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Hong Kong SFC Fines Ever-Long Securities $386,000 for IPO Sponsor Failure in Application of Singapore-Based Vessel Charter Services Coastal Corporation IPO in 2016 on Hong Kong Exchange Growth Enterprise Market (GEM) Including Conducting Limited Due Diligence, Accepting Representations by Directors at Face Value & Not Disclosing Material Issue of Coastal Corporation Top Customer
31st December 2024 | Hong Kong
The Hong Kong Securities & Futures Commission (SFC) has fined Ever-Long Securities $386,000 (HKD 3 million) for IPO sponsor failure in application of Singapore-based vessel charter services Coastal Corporation IPO in 2016 on Hong Kong Exchange Growth Enterprise Market (GEM), including conducting limited due diligence, accepting representations by Directors at face value and not disclosing material issue of coastal corporation top customer. Hong Kong SFC (27/12/24): “The Securities and Futures Commission (SFC) has reprimanded and fined Ever-Long Securities Company Limited (Ever-Long) $3 million for failing to discharge its duties as the sole sponsor in the application of Coastal Corporation Limited (Coastal) in 2016 to list on the Growth Enterprise Market (GEM) of the Stock Exchange of Hong Kong Limited (SEHK) (Notes 1 to 3). At the material times, Coastal and its subsidiaries (Coastal Group) were providers of vessel chartering services based in Singapore (Note 4). The disciplinary action followed the SFC’s investigation which found that Ever-Long failed to: 1) perform proper due diligence on material issues in relation to a business arrangement between Coastal’s subsidiary and a top customer of Coastal Group; 2) disclose a known material issue in relation to the top customer in writing to SEHK; and 3) ensure the completeness of information in the Application Proof (Note 5). In January 2014, Coastal’s subsidiary underwent a change of business model from leasing vessels to one of Coastal’s connected persons (Connected Person A) to leasing them to the top customer, an independent third party. Under this business arrangement, the top customer was able to utilise the vessels to provide bunkering services to its customers, which included another connected person of Coastal (Connected Person B). This leasing arrangement accounted for over 50% of Coastal Group’s revenue for each of the financial years ended 30 June 2015, 2016 and 2017, which fell within the track record periods of Coastal’s listing applications.”
“ Hong Kong SFC Fines Ever-Long Securities $386,000 for IPO Sponsor Failure in Application of Singapore-Based Vessel Charter Services Coastal Corporation IPO in 2016 on Hong Kong Exchange Growth Enterprise Market (GEM) Including Conducting Limited Due Diligence, Accepting Representations by Directors at Face Value & Not Disclosing Material Issue of Coastal Corporation Top Customer “
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- Failure to perform proper due diligence on rationale for and legality of leasing arrangement – Upon queries by SEHK, Ever-Long claimed the arrangement could save Coastal’s connected persons from incurring costs to comply with marine regulations in Singapore. However, despite Ever-Long’s awareness before submitting the first application that the top customer lacked a licence required under the marine regulations in Singapore to carry out bunkering operations, it failed to critically assess the rationale for Coastal’s subsidiary to enter into the arrangement. The Application Proof also cited the top customer’s professional experience and good know-how in bunkering as one of the justifications for the arrangement. However, information available to Ever-Long suggested otherwise as the top customer was only established shortly before the commencement of the arrangement. The top customer’s unlicensed status potentially contravened Singapore’s legal and regulatory requirements, and Coastal’s subsidiary also potentially breached the terms and conditions of its own licence by effectively outsourcing its bunkering operations to the top customer. This cast serious doubt on the legality and compliance of Coastal’s operations vis-à-vis the arrangement. The legality issue in turn called into question Coastal’s suitability for listing. Notwithstanding these red flags, Ever-Long only conducted limited due diligence. It appeared to have merely accepted the representations by Coastal’s directors at face value, without performing appropriate independent verification and further due diligence. In addition, Ever-Long failed to conduct reasonable due diligence to assess the legality issue and ascertain how the arrangement could have been in compliance with Singapore’s legal and regulatory requirements, and whether and how the arrangement would expose Coastal’s subsidiary, Coastal and its business operations to legal and compliance risks.
- Failure to perform proper due diligence on operations of leasing arrangement and Coastal’s business – Moreover, the descriptions of the operation model of the leasing arrangement in the Application Proof and relevant agreements were at odds with evidence available to Ever-Long. Specifically, they were different from the assumptions of two respective legal opinions obtained by Coastal and Coastal’s subsidiary, and even the two legal opinions contained inconsistencies between them regarding the operation model. Although Ever-Long was aware of some of these inconsistencies, it did not conduct adequate due diligence to identify and reconcile such inconsistencies. As such, Ever-Long failed to have a thorough knowledge of the operations of the leasing arrangement, which would be a prerequisite for a sound understanding of Coastal’s business, financial condition and prospects.
- Failure to perform proper due diligence on deemed connected transactions – The Application Proof stated that Coastal’s directors considered it prudent to deem the transactions between Coastal’s subsidiary and the top customer as connected transactions under the GEM Listing Rules. There were disclosures in the Application Proof on transactions involving the top customer, Coastal’s subsidiary and Connected Person B. However, Ever-Long failed to conduct reasonable due diligence to ascertain and ensure the basis and accuracy of such disclosure as the financial information it had access to lacked the details for it to conduct verification.
- Further, the financial information available to Ever-Long suggested that Connected Person A was also a client of the top customer. However, there was no relevant disclosure in the Application Proof, and Ever-Long did not ascertain the reason for treating and disclosing the top customer’s revenue attributable to Connected Person A in a manner different from Connected Person B.
- Failure to disclose a known material issue to SEHK and ensure completeness of information in Application Proof – Notwithstanding Ever-Long’s knowledge of the top customer’s lack of licence and the materiality of the same to Coastal’s suitability for listing, Ever-Long did not disclose this and any associated legal and regulatory risks in any version of the Application Proof and its submissions to SEHK, until after SEHK’s query. Ever-Long therefore failed to, when submitting the listing application, ensure that all material issues known to it which, in its reasonable opinion, were necessary for the consideration of whether Coastal was suitable for listing, and the listing of Coastal’s securities was contrary to the interest of the investing public or to the public interest, were disclosed in writing to SEHK. Ever-Long also failed to ensure the completeness of information in the Application Proof before submitting the listing application.
Conclusion – The SFC is of the view that Ever-Long’s conduct fell below the standards expected of it as a sponsor and breached the requirements of the Code of Conduct (Note 6). In deciding the disciplinary sanction, the SFC took into account all relevant circumstances, including:
- the need to send a strong message to the industry and market that sponsor failures will not be tolerated;
- certain due diligence was not conducted and material information was not disclosed until after queries were made by SEHK;
- the lapse of the listing application averted any harm to members of the investing public;
- Ever-Long’s cooperation with the SFC in resolving the SFC’s concerns; and
- Ever-Long’s financial position (Note 7).
Notes:
- Ever-Long is licensed under the Securities and Futures Ordinance to carry on Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities) and Type 6 (advising on corporate finance) regulated activities.
- Ever-Long submitted Coastal’s first listing application to SEHK on 7 October 2016 and re-submitted the application twice, on 26 May 2017 and 31 January 2018 respectively, due to the lapse of more than six months from the previous application.
- The SFC has also suspended the licence of Mr Wilson Cheung Kin, a former responsible officer and director of Ever-Long, for nine months. Cheung was the sponsor principal in charge of supervising the execution of the listing application of Coastal. Please see the SFC’s press release dated 23 September 2024.
- Coastal Group specialised in providing vessels for fuel oil bunkering (which is the process of supplying fuel oil from bunker crafts to receiving crafts) and fuel cargo transportation in Singapore and the Southeast Asia region.
- According to the Rules Governing the Listing of Securities on GEM of SEHK (GEM Listing Rules), the Application Proof refers to a draft listing document that is required to be substantially complete and is submitted to SEHK together with a listing application form for the purpose of listing equity securities of a new applicant.
- Chapter 17 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission.
- But for the firm’s financial position and cooperation with the SFC in resolving the SFC’s concerns, the SFC would have imposed a $13.5 million fine against it.
Hong Kong SFC Fines Ever-Long Securities $386,000 for IPO Sponsor Failure in Application of Singapore-Based Vessel Charter Services Coastal Corporation IPO in 2016 on Hong Kong Exchange Growth Enterprise Market (GEM) Including Conducting Limited Due Diligence, Accepting Representations by Directors at Face Value & Not Disclosing Material Issue of Coastal Corporation Top Customer
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