The HKEX Statement of Expectation on the Independent Judgement of a Sponsor's Due Diligence

The Hong Kong Stock Exchange (HKEX) published a Statement of Expectation in Q3 2025 clarifying the standard of independent judgement required of sponsors during due diligence, a direct response to the SFC’s 2024 enforcement report which found that 38% of sponsor-led IPO applications reviewed between 2021 and 2023 contained material deficiencies in verifying third-party confirmations. This Statement, issued under HKEX Listing Rules Chapter 3A and Practice Note 21, does not introduce new legal obligations but explicitly codifies the Exchange’s interpretation of “reasonable steps” under the existing sponsor regime. For the 60-odd SFC-licensed sponsors currently active on the Main Board, the document signals a shift from a procedural checklist approach to a substantive, outcome-based assessment of a sponsor’s intellectual independence from the issuer and its professional advisers. The timing is deliberate: with 23 new listing applications filed in May 2025 alone, a 12% increase year-on-year, the Exchange is pre-empting a repeat of the 2022-2023 cycle where 14 sponsor firms faced SFC disciplinary action for inadequate due diligence. The following analysis dissects the Statement’s three core expectations, their practical implications for sponsor compliance teams, and the specific regulatory provisions that now govern the “independent judgement” standard.

The Codification of “Reasonable Steps” Under Practice Note 21

The HKEX Statement directly references Practice Note 21 (PN21) of the Listing Rules, which has governed sponsor due diligence since the 2013 overhaul. Paragraph 3.2 of PN21 requires sponsors to exercise “independent judgement” when evaluating an applicant’s business, but until 2025, this requirement was interpreted as a general principle rather than a specific operational standard. The Statement now defines independent judgement as the sponsor’s ability to form its own view on the accuracy and completeness of information provided by the issuer, without undue reliance on the issuer’s management, its professional advisers, or third-party experts.

The Three-Pronged Test for Independence

Paragraph 8 of the Statement establishes a three-pronged test: (a) the sponsor must verify the issuer’s information against independent sources, not merely accept management representations; (b) the sponsor must challenge the issuer’s assumptions and projections with its own analysis; and (c) the sponsor must document the basis for its independent conclusions in the due diligence record. This test directly addresses the SFC’s 2024 enforcement findings, where in 7 out of 18 disciplinary cases, sponsors had relied solely on legal opinions or auditor reports without conducting independent verification of underlying facts.

The Rejection of “Delegated Due Diligence”

A critical clarification in Paragraph 14 of the Statement prohibits what the HKEX terms “delegated due diligence,” where sponsors outsource entire workstreams to external consultants or rely on the issuer’s professional advisers to perform core verification tasks. The Statement explicitly states that while sponsors may engage experts under Listing Rule 3A.13, the sponsor remains “primarily and directly responsible” for the quality and completeness of the due diligence, and cannot delegate its independent judgement to any third party. This provision has immediate practical implications for the common practice of relying on legal due diligence reports for PRC-based applicants, where sponsors have historically accepted a law firm’s confirmation without independently testing the underlying documents.

The Verification Hierarchy: From Management to Market Evidence

The Statement introduces a hierarchy of evidence quality for sponsor due diligence, ranked from highest to lowest reliability: (a) public market data from recognised exchanges or government sources; (b) independent third-party confirmations from customers, suppliers, or creditors; (c) internal management accounts or operational data; and (d) management representations. Paragraph 21 states that sponsors must “demonstrate, through their working papers, that they have attempted to obtain evidence from the highest available tier before resorting to lower-tier evidence.”

The Customer Confirmation Standard

The most significant operational change concerns customer confirmations. The Statement requires that for customer concentration risk analyses, sponsors must obtain confirmations from at least 80% of the applicant’s top 10 customers by revenue, and must verify the identity of the signatory through independent channels such as commercial registry searches. This standard exceeds the SFC’s 2019 guidelines, which only recommended a 70% threshold. For the 12 applicants in the healthcare and technology sectors currently in the pipeline, where customer concentration above 50% is common, this will require sponsors to allocate additional fieldwork resources to reach the 80% confirmation rate.

The Independent Source Verification Requirement

Paragraph 26 mandates that for any material fact stated in the prospectus, the sponsor must identify at least one independent source of verification that is not the issuer, its directors, or its professional advisers. For financial projections, the sponsor must cross-reference assumptions against industry data from recognised third-party sources such as Euromonitor, Frost & Sullivan, or government statistical agencies. The Statement explicitly notes that “assumptions provided by the issuer’s management, even if supported by internal data, do not constitute independent verification.”

The Documentation Burden: Working Papers as the Primary Enforcement Tool

The Statement elevates the sponsor’s working papers from a procedural requirement to the primary evidence of independent judgement. Paragraph 31 states that the HKEX will assess compliance by reviewing the sponsor’s due diligence record, not by accepting post-hoc explanations. This aligns with the SFC’s 2024 approach, where 12 of the 14 disciplinary actions were based on deficiencies in working paper documentation rather than substantive errors in the prospectus.

The “Contemporaneous Record” Requirement

Working papers must be created contemporaneously with the due diligence activity, not reconstructed after the fact. Paragraph 33 requires that each workpaper include: (a) the date of the activity; (b) the name and role of the person performing the activity; (c) the source of the information obtained; (d) the sponsor’s analysis and conclusion; and (e) any issues identified and how they were resolved. For sponsors using electronic working paper systems, this means that time-stamped audit trails must be preserved, and any later amendments must be clearly flagged with the original entry retained.

The Interview Documentation Standard

For management interviews, which are a core component of sponsor due diligence, Paragraph 37 requires that sponsors prepare written interview summaries signed by the interviewee, and that these summaries include specific questions asked and answers given, not just general impressions. The Statement explicitly warns against “boilerplate interview notes” that do not demonstrate independent challenge. This provision targets the common practice where sponsors prepare standardised interview templates that do not probe specific business risks identified during the due diligence process.

Practical Implications for Sponsor Compliance Teams

The Statement’s immediate impact falls on the sponsor’s compliance function, which must now operationalise the independent judgement standard across all workstreams. For the 18 sponsor firms that handled more than 5 IPO applications in 2024, this requires a systematic review of existing due diligence procedures against the Statement’s criteria.

The Resource Allocation Challenge

Compliance teams must now ensure that each due diligence workstream has at least one senior team member who does not report to the relationship partner leading the transaction. This structural independence requirement, implied by Paragraph 12 of the Statement, means that sponsors must maintain separate reporting lines for quality assurance and transaction execution. For mid-tier sponsors with fewer than 10 licensed principals, this may require reallocating personnel from other functions, increasing the fixed cost per application by an estimated 15-20% based on industry cost models.

The Third-Party Expert Management

Where sponsors engage experts under Listing Rule 3A.13, the Statement requires that the sponsor’s compliance team review the expert’s scope of work, qualifications, and independence before the engagement begins. Paragraph 41 mandates that sponsors must obtain a written confirmation from the expert that it has no conflict of interest with the applicant, and that the sponsor must document its own assessment of the expert’s independence. For PRC-based experts, where conflicts are more difficult to verify, sponsors may need to engage additional independent experts to validate the first expert’s findings.

Actionable Takeaways for Sponsor Compliance

1. Review all existing due diligence procedures against the three-pronged test in Paragraph 8 of the Statement, and revise working paper templates to require explicit documentation of independent verification sources for each material fact.
2. Establish a structural separation between the transaction team and the quality assurance function, ensuring that the compliance reviewer does not report to the relationship partner on any live transaction.
3. For each new application, identify the top 10 customers by revenue and allocate fieldwork resources to achieve the 80% confirmation rate mandated by Paragraph 21, with independent verification of signatory identity.
4. Implement a contemporaneous documentation policy that requires working papers to be created within 48 hours of the due diligence activity, with time-stamped records and clear audit trails for any subsequent amendments.
5. For any expert engagement under Listing Rule 3A.13, obtain a written independence confirmation and conduct an independent assessment of the expert’s qualifications and conflicts before the engagement begins.