Desconstructing Sponsor Prospectus Liability

Abstract

The question of whether a sponsor of an initial public offering (IPO) is subject to the criminal and civil liability provisions of Hong Kong’s prospectus law has been debated for over 15 years and remains untested in court. The interpretation of the law provided by the Securities and Futures Commission (SFC) in August 2014 is that sponsors are subject to prospectus liability because they are persons who authorize the issue of the prospectus, an interpretation based on certain non-statutory considerations to which sponsors are subject. To examine whether the SFC’s position is supported in law, this article considers three possible routes by which legal liability might be established: through the relationship between non-statutory regulations and law, the law on authority, and the legal, regulatory and commercial context of sponsor work. However, none of these routes provide clear support. An unexpected finding was that elements underlying the SFC’s position could potentially apply to underwriters of an IPO. While the SFC has significant powers over sponsors outside the scope of prospectus law, the position under prospectus law of private civil litigants vis-à-vis sponsors remains uncertain. The options for resolving the current disjunct between prospectus provisions originally introduced in the context of a largely unregulated market and expectations under current regulatory architecture are considered.