A $19 Million Hong Kong IPO Heralds New Transparency Rules

(Bloomberg) -- Six months after Hong Kong’s market regulators vowed to protect small investors by stamping out wild swings in stock debuts, the watchdogs are now moving in to ensure better transparency in initial public offerings.

The Securities and Futures Commission and the Hong Kong stock exchange asked Better Home Group Holdings, a Chinese maker of drying racks for clothes, to prominently reveal in its prospectus five conditions it needs to meet before its Nov. 12 listing on the main board. The disclosures required include information related to broker fees, IPO pricing, share allocation and monthly updates for a year on how the proceeds are being spent. 

The Huzhou City, Zhejiang-based company, which filed to raise as much as HK$150 million ($19.3 million), is the first to publish the conditions in its offer document since the SFC and the HKEX issued in May a joint statement laying out their goal to curb potential market manipulation. They outlined indications of suspicious activity that often lead to so-called “ramp-and-dump” situations, where post-listing stock volatility causes losses to retail investors.  

In their May statement, the regulators listed “red flags” including market capitalization barely meeting the minimum listing threshold, unusually high underwriting or placing commissions or other listing expenses, and shareholdings highly concentrated among a limited number of owners. The SFC and HKEX haven’t accused Better Home Group of any manipulation.

“The joint statement sets out features of problematic IPOs which may lead to heightened scrutiny by regulators and clearly explains the approach taken by the regulators to these cases,” an SFC representative said. “It also highlights the regulators’ power in tackling these cases.”

Invoking Powers

SFC also said it has followed such an approach in invoking its power to impose conditions on Better Home’s listing application. Representatives for HKEX and Better Home declined to comment.

Earlier, it was very rare for companies to disclose conditions set out by watchdogs in their offer documents. The last time a company did that was when United Co. Rusal International PJSC sought a Hong Kong listing in 2009. But then, retail investors weren’t allowed to buy the Russian aluminum maker’s shares.

While the regulators have already allowed Better Home Group to proceed with the share sale -- which wrapped up on Nov. 5 -- they could still potentially stop the listing if they don’t find the disclosures satisfactory.   

Back in 2017, Alpha Era International Holdings Ltd. and GT Steel Construction Group both postponed their IPOs, citing inquiries made by regulators. But they didn’t detail the concerns raised by the watchdogs.

In recent years, the stock exchange has focused more on bigger companies such as technology giants with weighted voting rights, and innovative biotech companies. Separately, the SFC also launched new rules on equity and debt market book-building to demand better clarity and ensure a fair market. The new rules will be in place by next August. 

In its prospectus, Better Home Group said seven underwriting brokers, led by a local sponsoring firm Giraffe Capital Ltd. and Chinese giant Guotai Junan Securities Co., would receive a 10% commission, totaling around HK$40.7 million, or 27% of the maximum planned gross proceeds.

“The commission rate offered by our company is relatively higher than those offered by large-cap corporations” that are well-known to investors, Better Home explained in its prospectus. Underwriters “have to spend more time and effort in marketing our shares” as a small-cap firm, it said. 

©2021 Bloomberg L.P.