保荐人 · 2026-03-01

How Type 6 Licensees Ensure a Reasonable Basis for the Listing Applicant's Prospective Disclosures

The SFC’s enforcement focus on sponsor liability has entered its sharpest phase since the landmark ICBC International disciplinary action of 2019. In 2024, the SFC publicly reprimanded two Type 6 sponsors for failures in due diligence related to revenue recognition and connected-party disclosures in listing applications (SFC Press Release, 15 March 2024). These actions, combined with the HKEX’s 2024 consultation on enhancing the sponsor regime (HKEX Consultation Paper, June 2024), signal a regulatory expectation that the “reasonable basis” standard under Paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC is no longer a procedural checklist but a substantive, risk-calibrated obligation. For Type 6 licensees, the margin for error has narrowed: the SFC now routinely examines whether a sponsor has independently verified, rather than merely collected, the factual underpinnings of a listing applicant’s prospective disclosures. This article dissects the mechanics of establishing that reasonable basis, drawing on the SFC’s Sponsor Supervision Framework and the HKEX’s Listing Decision approach to prospectus liability.

The Regulatory Architecture of Reasonable Basis

Paragraph 17 and the Sponsor’s Duty of Verification

The SFC’s Code of Conduct, Paragraph 17, imposes a non-delegable duty on the sponsor to take all reasonable steps to ensure that the listing applicant’s prospectus disclosures are accurate and complete in all material respects. This is not a duty of audit or guarantee, but a duty of reasonable inquiry. The SFC’s 2023 thematic review of sponsor due diligence (SFC Annual Report 2023, page 42) found that 60% of sampled sponsors failed to document the basis for their reliance on management representations, particularly in areas of revenue recognition and related-party transactions.

The reasonable basis standard requires the sponsor to form an independent view, not merely to accept management’s assertions. For a Type 6 licensee, this means conducting procedures that are proportionate to the risk of material misstatement. In the ICBC International case (SFC Disciplinary Action, 2019), the SFC found that the sponsor had failed to verify the commercial rationale for a series of pre-IPO investments, relying instead on a single management interview without independent corroboration. The outcome: a HKD 80 million fine and a suspension of the sponsor’s licence for 18 months.

The HKEX’s Listing Decision Approach: The “Reasonable Investor” Test

The HKEX’s Listing Committee applies a complementary standard when assessing prospectus disclosures under the Listing Rules, Chapter 11. In Listing Decision LD-2023-001 (HKEX, 2023), the Committee rejected a listing application on the basis that the sponsor had not established a reasonable basis for the applicant’s forward-looking revenue projections. The Committee applied a “reasonable investor” test: would a reasonable investor, reading the prospectus, be misled as to the key assumptions underpinning the forecast? The sponsor had relied on a single internal forecast model without stress-testing the assumptions against independent market data. The HKEX required the sponsor to produce a sensitivity analysis showing the impact of a 20% decline in the applicant’s primary market on the forecast revenue.

This decision aligns with the SFC’s expectation that the sponsor’s work must be both procedurally rigorous and substantively defensible. The HKEX now routinely requests the sponsor’s due diligence workpapers, including the basis for reliance on any third-party expert reports, under the Listing Rules, Rule 9.11(3).

Operational Mechanics: Building the Reasonable Basis File

Revenue Recognition: The Highest-Risk Area

The SFC’s 2024 enforcement actions reinforce that revenue recognition is the single highest-risk area for sponsor liability. In the 2024 reprimand of Sponsor A, the SFC found that the sponsor had accepted the applicant’s revenue recognition policy for long-term contracts without testing the contractual milestones against actual project completion data. The sponsor’s due diligence file contained only a summary of the applicant’s accounting policy, without any independent confirmation from the applicant’s major customers.

To establish a reasonable basis for revenue disclosures, the sponsor must perform the following procedures, documented in the sponsor’s due diligence file:

Contract-level testing: Select a sample of contracts representing at least 75% of the applicant’s reported revenue for the most recent financial year. For each contract, verify the contractual terms against the applicant’s revenue recognition policy, including the existence of customer acceptance certificates or milestone completion reports.
Customer confirmation: Obtain direct written confirmation from at least the top five customers by revenue, covering the amount of revenue recognised and the stage of completion of the relevant contracts. The SFC’s 2023 thematic review found that only 35% of sponsors obtained direct customer confirmations (SFC Annual Report 2023, page 44).
Independent market verification: Where the applicant’s revenue is dependent on a specific market or industry, commission an independent market report from a recognised third-party provider. The HKEX’s Listing Decision LD-2023-001 explicitly requires that the sponsor’s assumptions be tested against independent market data.

Connected transactions under the Listing Rules, Chapter 14A, represent a second major area of sponsor liability. The SFC’s 2024 case against Sponsor B involved a failure to identify a connected party that was a close associate of a director, where the director’s spouse held a 30% interest in a supplier that accounted for 40% of the applicant’s cost of goods sold. The sponsor had relied on the applicant’s management representation that no connected parties existed, without conducting a beneficial ownership search through the Hong Kong Companies Registry or the BVI Registry of Corporate Affairs.

The reasonable basis standard requires the sponsor to conduct the following procedures:

Beneficial ownership search: Conduct a search of the Hong Kong Companies Registry’s register of directors and shareholders for all material suppliers and customers, cross-referencing the results against the applicant’s list of directors, senior management, and their close associates.
Corporate registry checks in offshore jurisdictions: Where the applicant or its material counterparties are incorporated in BVI, Cayman, or Bermuda, obtain certified extracts from the relevant registry showing the current directors and shareholders. The SFC’s 2023 thematic review noted that only 20% of sponsors conducted offshore registry checks (SFC Annual Report 2023, page 46).
Transaction-level verification: For each material connected transaction, verify the pricing against independent market benchmarks. For example, if the applicant purchases raw materials from a connected supplier, the sponsor must obtain independent market quotes for comparable goods from unrelated suppliers.

The Role of Expert Reports and Third-Party Reliance

When Reliance Is Permissible

The SFC’s Code of Conduct, Paragraph 17.3, permits the sponsor to rely on expert reports, but only where the sponsor has taken reasonable steps to satisfy itself that the expert is competent and independent, and that the expert’s work is based on reasonable assumptions. The SFC’s 2022 guidance on sponsor reliance on experts (SFC Circular, 15 August 2022) clarifies that the sponsor cannot simply accept an expert’s conclusion without understanding the methodology and assumptions used.

In practice, this means the sponsor must:

Review the expert’s terms of reference: Ensure that the expert’s engagement letter clearly defines the scope of work, the assumptions to be used, and the expert’s independence from the applicant.
Challenge the expert’s assumptions: Where the expert’s report relies on assumptions that are material to the prospectus disclosures, the sponsor must independently verify those assumptions. For example, if a property valuer assumes a 5% annual rental growth rate, the sponsor must compare that assumption against independent market data from sources such as the Rating and Valuation Department’s property market statistics.
Document the sponsor’s own independent work: The sponsor’s due diligence file must contain a separate section documenting the sponsor’s own verification of the expert’s assumptions, not merely a copy of the expert’s report.

The SFC has consistently held that “blind reliance” on experts or management representations is a breach of the sponsor’s duty. In the Standard Chartered case (SFC Disciplinary Action, 2018), the sponsor was fined HKD 40 million for relying on a legal opinion without verifying the underlying facts supporting the opinion. The SFC found that the sponsor had not taken any steps to confirm that the legal opinion’s factual premises were accurate.

For Type 6 licensees, the practical implication is clear: the sponsor must treat every expert report as a starting point, not an end point, for its own independent due diligence.

Forward-Looking Disclosures: The Sensitivity Analysis Requirement

The HKEX’s 2024 Guidance on Forecasts

The HKEX’s 2024 consultation on sponsor regime enhancements (HKEX Consultation Paper, June 2024) proposes to codify the requirement for sponsors to conduct sensitivity analysis on all forward-looking disclosures in the prospectus. The consultation paper states that the sponsor must demonstrate a “reasonable basis” for the key assumptions underlying any profit forecast or revenue projection, including a sensitivity analysis showing the impact of a 10% adverse variance in each material assumption.

This proposal responds to the HKEX’s observation that many sponsors present forward-looking disclosures as a single-point estimate without any range or sensitivity analysis. The HKEX’s Listing Committee has rejected at least two listing applications in 2023-2024 on this basis (HKEX Annual Report 2023, page 28).

To comply with this emerging standard, the sponsor should:

Identify material assumptions: For each forward-looking disclosure, identify the assumptions that have the greatest impact on the projected result. Common examples include revenue growth rate, gross margin, and working capital turnover.
Conduct sensitivity analysis: For each material assumption, calculate the impact of a 10% adverse variance on the projected net profit or revenue. Present the results in the sponsor’s due diligence file as a sensitivity table.
Stress-test against historical data: Compare the projected assumptions against the applicant’s historical performance over the past three financial years. If the projection assumes a 15% revenue growth rate but the applicant’s historical growth rate is 5%, the sponsor must document the basis for the higher assumption, citing independent market data or specific contractual commitments.
Obtain independent market data: For assumptions related to market growth, commission an independent market report from a recognised provider such as Euromonitor, Frost & Sullivan, or a Big Four accounting firm’s industry practice.

Five Actionable Takeaways for Type 6 Licensees

The SFC’s 2024 enforcement actions and the HKEX’s 2024 consultation paper confirm that the “reasonable basis” standard now requires the sponsor to independently verify, rather than merely collect, the factual underpinnings of all material prospectus disclosures, with particular focus on revenue recognition and connected-party transactions.
For revenue recognition, the sponsor must perform contract-level testing on a sample representing at least 75% of reported revenue and obtain direct customer confirmations from the top five customers, as the SFC’s 2023 thematic review found that only 35% of sponsors currently meet this standard.
For connected-party identification, the sponsor must conduct beneficial ownership searches through the Hong Kong Companies Registry and offshore registries in BVI, Cayman, and Bermuda, as the SFC found that only 20% of sponsors currently perform this step.
When relying on expert reports, the sponsor must independently verify the expert’s material assumptions and document its own verification work in a separate section of the due diligence file, as blind reliance is a breach of Paragraph 17 of the SFC’s Code of Conduct.
For forward-looking disclosures, the sponsor must conduct a sensitivity analysis showing the impact of a 10% adverse variance in each material assumption, stress-test those assumptions against the applicant’s historical performance over the past three financial years, and commission an independent market report to support any growth assumptions that exceed the applicant’s historical trend.