IPOs: Creativity or Transparency?
Hong Kong’s Securities and Futures Commission recently called for a change in Hong Kong law which would make IPO sponsors criminally liable for producing misleading or fraudulent prospectuses.
This is a good move, although, not surprisingly, the investment banks are staunchly opposed. However, restoring confidence in the badly diminished China IPO market is in everyone’s best interest: regulators, investment banks, big investors and small retail investors.
As consumers, we have rightfully come to expect higher standards of truth in advertising than we did 20 or more years ago. Such expectations are widely protected by laws and regulations.
Should individual investors be content with incomplete or misleading information when considering whether or not to purchase shares in an IPO? Obviously not.
As Tom Holland wrote in the South China Morning Post recently on this subject:
“A prospectus is meant to be a legal document containing all the information an investor needs to decide whether to buy shares or not. Its accuracy should be beyond doubt.”
If we read an advertisement for a pharmaceutical product containing specific claims about that product’s effects on human health, we have the right to expect that those claims have been carefully vetted, based on scientific data, and that the wording in the advertisement does not distort, misstate, or exaggerate the truth. This is enshrined in law in Hong Kong, China and many other places.
A bad investment decision can have disastrous effects on an individual’s or family’s financial health, just as bad medicine can have on physical health.
In the absence of criminal liability, investment banks have been far too relaxed in the due diligence process, specifically with regard to vetting and packaging the data which goes into IPO prospectuses.
Holland writes that according to Hong Kong’s SFC, a high percentage of IPO applications received are not up to standard, by failing to accurately disclose companies’ past performance, overlooking significant risks, or offering financial forecasts which were so creatively optimistic as to stretch the bounds of reasonable assumption.
Creativity is great, but not when its primary purpose appears to be to cheat ordinary people out of their money.
Not surprisingly, Hong Kong’s investment banking community is dead set against any moves to change the law in ways that would make them criminally liable for these kinds of activities. In the meantime, the brunt of “caveat emptor” is on the retail investor.
Ironically, retail banks in Hong Kong now have to go through elaborate and time-consuming new procedures to ensure individual investors understand the risks when considering investing in the bank’s investment product offerings. This came about in the wake of the global financial crisis, when many Hong Kong retail investors lost their life savings after buying complex investment products which they did not understand.
Yet when it comes to the Hong Kong equity market, the retail investor has no such protection. Their ability to understand the risks inherent in an IPO share offering is dependent on the prospectus. If the sponsoring investment banks fudge that document, it’s just as bad or arguably even worse than a retail bank offering risky schemes which most ordinary investors cannot possibly understand.
Retail investors are the small fry in Hong Kong’s IPO market, but they deserve better protection. I hope the SFC’s effort to achieve this is a success. It would be good for the market as well as the consumer, and it’s long overdue.
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