Governance Briefing — October 5, 2022
Hong Kong’s October 2022 sponsor reforms overhaul IPO due diligence expectations, forcing licensed sponsors and listing applicants to retool engagement terms, governance controls, and evidence trails before the 2023 effective date.
Executive briefing: On Hong Kong’s Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX) released consultation conclusions that overhaul the city’s initial public offering (IPO) sponsor regime. The SFC adopted sweeping amendments to Paragraph 17 of its Code of Conduct for Persons Licensed by or Registered with the SFC, clarifying the scope, documentation, and accountability expectations for sponsors. HKEX simultaneously amended the Main Board and GEM Listing Rules and issued new guidance to embed the enhanced due diligence and governance standards. Sponsors, listing applicants, and their advisers now face a twelve-month implementation runway culminating on , when the revised Code becomes fully operative for listing applications. Compliance functions must treat the reform as a comprehensive control transformation covering engagement letters, due diligence planning, record retention, and senior management accountability.
The reforms respond to persistent SFC enforcement cases where insufficient sponsor diligence contributed to fraudulent listings, inflated valuations, or undisclosed related-party transactions. They also reflect findings from the Report on IPO Sponsor Review and align with global regulatory expectations on gatekeepers. The new regime requires sponsors to secure explicit commitments from listing applicants to provide complete, accurate information and unrestricted access to records. Sponsors must produce and maintain a diligence plan that evolves with the engagement, document key judgments, and demonstrate independent verification of third-party evidence. Senior sponsor principals are expected to lead the work, supported by robust internal control frameworks that withstand regulatory inspections.
Engagement letter and scope definition controls
Effective immediately, sponsors must ensure their engagement letters include prescribed terms set out in new Paragraph 17.11A. These cover the scope of sponsor work, responsibilities of each party, rights of access to records, cooperation obligations of the applicant, fee arrangements, and conditions for termination. Engagement letters must obtain the applicant’s written acknowledgement that it will provide the sponsor with all necessary information and access to senior management, significant shareholders, and other professional advisers. Compliance officers should develop standardized templates reflecting the SFC’s required clauses, incorporate change-control mechanics, and route all engagement letters through legal review before execution. Where multiple sponsors are appointed, coordination protocols should articulate allocation of responsibilities, information-sharing expectations, and escalation mechanics so that the overall diligence remains coherent.
New sponsor appointments must also be made sufficiently early to allow meaningful due diligence. The SFC emphasised that the existing requirement—appointment at least two months before submitting a listing application—is a minimum baseline; sponsors must build onboarding checklists to evidence that they have been engaged in time to understand the business, assess red flags, and challenge management assumptions. Internal policies should prevent staff from accepting mandates where resources are constrained, and require sponsor principals to document independence assessments addressing financial interests, relationships with controlling shareholders, and existing advisory mandates.
Due diligence execution and documentation
Paragraph 17.4A now demands sponsors prepare a written due diligence plan that identifies key risks, proposed verification procedures, timelines, and responsible team members. The plan should be updated as new information emerges. Compliance teams must embed this requirement into case-management tools so plans are version-controlled, approved by sponsor principals, and linked to supporting evidence. Sponsors are expected to conduct management interviews covering all executive directors, key senior managers, and founders; minutes must record questions asked, responses provided, and follow-up actions. The SFC has also reinforced expectations around site visits, customer and supplier checks, and review of non-ordinary course transactions. Sponsors must scrutinise the provenance of revenue, major customers, and subcontracting arrangements—particularly for businesses relying on third-party distributors or manufacturing partners.
Reliance on third-party experts—such as property valuers, legal advisers on industry-specific licences, or technical consultants—now requires more explicit documentation. Sponsors must assess the independence, qualifications, and methodologies of experts, review engagement scopes, and evaluate whether experts performed sufficient work to support the conclusions included in the listing document. The SFC’s updated Guidance Letter HKEX-GL115-22 reinforces expectations on experts’ due diligence, including the need to obtain original source documents, perform site inspections, and test assumptions. Sponsors should maintain expert assessment checklists, cross-reference expert opinions against management representations, and escalate inconsistencies.
Record retention and internal governance enhancements
The SFC has extended the minimum retention period for sponsor records from seven to twelve years, reflecting the extended statute of limitations for disciplinary proceedings. Sponsors must maintain a comprehensive audit trail covering engagement letters, due diligence plans, interview notes, corroborating documents, expert assessments, and communications with regulators. Technology teams should invest in secure document management platforms with granular access controls, ensuring records cannot be altered post-engagement. Metadata capturing authorship and timestamps will be critical when demonstrating compliance to regulators. Firms should refresh their record retention schedules, update destruction protocols, and coordinate with legal teams to implement litigation holds when investigations arise.
Governance expectations have also intensified. Each listing engagement must be supervised by at least one responsible officer who acts as sponsor principal. Firms should maintain capability matrices mapping each principal’s experience to industry sectors, and assign backups to mitigate capacity constraints. Compliance officers must update sponsor manuals to describe escalation pathways, requirements for second-level reviews, and protocols for reporting suspected non-compliance or fraud. The SFC expects periodic training for sponsor staff focusing on updated requirements, recent enforcement actions, and case studies illustrating acceptable levels of verification. Boards of sponsor firms should receive quarterly dashboards summarizing active mandates, resource allocation, red flags identified, and remediation status.
HKEX listing rule interplay and applicant obligations
HKEX has aligned its Listing Rules to the revised sponsor standards. Amendments to Main Board Rules 3A, 9, and 12 codify the need for applicants to cooperate fully with sponsors, provide complete documentation, and notify HKEX of material developments. New Form M112 requires directors to confirm that they have read the sponsor’s due diligence plan and will ensure management support. HKEX Guidance Letter HKEX-GL115-22 elaborates on expectations for customer due diligence, expert reliance, and internal controls at listing applicants. Issuers must establish financial reporting procedures capable of supporting quarterly updates during the vetting process, and ensure that connected transactions, undisclosed guarantees, or non-compliant structures are resolved before listing.
Controlling shareholders are now expected to provide enhanced undertakings covering lock-up arrangements, non-competition, and management continuity. HKEX has updated templates for directors’ and supervisors’ declarations, requiring more detailed disclosures of conflicts of interest, disciplinary history, and compliance with Chapter 8 suitability criteria. Sponsors should embed these requirements into onboarding questionnaires and verify statements against public records, litigation searches, and regulatory databases. For applicants with mainland Chinese operations, sponsors must coordinate with PRC counsel to evidence compliance with cybersecurity, data export, and industry-specific licensing requirements that could impact listing eligibility.
Outcome testing, quality assurance, and metrics
To demonstrate adherence to the strengthened regime, sponsors should implement outcome-testing programs. Compliance assurance teams can perform thematic reviews on recently completed IPOs, sampling verification workstreams—such as revenue testing, related-party due diligence, or internal control assessments—to ensure documentation meets SFC expectations. Define key risk indicators, including the percentage of engagements with approved due diligence plans before site work begins, average time from red flag identification to resolution, and number of regulatory queries attributable to incomplete sponsor work. Establish independent file reviews prior to listing submission, with sign-off from a sponsor principal not involved in day-to-day execution.
Firms should also benchmark their programs against SFC and HKEX enforcement actions. Recent disciplinary cases have focused on inadequate customer due diligence, failure to challenge unusual revenue concentration, and insufficient follow-up on expert assumptions. Lessons learned should feed into training and procedure updates. Sponsors may engage external consultants to perform mock inspections replicating SFC thematic reviews, documenting remediation actions and control owners. Internal audit should expand its scope to include sponsor compliance, testing data governance, segregation of duties, and the effectiveness of record-retention controls.
Implementation timeline and cross-functional coordination
The new SFC Code of Conduct provisions take immediate effect for sponsor engagements initiated on or after , while a twelve-month transition applies to listing applications submitted before . HKEX’s rule amendments take effect for applications submitted on or after , aligning the enforcement timeline. Sponsors should establish a detailed implementation roadmap: update policies by the end of 2022, deploy upgraded document management systems by mid-2023, and conduct dry runs on new diligence plans ahead of the effective date. Cross-functional steering committees—combining sponsor compliance, legal, finance, HR, and IT—should meet monthly to monitor progress, address resourcing gaps, and escalate issues to senior management.
Stakeholder communications are crucial. Sponsors must brief listing applicants, law firms, auditors, and valuation experts on the heightened expectations, providing checklists and timelines that align with SFC and HKEX guidance. Training for sponsor staff should include scenario-based workshops addressing complex structures such as VIE arrangements, cross-border data transfers, or pre-IPO investments from connected persons. Firms should also engage with industry associations—such as the Hong Kong Sponsors Association—to share interpretations, coordinate with regulators on FAQs, and anticipate future enhancements.
Finally, organizations should monitor ongoing regulatory developments. The SFC has indicated it will publish further FAQs and may conduct targeted inspections to assess early implementation. HKEX continues to refine its guidance on sustainability disclosures and internal controls, which intersect with sponsor due diligence. By institutionalizing governance upgrades, technology investments, and outcome testing, sponsors can demonstrate readiness for the strengthened regime and help restore confidence in Hong Kong’s IPO market.
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