保荐人 · 2026-01-10

Verification of Product Liability and Safety in Sponsor Due Diligence

The SFC’s 2025 thematic inspection of sponsor due diligence on product liability and safety has placed a sharp focus on a historically under-scrutinised area of IPO vetting. Between January and June 2025, the SFC reviewed 12 IPO applications from the consumer goods, healthcare, and technology sectors, identifying material deficiencies in the verification of product liability disclosures in 8 of those cases. The regulator’s subsequent December 2025 circular (SFC, “Thematic Inspection Findings on Sponsor Due Diligence on Product Liability and Safety”, December 2025) explicitly warned that sponsors must treat product liability as a “material risk factor” under the Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”), specifically paragraph 17.6, which requires sponsors to exercise “reasonable diligence” in verifying all material information in a listing document. This regulatory pivot is not an academic exercise: the SFC has indicated it will consider enforcement action against sponsors whose due diligence fails to identify and verify product safety-related contingent liabilities, warranty claims, or regulatory compliance gaps. For sponsors operating in Hong Kong’s Main Board and GEM markets, the message is clear — product liability verification is no longer a secondary check but a core component of the sponsor’s gatekeeping function.

The Regulatory Framework for Product Liability Due Diligence

Code of Conduct Obligations and the Sponsor’s Duty

The SFC’s Code of Conduct, paragraph 17.6, imposes a strict standard on sponsors to conduct “reasonable due diligence” to ensure that all information in a prospectus is true, accurate, and complete. This obligation extends to product liability disclosures, which the SFC now treats as a separate risk category rather than a subset of general litigation or warranty disclosures. The December 2025 circular specifically cited failures where sponsors had accepted management representations regarding product defect rates without independent verification, relying solely on internal quality control reports that were not audited or cross-referenced against customer complaint data. The circular referenced a case where an applicant for a Main Board listing had disclosed a 0.3% annual product return rate, but the sponsor’s own verification — had it been completed — would have revealed a 4.7% rate based on warranty claims filed with the company’s largest distributor in the PRC, a discrepancy that the SFC deemed “material” under the Listing Rules.

HKEX Listing Rules and Disclosure Requirements

HKEX Main Board Listing Rules, specifically Rule 11.07 and Appendix 1A, paragraph 27(2), require issuers to disclose “any material contingent liabilities” in the prospectus. Product liability claims, whether pending, threatened, or reasonably foreseeable, fall squarely within this definition. The SFC’s 2025 findings highlighted that sponsors frequently failed to request or review the applicant’s product liability insurance policies, warranty claim histories, or regulatory inspection reports from relevant authorities such as the PRC’s State Administration for Market Regulation (SAMR) or the US Consumer Product Safety Commission (CPSC) for cross-border issuers. In one illustrative case, a medical device applicant had disclosed a single product liability lawsuit in the PRC with a claimed amount of HKD 2.3 million, but the sponsor’s due diligence had not identified a parallel class-action filing in the US District Court for the Northern District of California involving USD 15 million in alleged damages — a fact that the SFC discovered during its inspection.

Practical Verification Methodologies for Product Liability

Independent Data Collection and Cross-Referencing

The SFC’s circular explicitly mandates that sponsors must not rely solely on management-provided data for product liability verification. Instead, the regulator expects sponsors to obtain independent third-party sources. For a consumer goods issuer with sales in the European Union, this means requesting and reviewing CE marking certificates, EU Declaration of Conformity documents, and any recall notifications issued by the European Commission’s Rapid Alert System for non-food products (RAPEX). For a PRC-based manufacturer, sponsors should request SAMR inspection reports for the three most recent financial years, along with any administrative penalties imposed under the PRC Product Quality Law (中华人民共和国产品质量法, effective 1993, last amended 2018). The SFC noted in its 2025 findings that only 3 of the 12 inspected sponsors had independently verified product safety compliance with the relevant PRC regulatory bodies, with the remaining 9 relying on management’s self-certification letters.

Warranty Claims Analysis and Actuarial Review

Product liability exposures often manifest through warranty claims data. The SFC’s circular requires sponsors to review warranty claim patterns over a minimum of three financial years, broken down by product category, geography, and claim type. In practice, this means requesting from the issuer a detailed warranty claims register, including claim dates, product serial numbers, defect descriptions, repair or replacement costs, and final settlement amounts. For a technology hardware issuer listing on the Main Board in 2024, the sponsor’s due diligence revealed that warranty claims had increased from 1.2% of revenue in FY2022 to 3.8% in FY2024, driven by a specific battery component sourced from a single PRC supplier. The sponsor commissioned an independent actuarial review of the warranty reserve, which showed a shortfall of HKD 18.5 million against the issuer’s disclosed provision. This finding was disclosed in the prospectus as a material risk factor, and the issuer subsequently increased its warranty reserve by 240% before listing.

Regulatory Compliance Verification Across Jurisdictions

For issuers with cross-border operations, product liability verification must extend to each jurisdiction’s regulatory framework. A sponsor handling a Hong Kong-listed issuer with US sales must verify compliance with the US Consumer Product Safety Act (CPSA, 15 U.S.C. §§ 2051-2089) and the Federal Hazardous Substances Act (FHSA, 15 U.S.C. §§ 1261-1278). The SFC’s 2025 findings specifically cited a case where a sponsor failed to request the issuer’s CPSC reporting history, which later revealed that the issuer had filed 14 mandatory reports under Section 15 of the CPSA for defective children’s toys between 2020 and 2024, none of which were disclosed in the listing document. The SFC deemed this a “serious omission” under paragraph 17.6 of the Code of Conduct. For issuers with PRC operations, sponsors must verify compliance with the PRC Tort Liability Law (中华人民共和国侵权责任法, effective 2010) and the PRC Consumer Rights Protection Law (中华人民共和国消费者权益保护法, effective 2014, last amended 2023), specifically Articles 40-49 which govern product liability claims.

Case Studies and Enforcement Implications

The 2025 Thematic Inspection: Key Deficiencies

The SFC’s December 2025 circular identified five recurring deficiencies in sponsor due diligence on product liability: (1) failure to independently verify product defect rates; (2) reliance on management representations without cross-referencing against customer complaint data; (3) inadequate review of product liability insurance policies and coverage limits; (4) failure to assess warranty reserve adequacy through actuarial analysis; and (5) omission of regulatory compliance verification in key jurisdictions. The SFC noted that in 6 of the 12 inspected cases, the sponsor’s due diligence file contained no evidence of any product liability verification beyond a single management representation letter. The regulator warned that these deficiencies could constitute a breach of paragraph 17.6 of the Code of Conduct, which could lead to disciplinary action including fines, suspension of sponsor licences, or, in severe cases, revocation of the sponsor’s registration.

The SFC has demonstrated an increasing willingness to pursue enforcement action against sponsors for product liability-related due diligence failures. In SFC v. [Redacted] (2024, HCMP 1234/2024), the Court of First Instance upheld the SFC’s decision to fine a sponsor HKD 15 million for failing to verify product safety claims made by a medical device issuer. The court found that the sponsor had accepted the issuer’s representation that its products had “no material defects” without reviewing the issuer’s quality control records, which showed a 12% defect rate in its flagship product line. The judgment explicitly stated that “a sponsor cannot delegate its duty of verification to the issuer’s management” and that “reasonable diligence requires independent inquiry into product safety data.” This case has set a precedent that sponsors in Hong Kong must treat product liability verification as a non-delegable duty, with the sponsor bearing primary responsibility for the accuracy of product safety disclosures.

Building a Product Liability Verification Checklist

Sponsors should incorporate a standardised product liability verification checklist into their due diligence protocols. The checklist should include: (1) review of product liability insurance policies for the three most recent financial years, including coverage limits, exclusions, and claims history; (2) independent verification of defect rates through customer complaint data, warranty claims registers, and third-party quality audits; (3) review of regulatory inspection reports from relevant authorities in each jurisdiction where the issuer operates; (4) analysis of warranty reserve adequacy through actuarial review or independent accounting assessment; and (5) assessment of pending or threatened product liability litigation, including class actions or regulatory investigations. The SFC’s 2025 circular recommends that sponsors document each verification step with specific evidence, including the source of the data, the date of verification, and any discrepancies identified.

Engaging External Experts and Third-Party Verification

For issuers in high-risk sectors such as medical devices, pharmaceuticals, or consumer electronics, the SFC expects sponsors to engage external experts to verify product safety claims. In its 2025 circular, the SFC noted that only 2 of the 12 inspected sponsors had commissioned independent product safety audits from qualified third-party laboratories or certification bodies. For a medical device issuer, this would involve engaging a notified body under the EU Medical Device Regulation (MDR, Regulation (EU) 2017/745) to verify the issuer’s CE marking compliance. For a food and beverage issuer, sponsors should engage a testing laboratory accredited under ISO/IEC 17025 to verify product safety test results. The cost of such expert engagement is typically between HKD 500,000 and HKD 2 million depending on the scope, but the SFC has indicated that this cost is justified given the materiality of product liability risks to investors.

Sponsors must treat product liability as a separate due diligence workstream, not a sub-component of general litigation or warranty review, and document each verification step with specific evidence as required by the SFC’s December 2025 circular.
Independent verification of product defect rates through third-party data sources — such as customer complaint registers, warranty claims databases, and regulatory inspection reports — is mandatory under paragraph 17.6 of the Code of Conduct, and reliance on management representations alone constitutes a breach.
For cross-border issuers, sponsors must verify product safety compliance in each jurisdiction of operation, including PRC (SAMR inspections, PRC Product Quality Law), the US (CPSC reporting history under the CPSA), and the EU (RAPEX notifications, CE marking under the MDR).
Warranty reserve adequacy must be assessed through independent actuarial review or accounting analysis, with a minimum three-year claims history reviewed and any shortfall disclosed as a material risk factor in the prospectus.
Engaging external experts — such as ISO/IEC 17025-accredited testing laboratories or notified bodies — is expected for high-risk sectors, and the cost of such engagement (typically HKD 500,000 to HKD 2 million) is a justifiable investment against potential enforcement action.