statutory investigator. Then test yourself by asking 'who signs the listing approval letter?' and 'who issues the Type 6 licence?' until the answer is automatic.
Confusing the sponsor's obligations with those of the overall coordinator, or assuming a sponsor's due diligence ends when the listing application is filed.
The regimes were layered on over time and candidates learn the sponsor role from older summaries that predate the overall coordinator and the post-vetting continuing obligations.
What to do instead
Learn the sponsor's duties as a timeline: before appointment (independence, no conflicts, reasonable grounds to believe listing is achievable), during due diligence (reasonable due diligence on all material claims, no reliance on the accountants alone), at filing (sponsor's declaration and confirmation), and after filing (respond to Exchange comments, keep the Exchange informed of material changes, and remain appointed until listing). Separately note that the overall coordinator role applies to a narrower set of main board applicants and carries coordination duties across advisers. Practise by writing the three or four duties that survive after the application is submitted.
Applying the financial eligibility tests for the Main Board to a GEM applicant, or mixing the profit test, market capitalisation/revenue test and market capitalisation/revenue/cash flow test thresholds.
The three Main Board tests share similar labels and the numbers are easy to half-remember; GEM has its own, lower, stream.
What to do instead
Create a single comparison grid with rows for the profit test, the market capitalisation/revenue/cash flow test and the market capitalisation/revenue test, and columns for Main Board and GEM. Include the trading record period, the management continuity and ownership continuity requirements, and the public float and market capitalisation floors. Rehearse by explaining which test a loss-making biotech or a cash-rich company would use and why. Verify current thresholds against the Exchange's published Listing Rules at the time you sit, because they are periodically revised.
Classifying a connected transaction by the identity of the counterparty alone, without checking the percentage ratios and whether an exemption applies.
Candidates memorise the definition of a connected person and stop there, forgetting that classification is a two-step process: is it connected, and then which ratio bands and exemptions apply.
What to do instead
Adopt a fixed decision sequence for every transaction question: (1) identify connected persons at the issuer, subsidiary and holding company level, including 30%-controlled companies and their associates; (2) compute the percentage ratios (assets, profits, revenue, consideration, equity capital) against the correct denominator; (3) place the transaction in the de minimis, notifiable or major band using the ratio thresholds; (4) check the specific exemptions, including de minimis financial assistance, intra-group transactions, and transactions on normal commercial terms; (5) state the resulting requirements: announcement, circular, independent shareholders' approval and abstention by the interested parties. Write the sequence out each time rather than jumping to the answer.
Answering Takeovers Code questions using company law or Listing Rules principles, for example assuming a shareholder can accept a partial offer for less than all shares, or that the 30% trigger can be crossed with SFC approval on commercial grounds.
The Takeovers Code is a non-statutory code administered by the SFC's Takeovers Executive, and its mandatory offer, equality of treatment and special deal rules cut across ordinary company law intuitions.
What to do instead
Learn the Code as a small set of hard rules: the 30% mandatory general offer trigger and the creep rule allowing an increase of no more than 2% in any 12-month period between 30% and 50%; the requirement that a mandatory offer be in cash at the highest price paid; the rule that partial offers need consent and must be conditional on a specified minimum level of acceptances; the prohibition on special deals for selected shareholders; and the requirement for independent advice to offeree shareholders. Practise by describing what a concert party must do before crossing 30%, and what happens if a shareholder breaches the trigger.
Treating 'inside information' as synonymous with 'material non-public information' in the general sense, and missing the SFO's specific elements and the listed-company disclosure regime.
Candidates carry over the insider dealing concept from other jurisdictions and do not separate the civil market misconduct regime, the criminal offence, and the statutory obligation on listed companies to disclose inside information as soon as reasonably practicable.
What to do instead
Write out the SFO definition element by element: specific information about the corporation, about a shareholder or officer, or about the listed securities or their derivatives; not generally known to the market; and if generally known, likely to materially affect the price. Then distinguish the three consequences: the civil market misconduct regime before the Market Misconduct Tribunal, the criminal offence, and the company's own disclosure duty with its safe harbour for incomplete proposals or negotiations. Test yourself on borderline examples such as a rumoured transaction, an incomplete negotiation and a sudden profit warning.
Confusing the share buy-back rules on the Exchange with the Companies Ordinance requirements, for example assuming an on-market buy-back needs a special resolution each time, or that a general mandate is unlimited.
Buy-backs sit at the intersection of the Listing Rules, the Companies Ordinance and the Takeovers Code, and candidates study each in isolation.
What to do instead
Build an integrated checklist for a buy-back: the general mandate renewed by ordinary resolution at the annual general meeting, its cap (commonly 10% of issued shares), the refreshment by a further ordinary resolution, the prohibition on buy-backs in restricted periods, the price limits for on-market buy-backs, the reporting and announcement obligations, the effect of buy-backs on the 30% mandatory offer threshold, and the Companies Ordinance requirements for capital reduction or court-sanctioned arrangements where relevant. Then answer past-style questions by stating which rulebook each step comes from.
Reciting the Listing Committee's existence without knowing its composition, its delegated powers and the review and appeal route from a Listing Division decision.
Governance material reads as background and candidates skip it, but questions test who decides, who reviews and who hears appeals.
What to do instead
Map the decision chain: Listing Division staff make routine and some substantive decisions; the Listing Committee (with its members drawn from market practitioners and Exchange representatives) decides listing applications and policy; the Listing Review Committee hears reviews of Listing Committee decisions; and the SFC has a power to object to a listing application. Learn the difference between a review and an appeal and who sits on each body. Confirm the current committee structure on the Exchange's website before the exam.
Answering corporate finance adviser and sponsor questions from the general licensing chapter, so the candidate says a Type 6 licence alone permits sponsoring a listing, or ignores the sponsor's independence and conflict rules.
The licensing regime and the corporate finance regime are taught in separate chapters and the licence types are memorised as a list rather than as permissions.
What to do instead
Learn the licence types by activity: Type 1 dealing in securities, Type 4 advising on securities, Type 6 advising on corporate finance, Type 9 asset management. Note that sponsor work requires the firm to be licensed for Type 6 (and, for the sponsor's overall role, the firm must be appropriately licensed and the sponsor must be independent of the applicant). Then add the conduct overlay: the sponsor's declaration to the Exchange, the requirement for at least one appropriately qualified principal, and the conflict-of-interest rules that prevent the sponsor from also acting for a competing applicant. Test yourself by asking which licence a firm needs to advise on a takeovers Code offer document.
Treating post-listing obligations as a single 'disclose everything' rule, without distinguishing inside information disclosure, periodic reporting, notifiable transaction announcements and connected transaction circulars, and their different deadlines.
The obligations are spread across the Listing Rules, the SFO and the Companies Ordinance, and candidates learn them as a list of documents rather than a set of triggers and deadlines.
What to do instead
Create a trigger-and-deadline table: inside information (as soon as reasonably practicable, with the safe harbour), annual and interim results and reports (specific publication windows), notifiable transaction announcements (promptly after the terms are agreed), circulars to shareholders (within the prescribed period before the meeting), and connected transaction independent shareholders' approval. For each row, note who must act, what must be published, and the consequence of delay. Rehearse with a scenario such as a subsidiary disposing of a major asset and a director buying shares from the issuer, and state every obligation each triggers.