Hong Kong: Possible Reforms to the Prospectus Regime
At the end of August 2005 the SFC issued a consultation paper which comprised the final phase of a three part review of the manner in which shares and debentures are offered to the public pursuant to the Companies Ordinance (“CO”). The SFC is seeking the views of industry on the following issues: Consolidation of Existing Legislation The Consultation Paper discusses the introduction of a unified offering regime for all regulated investments currently falling within the CO and the Securities and Futures Ordinance (“SFO”). The objective of such consolidation would be to amalgamate all securities law into one piece of legislation and to remove all inconsistencies between the CO and the SFO. This would be very positive for parties seeking to make private offerings in Hong Kong as it would mean that funds structured as companies and funds structured as unit trusts would be treated equally. Enhancement of Investor Protection The Consultation Paper proposes several measures which are designed to enhance investor protection, including proposals: • that the compensation provisions whereby shareholders can claim compensation for loss sustained by reason of untrue statements in a prospectus set out at Sections 40(1) and 40(7) of the CO and which currently only apply to persons who acquire shares in the primary market be extended to shareholders who acquire their shares on the secondary market (this has been proposed to remedy a loophole in the existing legislation and presumably will apply to all types of offering regardless of whether they are offerings of shares, units or interests in limited partnerships if the SFC’s proposal to consolidate the SFO with the relevant provisions of the CO as set out above is implemented although this is not altogether clear from the Consultation Paper); • to extend the circumstances in which a shareholder can claim compensation for loss resulting from an untrue statement in the prospectus; • to impose due diligence obligations on those responsible for the contents of a prospectus and to provide that only those persons who are responsible for a contents of a prospectus who have completed this due diligence will successfully be able to use the defence that they reasonably believed that an untrue statement contained in the prospectus was true; • to update the disclosure standards set out at the Third Schedule to the CO, to move these provisions in to the body of CO prospectus regime (to be set out in a discrete section of the revised SFO) and to expressly tie such disclosure provisions to the civil and criminal liability provisions for untrue statements in a prospectus set out currently at Section 40 of the CO; and • to clarify Section 38(1) of the CO which prohibits the issue of any form of application for shares or debentures unless the form is issued with a prospectus that complies with the requirements of the CO prospectus provisions. It is also proposed to extend the scope of this regulation to any type of application form or application process and to any person engaging in their distribution or implementation. The SFC has requested comments from market participants and interested parties by 30 November 2005.