Heard the one about the orchid king and the sports fabric maker? The former lasted a year as a public company in Hong Kong, the latter 64 days. Both were undone after it emerged that they grossly overstated revenues in their listing documents. Under new rules proposed on Wednesday, sponsors of initial public offerings could be sued or even prosecuted for misstatements. About time.
The orchid king was Yang Bin, a Chinese-Dutch entrepreneur with North Korean links whose orchid producer, Euro-Asia Agricultural, was a market darling in 2001 before its reported overseas sales were shown to be twice the value of China's entire floricultural exports. In 2010, Hontex, a sports fabric maker, was suspended by the Securities and Futures Commission (SFC) after just three months – a record for the shortest float in Hong Kong.
The effect of the SFC's new rules will be to flip the de facto Hong Kong listings process on its head. During the boom years spearheaded by China's state-owned behemoths, IPO sponsors – banks and brokers – often filed sketchy applications and relied on regulators to ask the tricky questions before offer documents were published. Drafts will now be made public, among many changes the SFC is proposing. The essence of the new rules is simple, however: Sponsors should do their own checks of, say, the flower industry, and be prepared to stand by them.
Hong Kong has profited massively from being the gateway to China. In the three years before 2012, the exchange raised a third more equity than New York, according to Dealogic. While IPOs of state-owned giants are now fewer, it is still the most likely avenue for private Chinese companies seeking funds. Last time the SFC tried to put the onus on sponsors in the wake of the orchid scandal, the industry, including the big international banks, called it unreasonable. With investors and regulators around the world querying Chinese companies' accounts, the city's future status as a financial centre depends on these very reasonable steps.