In the world’s largest IPO market, Hong Kong, bankers could face two years in prison and $100,000 worth of fines if any IPO documents are misleading or falsified. Hong Kong Securities and Futures Commission released these proposed penalties on Wednesday as the regulatory gets tough on IPO fraud after a string of fraudulent IPOs in the country.
According to the NYTimes, Hong Kong has a lot of mainland Chinese firms that have been listed in its stock market as these firm look to find more ways of raising capital while Hong Kong dollars are not under the same restrictions as the Chinese currency. This Chinese sprint for raising capital in Hong Kong has given the country the rank of number 1 in initial public offerings three years in a row. The Hong Kong stock market saw 88 new listings which came to raising 271 billion Hong Kong dollars.
Unfortunately, this title of number 1 has not given the country’s investment banks the level of profits you would expect. The reasoning is that eight of the top ten underwriters for Hong Kong IPO’s last year were banks on Wall Street. Goldman Sachs leads the US banks’ role in underwriting in IPOs.
Hong Kong could possibly get a piece of the pie if they implement harsher punishments as stated earlier. IPOs are not going to hire underwriters in a country that has been hit with accounting and securities fraud which is possibly the reason for the harsh punishments proposed. If Hong Kong can reassure IPOs that they have a solid platform in which they can avoid any scandals, we may start to see some Hong Kong banks as underwriters.
Under Hong Kong’s new punishments, we can’t help but to think what would happen to some of the IPOs in the US. Take Groupon Inc (NASDAQ:GRPN), who had “accounting errors” as they were filing for IPO and ultimately had to settle with the SEC. So does that mean that under Hong Kong’s new laws we would have seen board members such as CEO Andrew Mason and underwriters of the IPO go to jail and pay fines? It is hard to say but the US has a different way of handling firms that have accounting and other issues.
The only difference is that these types of fraud will be almost non-existent is Hong Kong as the new punishments take affect while the US continues to not correct the problem, allowing frauds to continue on their path of greed.