ROBSON LEE: Insights into the making of robust IPO prospectuses

Q: It amazes people that there is so much information residing in an IPO prospectus. Tell us briefly how all this is put together. 

Robson Lee was a legal advisor to the IPOs of, among others, Sheng Siong Group, AsiaPhos, XMH Holdings and MoneyMax Financial Services. Photo by Sim Kih.Robson: The prospectus is arguably the most important document in an IPO. The preparation and drafting process is lengthy and typically takes up to 6 months, depending on the complexity of the offer, the nature and scale of the listing applicant’s business, as well as the extent of the accompanying risks to be disclosed. 

Information in the prospectus is collated from site visits, meetings with key management and the IPO due diligence exercise, all of which are conducted as part of the IPO preparation. A typical due diligence exercise entails the making of detailed enquiries on the business and assets of the group and the management and controlling shareholders.

Care is taken to ensure that the prospectus contains all information material to investors and that there are no misstatements. The contents of the prospectus must be subject to a comprehensive verification process involving detailed reviews of all information and documents as well as formal verification meetings with the directors, shareholders who intend to sell their shares at the IPO, and all the professional advisers to the IPO. 

Q: What are the main responsibilities of company directors, issue managers and underwriters? 

Robson:The directors have the collective and individual legal responsibility to ensure that all information and statements in the prospectus are true, complete and accurate in all material respects. The directors must also ensure that the group has adequate internal controls and risks management systems to safeguard the finances of the group. The directors have oversight responsibility in the proper corporate governance and accountability of the group.  

For a Mainboard listing, the issue manager (who may also concurrently be the underwriter) is in charge of the overall coordination of the IPO involving the various professional parties and advisers, including the underwriters and placement agents with the group’s management.

The issue manager is primarily responsible for ensuring that the listing applicant satisfies the listing criteria and the terms and conditions of the Singapore Exchange Securities Trading Limited (the “SGX”). For a listing on Catalist, the sponsor-supervised regime of the SGX, the sponsor takes the role of the issue manager as described above. 

As for the underwriter, its main role is to underwrite the IPO’s success by applying for shares not taken up by investors. In other words, the risk of an under-subscription of the IPO is assumed by the underwriter in return for a fee.

Q: What would be the role of a legal advisor like yourself? 

Robson: As a legal advisor, I am usually involved in the listing process from the beginning. I help potential issuers source for a Singapore-based issue manager which is usually a merchant bank, a stock broking member firm of the SGX or a corporate finance institution with a capital market services licence to advise and manage the listing process. 

The general scope of legal advisory work would include advising on the legal structure of the IPO as well as legal issues in relation to the prospectus, undertaking legal due diligence on the listing applicant, reviewing and commenting on regulatory issues, and drafting the bulk of the prospectus. 

Legal advisors are also responsible for preparing ancillary legal documentation. These will include the new Articles of Association to be adopted by the listing applicant for compliance with the listing rules, the restructuring agreements and corporate secretarial documents for the conversion of the listing applicant (a private company) to a public company, the rules of any employee share options scheme, and the service contracts of key executives.

An equally important aspect of the listing preparation is to help the listing applicant establish what I term as “good corporate DNA constitutional structure” – a sound system of internal controls, risk management system of checks and balances, clarity of roles and accountability. 

Q: Beyond these parties, who approves a "red herring" prospectus and the final prospectus for release into the public domain? 

Robson: The listing process and approvals required differ depending on whether the applicant decides to list on the Mainboard or on Catalist.

For a Mainboard applicant, the approval of SGX is required. The "red herring" prospectus is lodged with the Monetary Authority of Singapore (the “MAS”); and the final prospectus registered by the MAS. For a Catalist applicant, the clearance of the sponsor is required. The "red herring" prospectus, termed as an “offer document”, is lodged with SGX, acting as an agent of the MAS, instead of directly with the MAS. The final offer document is registered by the SGX.

The listing processes for Mainboard and Catalist are elaborated further below.

For a Mainboard listing, the applicant will first be required to submit to the SGX its listing application and a draft prospectus. Subsequent to SGX’s approval (i.e. Eligibility-To-List), the “red herring” prospectus, also known as a “preliminary prospectus”, is lodged with the MAS for an exposure period of at least 7 days. The MAS, as well as the public, may provide comments on this “red herring” prospectus within the exposure period. The applicant can also conduct road show presentations and commence book-building with institutional and accredited investors within the same period. After the exposure period, assuming that the comments (if any) have been properly addressed by the applicant, MAS will proceed to register the final prospectus, following which the applicant can proceed to launch the offer and distribute the registered final prospectus to the general public.

In 2010, as part of the ongoing efforts to reduce time-to-market and enhance the attractiveness of Singapore as a listing destination, MAS and SGX commenced road-testing of a concurrent review process for prospectuses where the draft prospectus is submitted to both MAS and SGX for concurrent review (instead of SGX first, followed by MAS).

For a Catalist listing, the sponsor takes the role of the SGX in reviewing the offer document; and the SGX acts as the agent of MAS as the lodgement authority. The applicant will, accordingly, first have to satisfy the sponsor that the draft offer document complies with the listing requirements. Subsequent to this, the applicant will then lodge the “red herring” offer document with the SGX (acting as the agent of MAS) for the prescribed exposure period of at least 14 days. SGX, acting as the agent of MAS, will proceed to register the final offer document, following which the applicant can proceed to launch the offer and distribute the registered final offer document to the general public. 

Q: Accuracy is paramount. Non-omission of material information is paramount. How are all these ensured by all parties concerned? 

Robson: The due diligence review on the listing applicant and getting up the prospectus require that the professional advisers exercise great care and thoroughness to ensure that the disclosures in the prospectus in relation to the IPO and the listing applicant are true, accurate and complete. 

As such, it is important to put in place a systematic process through which material and relevant information pertaining to the listing applicant will be made available by its management and directors to all professional advisors for disclosure. This process is continuing and parties should conduct a stock-take of the due diligence exercise by conducting verification meetings at various junctures to prepare and verify the content of the prospectus.

I make it a point to hold at least four verification meetings where clear records, in the form of verification notes, are taken to establish the source of information and confirmation obtained. For a Mainboard listing, the main verification meetings are held at various junctures such as
(i) the pre-submission stage before the listing application is submitted to the SGX;
(ii) before the lodgement of the preliminary prospectus with the MAS;
(iii) before the final registration of the prospectus prior to the IPO; and
(iv) one market day before the close of the IPO.

For a Catalist listing, the main verification meetings are held (i) before the lodgement of the preliminary offer document with the SGX, acting as agent of the MAS; (ii) before the final registration of the offer document prior to the IPO; and (iii) one market day before the close of the IPO. 

Each of the parties concerned should participate in the due diligence process, and take every opportunity to query on information contained in the prospectus to ensure that the information has been accurately presented. This ensures that the management fulfils the statutory responsibilities in connection with an IPO. 

What would be considered serious lapses?

Serious lapses which attract liability under the Securities and Futures Act (“SFA”) would include making false or misleading statements in the prospectus, omission of information required to be included in the prospectus as well as new circumstances which have arisen since the lodgement of the prospectus. 

The way that information is being presented is also essential. For example, if there is a forecast that is qualitative, professional advisers need to inquire as to the level of due diligence done to substantiate the statements. 

I should stress that the role of the lawyer is not simply to draft the relevant documents but to verify every bit of information which is material to the IPO. It is the lawyer’s job to scrutinise the documents and ask candid and probing questions to establish the factual and legal basis for all information and statements in the prospectus.   

Q: In 2010, New Century Shipbuilding pulled its IPO in Singapore after a whistle blower reported that its prospectus had material omissions regarding a shipbuilding order and a legal suit that the company was involved in then. In such a case, would the company be exposed to liability (such as class action suit) if its IPO had gone ahead?

New Century Shipbuilding pulled its IPO after a complaint was made to the MAS that the prospectus had material omissions.
Photo: http://singapore-ipos.blogspot.sg/Robson: Indeed, material omissions in the prospectus may expose the issuer to liability if it proceeds with its IPO. Under Section 253 of the SFA, the issuer could face a fine of up to S$150,000 for such false and misleading statements. Section 254 of the SFA further provides that such issuer shall also be liable to compensate any person who suffers loss or damage as a result of such false or misleading statements. Investors who participated in the IPO could thus bring a claim against the issuer if they suffered losses pursuant to false or misleading statements made by it.

Class action litigation has been used extensively in the United States to allow investors to seek compensation from issuers for false and misleading statements made in the prospectus. There is no precedent nor convention in Singapore for investors’ class actions against errant companies and directors who are responsible for publishing misleading information or misrepresentations in a prospectus. The SGX in collaboration with regulators such as the MAS and the Commercial Affairs Department will however institute strict enforcement actions in the event of a breach by any person responsible (including professional advisers) for publishing any materially misleading information or false statements in a prospectus. 

Q: Can you share your experience of lapses that have been discovered and rectified? 

Robson: As the entire IPO process may stretch up to more than a year, it can be challenging to ensure that the prospectus is true, accurate and non-misleading in accordance with the listing applicant’s evolving business developments.

Sometimes, if there are reasons for the SGX to believe that certain independent investigations should be conducted on the listing applicant, the SGX may employ an investigator (at the expense of the listing applicant) to verify the listing applicant’s operations or management. In serious cases, the MAS may refuse the registration of the listing applicant’s prospectus if it is of the opinion that it will not be in the public interest to do so.

I cite the example of Nagacorp, whose prospectus was refused registration as the MAS had felt that its queries and reservations were not adequately addressed by the listing applicant.

Lapses may also be discovered during the period between the formal registration of the prospectus and close of the offer. For example, if it materialises that there are misstatements in the prospectus which have only just been discovered after the launch of the IPO, the listing applicant is permitted to withdraw the offer and/ or register a new or supplemental prospectus, while refunding all application monies to investors.
 

A: Have significant errors or omissions happened in the case of published Singapore prospectuses? 

Robson: InAuston International Group Ltd v Public Prosecutor[2008] 1 SLR(R) 882, the Singapore High Court imposed a fine of $10,000 on Auston International Group Ltd pursuant to section 253(1) of the SFA due to an overstatement of profits in its prospectus dated 14 April 2003. In its reasoning, the High Court stated that such overstatement was seen as material when compared to the reported profit figures. 

Auston’s CEO was initially sentenced to 9 months’ imprisonment for each of the charges under section 477A of the Penal Code and to 6 months’ imprisonment under section 253(1) of the SFA. On appeal, however, the sentences were reduced to fines of $5,000 each and a fine of $50,000 respectively. In a separate court hearing, Auston’s CFO was sentenced to 7 months’ imprisonment on each of the two charges under section 477A of the Penal Code. 

In 2011, the MAS investigated the omission of information inGlobal Logistics Properties Limited’s (“GLP”) prospectus dated 11 October 2010 in relation to its non-competition arrangement with ProLogis, Inc. Although the MAS concluded that the omission did not amount to a breach of the SFA, it stated that GLP should not have adopted a narrow and technical assessment of the materiality of the non-competition arrangement and that it would have been more prudent for GLP to disclose the arrangement in the prospectus.

Such cases serve as a reminder that all entities accessing the capital markets in Singapore have a responsibility to uphold the high disclosure standards prescribed by the relevant laws and regulations.

Q: What penalties could the people responsible be subject to?

Robson: Under the SFA, the persons liable for any false or misleading statement in the prospectus would include:
(i)            the issuer and its directors;
(ii)           the selling shareholders (if any) and the directors of the selling shareholders (if the selling shareholder is a corporate entity);
(iii)          the issue manager;
(iv)         the underwriter (excluding sub-underwriters);
(v)          persons considered to be experts for the purposes of the prospectus; and
(vi)         any other person who intentionally or recklessly makes the false or misleading statement, or omits to state the information or circumstance.

These parties could face criminal as well as civil penalties. The criminal penalties provided under section 253 of the SFA for false or misleading statements are a fine of up to S$150,000 and/ orimprisonment for a term not exceeding 2 years.  The civil penalties provided undersection 254 of the SFA would involve the persons liable compensating any person who suffers loss or damage as a result of such false or misleading statements. 

Q: I don't think there have been class action cases -- but how about regulatory action taken against any party which may not have made it to the headlines?

Robson: For example, the MAS issued an interim stop order on theprospectus of EC-Asia International Limited (“EC-Asia”) due to concerns that the prospectus did not contain adequate disclosure on matters that the MAS considered to be material for investors to make an informed decision on the offer. EC Asia subsequently informed the MAS that it will withdraw the offer and return all application monies to investors.

Section 242 of the SFA empowers the MAS to stop an offer if,inter alia, the prospectus: (i) contains any false or misleading statement; (ii) has omitted any material information that should be included in a prospectus; or (iii) does not comply with the SFA in any other way. Although the disclosure-based regime under the SFA places responsibility on issuers and their advisersto ensure that prospectuses contain adequate and accurate information for investors, the MAS has the power to issue a stop order if a prospectus is discovered to be deficient after registration.

Q: I understand that liability insurance is available. Is it commonly purchased by the relevant parties? 

Robson: Prior to the IPO, issuers typically purchase directors and officers liability insurance (“D&O Insurance”) to cover any liability arising from any director’s or officer’s actions on behalf of the issuer. Depending on the scope of coverage, D&O Insurance may allow the issuer to be reimbursed for anyindemnification payments it makes to its directors and officers, or provide coverage to the directors and officers directly. In addition, D&O Insurance may include entity coverage, which insures the issuer directly for claims made against it. Such D&O Insurance effectively assists companies in ring-fencing their liability in relation to their IPO.

Q: Is there any comparison that can be made about the standards of Singapore prospectuses vis-a-vis the standards of prospectus in other exchanges in the region? 

Robson: In general, section 243 of the SFA requires that the prospectus “containall the information that investors and their professional advisers would reasonably require to make an informed assessment” of the following matters:

(i)            the rights and liabilities attaching to the securities;

(ii)           the assets and liabilities, profits and losses, financial position and performance, and prospects of the issuer;

(iii)          if the person making the offer or invitation is one who controls the entity whose shares or debentures underlie the offer or invitation, the assets and liabilities, profits and losses, financial position or performance, and prospects of that entity; and

(iv)         in the case of units or options over shares or debentures, the capacity of the person making the offer or invitation to issue or deliver the relevant shares or debentures.

Consistent with the practice in the United Kingdom and Hong Kong, the reasonable investor test is supplemented by detailed checklists contained in the Securities and Futures (Offers of Investments) (Shares and Debentures) Regulations 2005.

Although Hong Kong has been successful in offering listings for companies with a Chinese focus, Singapore remains the listing venue of choice for companies that wish to adopt a broader focus and reach out to South-East Asia, India and even China due to its market liquidity, particularly access to the region’s institutional and private wealth market, and its broader environment which ensures good corporate governance, political clarity and clarity on the rule of law. 

Q: Lastly, can you share your experience working on IPOs?

Robson: Some of the recent transactions I have been involved in included acting for Sheng Siong Group Ltd, one of Singapore’s largest grocery retailers, in its IPO to raise net proceeds of approximately S$62.6 million. The offering of 351.5 million invitation shares was over-subscribed with strong interest from retail investors and backed by quality institutional investors. Notably, the deal was awarded the Best Small Cap Equity Deal in 2011 by FinanceAsia.

I have also acted for:

* XMH Holdings Limited, a diesel engine, propulsion and power generating solutions provider in the marine and industrial sectors, in its IPO on the SGX Mainboard which raised approximately S$25.2 million,
* AsiaPhos Limited, the first mineral resources company listed on the SGX focused on exploring and mining phosphate in the PRC, and
* MoneyMax Financial Services Ltd., a Singapore house-hold name providing pawnbroking services and the retail and trading of pre-owned jewellery and watches, in their IPOs on Catalist which raised S$30.5 million and S$16.2 million respectively. 

Robson Lee was the Guest of Honour at his alma mater Hwa Chong Institution's Chinese Orchestra concert celebration of its 40th anniversary in June this year. He was presented with a Chinese calligraphy painting.

The Chinese version of this article can be found here.