With limited exceptions, companies seeking a listing for their equity shares in Hong Kong will normally also engage in a public offering that invokes the prospectus provisions of the Companies (Winding-up and Miscellaneous Provisions) Ordinance (Cap. 32) (CWUMPO). In addition to the requirements of the CWUMPO, it will be necessary to comply with the non-statutory listing rules of The Stock Exchange of Hong Kong Limited (SEHK), which require a listing document to be produced - this will be combined with the CWUMPO-compliant prospectus into a single document (together, the prospectus). While the prospectus is typically produced in a physical print run of around three to five thousand copies that are made available at banks and other financial services providers, Alibaba’s recent secondary listing (26 November 2019) and public offer was achieved on a paperless basis – the prospectus and the application forms were only made available electronically.
As a wholly paperless public offering is a first for the Hong Kong market, this article explores the underlying legal and regulatory requirements and considers whether Hong Kong must remain wedded to paper when competitor markets are not. It queries the necessity of the waivers obtained by Alibaba to go paperless and suggests that that regulatory clarity - and regulator proaction - is required to facilitate Hong Kong more clearly moving forward to a paperless system that reflects the modernisation of public offering and placement processes. This has become essential in view of developments internationally, commercial and environmental considerations, and local realities.
The Legal Requirements
Parts II and XII of the CWUMPO set out the requirements for the prospectus, the former being concerned with Hong Kong incorporated companies and the latter being concerned with all other companies. Both are in substance identical in the relevant regards and are concerned with the act to have “issued” or to “issue” a prospectus that complies with the relevant dating and other content requirements (ss. 38 and 342(1) CWUMPO – the latter also referring to “circulate or distribute”). The defined term “prospectus” in s. 2(1) CWUMPO refers to “prospectus, notice, circular, brochure, advertisement, or other document” and to “a publication”. Sections 39A and 39B CWUMPO contemplate that a prospectus may consist of more than one “document” and s. 41A CWUMPO contemplates the incorporation in a prospectus of statements made in “any report or memorandum”.
As the foregoing quoted phrases are not further defined in the CWUMPO, it is a question of statutory interpretation as to whether they require a prospectus to be in a physically printed medium. It is well established law “that the language of a statutory provision is to be construed having regard to its context and purpose” (per Mr Justice Fok PJ in Pacific Sun Advisors Ltd v Securities and Futures Commission  HKCFA 27, ), and that statutory language is to bear its “natural and ordinary meaning unless the context or purpose points to a different meaning” (per Li CJ in HKSAR v Cheung Kwun Yin (2009) 12 HKCFAR 568, ). Reflecting this purposive approach, s. 19 of the Interpretation and General Clauses Ordinance (Cap. 1) (IGCO) provides that Ordinances of Hong Kong, including CWUMPO, “shall be deemed to be remedial and shall receive such fair, large and liberal construction and interpretation as will best ensure the attainment of the object of the Ordinance according to its true intent, meaning and spirit.”
The origins of the CWUMPO sit at a time when paper was the only way of issuing a prospectus. However, legislation is intended to be flexible to achieve statutory objectives, which in the case of CWUMPO concerns the protection of investors via disclosures that give rise to legal means of redress for mis-disclosure, which are provided for in ss. 40, 40A, 342E and 342F CWUMPO, as well as an orderly system for the registration of prospectuses. Viewed from today’s perspective, paper is far from being necessary to achieve these objectives. It may also be noted that the definitions of “document” and “publication” in s. 3 IGCO indicates considerable breadth and flexibility as to the medium in which matters may be written and published, including by electronic means.
While these considerations point to there being no requirement for a paper-based prospectus, it is also necessary to consider the means by which persons can apply for shares in a public offer, which has traditionally been by way of a printed application form that is distributed with the printed prospectus. Sections 38(3) and 342(3) CWUMPO both refer to a “form of application” that may only be “issued with” the prospectus. This had in practice been interpreted as requiring a printed application form to accompany a printed prospectus. The introduction in 2010 of s. 9A of the Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Cap. 32L) (s. 9A) permitted a public offering in connection with a listing to use paper application forms and an electronic prospectus, subject to compliance with the requirements set out in s. 9A thereof (normally referred to as a Mixed Media Offering or MMO).
However, Alibaba’s offering was not an MMO conducted under s. 9A - its electronic prospectus was accompanied by a wholly electronic application process. While Alibaba’s prospectus sets out the various waivers obtained, they did not include any waiver from the provisions of CWUMPO concerning the application forms. The process of statutory interpretation discussed above in relation to prospectuses is equally applicable to application forms, particularly in view of the Electronic Transactions Ordinance (Cap. 553) (ETO) which allows binding contracts to be formed electronically. Indeed, the Securities and Futures Commission (SFC) and SEHK have previously expressed the view that CWUMPO is not concerned with the medium used to issue either a prospectus or an application form (paragraph 8 of their Joint Consultation Paper April 2008), and this now seems to be de facto accepted by the two regulators in practice.
The final matter to consider is the prospectus authorisation and registration requirements, which present slightly different issues from those discussed above. Sections 38D(3) and 342C(3) CWUMPO require an application for authorisation to be made “in writing” and contemplates the registration of a “copy of the prospectus” which has been signed or certified (s.3 IGCO defines “writing” to include any mode of representing words in a visible form; IGCO does not define “copy” but does contemplate a copy of an electronic publication). Section 39C CWUMPO requires “a true copy of the document” to be certified (by a director or company secretary of the company or their authorised agent, a solicitor, a certified public accountant, or notary public) and submitted to the Registrar of Companies. There is no guidance in CWUMPO or IGCO on the certification or other requirements, however, the ETO does provide for electronic certification. It is understood that the Registrar of Companies required paper copies of the Alibaba prospectus and, while the legal necessity of this may be debatable, s. 38D(7)(a)(iv) & (7A)(b)(ii) CWUMPO empowers the Registrar to set requirements, including for the purpose of “enabling the Registrar to make copies or image records of documents and to make and keep records of the information contained in them.” The small number of printed copies required by the Registrar does not at this stage appear to warrant concern and having a paper-based record may well be prudent.
The Regulatory Requirements
Similar to the position under the law, the SEHK’s listing rules (LR) do not expressly provide for paper-based requirements. LR 2.07A provides that the electronic format is capable of satisfying any specific LR requirement for a printed form, however, that is limited to corporate communications made by listed issuers to holders of its securities, and so does not apply to listing applicants. Various requirements of the listing rules concerning the SEHK’s procedural requirements specify printed copies of the prospectus to be lodged with the SEHK, such as those related to the SEHK’s power to authorise prospectuses (LR 9.11(33)(b) and 11A.08).
In contrast to the foregoing requirements that specifically refer to the printed form the rules contemplating availability of the prospectus to the public do not. This includes LR 12.04(3) concerning “the address(es) at which copies of the listing document (if any) are available to the public”, and LR 12.07 which requires that “the issuer must make sufficient copies of the listing document available to the public”. On the other hand, LR 12.11 provides that “Listing documents published by a new applicant must include copies available in printed form”.
Unlike the statutory interpretation process discussed above, as non-statutory regulations the interpretation process is internally governed by LR 1.06 and 2A.02 which provide that the listing rules are to be interpreted by the SEHK, ie the Listing Division and the Listing Committee. It is nevertheless relevant to recall that the power to make the listing rules derives from the Securities and Futures Ordinance (Cap. 571) (SFO) which grants rule making power “for the proper regulation and efficient operation of the market which it operates” and in relation to “applications for the listing of securities and the requirements to be met before securities may be listed” (s. 23(1)(a) and (2)(a) SFO). The listing rules themselves state the principal function of the SEHK “is to provide a fair, orderly and efficient market for the trading of securities” and that the listing rules have been made in furtherance of this function (LR 2.01). Such provisions do place boundaries on how the relevant listing rules may be properly interpreted.
The Waivers Alibaba Obtained
The Alibaba prospectus states it obtained waivers from strict compliance with LR 12.04(3), 12.07 and 12.11 in respect of the “availability of copies of the prospectus in printed form” (pages 133 and 150). While the implication is that a printed prospectus would have been required in the absence of such waivers, uncertainties remain.
First, there is no mention of a waiver being necessary in respect of the application form being paperless. This appears to indicate the regulators have, as suggested above, de facto accepted that CWUMPO does not require application forms to be printed (nor do the listing rules), at least where the prospectus is in electronic form.
Second, it is less clear how the statutory phrase “issued with”, discussed above, should be properly understood. The Alibaba prospectus, which was available on the websites of HKEX and Alibaba, states (page 412) the application form was available at other, independently operated, websites. Given that the Internet is not a singular, undifferentiated space, “issued with” appears to have been given a more liberal or functional interpretation that did not necessitate any exemption being granted (under s. 38A CWUMPO) from the requirement - perhaps along the lines of “readily available at the same time as” (compare Rule 172, discussed below). If so, this would appear to render the format-dependent basis of s. 9A redundant.
Third, LR 12.04(3) and 12.07 are primarily concerned with availability of the listing document. It would seem a stretch to interpret the requirement in LR 12.11 that a prospectus must be “available in printed form” as mandating a printed copy of the listing document to be made widely available to every person considering applying for shares. Moreover, LR 12.11A(2), which applies to an MMO employing an electronic prospectus, only provides for an amendment to LR 12.04(3), suggesting that LR 12.07 and 12.11 do not mandate printed prospectuses being made widely available (ie, where this is not required under the law). The amending provisions of LR 12.11A(2)(d) & (f) concerning access to a printed prospectus reflect s. 9A (3)(b) & (c) (Cap. 32L). Indeed, it would be odd, and possibly ultra vires the powers of the SEHK’s rule-making power under s. 23 SFO (and beyond LR 2.01), to make a listing rule mandating printed prospectuses in connection with a public offer where the governing statute did not require it – here the SEHK’s rule-making powers would appear to be confined to the listing document rather than the prospectus per se.
Finally, the waivers appear to have been obtained “based on the specific and prevailing circumstances of the Company” without further elaboration (Alibaba prospectus, page 150).
Alibaba would understandably need commercial certainty they are complying with the listing rules. However, the foregoing considerations raise doubt over whether the waivers were strictly necessary and create uncertainty as to what “issued with” now requires. It is suggested that the regulators should make the position clear to the market, particularly in view of developments internationally, environmental considerations, and local realities, as discussed next.
The Bigger Picture: Sustainable Stock Exchange Practices
Hong Kong’s main competitor markets internationally have made the position on electronic public offerings clear. Over a decade ago, the U.S. Securities and Exchange Commission recognised “the need to modernise the [prospectus delivery] obligations in view of technological and market structure developments” (SEC International Series Release No. 1294; square brackets added for clarity). It introduced Rule 172 to reflect an “access equals delivery” model for prospectuses in which investors are presumed to have access to the Internet. The UK complies with the EU’s Prospectus Directive, which permits a prospectus to be delivered in electronic only form provided it is easily accessible, searchable, downloadable and printable (Art. 6, Commission Delegated Regulation (EU) 2016/301).
To this may be added environmental concerns. It has been estimated that in a typical year in Hong Kong, around 750 tonnes of paper are used in printing IPO prospectuses, consuming around 10 football pitches of forest land and water equivalent to 28 Olympic sized swimming pools (“Alibaba, HKEX & ESG: missed leadership opportunities”, International Financial Law Review, 10 December 2019). The extent of avoidable environmental waste is more disturbing when one considers that, per a 2007 survey by the SFC, around two-thirds of paper-based prospectuses were not taken up by retail investors (para 15 of the SFC/SEHK Joint Consultation Paper April 2008).
The incongruity here is that Hong Kong’s regulators have been at the forefront of environmental initiatives. The SFC has actively supported positioning Hong Kong as an international green finance centre. The SEHK has, as a signatory to the United Nation’s Sustainable Stock Exchanges Initiative (SSE) commitment letter, shown global leadership in terms of developing the listing rules toward sustainability objectives as compared to peer signatory markets such as NYSE, Nasdaq and LSE. Stock exchanges in particular must assess themselves under the same lens that they apply to those issuers that utilise their resources. Despite these considerations, more than 95 percent of Hong Kong IPOs continue to print prospectuses.
Hong Kong must modernise its public offering and placement processes beyond MMOs to accommodate electronic methods capable of delivering greater efficiency. If practices are to be aligned with environmental aspirations, regulators will need to be more proactive to clarify and promote paperless offerings. Doing so would send a strong signal to the global market.