The MMO approach for Hong Kong IPOs cannot be ignored

In April 2013, we wrote a letter to Hong Kong Lawyer in reference to the joint consultation conclusions published by the Securities and Futures Commission (the “SFC”) and The Stock Exchange of Hong Kong Limited (the “SEHK”) on 25 November 2010 concerning the approval of the Mixed Media Offer (the ‘MMO”) proposal. The letter was published in Hong Kong Lawyer’s 2013 April issue.

The MMO allows listing applicants to issue paper application forms in public offers without being accompanied by paper prospectuses, provided that listing applicants comply with the conditions set forth in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). In essence, these conditions require listing applicants to ensure the availability of printed copies of the prospectus, for no cost, at specified locations, whilst being accompanied by its form that is freely accessible on both their own and the SEHK’s websites.

As most are aware, the prospectuses for public offers in Hong Kong can often be hundreds of pages and several inches thick. The primary purpose of the MMO approach is to promote the use of electronic media in IPOs, by reducing the need for printed materials.

The letter we wrote previously sought to promote the use (due to the underuse) of MMOs and we want to continue to encourage this approach. Since its inception from February 2011 to 31 December 2017, there has been a total of 23 out of a possible 835 MMOs. Please refer to the table below which shows the breakdown of trends of using MMO over the same period.

The statistics demonstrate that whilst the total number of new IPOs is increasing, the use of MMO approach is not increasing in relation to this and the regularity of its use is decreasing in both absolute and percentage terms. For example, in the first three years (2011-2013) there were 11 MMOs out of a possible 275 (4%), but in the last three years (2015-17), there were only 9 out of a possible 438 (2%).

As evident from the above statistics, the MMO approach has been unsuccessful. More promotion is needed to encourage listing applicants to consider this method when undertaking an IPO. The legal profession, as a significant participant in local capital markets, also has a duty to work in a way that best protects the environment when it’s viably possible. The SEHK has recently updated the guidance letter HKEX-GL81-15 (Guidance on Mixed Media Offer) in July 2018. We do advise our fellow practitioners to read this letter carefully and try their best to educate their clients in adopting the MMO approach. It is a social responsibility to provide adequate education for listing applicants and sponsors for the benefit of society at large.

The promotion of the MMO approach should be straightforward as it has obvious benefits are for all parties, as listed below.

  1. Improve time and cost efficiencies in the dissemination of information to prospective investors;
  2. Save resources for printing, posting and handling;
  3. Enhance competitiveness of Hong Kong as an international financial centre by reducing costs; and
  4. Augment Hong Kong’s reputation as a progressive, forward-thinking financial market by upholding social responsibility through digitalisation.

Furthermore, we would like to reaffirm the same amendment that we have previously advised on the Listing Rules to the effect that:

“A listing applicant must use the MMO approach when distributing prospectuses in public offers unless it has a justifiable reason for not doing so and this reason must be disclosed in its prospectus.”

This approach is similar to the “comply or explain” approach in the Corporate Governance Code in Appendix 14 of the SEHK’s Main Board Listing Rules.

In order to provide an incentive for listing applicants, the SEHK may also consider reducing the initial listing fee (or even waive it entirely) if a listing applicant adopts the MMO approach for its IPO.

In the last few years, we have seen printed newspapers and magazines gradually being replaced by their corresponding electronic versions. By the same analogy, we do not see any reason why this should not occur in printed prospectuses. In the long run, we believe printed prospectuses should be replaced and all IPOs should be required to adopt the “electronic prospectus” approach.

We are now in an era of rising environmental risks and the corporate world cannot be exempt from the consequences of these risks and the responsibilities that they bring. Increasingly, the global society is expecting more environmentally ethical practices and here in Hong Kong, we should be ahead in this regard or risk being left behind.

I urge the SFC and the SEHK to heed my advice, and to help promote the MMO approach in a bid to achieve the objectives set out above and in paragraph 15 of the Joint Consultation Conclusions. Hopefully, this will encourage other companies to start adopting the responsible approach of electronic prospectuses

 

David George-Carey also contributed to the article.

We would welcome thoughts from readers on our observations above. Readers can reach the authors of this article by email at mike.suen@withersworldwide.com.

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Partner, Withersworldwide

Mike is a partner in Withers’ corporate team. He has over seventeen years’ experience in corporate finance and specialises principally in initial public offerings on the Main and Growth Enterprise Market Boards of the Hong Kong Stock Exchange, including the listing of real estate investment trusts. He also has extensive experience in mergers and acquisitions, corporate reorganisations, compliance pertaining to Hong Kong listing rules and local securities regulatory compliance.