On 18 May 2023, SFC announced that it reprimanded and fined China On Securities Limited $6 million over its failures as the placing agent in a share placement between 25 Nov and 6 Dec 2019.
Summary of facts in this case:
- On 25 November 2019, China On entered into a share placing agreement with the then majority shareholder (vendor) of Hon Corp (with GEM listing cancelled on 22 Jun 2022), under which it agreed to procure, as the vendor’s agent, not less than 6 placees to subscribe for shares representing up to 45% of Hon Corp’s total issued share capital. The agreed total placing price for the shares would amount to HK$57.24 million (i.e. HK$0.265 per share).
- When completion takes place, (i) China On should pay, or procure the placees to pay, to the Vendor the aggregate placing price; and (ii) the Vendor should allot the shares to the placees. The vendor deposited the shares into its account with China On thereafter.
- In the meantime, China On entered into a subscription agreement with each of the placees on 27 November 2019. Subsequently, on 28 November 2019, without the vendor’s specific authority, China On entered into a bought and sold note relating to the shares on behalf of the vendor with each of the placees, in which the transaction prices were inconsistent with the placing price agreed with the vendor.
- On 6 December 2019, in the absence of the vendor’s consent or any funds deposited by the placees to settle the placing price, China On arranged to transfer the shares from the vendor’s account to the placees’ accounts. Such arrangements were made by China On in the mere hope that the placees would sell the shares on the market and the sale proceeds from such disposal would be sufficient to settle the placing price with the vendor, without even considering that the sale proceeds might fall short of the agreed placing price, not to mention other settlement risks which had not been accepted by the vendor.
- China On’s then responsible officer (RO) handling the placement claimed that he carried out the above arrangement because he had received instructions from two individuals (including a consultant of China On and a person associated with the minority shareholder of China On, both were not licensed representatives or employees of China On), that the vendor had agreed to allot the shares to the placees and receive payment from the placees only after the placees successfully sold the shares on the market. Whilst the RO had no idea how these "associates" communicated with the vendor, he did not seek written or any other direct confirmation from the vendor before effecting the above arrangement.
- Almost all the shares were immediately sold by the placees on the market on 6 December 2019, and the account statements issued by China On show that HK$53 million was credited from the placees’ accounts to the Vendor’s account on the next business day (9 December 2019). This amount fell short of the total agreed placing price for the shares of HK$57.24 million because the RO was under the unverified and unsupported belief that the vendor had agreed with one of the placees for the placing price of HK$4.24 million to be settled “off market” (i.e. not through China On).
- On 9 and 10 December 2019, China On was informed by law enforcement agencies that the placees were suspected to be involved in market manipulation. On 21 January 2020, SFC issued a restriction notice on China On, prohibiting it from disposing of or dealing with any assets in the placees’ accounts up to the total value of HK$170 million. Since the placees did not have any additional funds in their accounts, China On refused to make payment of the agreed price for the shares to the vendor.
Based on the facts summarised above, SFC found that China On was
grossly negligent, if not reckless, in its disregard of its fundamental duties to
safeguard its client’s assets and ensure that it was acting under its client’s
instructions and authorities.
My comments/queries:
- It appears that the share placing arrangement was misleading, given that the actual transaction prices were lower than the agreed placing price.
- Whether or not the placees were really procured by China On is questionable.
- I suppose SFC had investigated the two "associates", the vendor and even Hon Corp; if yes, the investigation results had better been disclosed.
- Who were the "law enforcement agencies" informing China On? Were they including the PRC authorities (e.g. CSRC)?
- If the placees were suspected to be involved in market manipulation, does it mean this share placing was part of it?
