Bookbuilding and placing activities by intermediaries in debt offerings have not been subject to specific regulatory requirements in Hong Kong.
From 5 August 2022 this will change. The SFC is adding new requirements (New Requirements) as paragraph 21 to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (SFC Code of Conduct). The New Requirements will apply to SFC licensed or registered persons that perform certain in-scope activities in respect of certain debt offerings. The SFC has helpfully released FAQs to provide additional guidance on the New Requirements.
The New Requirements seek to improve governance and enhance market standards by targeting current regulatory shortcomings in Hong Kong, such as:
- lack of transparency in the order book
- preferential treatment or rebates paid to some investors
- conflicts of interest between intermediaries and its investor clients, and
- a lack of documentation and record keeping processes.
The SFC will also introduce requirements relating to share offerings, the appointment of sponsors and Global Enterprise Market (GEM) stocks[1], and by way of certain revisions to the SFC’s Guidelines, to capital market intermediaries involved in placing activities for GEM stocks. However, for the purposes of this alert, we only focus on the New Requirements as they relate to debt offerings.
In addition to detailing who must comply and what their obligations are, we outline likely areas of difficulty including where transactions have offshore elements or parties.
What types of debt offerings do the New Requirements apply to?
The New Requirements apply to an offering of debt securities – whether listed or unlisted and whether offered in Hong Kong or otherwise (an In-Scope Debt Offering).
Certain transactions are excluded and therefore are not subject to the New Requirements:
- club deals: bilateral agreements between an issuer and investors
- private placements: transactions involving only one or several investors where the terms of the offering are negotiated and agreed directly, or
- transactions where debt securities are allocated to investors on a pre-determined basis at a pre-determined price.
What types of activities do the New Requirements apply to?
The New Requirements apply to the following types of activities conducted in Hong Kong in respect of an In-Scope Debt Offering (together, In-scope Activities):
- Bookbuilding activities: collating investors’ orders (including indications of interest) in an offering to facilitate:
- the price determination and the allocation of debt securities to investors, or
- the process of assessing demand and making allocations.
- Placing activities: marketing or distributing debt securities to investors pursuant to those bookbuilding activities.
- Issuer advice: advising, guiding and assisting the issuer of the In-Scope Debt Offering (the Issuer) in the above bookbuilding and placing activities.
Who do the New Requirements apply to?
“Capital market intermediaries” (CMIs) – persons licensed or registered with the SFC who engage in the In-scope Activities – must comply with the New Requirements.
There are two types of CMIs:
- Non-Syndicate CMIs: CMIs not engaged by the Issuer, and
- Syndicate CMIs: CMIs engaged by the Issuer.
A Syndicate CMI may also be an “overall coordinator” (OC) where they, solely or jointly:
- conduct the overall management of an In-Scope Debt Offering
- coordinate the bookbuilding or placing activities conducted by other CMIs
- exercise control over bookbuilding activities, or
- make pricing or allocation recommendations to the Issuer.
Potential areas of difficulty
Although the New Requirements endeavour to set out clear rules, we expect difficulties will arise in determining whether or not they apply, for instance where syndicates comprise a mix of intermediaries based in and outside of Hong Kong. We also expect difficulties to arise where different degrees of bookbuilding and placing activities for debt offerings are conducted in Hong Kong, such as:
- in global debt offerings which include distribution into Hong Kong, or
- debt offerings involving origination teams in Hong Kong but syndicate teams advising on bookbuilding and placing outside Hong Kong, with minimal or no distribution into Hong Kong.
It will be important in these circumstances that intermediaries to which the New Requirements apply discharge their obligations and maintain records to demonstrate their efforts to do so. The SFC’s FAQ’s provide some useful guidance in this respect. For example, they clarify that when a Hong Kong syndicate member in a global or Asia-Pacific debt offering with multiple tranches or with syndicates comprising members in Hong Kong and overseas jurisdictions does not exercise control over the whole order book for the offering, regardless of whether it has control over part of the offering, it will be deemed a “Hong Kong non-OC syndicate CMI”.
CMI and OC obligations and expected standards of conduct under the New Requirements
A CMI is subject to obligations and expected standards of conduct under paragraph 21.3 of the New Requirements in the SFC Code of Conduct. In addition to those, OCs are subject to further obligations and expected standards of conduct under paragraph 21.4 of the New Requirements in the SFC Code of Conduct. The main obligations and expected standards of conduct of CMIs and OCs are summarised in the table below.
CMI – Obligations and expected standards of conduct
Assessment of Issuer and offering |
Conduct an adequate assessment of an Issuer before engaging in an In-Scope Debt Offering for that Issuer. This would include the Issuer’s history, background, business and performance, financial condition and prospects, operations and structure of the Issuer. |
Assess the offering |
Establish a formal governance process to review and assess the In-Scope Debt Offering including for actual or potential conflicts of interest. |
Appointment of CMI |
Enter into a formal written appointment agreement. |
Assessment of investor clients |
Assess whether investor clients are “targeted investors” (investors which are targeted in a marketing and investor targeting strategy). |
Identify whether investor clients have any associations with the Issuer, the CMI or a company in the same group of companies as the CMI. |
|
Marketing |
Market only to targeted investors. |
Order book |
Ensure all orders placed in an order book represent bona fide demand of its investor clients, itself and its group companies. Enquiries should be made of any unusual orders. |
Disclose the identities of all investor clients in an order book (except omnibus orders). |
|
Allocation |
Establish and implement an allocation policy to ensure fair allocation of debt securities to investor clients. |
Rebates and preferential treatment |
CMIs are not permitted to offer or pass on any rebates to an investor client. |
Disclose any rebates or other preferential treatment offered to the CMI or targeted investors to the Issuer, OC, targeted investors and non-syndicate CMIs. |
|
Disclosure of information to OC, non-syndicate CMIs and targeted investors |
Disclose, in a timely manner, complete and accurate information on the status of the order book to the OC, its appointed non-syndicate CMIs and its targeted investors. |
Record keeping |
Maintain books and records to demonstrate compliance with the New Requirements – for example audit trails from the receipt of orders, order confirmations, all key correspondence with the Issuer as to actual or potential conflicts of interest, rebates etc. |
Conflicts of interest |
Establish and maintain policies and procedures to identify, manage and disclose any actual and potential conflicts of interest. |
Ensure priority is given to satisfying investor clients’ orders over its own proprietary orders and those of its group companies. In respect of its (and its group companies’) proprietary orders, it should be a price taker. It should segregate and clearly identify its (and its group companies) proprietary orders in the order book. |
|
Resources, systems and controls |
Maintain sufficient resources and effective systems and controls to ensure it can discharge its obligations and responsibilities. |
OC – Obligations and expected standards of conduct
In addition to those obligations and expected standards of conduct applicable to CMIs as set out above, OCs are required to comply with the following:
Terms of appointment |
Enter into a formal written appointment agreement with the Issuer. There is no specific timeframe for appointing an OC. |
Advice to Issuer |
Act with due skill, care and diligence when providing advice, recommendations and guidance to the Issuer. |
Marketing, rebates and preferential treatment offered |
Consult with the Issuer, devise a marketing and investor targeting strategy for order generation, taking into account the objectives/preferences of the Issuer. Advise the Issuer of the disclosure of any rebates and preferential treatment. |
Bookbuilding |
Take all reasonable steps to ensure price discovery is credible and transparent, that the order book is properly managed and that allocation recommendations made to the Issuer and the final allocation have a proper basis. |
Disclosures to syndicate CMIs and targeted investors |
Inform other syndicate CMIs of the Issuer’s marketing and investor targeting strategy and disseminate material information (which is complete, accurate and has a proper basis) related to the offering in a timely manner to all syndicate CMIs. |
Record keeping |
Document all changes in the order book throughout the bookbuilding process; all key discussions, advice or recommendations provided to the Issuer; the final decisions of the Issuer which debate materially from advice or recommendations from the OC; and the rationale for decisions delegated to it by the Issuer. Records should be maintained for at least seven years. |
How to implement the New Requirements
For capitalized terms which are not defined in this alert, please refer to 'Sidebar - The Words We Use' in our foreword here.
Disclaimer: This alert is provided for general information purposes only and does not constitute legal advice.
References
[1] As paragraph 17.1A and paragraph 21 of the SFC Code of Conduct
