SFC plans new conditional regulatory tool, expected to take effect in first quarter of 2027

The Securities and Futures Commission (SFC) said on October 12 that it would implement amendments to the Securities and Futures (Stock Market Listing) Rules, known as the Stock Market Listing Rules. The amendments would introduce a conditional regulatory tool, giving the SFC an option other than immediate suspension, and allow more of its decisions to be subject to a full review by the Securities and Futures Appeals Tribunal (SFAT). The amendments must first be tabled in the Legislative Council under the positive vetting procedure, and the SFC expects them to take effect in the first quarter of 2027.

Since 2017, the SFC has adopted a "front-loaded regulatory approach", using powers under the Stock Market Listing Rules to intervene early when it suspects fraud or other serious misconduct, complementing traditional enforcement action.

An option other than suspension

In the past, where the SFC believed that relevant documents contained information that was materially false, incomplete or misleading, or considered a suspension necessary to maintain market order or protect investors, it could direct Hong Kong Exchanges and Clearing's stock exchange, the Stock Exchange of Hong Kong (HKEX), under section 8(1) to suspend all trading in the relevant shares. During a suspension, shareholders are unable to sell their holdings.

New section 7A would allow the SFC to impose conditions on a listed issuer, with trading in its shares allowed to continue only if the issuer complies. The SFC could exercise this power only if one of three statutory grounds applies: shareholders have not been provided with sufficient information to make an investment decision; the company's business or affairs involve misconduct or improper practices; or the action is necessary to protect the investing public or the public interest.

Examples cited by the SFC mainly involve requiring companies to provide additional disclosure or explain the rationale for transactions. If a company planned to acquire, at a substantial cost, a target with a limited profit track record, for example, the SFC could require it to obtain an independent valuation and explain how the directors had conducted due diligence. In another example, a placing raises significantly less than a company's monthly operating expenses but would substantially dilute shareholders' interests. The company could be required to demonstrate that it genuinely needed the funds.

The SFC said it would assess the relevant facts and give the company an opportunity to respond before imposing conditions. If the company failed to comply, the SFC would first issue a warning letter and allow a reasonable period for remedy. Only if the company still failed to comply could the SFC direct a suspension. Its suspension power would remain in place; the new tool would provide a less severe option in individual cases, with its use determined by the circumstances.

The SFC would also simplify the process for resuming trading. It could initiate the process either after an application by the company or on its own if the company had not applied. Before refusing a resumption or directing a delisting, it would have to give the company a reasonable opportunity to make representations.

New listings: Conditions may continue after listing

The SFC already has the power to impose conditions while not objecting to a listing under section 6(3)(b). New section 6(3B) would expressly provide that such conditions could continue to apply after listing. The SFC described the change as technical and clarificatory, saying it would not lower the listing threshold, allow lower-quality companies to list or weaken investor protection. It expects continuing conditions to be used only in limited circumstances, where concerns require ongoing monitoring but do not amount to grounds for objecting to a listing.

The SFC's examples include an applicant displaying characteristics of a "problem IPO", such as an implied price-to-earnings ratio markedly higher than those of comparable companies or underwriting commissions of about 10 per cent. The applicant could be required to declare that there were no side arrangements and to disclose relevant transactions and the use of proceeds after listing. In another example, if a former senior executive had been convicted, the company would have to make an announcement and disclose the person's criminal record before appointing them as a director or senior executive after listing. The conditions would have to be disclosed in the prospectus.

In addition, where the SFC had issued an objection notice to an applicant, it could later withdraw the notice after the applicant resolved the issues under new section 6(2A), allowing the application process to continue. Some respondents were concerned that the amendments would increase listing costs and compliance burdens, but the SFC said conditions would be used only in limited circumstances.

Requests for information and two exemptions

New section 7B would allow the SFC to require a listed issuer to provide information that it reasonably required, extending the existing power under section 6(1) to request information from applicants to matters arising after listing. Depending on the circumstances, the SFC could also use section 179 of the Securities and Futures Ordinance to require information.

The amendments would also remove the automatic exemptions under sections 4(b) and 4(d) of the Stock Market Listing Rules. Securities offered through proportionate offerings, such as rights issues, and securities issued under employee share option schemes would be brought within the scope of "listing applications". The SFC said the aim was to address situations in which the exemptions were abused to the detriment of investors, allowing it to intervene in serious cases. It expects the vast majority of such transactions to remain unaffected, with no additional disclosure or compliance obligations for issuers.

SFAT review rights expanded

At present, the SFC's decisions to object to a listing and to impose conditions under section 6(3)(b) can be reviewed by the SFAT. After the amendments, listed companies would be able to apply to the SFAT for a full review of the following decisions:

• Conditions imposed under section 7A
• A direction to suspend trading under section 8(1)
• Conditions for resuming trading and a refusal to allow resumption
• A direction to HKEX to delist a company

The SFC said the change would transfer reviews previously handled by an SFC committee to an independent tribunal, without changing the SFAT's composition, appointment mechanism or independence. The SFAT chairman must be a judge or former judge and is appointed by the Chief Executive on the recommendation of the Chief Justice of the Court of Final Appeal. Under the amendment bill, SFC decisions to impose conditions or direct a suspension would take immediate effect.

What to watch

Once the rules take effect, the market will be watching three areas: the proportion of new listing applications carrying continuing conditions; how many companies subject to conditions are eventually suspended for failing to comply; and the time required for SFAT reviews, together with the proportion of SFC decisions that are overturned or varied. The relevant data will depend on future disclosures by the SFC and the SFAT.