The Hong Kong Growth Enterprise Market: A System of Decomposed Sponsor Roles
The Growth Enterprise Market (GEM) of the Hong Kong Stock Exchange was officially launched in 1999. Sticking to British traditions, it put in place a fairly complete sponsor system that mirrors that of the London Securities Exchange, requiring listed enterprises to hire at least one sponsor. In 2003, the Hong Kong Stock Exchange established a simple sponsor system for the main board. It requires applicants for the listing of equity securities, redeemable shares of unit trust funds, and mutual funds to hire sponsors who cease to be responsible upon listing. However, in terms of sponsor independence, the provisions are far less clear than those of the London Securities Exchange. Therefore, a series of financial scandals and closures involved multiple listed companies in the second half of 2002.
In order to change the situation, the Hong Kong Securities Regulatory Commission and the Hong Kong Stock Exchange jointly amended the Main Board Listing Rules and the GEM Listing Rules in 2003. They created new rules regarding sponsors and compliance advisors, new rules regarding independent financial advisors, and implementation guidance in relation to due diligence investigation by sponsors. At the core of the changes is the division of the role of sponsor into the following three parts:
1. Sponsor: The sponsor takes on the responsibility of sponsoring and tutoring before the applicant gets listed.
2. Compliance advisor: The compliance advisor is responsible for assisting and supervising the issuer after the listing.
3. Independent financial advisor: The independent financial advisor is responsible for reviewing major transactions or arrangements.
Another essential part of the amendment of the sponsor system in Hong Kong is the emphasis on the independence of sponsors. Investors rely on the disclosures in the prospectus to make investment decisions. The stock exchange also relies on the due diligence work performed by the sponsor. Any substantial acquisition of shares or important relations may affect the independence of the sponsor and bring down sponsoring quality. Therefore, it is vital to emphasize independence.