The Securities & Futures Commission has released a consultation paper listing 21 proposals designed to modernise the regime governing the public offering of shares and debentures set out in the Companies Ordinance.

The subjects covered are diverse and, if reforms are implemented in due course, will have a significant effect across the Companies Ordinance prospectus regime.

The overriding purpose of the review is to encourage capital raising and issuance of securities in Hong Kong by adjusting and refining the legal framework to facilitate offers while ensuring satisfactory standards of investor protection.

The commission's Executive Director of Corporate Finance Peter Au-Yang said: "The goal of the reform exercise is to create a legal framework that accommodates the Hong Kong financial market's needs in the 21st Century, caters for issuers and investors alike and supports Hong Kong's continuing role as an international financial centre."

Due diligence

To enhance investor protection, the paper discusses whether sponsors and managers of an offering should be liable for untrue statements in the prospectus and, to promote greater due diligence by all those liable for the prospectus, whether the "reasonable belief" defence available to defendants in both civil compensation claims and criminal proceedings should be confined to cases where all reasonable inquiries have been made.

There are discussions on extending the right to claim compensation for losses resulting from untrue statements in a prospectus to secondary market purchasers, and on removing the need to prove the investor relied on the prospectus.

To emphasise the prospectus should contain all information that investors and their professional advisers would reasonably require to make an informed investment decision, there is a discussion on highlighting this requirement as a "disclosure standard" in the body of the legislation and specifically attaching liability to any failure to meet it.

Also, to encourage the issue of prospectuses containing relevant and meaningful information, this disclosure standard would be supplemented by prescribed content requirements tailored specifically for equity and debt instruments.

The paper discusses the high incidence in Hong Kong of information contained in pre-deal research reports being reported on in the media in the lead-up to and during the offer period for IPOs.

Conflicting info

The discussion recognises that while pre-deal research has a useful role to play in IPOs, investor interests are prejudiced when there are two or more sources of conflicting information relating to the company circulating indistinguishably in the public arena during an offer period.

The Consultation Paper accepts there may be a number of ways to tackle this issue and highlights two, namely:

* to ban all written pre-deal research by analysts connected with the sponsors, managers or underwriters of the offering; or,

* if leakage results in media coverage, to require publication of pre-deal research by the issuer of the research and commentary by the company in the prospectus (or a supplemental prospectus) on all non-prospectus information.

The commission said the consultation paper should be seen as a "concept release" designed to promote discussion and feedback.

It said a number of the initiatives are complex or challenging and will present a range of possible solutions.

Public and market feedback will provide a guide as to how to move forward.

The consultation will end November 30. The paper is available on the commission's website.