Private eyes crack into IPO market

A new regulation that will hold listing sponsors criminally liable for failing to perform due diligence has led to investment banks hiring investigators to check up on listing prospects.

Bankers said the new rule, to come into force soon, would help prevent listing scandals but would also make many firms unwilling to sponsor small offerings.

The Securities and Futures Commission said last year it would tighten the regulation of sponsors from October this year. Under the new rule, bankers may face up to three years in jail and a fine of HK$700,000 if they fail in their due diligence of listing candidates.

The criminal liability reform for sponsors follows problems that emerged with several firms soon after listing.

In June last year, the High Court ordered sports fabric maker Hontex International to repay investors more than HK$1 billion for overstating its revenue and profit in its listing prospectus. The company had traded for only 64 days when the SFC suspended it in March 2010. It was delisted in March this year. The SFC revoked Hontex's sponsor Mega Capital's licence in April last year and fined it a record HK$42 million.

Steve Vickers, a Hong Kong policeman turned commercial investigator and now the chief executive of Steve Vickers and Associates, said that after the SFC announced the reform, his company had found more investment banks asking for help with pre-listing investigations.