Drafting the Sponsor's Statement in the Prospectus: Key Points and Common Deficiencies

The sponsor’s statement in a Hong Kong IPO prospectus is not a procedural formality; it is a statutory declaration of work done, and its drafting quality directly influences the HKEX Listing Division’s decision on whether to accept an application for filing. Since the SFC’s thematic review of sponsor due diligence published in December 2024 (SFC, Thematic Review of Sponsor Due Diligence on Corporate Governance and Third-Party Payments), the regulator has explicitly flagged deficiencies in how sponsors articulate their work scope, reliance on experts, and the basis for their opinion on Listing Rule 3A.02. Concurrently, the HKEX’s 2025 consultation on proposed amendments to the Listing Rules regarding sponsor liability and statement content (HKEX, Consultation Paper on Proposed Enhancements to the Sponsor Regime, March 2025) signals a tightening of the standard. For a sponsor holding an SFC Type 6 or 6A licence, the margin for error in drafting the statement has narrowed. This article examines the structural requirements, common drafting deficiencies identified by regulators, and the practical steps sponsors must take to ensure their statement withstands both the Listing Committee’s scrutiny and potential post-listing enforcement action.

The Regulatory Framework and Core Requirements

The sponsor’s statement is governed primarily by the Listing Rules and the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code). Its function is to certify that the sponsor has conducted reasonable due diligence to verify the accuracy and completeness of the prospectus, and that no material fact has been omitted that would make the prospectus misleading.

Statutory Basis Under the Listing Rules

Listing Rule 3A.02 requires every listing applicant to appoint a sponsor, and Listing Rule 3A.13 sets out the sponsor’s obligations, including the duty to exercise reasonable care and skill in verifying the prospectus content. The specific form and content of the sponsor’s statement are prescribed by Listing Rule 11.03 and Appendix 1A, Part A, paragraph 42 (for Main Board) and the corresponding provisions for GEM. The statement must be signed by the sponsor’s responsible officer(s) and included in the proof prospectus filed with the HKEX.

The statement must explicitly confirm that the sponsor has:

1. Conducted due diligence in accordance with the SFC’s Code of Conduct, paragraph 17.6 (the sponsor due diligence standard).
2. Reviewed the prospectus and is satisfied that it contains all material information required by the Listing Rules and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).
3. No reason to believe that the prospectus contains any untrue statement of material fact or omits a material fact necessary to make the statements not misleading.
4. Disclosed any conflicts of interest as required by Listing Rule 3A.34 and the SFC’s Code of Conduct, paragraph 17.9.

A common deficiency is the use of boilerplate language that fails to tailor these confirmations to the specific facts of the applicant. The HKEX has repeatedly rejected applications where the sponsor’s statement reads as a generic template, particularly where the applicant operates in a complex sector such as biotech (Chapter 18A) or special purpose acquisition companies (Chapter 18B).

The SFC’s Code of Conduct and the Reasonable Care Standard

Paragraph 17.6 of the SFC’s Code of Conduct sets out the minimum due diligence steps sponsors must take. It requires the sponsor to form a reasonable basis for its opinion on the prospectus, based on:

• Review of corporate records, contracts, and material agreements.
• Interviews with directors, management, and key personnel.
• Verification of key financial and non-financial information.
• Assessment of the applicant’s internal controls and corporate governance structure.

In its 2024 thematic review, the SFC found that in 12 out of 20 reviewed IPO applications, the sponsor’s statement did not adequately reflect the work done to satisfy paragraph 17.6. Specifically, the statement failed to identify the key risk areas examined, the scope of verification performed, and the basis for concluding that no material issues remained. The SFC’s report cited one case where the sponsor’s statement was a single paragraph that merely recited the legal language of the Listing Rules without any factual elaboration (SFC, Thematic Review, December 2024, p. 8).

The HKEX’s 2025 Consultation and Proposed Changes

The HKEX’s March 2025 consultation proposes to amend Listing Rule 11.03 to require sponsors to include a detailed “work scope summary” in the prospectus. The proposed amendment would mandate that the sponsor’s statement:

• Describe the key due diligence procedures performed.
• Identify the specific documents reviewed and the sources of information relied upon.
• Specify the extent of reliance on third-party experts (e.g., legal counsel, auditors, industry consultants) and the basis for that reliance.
• Disclose any limitations on the sponsor’s access to information or cooperation from the applicant.

If adopted, this change would effectively codify the best practices already expected by the regulators. Sponsors should begin preparing for this requirement now, as the consultation period closes in June 2025, and the amendments are expected to take effect in Q4 2025.

Common Deficiencies in Drafting the Sponsor’s Statement

Regulatory enforcement actions and Listing Committee decisions have identified a pattern of recurring deficiencies. These can be grouped into three categories: vague or incomplete scope description, inadequate disclosure of reliance on experts, and failure to address conflicts of interest.

Vague or Incomplete Scope Description

The most frequent deficiency is the use of generic language that does not reflect the actual due diligence performed. For example, stating that the sponsor “reviewed the applicant’s corporate records and financial statements” without specifying which records, for what period, or how the review was conducted. The HKEX’s Listing Committee has rejected applications where the sponsor’s statement failed to demonstrate that the sponsor had examined the applicant’s material contracts, related-party transactions, or compliance with applicable PRC regulations (HKEX, Listing Committee Decision LD-2024-001, January 2024).

A specific example from the SFC’s 2024 review involved a sponsor that stated it had “conducted interviews with management” but did not identify the individuals interviewed, the topics covered, or the duration of the interviews. The SFC considered this insufficient to satisfy the reasonable care standard, as it provided no basis for the reader to assess the depth of the sponsor’s inquiry.

To avoid this deficiency, sponsors should draft the statement to include:

• A list of key documents reviewed (e.g., articles of association, material contracts, minutes of board meetings, financial statements for the track record period).
• A description of the interview process, including the number of interviewees, their positions, and the key topics covered.
• An explanation of how the sponsor verified critical representations made by the applicant, such as revenue recognition policies or the existence of key assets.

Inadequate Disclosure of Reliance on Experts

Sponsors frequently rely on expert reports from lawyers, auditors, industry consultants, and valuation specialists. The sponsor’s statement must clearly delineate the scope of that reliance and the steps taken to verify the expert’s work.

Listing Rule 3A.13 requires the sponsor to exercise independent judgment and not simply defer to an expert’s opinion without assessment. The SFC’s Code of Conduct, paragraph 17.6(d), states that the sponsor must “evaluate the competence, resources, and independence of any expert whose work is relied upon.”

A common deficiency is the statement that the sponsor “relied on the legal opinion of PRC counsel” without disclosing:

• The specific legal issues covered by the opinion (e.g., VIE structure validity, foreign ownership restrictions, tax compliance).
• Whether the sponsor independently reviewed the legal opinion or merely accepted it at face value.
• Any qualifications or limitations expressed by the legal counsel in their opinion.

In a 2023 enforcement action, the SFC reprimanded a sponsor for including a statement that it “relied on the audited financial statements” without disclosing that the sponsor had not reviewed the audit work papers or assessed the auditor’s independence (SFC, Disciplinary Action against Sponsor A, 2023). The SFC’s position is that reliance on an expert does not absolve the sponsor of its own due diligence obligations; the sponsor must demonstrate that it has taken reasonable steps to verify the expert’s conclusions.

Failure to Address Conflicts of Interest

Listing Rule 3A.34 requires the sponsor to disclose any actual or potential conflicts of interest in its statement. The SFC’s Code of Conduct, paragraph 17.9, further requires the sponsor to assess whether the conflict impairs its independence and to take appropriate steps to manage or mitigate the conflict.

A recurring deficiency is the omission of conflicts that are known to the sponsor but not explicitly disclosed. For example, where the sponsor is also a shareholder of the applicant, or where the sponsor’s parent company has a business relationship with the applicant, the statement must disclose this. The HKEX has rejected applications where the sponsor’s statement was silent on a conflict that was later identified by the Listing Division (HKEX, Listing Committee Decision LD-2024-003, April 2024).

Sponsors should adopt a conservative approach: if there is any potential conflict, disclose it explicitly in the statement and explain the steps taken to ensure independence. This includes disclosing any fees that are contingent on the success of the listing, which is prohibited under Listing Rule 3A.33 but must still be stated as a negative confirmation.

Practical Drafting Considerations for Compliance

Beyond avoiding the common deficiencies, sponsors must adopt a structured approach to drafting the statement that aligns with regulatory expectations and the practical realities of the due diligence process.

Structuring the Statement for Clarity and Completeness

A well-drafted sponsor’s statement should follow a logical structure that mirrors the due diligence process. The SFC’s 2024 thematic review recommended that sponsors adopt a “narrative format” rather than a checklist, as a narrative better demonstrates the exercise of professional judgment.

The statement should be divided into the following sections:

1. Scope of Appointment: Confirm the sponsor’s role and the date of appointment.
2. Due Diligence Procedures: Describe the key work streams, including document review, management interviews, site visits (if any), and verification of material facts.
3. Reliance on Experts: Identify each expert relied upon, the scope of their work, and the steps taken to evaluate their competence and independence.
4. Key Risk Areas: Identify the material risks identified during due diligence and how they were addressed.
5. Conflicts of Interest: Disclose any actual or potential conflicts and the steps taken to manage them.
6. Conclusion: State the sponsor’s opinion in the form required by the Listing Rules.

Each section should be fact-specific. For example, instead of stating “the sponsor conducted site visits,” the statement should specify: “The sponsor conducted site visits to the applicant’s three manufacturing facilities in Shenzhen, Dongguan, and Suzhou on 15-17 January 2025, during which the sponsor observed the production process and interviewed the plant managers.”

The Role of the Responsible Officer

The sponsor’s statement must be signed by the sponsor’s responsible officer(s) under Listing Rule 3A.18. The responsible officer is personally liable for the accuracy of the statement. In practice, the responsible officer should be directly involved in the drafting process and should review the statement for consistency with the due diligence work papers.

The SFC has taken disciplinary action against responsible officers who signed statements that contained material inaccuracies or omissions that they should have identified (SFC, Disciplinary Action against Responsible Officer B, 2022). To mitigate this risk, the responsible officer should maintain a “statement review checklist” that cross-references each element of the statement to the corresponding work paper or due diligence record.

Timing and Integration with the Prospectus Drafting Process

The sponsor’s statement should not be drafted as a standalone document at the end of the process. It should be developed iteratively as due diligence progresses. The HKEX’s Listing Division expects the statement to be consistent with the prospectus content. For example, if the prospectus discloses a material litigation risk, the sponsor’s statement should reflect that the sponsor has examined the litigation and is satisfied that the disclosure is adequate.

A practical approach is to assign a dedicated compliance officer or lawyer to track the due diligence findings and update the statement in real time. This ensures that the statement is an accurate reflection of the work done, rather than a post-hoc summary that may omit key details.

Actionable Takeaways for Sponsors

1. Adopt a narrative structure for the sponsor’s statement that describes the specific due diligence procedures performed, rather than using a generic checklist, to satisfy the SFC’s expectation of demonstrated professional judgment (SFC, Thematic Review, December 2024).

2. Disclose all reliance on experts explicitly, including the scope of the expert’s work, the sponsor’s independent assessment of the expert’s competence and independence, and any qualifications or limitations in the expert’s opinion (SFC Code of Conduct, paragraph 17.6(d)).

3. Prepare for the HKEX’s proposed 2025 amendments by including a detailed work scope summary in the sponsor’s statement now, even before the rule change takes effect, to avoid rejection during the application process.

4. Ensure the responsible officer personally reviews the statement against the due diligence work papers and maintains a signed checklist that cross-references each element of the statement to the underlying evidence.

5. Integrate the statement drafting into the due diligence process from the start, updating it iteratively as findings emerge, to ensure consistency with the prospectus and to avoid last-minute omissions or inaccuracies.