Hong Kong SFC Fines IPO Sponsor TC Capital $382,000 & Suspends Chairman Edward Wu License for 7 Months for Due Diligence Failure in China Candy IPO in 2015, Shares Suspended in 2017 & Cancelled in 2019
4th August 2022 | Hong Kong
The Hong Kong Securities & Futures Commission (SFC) has fined IPO sponsor TC Capital International $382,000 (HKD 3 million) and suspended Chairman Edward Wu Wen Guang for 7 months for due diligence failure in China Candy IPO in 2015 (China Candy shares was subsequently suspended in 2017 and cancelled in 2019 by Stock Exchange of Hong Kong). As IPO Sponsor of China Candy, TC Capital had failed to conduct reasonable due diligence on the 3rd payments made on behalf of 2 top customers of China Candy, and failed to maintain proper records of the due diligence work allegedly done. Hong Kong SFC: “The SFC’s investigation revealed that a significant portion of China Candy’s revenue during the track record period was contributed by two top customers who settled most of their payments to China Candy through multiple third parties, which should have been considered as a red flag as they might be used to disguise the original source of funds and facilitate a fraudulent scheme. Although Wu claimed that he was aware of the third party payments, which were shown in the due diligence documents, he and the transaction team members did not turn their mind to the question of whether further enquiries were necessary and/or assess with a questioning mind as to whether such payment method was legitimate. No further follow-up due diligence was conducted by TC Capital to ascertain the extent of the third party payments and the rationale for using this payment method … … The SFC’s investigation also revealed that there were no records showing how TC Capital enquired about the third party payments and/or came to the conclusion that the third party payments were immaterial to warrant disclosures in China Candy’s prospectus. There was also no audit trail demonstrating TC Capital had turned its mind to certain discrepancies identified in the due diligence documents and what conclusion it had reached, including inconsistent information as to the ownership of the two top customers who settled most of their payments to China Candy through third parties.” See below for HK SFC Statement | Statement of Disciplinary Action
“ HK SFC Fines IPO Sponsor TC Capital $382,000 & Suspends Chairman Edward Wu License for 7 Months for Due Diligence Failure in China Candy IPO in 2015 “
SFC Statement:
SFC reprimands and fines TC Capital International Limited $3 million and suspends its responsible officer for sponsor failures.
The Securities and Futures Commission (SFC) has reprimanded and fined TC Capital International Limited (TC Capital) $3 million for failing to discharge its duties as the sponsor in the listing application of China Candy Holdings Limited (China Candy) (Notes 1 to 3). The disciplinary action followed the SFC’s investigation which found that TC Capital failed to:
- conduct reasonable due diligence on the third party payments made on behalf of two top customers of China Candy; and
- maintain proper records of the due diligence work allegedly done in relation to the listing application.
The SFC has also suspended the licence of Mr Edward Wu Wen Guang for seven months from 29 July 2022 to 28 February 2023 for failing to discharge his duties as a responsible officer and sponsor principal of TC Capital in charge of China Candy’s listing application and the supervision of the transaction team responsible for the listing application (Note 4).
Failure to conduct reasonable due diligence on third party payments
The SFC’s investigation revealed that a significant portion of China Candy’s revenue during the track record period was contributed by two top customers who settled most of their payments to China Candy through multiple third parties, which should have been considered as a red flag as they might be used to disguise the original source of funds and facilitate a fraudulent scheme (Note 5).
Although Wu claimed that he was aware of the third party payments, which were shown in the due diligence documents, he and the transaction team members did not turn their mind to the question of whether further enquiries were necessary and/or assess with a questioning mind as to whether such payment method was legitimate. No further follow-up due diligence was conducted by TC Capital to ascertain the extent of the third party payments and the rationale for using this payment method.
Failure to maintain proper records of due diligence work
The SFC’s investigation also revealed that there were no records showing how TC Capital enquired about the third party payments and/or came to the conclusion that the third party payments were immaterial to warrant disclosures in China Candy’s prospectus.
There was also no audit trail demonstrating TC Capital had turned its mind to certain discrepancies identified in the due diligence documents and what conclusion it had reached, including inconsistent information as to the ownership of the two top customers who settled most of their payments to China Candy through third parties.
The SFC is of the view that TC Capital’s conduct fell below the standards expected of it as a sponsor and breached the requirements under Chapter 17 of the Code of Conduct (Notes 6 & 7). The SFC also considers that TC Capital’s failures are attributable to Wu’s failure to discharge his duties as a sponsor principal, a responsible officer and a member of the senior management of TC Capital. In deciding the disciplinary sanction, the SFC took into account all relevant circumstances, including:
- the need to send a strong deterrent message to the industry and market that sponsor failures will not be tolerated;
- TC Capital’s financial position (Note 8);
- TC Capital and Wu have no previous disciplinary record with the SFC; and
- TC Capital and Wu cooperated with the SFC in resolving the SFC’s concerns.
Notes:
- TC Capital, formerly known as TC Capital Asia Limited, is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities.
- TC Capital was the sole sponsor in the listing application of China Candy on the Growth Enterprise Market (GEM) of The Stock Exchange of Hong Kong Limited (SEHK).
- China Candy was listed on GEM on 11 November 2015. At the request of China Candy, trading in the shares of China Candy had been suspended since 12 December 2017. The SEHK cancelled China Candy’s listing with effect from 31 December 2019.
- Wu has been accredited to TC Capital and approved to act as its responsible officer to carry on Type 1 (dealing in securities) and Type 6 (advising on corporate finance) regulated activities since 11 August 2010.
- The third party payments made on behalf of these two top customers accounted for around 45% of China Candy’s revenue during the track record period ie, the years ended 31 December 2013 and 2014 and the six months ended 30 June 2015.
- Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
- Please refer to the Statement of Disciplinary Action for the relevant regulatory requirements.
- But for the firm’s financial position, the SFC would have imposed a heavier fine against it.
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