HONG KONG (Reuters Breakingviews) - It may have taken a while, but Hong Kong finally showcased an investor-protection edge. The financial regulator banned UBS from leading market debuts for a year, and the Swiss bank and three of its peers will pay $100 million in fines for shoddy due diligence on initial public offerings stretching back to 2009. As bourses battle to host the next wave of unproven startups, the city’s aegis provides a bit of extra comfort.
Because of strict capital controls on the mainland, Hong Kong has been a choice destination for Chinese companies to raise money offshore. Providing safeguards through enforcement action can be tough, however, because of the different legal systems. Hence, Hong Kong’s Securities and Futures Commission implemented rules in 2013 that hold investment banks to higher standards on IPOs.
Some consequences became clearer on Thursday. In one case, UBS literally failed to see the forest for the trees, when it didn’t verify that China Forestry had any woods to speak of. During the 2014 IPO of Tianhe Chemicals, sponsors Morgan Stanley, Bank of America Merrill Lynch and UBS neglected to follow up when a person claiming to represent the company’s biggest customer refused to produce identification and stormed out of an interview.
Monetary penalties are a deterrent, but only up to a point. They can often be shrugged off as a cost of doing business. A suspension cannot be so easily dismissed, however, as the damage is harsher.
Making lead financial advisers liable for untrue statements in a client’s prospectus, as Hong Kong does, is an uncommonly high bar. The U.S. legal system, by comparison, allows shareholders to band together in class action lawsuits. This allows for a different form of protection, but doesn’t hold bankers responsible in the same way. Mainland China authorities, meanwhile, safeguard investors from wrongdoing in vigorous, but often unwritten, ways.
Having recently opened the door to dual-class shares that give some founders outsize control, Hong Kong leaves investors vulnerable in some ways. Even so, as a new batch of unprofitable tech companies and pre-revenue biotech ventures from China and beyond prepare to go public, at least the city can offer investors one extra layer of assurance.
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