Note to subscribers for the amendments to the rules governing the listing of securities on the Growth Enterprise Market ("GEM Listing Rules")
Update No. 19
1 December 2004
Amendments to the GEM Listing Rules relating to the regulation of sponsors and independent financial advisers
We enclose reprinted pages of the GEM Listing Rules incorporating amendments regarding the regulation of sponsors and independent financial advisers (IFAs).
The rule amendments were announced in the news release published jointly by The Stock Exchange of Hong Kong Limited (the Exchange) and the Securities and Futures Commission (the SFC) on 19 October 2004 (the "News Release").
We also enclose filing instructions for the reprinted pages.
Key objectives of the rule amendments
The Exchange's primary objectives in introducing these amendments are to:
• ensure sponsors, post-listing advisers (to be known as compliance advisers) and IFAs are clear about what is expected of them, in particular, in performing due diligence;
• enable sponsors, compliance advisers and IFAs to participate in the market on a level playing field; and
• minimise the regulatory risk that sponsors, compliance advisers and IFAs will not discharge their responsibilities in a way that commands market confidence.
Overview of the amended rules
The amended rules address, amongst other things:
Sponsors and compliance advisers
• when an issuer must appoint a sponsor or compliance adviser;
• independence requirements for sponsors and compliance advisers;
• the roles and responsibilities of sponsors and compliance advisers including the due diligence the Exchange expects sponsors should typically perform;
• the responsibilities of issuers to assist sponsors and compliance advisers;
• undertakings and declarations required to be given by sponsor and IFA firms to the Exchange;
• independence requirements for IFAs;
• the roles and responsibilities of IFAs including the reasonable steps an IFA will typically perform in order to be able to make the statements required by rule 20.22
, dealing with the letter setting out its independent financial advice;
• the responsibilities of issuers to assist IFAs they appoint; and
• undertakings and declarations required to be given by IFAs to the Exchange.
The key amendments are set out below.
Sponsors and compliance advisers
• The rules will include an amended definition of "Sponsor" in rule 1.01
• Compliance advisers will be expressly referred to in rule 6.67 dealing with the Exchange imposing sanctions.
• Rules 6.01 to 6.03 relating to sponsors will be repealed.
• A new chapter, Chapter 6A
, will set out most of the roles and obligations of sponsors and compliance advisers including as follows:
• the current rules require that a new applicant appoint a sponsor to assist it through the listing application process and for a fixed period after listing. Under the amended rules, new applicants (including issuers deemed to be new applicants pursuant to rule 19.54
) will continue to be required to appoint (at least) one sponsor to assist with their initial applications for listing. Additionally, all listed issuers will have to appoint a compliance adviser for the period commencing on initial listing and ending on publication of financial results for the second full financial year after listing, and for any further period directed by the Exchange;
• the current rules provide that no sponsor may act for any new applicant or continue to act for any listed issuer in circumstances where any actual or potential conflict of interest impedes or is likely to impede its ability to provide competent advice to the new applicant or listed issuer in a professional and impartial manner. The amended rules will provide that sponsors and compliance advisers must perform their duties with impartiality and that at least one sponsor appointed by a new applicant must be independent. Compliance advisers need not be independent;
• the independence test will be set out in the amended rules. To provide clarity to issuers the independence test will be a bright-line (or black letter) test;
• sponsors will be required to give the Exchange a statement addressing whether they are independent and, if they are not, how their lack of independence arises. (The prescribed form for that statement will be set out in Form K
of Appendix 7.) Sponsors will also have to advise the Exchange if there is any change to the information in the statement after it is given;
• sponsors and compliance advisers will have to give undertakings to the Exchange in the forms prescribed in Form A
of Appendix 5 and Form M
of Appendix 7, respectively. The undertakings will provide, for example, that the sponsor or compliance adviser will comply with the GEM Listing Rules and cooperate in any investigation conducted by the Listing Division and/or the GEM Listing Committee of the Exchange;
• sponsors will have to conduct due diligence, having regard to a new practice note 
, Due diligence by sponsors in respect of initial listing applications
, dealing with due diligence by sponsors in respect of initial listing applications including the Exchange's expectations of due diligence sponsors will typically perform to meet their obligations under the rules;
• after undertaking the necessary due diligence, sponsors will have to make a declaration to the Exchange concerning the new applicant. The declaration must be in the form prescribed in Form G
of Appendix 7;
• compliance advisers will only be required to provide advice and guidance if they are asked for it by the issuer by whom it is appointed. Listed issuers will have to consult with and, if necessary, seek advice from their compliance advisers on a timely basis in the prescribed circumstances, for example, before publication of any regulatory announcement, circular or financial report; and
• issuers will be required to assist sponsors and compliance advisers. For example, new rule 6A.05
will provide that a new applicant and its directors must assist the sponsor to perform its role and must ensure that its substantial shareholders and associates also assist the sponsor.
• The rules will include a new definition of "IFA group" in rule 1.01
• New rules 17.92
will set out most of the roles and obligations of IFAs.
• IFAs will be required to perform their duties with impartiality and be independent. The independence test will be set out in the rules. As with the sponsor independence test, to provide clarity to issuers the independence test will be a bright-line test.
• IFAs will be required to give the Exchange a declaration of their independence in the prescribed form to be set out in Appendix 13
. IFAs will also have to advise the Exchange if there is any change in the circumstances set out in the independence declaration.
• As with sponsors and compliance advisers, IFAs will have to give an undertaking to the Exchange in the form prescribed in Appendix 14
. The undertaking will provide that the IFA will comply with the GEM Listing Rules and cooperate in any investigation conducted by the Listing Division and/or the GEM Listing Committee of the Exchange.
• IFAs will have to take all reasonable steps to satisfy themselves that there is a reasonable basis for making the statements required by rule 20.22
(1) to (5) and that there is no reason to believe any information relied on by the IFA in forming its opinion or any information relied on by any third party expert on whose advice or opinion the IFA relies in forming its opinion, is not true or omits a material fact.
• A note to rule 17.92
will set out the due diligence steps the Exchange expects an IFA will typically perform.
• The amended rules will also set out the responsibilities of issuers to assist IFAs. That is, rule 17.93
will provide that, for example, an issuer must keep the IFA informed of any material change to any information previously given to or accessed by the IFA.
Coming into effect
Subject to the transitional arrangements described in the News Release, the rule amendments will come into effect on 1 January 2005.
The amendments to the relevant sections of the GEM Listing Rules have been marked-up for your ease of reference. Please click HERE to see the amendments to the respective chapters. The revised version of the entire GEM Listing Rules is located in the section headed "Listing Rules (GEM) ".
For and on behalf of
The Stock Exchange of Hong Kong Limited
Head of Listing