Is there a Formula for Entrepreneurial Success?

I don’t think any shortcuts exist to entrepreneurial success. Achieving overnight success has taken me years of determination and hard work. I’ve always been willing to learn, actively engage and listen to the advice of others.

During challenging times, resilience is vital. Increasing my fitness and focusing on my health over the last few years have also had a remarkably positive impact on my work. I’ve come to see that entrepreneurship is not just an external journey, but an internal one as well. Aligning the mind, body and spirit enables clearer thinking, more grounded decision-making and greater long-term fulfilment.

Generating New Ideas as a Serial Entrepreneur

Being open to learning and seeing things from different perspectives is essential as an entrepreneur. Education is a lifelong pursuit, and I take every opportunity to improve my knowledge and skills. 

Leading an international business like PG Paper, I find that travel, cultural exposure and cross-border collaboration often spark fresh ideas. I’m also surrounded by ambitious, creative people who are encouraged to bring ideas to the table. I believe that by collaborating and sharing these ideas, we grow as individuals. 

For example, I worked with a VC fund that specialises in early investments in Ed-tech, Fin-tech and Med-tech. This experience has helped me understand trends within these industries for the upcoming years and what’s to come. Beyond market trends, I’m increasingly inspired by ideas rooted in philosophy and intentional growth, where success begins with awareness and purpose.

Balancing Entrepreneurship and Family Life

Running your own business is a 24/7 commitment, and I wouldn’t have it any other way. I especially hope that my daughters feel excited and supported to follow their own career paths and that my passion, dedication and hard work has positively influenced them over the years.

To maintain balance, I integrate mindfulness, exercise and reflection into my daily life. These habits are not just tools for personal wellness, they’re also practices that support presence, clarity and conscious leadership.

The Joys of Entrepreneurship

One of the most rewarding aspects of being an entrepreneur is the variety each day brings. Working across five continents, 60+ markets and a range of products, no one day is the same as the next. We work hard to open opportunities and new markets, meaning each day brings new and exciting challenges.

I’ve also met so many great people. The PG Paper team, customers and suppliers have all helped us grow into the company we are today. Many of them have been with us since the beginning. We may be working within the paper industry, but we are firmly a people business.

The great thing about being a successful entrepreneur is the chance to make a positive difference in people’s lives. We support many social and charitable organisations at PG Paper, both locally and globally. It gives my work a real sense of purpose – something I deeply value. For me, the true measure of success is not just what we build, but how many lives we improve and the legacy we leave behind.

The maritime territorial dispute between China and the Philippines revolves around the northeastern section of the Spratly Islands (China: Xisha Islands, Philippines: Kalayaan Island Group) and the Scarborough Shoal (China: Huangyan Dao, Philippines: Bajo de Masinloc). China claims all islands, territories and waters within the ten-dash line (issued in 2023) which also overlaps with the Philippines’ Exclusive Economic Zone (EEZ) and continental shelf. Aside from China and the Philippines, Vietnam, Malaysia, Taiwan and Brunei also have overlapping claims in the SCS. The Chinese and Philippines vessels are engaged in confrontation in two major areas: the Scarborough Shoal, occupied by China after the 2012 standoff, and the Second Thomas Shoal, controlled by the Philippines, where Manila intentionally grounded World War II era ship, the BRP Sierra Madre to assert its claim. The recent tensions are caused by Chinese vessels using military-grade lasers and water cannons against supply ships heading to assist the warship in the Second Thomas Shoal. As found, the number of Chinese vessels at Second Thomas Shoal during Philippine resupply missions has significantly increased, from an average of one ship in 2021 to approximately 14 ships in 2023, with the most recent resupply mission on 10 December 2023 involving 46 Chinese ships compared to just 4 for the Philippines. In this regard, the maritime militia comprised of civilian fishing vessels and fishermen operating under the government’s direction collaborates with the CCG to harass, intimidate, and obstruct other countries’ activities within the SCS.

Given the rise in tensions, a recent survey report in the South China Sea Morning Post showed that 73 per cent of the 1,200 respondents nationwide favoured “further asserting the Philippines’ territorial rights through military action, such as expanded naval patrols and troop presence in the West Philippine Sea”. Besides, Filipino President Ferdinand R. Marcos, Jr, at the 2024 IISS Shangri-La Dialogue, categorically stated:

“[I]f, by a wilful act, not only a Filipino serviceman but even a Filipino citizen, is killed by a wilful act, that is, I think, very, very close to what we define as an act of war, and therefore we will respond accordingly. […] Is that a red line? Almost certainly it is going to be a red line”.

China so far has not crossed the threshold of war against the Philippines, as noted, the CCG applies coercion using ‘non-lethal’ force (water cannons)—a slow-intensity conflict approach or low-intensity coercion by which China uses incremental steps to expand its de facto control over disputed territories. The use of ‘water cannons’ by the CCG is a new addition to China’s use of ‘grey zone’ and ‘hybrid warfare’ techniques in the SCS, after establishing domestic laws, building artificial islands, and releasing the ten-dash line map- coinciding with Sun Tzu’s dictum of subduing the enemy without fighting.

A 2022 RAND report argues that while China employs grey zone tactics in every domain, but it is more predominant in employing maritime military grey zone tactics against its adversaries. Especially in the case of the SCS, China has adopted multifaceted grey zone tactics, which include: establishing a series of domestic laws to bolster its claims in the SCS, such as the 1992 Law of the Territorial Sea and Contiguous Zone, the Baseline Declaration, and the establishment of an EEZ and continental shelf- which have unilaterally incorporated disputed features within China’s maritime territory. These laws often utilize ambiguous terminology, such as the infamous “nine-dash line” and references to “adjacent waters”– a way to create a sense of expansive maritime claims that exceed internationally recognised baselines as defined by the UNCLOS.

In the Spratly and Paracel Islands, China has transformed the submerged features into artificial islands and has further fortified these outposts by constructing runways, military facilities, and other infrastructure. The other tactic, as prevalent in the case of the Philippines is the deployment of the CCG and maritime militia to assert its claims in the SCS. This has become rampant with the creation of the CCG in 2013 and with the 2021 Coast Guard Law which authorized China’s maritime law-enforcement fleets to use lethal force on foreign ships operating in China’s waters, including the disputed waters claimed by China. Furthermore, in May 2024, China issued a new regulation which authorized the CCG commanders to detain foreign vessels and persons in “waters under China’s jurisdiction” for up to 60 days. In June 2024, the Chinese Foreign Ministry announced that it would allow the Philippines to deliver living necessities to the grounded warship or evacuate the personnel concerned- “if the Philippines notifies the Chinese side in advance”. Hence, the query remains: Will the dangerous manoeuvres of the CCG and maritime militia push the escalation beyond the threshold? Thus, raising the possibility of a potential conflict between the two parties. If this happens, it will disrupt the security and stability of the Indo-Pacific region- thus, getting Manila’s allies and partners, such as the US involved in the crisis.

In recent weeks the business of the Bamboo Union triads have been apparent from cases in Taiwan, where the group is centred and most active.

The Bamboo Union triad society, or United Bamboo Gang, or ‘Chuk Luen Bong’ (竹聯幫), was established in Taiwan in 1956, largely comprised of many offspring of mainland Chinese who had fled from the communist forces in 1949. One group of Chinese exiles residing at Wing Wor Village on the outskirts of Taipei were repeatedly attacked and extorted by established local gangs, and so they grouped together to form the Chuk Luen Bong, literally translated as ‘Bamboo United Gang’ with the name derived from the bamboo groves that surrounded Wing Wor Village. The Bamboo United Gang were generally supportive of the Kuomintang and flourished. The original United Bamboo Triad society was reportedly comprised of five branches, which were lion, tiger, leopard, phoenix, and duck.

Read the full article here: https://asiacrimecentury.substack.com/p/young-and-dangerous-the-new-age-digital

Immigration is not a responsibility devolved to Holyrood. It is extremely disappointing therefore, that the Scottish government has fumbled a golden opportunity to encourage thousands of British National (Overseas) passport holders from Hong Kong to settle here. The BN(O) visa program, which opened in January 2021, is a welcome route to British citizenship for many thousands of Hongkongers who no longer fancy residing in authoritarian China. It is the first big migration policy post-Brexit Britain. Of the 166,000 Hongkongers who have so far applied for visas to come to the UK, it seems that substantially fewer than 5% have chosen to settle in Scotland. Some useful platforms and networks have been established to welcome settlers once in situ, but very little imagination or energy has been extended to encourage them to come in the first place.

I discussed some of the many potential benefits to Scotland of an influx of well-educated, law abiding, enterprising and industrious Hongkongers in a November 2020 article. It will enrich the UK, culturally and economically. I had hoped that the strong diasporatic connections, specifically between Scotland and Hong Kong, would stand us in good stead, even without any encouragement from Holyrood. I’ve wished the aphorism ‘if you put 20,000 Hongkongers in an empty field, before long there’ll be a thriving metropolis’ to be prescient.

But it has not come to pass. Sadly, few Hongkongers have chosen Scotland, and the more I’ve thought about it, the less surprised I am. It is unlikely to have much to do with, as some have suggested, our accents being hard to decipher, or our weather being less clement, or that we have fewer YouTube influencers enticing people here. It’s a good deal more fundamental than that.

There are few folk more obsessed with their future than the people of Hong Kong. What is the key ingredient for underwriting a prosperous future? A sound education. Unfortunately, Scotland no longer registers as a leading light in that regard, at least in the primary and secondary sectors. Standards have fallen across our state education system, which has failed to keep pace with best practice. There is no obvious long term strategy or vision for revitalisation. Our independent schools, which should be celebrated as global flagbearers for Scotland, are being increasingly bedevilled by the politics of envy.

Additionally, Hongkongers are hardworking, resourceful, and self-reliant. They cherish an economy that is unrestricted and growing, over and above an economy that is ‘well-being’. The Scottish government’s mantra of ‘vote for me, and I will give you free stuff’ is not a political economy that sits at all naturally with Hongkongers.  When it comes to a ‘fair tax system’, the basic sentiment of Hongkongers is that they get to keep the significant majority of what they earn, rather than it being taken by big government to (mis)allocate.  The top rate of salary tax in Hong Kong is 17%. The higher rates of income tax levied in Scotland vis-à-vis the rest of the UK, a position that may get worse still, is a deterrent. Indeed, it is not just a deterrent to would-be immigrants, it is a position that is driving aspirational Scots southwards.

There is a range of other conditions and circumstances that have provided a headwind to Scotland becoming the destination of choice. The rule of law has been an important and reliable underpinning to Hong Kong’s success. Scotland’s ruling party is under investigation for criminality. Our police force is institutionally racist, apparently. Our main cities increasingly appear down-at-heel and poorly administered. Our basic road, rail, airport and ferry infrastructure is deteriorating. Our politics is consumed with niche issues like gender ideology and recycling schemes. Wealth creation is deemed to be an unsavoury subject matter. And of course the primary reason Hongkongers are leaving the former British colony in the first place is because of the constitutional upheaval they’ve experienced. If half of Scotland gets its way, our own constitution will soon be re-written. This creates unappealing uncertainty for would-be immigrants.

So sadly Scotland is not, in totality, an attractive proposition for Hongkongers looking for a new home and a bright future at this juncture.

A few years ago passengers arriving at Edinburgh airport were greeted with a series of beautifully scenic but ultra-hubristic posters, that proclaimed Scotland to be the ‘best small country in the world’. If only.

This article was originally posted on Reford Scotland and has been re-published with expressed permission from the original author, Roy Leckie. For the original article, please visit:
https://reformscotland.com/2023/06/domestic-policies-deter-people-from-moving-to-scotland-roy-leckie/

It is time for us to ask the people of Hong Kong to return the favour to Scots and Scotland. Those seeking to escape China’s creeping authoritarianism should come and inject some much needed dynamism into Scotland’s economy. The Scottish government must capitalise on Westminster’s plan to offer a route to UK citizenship to the more than three million people living in Hong Kong who currently have a right to British National (Overseas) (BNO) passports.

From January 2021 holders of BNO status and their immediate families may apply for entry visas, for either two periods of 30 months or a single period of five years. After five years they can apply to settle in the UK, and then obtain full citizenship after a further 12 months. 

Scotland has a huge opportunity to benefit from this opening of our borders, by leveraging its historical and current bonds with Hong Kong. I would love to see the devolved government being proactive, positioning Scotland as the UK’s most attractive region for Hong Kong’s best and brightest to settle in. We should immediately start engaging with all of those Scots who have links to Hong Kong: individuals, businesses and our universities. Plans and policies should be designed and put into action.

Just as the recently launched inward investment strategy seeks to shape Scotland’s future economy, at least as much thought and energy should be allocated to the task of encouraging an influx of human capital, the return on which I believe would be considerable. If we can create policies that seek to incentivise companies to come to Scotland, let’s do so for Hong Kongers too.

Attracting 100,000 or more well educated, law-abiding, hardworking, enterprising Hong Kongers to Scotland would not just help fuel the eventual post-pandemic recovery. It would go a long way to alleviating some of our most intense structural pressures. 

Most worrying among these, if not immediately critical, is our demographic profile. Scotland needs more young, productive tax payers. Our population has barely grown over the last half-century, but it has aged. The ratio of workers to retirees is just over two, and falling. The fertility rate likewise, is low. It’s likely that (the BNO programme aside) constraints around the UK’s immigration policies will tighten rather than loosen. So how are we to fund future health, welfare and pension obligations? We have had a long bull market in expectations around welfare provision, but it’s been accompanied by a steady decline in our ability to deliver.

HMRC’s data starkly highlights the lack of breadth and depth across Scotland’s tax base. Too many people pay no income tax at all, and we have only 15,000 additional rate payers. As working from home becomes more the rule than the exception, the Scottish government should be concerned that some higher earners will move to more fiscally conservative (or sunnier?) climes. Indeed, by playing a game of arbitrage with the rest of the UK at the highest marginal tax rate, Scotland could become relatively attractive not just to those coming from Hong Kong, but to many high earning Scots currently living in London or elsewhere.

Hong Kong’s population is well known for its entrepreneurial vitality. Despite being devoid of any natural resources, the resilience and adaptability of its labour force has underwritten its success. We have much to learn (or re-learn) about the virtues of self-reliance and productiveness. Not only is Hong Kong wealthy, it is healthy. As far as education goes, Hong Kong ranks higher than Scotland in most international comparisons. In fact one just has to look at the attainment levels across UK by ethnicity. Chinese students are way out in front.  

Unlike most other solutions to our country’s challenges, an influx of Hong Kongers should be ideologically neutral from a political perspective. That is, there is no reason for any of Holyrood’s parties to object on philosophical grounds. This is a win-win proposal, for Scotland and for those who would choose to leave the growing menace of the Chinese state’s influence on Hong Kong.

If there is a downside, it is the risk of upsetting China. But my answer to this is that we should ‘play the long game’. In time, a substantial Hong Kong Chinese diaspora in Scotland would be of great benefit to our economic ties with the Orient. 

So this is a plea to those in Scotland who are in a position to affect this situation. As the Union Jack was lowered for the last time outside Hong Kong’s Government House on 30^th June 1997, Highland Cathedral was played by the Hong Kong Police Pipe Band. It’s time to reacquaint the people of Hong Kong with the country to which they owe so much, and which owes them so much in return.

This article was originally posted on Reford Scotland and has been re-published with expressed permission from the original author, Roy Leckie. For the original article, please visit:
https://reformscotland.com/2020/11/what-hong-kong-can-do-for-scotland-roy-leckie/

The Securities and Futures Commission (SFC) customarily prioritizes enforcement actions of high deterrence value. In capital markets, SFC has aimed enforcement firepower at sponsors of big initial public offerings (IPOs) – not because those institutions are necessarily the worst, but because their public disgrace is the most newsworthy. 

Sponsors punished in 2019 for a spate of disastrous listings ten years earlier were subsidiaries of international banks. In the last few years, SFC has shifted its enforcement focus. The change is not deliberate, and still does not hold the true perpetrators of the worst misconduct accountable. Instead, SFC has settled for trophy hunting among a less glamorous subset of the sponsor community. Having bagged the big deep-pocketed sponsor firms, SFC turned to small impecunious ones. There are plenty of those. 

There has been a step down, also, in the quality of the frauds: from sensational swindles of tycoons who vanished with millions, to the sideshow hustles of small-time grifters. Yet it remains the reality that sponsors bear most of the punishment for the sins of company insiders who abscond with investors’ money. 

Aside from regulatory risk, sponsors face stiff competition for fees. New sponsor coupling requirements are intended to redress imbalances between sponsors’ commercial power versus that of underwriters, but will render some boutique sponsors obsolete.

The IPO sausage factory 

The SFC’s most recent disciplinary action against sponsors concerned an unprosperous firm called Changjiang Corporate Finance. CJCF churned out a string of six failed listing applications, oblivious to regulatory requirements and specific risks threatening each company’s business. SFC fined CJCF HK$20 million and suspended its sponsor license. 

China Candy

An earlier case concerned TC Capital International, for its sponsorship of China Candy. While the IPO raised just HK$57 million, expenses burned through HK$21 million, meaning over a third of the cash was lost to underwriters and other service providers. Most of the rest was supposedly for expanding production. According to the prospectus: 

“With an increasingly sophisticated consumer base, an increasing number of young and fashionable people are attracted by exotic sugar confectionery in first and second tier cities. … As China gradually eases its restriction on birth control, birth rates are estimated to pick up in the years to come. A larger population of children, who are the primary target market of confectionery products will translate into a larger customer base and bolster sales of pastilles, gums, jellies and chews. … Functional pastilles, gums, jellies and chews, added with vitamin C, vitamin E, calcium or DHA, claim to provide consumers with nutritional supplements in addition to being just a snack food. Such products are gaining in popularity due to their claimed health benefits.”

If that wasn’t fanciful enough, investors might have guessed China Candy was doomed if they read in its 2016 Annual Report: “To enhance the value for the Shareholders, the Company decided to expand its business into investment business, mainly in listed shares.” Worse, this random pivot was financed by a loan from the company’s co-founder and CEO, Hong Yinzhi. 

The stock was suspended two years after listing, when it emerged that RMB178 million had been transferred from company bank accounts to personal accounts of its senior managers. Recipients included Hong and her husband, China Candy’s chairman. Some of the money was eventually recovered or accounted for, but the disappearance of RMB12 million remains a mystery. While Hong resigned as CEO in 2019, her daughter was then appointed deputy.

The company allegedly also falsified accounting records and overstated its 2016 cash balance by 97%. SFC has not attempted prosecution of key perpetrators (in the mainland beyond its jurisdiction) but merely sought their disqualification as directors. Meanwhile, SFC punished the sponsor for failing to properly investigate China Candy’s purported pre-IPO revenue. SFC fined TC Capital $3 million, saying the fine would have been heavier “but for the firm’s financial position”.

Two failed frauds 

SFC’s action against TC Capital echoed its earlier punishment of two sponsor firms for inadequate due diligence of listing applicants’ purported revenues. Those cases were significant for another reason: they demonstrated that sponsors can face serious penalties even if the application fails and no harm is done to the investing public. 

In the madcap goldrush of Hong Kong’s listing industry, applications sponsored by smaller firms are often launched speculatively then abandoned before their approval. A change in HKEX protocols has facilitated SFC’s ability to build enforcement cases against sponsors involved in those assignments. Previously, regulatory action in response to complaints against applicants ceased if the application terminated before approval. SFC now expects HKEX to consider whether further action is warranted, such as a referral to SFC. 

Ample Capital was one of the first sponsors disciplined for an abandoned listing application. The applicant, COCCI International, claimed to receive much of its revenue from one distributor, in bags of cash at rendezvous points in Hong Kong. Various individuals, who were not COCCI employees, then carried the cash to the mainland. 

The SFC said: “Settlement of payments through third parties by a customer is a red flag as third-party payments might be used to disguise the original source of funds and facilitate a fraudulent scheme.” 

The implication is that COCCI conspired with its purported distributor and supplier to generate bogus transactions, creating a circular flow of funds to inflate revenue artificially. After SFC’s second rejection of the draft prospectus, Ample Capital did not respond, and the application lapsed. SFC reprimanded Ample Capital and fined it HK$5.5 million. 

Similarly, SFC disciplined Yi Shun Da Capital (YSD Capital) for its sponsorship of Imperial Sierra Group. The application was under consideration when unknown persons, calling themselves “Blazing Research”, reported that major customers’ purchases were “most likely to be fabricated”. They presented evidence that Imperial Sierra’s young founder, Aric Yip Wik, was the son of Michael Yip, who in 2010 was jailed for stealing HK$180 million from Ocean Grand Holdings. Michael founded Ocean Grand with his father in 1990, took it public in 1997, and then promptly foundered it, siphoning off assets by making bogus purchases from his family’s other companies.

Blazing Research concluded:

“Imperial Sierra is just another fraud designed by Mr. Yip Kim Po after his release from jail, so as to earn the ‘shell’ price of Hong Kong listed companies. … Due to the high premium of ‘shell’ price in Hong Kong listed market, some companies collude with sponsors to conduct fraudulent IPO and earn huge profits by selling the company’s shares after lock-up period. Although many companies merely use accounting tricks to meet the profit test requirement, some companies use transaction without any commercial substance to fabricate revenue and net income to pass profit test. We believe the fraudulent extent of Imperial Sierra is the most serious among these companies, since Imperial Sierra does not have any operation with commercial substance at all.”

After the application lapsed, SFC concluded YSD Capital had failed to perform all reasonable due diligence. Appealing to SFAT, YSD Capital asserted it was entitled to rely on the accountant’s confirmation of the financial statements. SFAT held that YSD Capital could not use the accountant’s report to “wash its hands of the matter”. 

With respect to SFC’s $4.5 million fine, although considerably less than the $14 million originally proposed, YSD Capital lamented it would still suffer a significant loss. Its fee for the listing assignment had been a pitiable HK$2.5 million. Noting that a firm cannot be entitled to make a profit on work that “has been undermined by its own culpability”, SFAT nonetheless further reduced the fine to HK$3 million in view of YSD Capital’s “financial straits”.

It is not apparent that Yip family members who allegedly conceived the scheme suffered any regulatory consequences, though creditors sued Aric Yip Wik regarding an unpaid debt and a bond issued to raise money for the listing attempt. 

Sponsor coupling

Last year, 75 companies completed IPOs on HKEX − an annual total that has been declining in recent years. The applications were shared, unevenly, between 130 licensed sponsor firms. While the potential rewards of listing are enormous for pre-IPO shareholders, especially if they disappear with the proceeds, sponsorship is a competitive business with thin margins. Commercial pressures may encourage sponsors to offer a cut-priced service so that a group company can head the underwriting syndicate, which enjoys higher fees. In effect, sponsors provide loss-leaders for more lucrative underwriting work. 

An analysis of IPOs in 2020 revealed average underwriting fees of HK$49 million, versus sponsor fees of HK$6 million. SFC said this indicated “misalignment between fees and sponsor costs and responsibilities.” This doesn’t elucidate the problem, which is that misalignment of fees creates misalignment of incentives. When the economic incentive of its corporate group is to complete an IPO, a sponsor doesn’t simply face a temptation to offer a cursory and inexpensive service, but to actively ignore red flags. Discovery of fraud or falsity, through assiduous performance of their duties, could imperil underwriting fees. 

In response to sponsors’ commercial weakness, SFC in 2022 introduced a “sponsor coupling” requirement. Main Board applicants must now appoint at least one sponsor which is also part of the underwriting syndicate, or related to one of the underwriters. Also, an underwriter must be appointed when it (or its group company) is appointed sponsor. 

The SFC stated, “it appears that the sponsors presently have too little bargaining power. The ‘sponsor coupling’ requirement is aimed at redressing that”. It is intended to ensure sponsors are not incentivized to compromise due diligence to secure the underwriting appointment. When sponsors also act as underwriters, “total fees may properly compensate the additional sponsor resource commitments and responsibilities.” In effect, SFC hopes underwriting will cross-subsidize sponsor work.

It is not logical to hope that tying sponsors’ remuneration to underwriting will advance sponsors’ independence and performance. On the contrary, it will exacerbate conflicts of interest and entrench misaligned incentives. If an applicant’s share issue is underpriced, underwriters assume minimal risks and potentially gain huge profits at the applicant’s expense. Applicants cannot receive impartial pricing advice from sponsors also acting as their underwriters. 

Additionally, sponsor coupling has an anti-competitive effect, with underwriters locked in long before they would usually be appointed. So, it is questionable whether the requirement is consistent with SFC’s objectives, anchored in legislation, which include promotion of the security industry’s competitiveness. Moreover, the requirements prejudice sponsors which are not part of a corporate group that includes underwriters. Although underwriting involves completely different capabilities, firms that cannot offer underwriting will only be able to sponsor Main Board listings as co-sponsors with firms that can. This severely limits their opportunities because most listing applicants appoint only one sponsor. Responding to objections on this point, SFC concluded, “The impact on small boutique sponsors should be limited” because 72% of all sponsors (or their group companies) are also engaged in underwriting. Presumably the logic was that the changes will, at most, put only 28% of sponsors out of business.

A corollary of requiring at least one sponsor with underwriting capabilities is that at least one underwriter must have a sponsor in its corporate group. Underwriters thereby face pressure to participate in relatively unprofitable sponsor work. Or, at least, be appointed as a sponsor and accept the regulatory risk, even if most of the work is done by another sponsor. This increases the likelihood that for each IPO there will be a sponsor that is part of a highly capitalized financial group. That reinforces the allure of scapegoating sponsors for frauds committed by others.

Conclusion

While seeking to unlock the treasure chest of public capital markets, some company insiders fall to the temptation of falsifying disclosures. Whether the charades unravel before listing or after, regulators usually now focus on finding fault with the due diligence performed by sponsors. More than ever, sponsors face significant regulatory risks for limited financial gain.

This article first appeared in the October 2023 issue of Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.

The impact of language barriers

It’s always been a daunting task for the media, both East and West, to give a full picture to their respective audiences, of the kaleidoscope of reality on ‘the other side’. Differences in language and culture remain one of the biggest barriers. Google Translate, for example, still cannot reliably translate articles from Chinese languages into English. The Chinese group of languages (not just Mandarin and its regional dialects, but also Cantonese, Hakka and dozens of others) are considered the most difficult languages to learn, even for Chinese people immersed in them since childhood. Not many foreigners, especially Westerners, could master the language like locals do, as it takes many years – even decades – of learning and practice. 

China is so vast and diverse, with so many different cultures and languages, that it is more akin to the European Union than to an ordinary nation-state. Oscar Wilde’s quip on the differences between England and the US might also describe the differences between East and West: they are fundamentally identical, except, of course, in terms of language. 

Unification has been a constant theme of Chinese history for more than two thousand years, for political and economic reasons – from the creation of a unified state to the development of a single market. While China has long been criticised by the Western powers for not being open or transparent enough, within China itself, being open and transparent has always been a challenging demand, both at the local and central government levels. Western observers can often fail to understand the nature of the Chinese system. 

Likewise, it can be very hard for Chinese observers to fully understand the West, and its democratic systems. Media organisations on both sides can easily generalise events and clog up the flow of accurate information. This is one possible reason that Chinese and Western media groups look at each other’s countries through painted veils of cultural gaps and political differences. These differences are also being exacerbated by the rapid development of technology. 

The impact of new technologies

Mobile technology has developed at an explosive rate in the past three decades. Little has changed the world more than the rise of social media in the last decade, and the way that it has completely upended the media landscape. Even in China, nobody but a handful of venture capitalists could have foreseen the changes the occurred when TikTok (known in China as Douyin) was released. Social media has made it harder for traditional media groups to survive: on the one hand, audiences now don’t have to rely on a single media source to find out information about other parts of the world, where their national media may not have many correspondents on the ground. But on the other hand, too much questionable information from dubious sources has leaked onto social media, where it can attract public attention. Few in the West may realise the sheer scale of the sea-change in Chinese media, pushed by technology but remaining under the control of the Communist Party. This revolution happened because China has the largest literate population in the world – 96.8% of 1.4 billion people – and business has been vibrant since China joined the World Trade Organisation in 2001. 

Artificial intelligence in China and the West

Amid the media revolution, another new era has also arrived: artificial intelligence. AI is pushing the world’s digital economy to new heights. With its rise, the global media ecosystem is also being transformed, slowly but thoroughly, from production to distribution. The speed of information crossing geographical and economic boundaries is increasing faster than ever. It is already becoming clear that AI can easily match and could probably replace the output of many journalists working today. 

Many in the West have not yet been able to fully comprehend the scale of China’s AI revolution. 5G communication networks have been rolled out faster, and at a greater scale, in China than anywhere else in the world – something that has attracted the attention of no less than Elon Musk, who frequently comments on the use of AI in China. According to Xinhua, China’s main news agency, by the time Shanghai hosted an international AI conference in July this year, China’s artificial intelligence industry had reached a core market value of 500 billion renminbi (about $69 billion, or £55 billion). There are already 2.8 million 5G transmitters across the country. Chinese supercomputer capability is officially the second-greatest in the world, after the US – but there is a chance that capacity may in fact exceed the rest of the world of combined, because of off-the-books supercomputers being run under the radar to avoid American-led sanctions and chip export bans. But the rest of the world knows little of this – a situation not helped by hostile foreign reporting. 

Chinese development of AI is quickly catching up to American efforts, and may soon exceed it. Here, China has a unique cultural advantage. Across East Asia, there is generally a greater tolerance for intrusive data collection, which is crucial in the development of self-training AI, than there is in the West. It is easier to build and train an AI with the massive datasets available to Chinese researchers than it is to do so in the West. 

AI is already being deployed widely in China, having been tested in transportation, energy, manufacturing, medicine and even education. Farmers have trialled AI-driven crop management systems, and some schools have experimented with the development of an AI anti-bullying system that can read children’s body language. AI has also found a place in China’s media sector. As long ago as 2015, Tencent, China’s biggest tech firm, launched an AI news-writing program, “Dreamwriter”, capable of writing technical reports along provided guidelines (similar programs are just only now being rolled out in the UK). Other organisations quickly followed suit: Xinhua now uses AI to sift through data streams and collect information for its journalists, while CCTV, China’s biggest TV news channel, has experimented with using AI presenters to host some of its broadcasts. AI has been widely used, particularly in subjects where routine reports need to be churned out quickly, like financial news and sports. It has also been used on all Chinese social media platforms – where retailers have begun experimenting with using AI-generated influencers to sell their products, rather than employing humans. Amid the aforementioned social experiments in China, there has also been widespread debates in AI development circles about how to protect individual privacy rights in an era where personal data has become as valuable as gold. 

Conclusions: the challenges of AI

Since the advent of AI, experts have been warning the public about the negative side of these new technologies. In the world of media, AI can easily assist the spread of fake news, which has become a massive headache for traditional media organisations. There is a further dangerous aspect to AI, that potentially threatens all of mankind: every major world power is currently researching ways to weaponise artificial intelligence. The use of AI as a weapon could follow the trends set by drones: once the preserve of governments, they are now commercially available, relatively cheap, and have transformed warfare. To use China as an example, we find that Chinese-manufactured drones, costing only a few hundred dollars off the shelf, have been widely used in global conflicts, from the Middle East to Africa to Ukraine. Just as we currently worry about drones, will we soon have to worry about AI? Will we need to establish an international organisation to regulate the use of AI, as we do with nuclear weapons?

International regulation of AI has already become fragmented, and multi-centred. It has fallen far behind the pace of technology. Amid this pacing problem, where the Western powers complains about a Chinese lack of transparency, and China in turn complains about its exclusion from discussions about regulation among the G7 and EU. As 2023 comes to a close, we find a rapidly changing global political economy, and rising tensions between East and West. 

The British government, which is trying to position itself as a leader on artificial intelligence, is going to host the first global AI security summit in Bletchley Park, just outside London, in November. China’s attendance at the conference, only recently confirmed, has proved controversial: there has been significant pushback from some groups, driven by fears of Chinese spying and by political competition. But one could reasonably ask: how one could hold a global summit on AI without the world’s second AI superpower? Co-operation with China over AI regulation, aided by better-informed media coverage, is the only way the world can avoid sleepwalking into a technological cold war, and instead work together to improve the flow of information and keep international commerce running smoothly. But to do so, China and the West must also find a balance between their different values – most of all in AI and in media. 

Regulators struggle to prevent listing fraud and hold fraudsters accountable. So they found a softer target: licensed sponsors. Once a mere quirk of Hong Kong’s listing regime, sponsors became the primary enforcement focus, from which the Securities and Futures Commission (SFC) has extracted substantial fines. While SFC still hasn’t found a way to penalize the actual perpetrators of listing fraud, sponsors know they’ll now be blamed for it. 

That’s peculiar, because sponsors have limited commercial bargaining power and no responsibilities at all under legislation. Disciplinary action against them is useless for investor compensation, because fines are paid to the government. It might discourage poor due diligence but can’t deter fraud.

HKEX’s annus horribilis

SFC’s sentiment, that a campaign against sponsors is the solution to cleaning up HKEX, emerged after a blizzard of fraudulent IPOs in 2009: 

• Trading in Hontex was suspended just three months after listing, following allegations it massively overstated profits. SFC secured a share buyback requiring the return of funds raised in the IPO, but never attempted proceedings against the insiders who committed the fraud. Instead, SFC fined the sponsor, Mega Capital, HK$42 million and revoked its licence. This was only the second time in over a decade that SFC fined a sponsor, and the first time ever it revoked a sponsor’s licence. 

• Two years after listing, Real Gold Mining confessed to secretly transferring HK$1.4 billion to its founder, Wu Ruilin. Although SFC sought court orders that Wu and others compensate minority shareholders, it appears that no writ was ever served and no particulars ever pleaded, meaning the defendants had no case to answer. To punish the sponsor, Citigroup Global Markets Asia, SFC had to identify deficiencies occurring before the IPO. SFC found Citigroup’s due diligence of Real Gold’s customers was inadequate. Citigroup argued that, gold being a commodity with a ready market, it was reasonable to focus on the company’s production, rather than its customers. SFC disagreed, and fined it HK$57 million. 

• China Metal Recycling was suspended after short-sellers called its growth “suspiciously amazing”, return on capital “Madoffian” and revenue per employee “absurd”. They asked, “How many suspicious metrics do investors and regulators need to realize that the only explanation for the Company’s unusually strong performance is that [it’s] dabbling in the dark arts of accounting?” Liquidators chased founder Chun Chi Wai for HK$822,900,000 he milked from China Metal after the IPO. While Chun’s wife and a manager were jailed, Chun escaped prosecution, having fled to mainland China. 

• China Forestry was suspended after KPMG belatedly flagged massive accounting irregularities. While the IPO prospectus claimed a book value of RMB7.4 billion, the true figure was a net liability of RMB323 million. SFC litigation seeking compensation for public shareholders is on hold pending Market Misconduct Tribunal proceedings, in which SFC alleged insider dealing and false or misleading disclosures. Hearings concluded in 2020 but no report was released. Three years later MMT ordered a rehearing, the judge having become unable to discharge his duties.

Another horrible year

Two IPO scams in 2014 further exposed SFC’s difficulties bringing perpetrators to justice:

• Tianhe Chemicals was suspended after a “hacker collective” alleged Tianhe’s sales were fictitious. Associated Press said Tianhe’s chairman, Wei Qi, founded Tianhe with assets he transferred to himself for free from a state-owned company. Also, a supposed key customer’s office was “an unoccupied room containing broken furniture and old mattresses in a dilapidated apartment building”. 

SFC sued Tianhe and its CEO, Wei Xuan (Qi’s brother), and instituted MMT proceedings. It is unclear whether any IPO funds will be recovered. Moreover, while MMT can order disgorgement of profits it cannot impose prison terms. In practice, commencement of MMT proceedings precludes prosecution. MMT found Tianhe and Xuan committed market misconduct, and barred Xuan from managing listed companies for four years. The finding exposes defendants to civil liability but might be futile, considering Tianhe declined to participate in proceedings and Xuan vanished before they even started. 

• Fujian Nuoqi was suspended after Ding Hui (chairman and CEO) disappeared with HK$292 million (over 90% of IPO funds). No-one has been held to account, through criminal conviction, administrative sanction or restitution. Ding joined a long list of “pao lu lao ban” (runaway bosses) who, in the absence of extradition agreements with mainland China, would not face rendition to Hong Kong. 

SFC never disciplined CCB International Capital (CCBIC) for its sponsorship of Fujian Nuoqi, but disciplined it for an unsuccessful listing application of Fujian Dongya Aquatic Products. Leery about punishing the subsidiary of a state-owned mainland bank, SFC fined CCBIC HK$24 million but noted “no evidence [of] systemic failure in CCBIC’s policies, procedures and practices”.

The law

Pre-IPO shareholders maximize their returns by persuading public investors of their company’s financial prospects. To protect the integrity of this process, legislation and listing rules prescribe disclosure requirements. Company directors must accept responsibility for the accuracy of a prospectus and confirm it contains no untrue statement or omission of material fact. 

The Securities and Futures Ordinance imposes civil and criminal liability on anyone who discloses or disseminates false or misleading information likely to induce another person to subscribe for or deal in securities. 

The Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) provides that directors, promoters and persons who “authorized the issue of a prospectus” have civil liability to persons who subscribe for shares on the faith of the prospectus and who sustain a loss due to any untrue statement therein. Experts, such as accountants, who consented to the issue of a prospectus containing their professional statements, are liable in respect of their own untrue statements. A person is not liable if they prove they had reasonable grounds to believe the untrue statement or, in relation to untrue statements by an expert, had reasonable grounds to believe the expert was competent.

CWUMPO also imposes criminal liability on any person who authorized the issue of the prospectus containing an untrue statement, unless they prove the statement was immaterial or they had reasonable grounds to believe the statement was true. 

This legal framework gives regulators a range of options for taking action against a listing applicant, its directors and auditors. 

Sponsors

Unlike most jurisdictions, Hong Kong also requires applicants to engage a sponsor to assist with the listing process, despite IPO sponsors not even being mentioned in legislation. Their role is codified only in HKEX listing rules and SFC conduct codes. 

SFC asserts that persons who “authorized the issue of a prospectus” include sponsors. However, the legislation is ambiguous and no case law confirms that interpretation. In 2005, and again in 2012, SFC proposed statutory amendment to include sponsors explicitly within the scope of liability. On both occasions, SFC quietly dropped the proposals, claiming CWUMPO already covers sponsors and no revision is necessary.

In SFC’s view, “investors rely on sponsors to act as key gatekeepers of market quality and, at the heart of this is the expectation that sponsors have conducted sufficient due diligence to properly understand and assess a company aspiring to join the stock market.” From a rules-based perspective, however, it is not for sponsors to police “market quality”. Their responsibilities are less lofty, and include:

• being “closely involved” in preparation of the prospectus;
• conducting “reasonable due diligence”; and
• using “reasonable endeavours” to address all matters raised by HKEX. 

Decisions of the Securities and Futures Appeals Tribunal confirm that sponsors must ensure listing applicants issue a good quality prospectus. SFAT said sponsors “must act with independent professionalism in ensuring that all information placed before [HKEX] and investors generally is fully, fairly and accurately presented.” But sponsors are not required to “chase every rabbit down every hole”, nor to ensure the applicant is a good quality company. Case law does not support SFC’s implication that sponsors’ duties extend to rejecting any applicant that offers a poor investment opportunity. 

Moreover, there is no public policy rationale for requiring sponsors to assume greater responsibility than accountants for accuracy of financial statements. A note buried in SFC’s licensee Code of Conduct acknowledges: “As a reporting accountant performs audit procedures on information received from a listing applicant under applicable professional standards, a sponsor is not expected to carry out any further due diligence on this information.” However, SFC disciplinary announcements give no hint of this.

In fact, when listings go awry, sponsors risk being the first parties SFC pursues, and possibly the only parties pursued successfully. Being licensed, sponsors can be fined, reprimanded, suspended and stripped of their licences by SFC – in effect wielding disciplinary powers as prosecutor, judge and jury – without any need to make its case in court. 

Outsourcing

When disciplining CCBIC, SFC complained the sponsor commissioned a due diligence plan from lawyers but didn’t follow it. The finding is perverse because sponsors, not their service providers, are responsible for determining due diligence plans. A plan’s adequacy should be assessed objectively, not against whatever some lawyers happen to propose. SFC has itself warned of sponsors’ habitual delegation of responsibilities, and insisted, “Sponsors remain ultimately responsible for the quality and substance of the due diligence undertaken by agents they appoint.” 

Problematically, some sponsors lack the competence to fulfil that responsibility. With lawyers and accountants cutting fees to compete for work, cutting the quality of services correspondingly, outsourcing might fail to fill the competency gap.

Reliance on accountants is inescapable, because prospectuses must include an auditor’s report. IPO fraud usually involves paying accountants to sign off false financial statements. That begs the question whether accountants were negligent in failing to detect the fraud, which should expose them to prosecution. Invariably, however, accounting firms escape SFC’s attention.

Punishment

In 2013, SFC introduced a new regime seeking to make sponsors explicitly accountable. Two previous attempts at statutory reform having failed, the regime was implemented by inserting a new paragraph into the Code of Conduct. It is arguable whether the change amounted to new regulatory standards, or simply a more detailed expression of SFC’s expectations. In any case, SFC codes do not have force of law. They serve legitimately only as tools of statutory interpretation. However, SFC staff seldom appreciate the difference, so codes are commonly regarded unquestioningly. 

Further clues to SFC’s expectations are found in circulars, regulatory bulletins and thematic reviews. Typically, SFC alleges failure by sponsors to:

• conduct reasonable due diligence, confirm material customers and conduct face-to-face interviews;
• investigate red flags;
• properly supervise team members;
• keep proper records; and
• ensure that information submitted to the regulators is complete and accurate.

Initially, SFC took little regulatory action reinforcing its rhetoric. Perceptions lingered that SFC was struggling to figure out how to use coercive powers without tainting Hong Kong’s reputation as an attractive listing venue. HKEX has become increasingly reliant on mainland companies, which account for 80% of market capitalization and 90% of turnover. A crackdown on fraud might scare some of them off. 

Any doubt that SFC would act was dispelled in 2019, when SFC fined sponsor subsidiaries of four international banks: 

• UBS AG and UBS Securities Hong Kong − HK$375 million, and 12 months licence suspension (for sponsorship of China Forestry, China Metal and Tianhe);
• Morgan Stanley Asia − HK$224 million (Tianhe);
• Merrill Lynch Far East − HK$128 million (Tianhe);
• Standard Chartered Securities (Hong Kong) − HK$59.7 million (China Forestry).

SFC later fined China Merchants Securities HK$27 million for neglecting “a number of unusual facts and findings on China Metal and its customers”. China Merchants had only a token involvement in the listing, being appointed just a few months before China Metal’s second application. Strangely, SFC’s summation of China Merchants’ failings focused almost entirely on activities of its co-sponsor, UBS. This suggests co-sponsors might be unable to mitigate risks by contractually delineating the extent of their responsibilities. SFC might consider all the sponsors culpable for any supposed shortcomings in the whole sponsorship process. 

Conclusion

Hong Kong’s absorption into China over recent decades has been a bonanza for HKEX but the scourge of many investors, introducing a slew of scams to public markets. SFC has limited success holding fraudsters accountable, and has shown no inclination to pursue auditors who sign off false company accounts. Instead, enforcement efforts are primarily focused on sponsors. As licensees, sponsors are attractive candidates for punishment.

In next month’s issue, the author will review recent regulatory and enforcement developments concerning sponsors. 

***

A version of this article first appeared in the September 2023 issue of Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.

At the heart of Scottish society lies a spirit of camaraderie and shared values, reflecting in the country’s networking culture. Scottish networking is not merely about exchanging business cards or seeking short-term gains; it is an avenue for building long-lasting relationships, rooted in trust and mutual support. The Scots understand that networking is a two-way street, where individuals strive to assist one another to achieve common goals and foster growth in the community.

In Scotland’s tight-knit business environment, networking is the glue that binds professionals, entrepreneurs, and organizations together. It transcends mere transactional connections and opens doors to opportunities that may have otherwise remained hidden. By networking, businesses gain access to valuable resources, mentorship, potential clients, and collaborative partnerships. In an era of global competitiveness, Scottish businesses rely on their network to stay informed, adapt to changes, and foster innovation.

Each individual has their unique way of networking, and Scotland offers a plethora of avenues to connect with others. Some prefer the traditional in-person gatherings, such as conferences, seminars, and trade shows, where they can engage face-to-face, exchanging ideas and experiences. Others harness the power of social media platforms to build virtual networks that span beyond geographical boundaries. The key lies in blending these methods to create a diverse and well-rounded networking experience. In my personal approach, I seek out relevant events that could be beneficial to me through platforms like Eventbrite, Google, or well-established business communities.

Scotland brims with diverse networking opportunities, ranging from industry-specific events to general business gatherings. Local community gatherings, workshops, and charity events offer a chance to connect with like-minded individuals who share a passion for social impact. I highly recommend attending the monthly Edinburgh Tech meetup, where you can connect with like-minded individuals from various sectors, including tech and startups, to exchange ideas and expand your network.

Various groups and associations in Scotland are devoted to nurturing networking and community-building. Organizations like Scottish Chambers of Commerce, Young Scot, and Women’s Enterprise Scotland offer platforms for professionals from different backgrounds to come together, share knowledge, and uplift one another.

As the world becomes increasingly digital, social media and online communities play a pivotal role in networking across Scotland. Platforms like LinkedIn, Twitter, and industry-specific forums allow individuals to expand their reach beyond physical boundaries. Online networking enables Scottish businesses to tap into international markets, learn from diverse perspectives, and identify global trends.

As technology continues to evolve, networking in Scotland will adapt accordingly. Virtual events and hybrid gatherings will become more prevalent, providing greater access to a wider audience. Nevertheless, the core values of trust, community, and collaboration that underpin Scottish networking will remain steadfast, forming the bedrock of prosperity in the region.

As a young professional starting my journey in Scotland, I was initially intimidated by the notion of networking. However, attending local business meetups and joining online communities exposed me to a world of support and inspiration. Through networking, I met mentors who guided me through hurdles, made lifelong friends, and found partners for exciting collaborations. It was through these connections that I realised the true power of networking – not just for business growth but for personal growth as well. Thanks to the power networking, I gained access to a multitude of networks, including Scottish Business Network, ASI, Invest HK, The Association of Chinese Entrepreneurs in Scotland, Global Diaspora Confederation, and numerous others which has helped catapult my career to new heights. 

Networking in Scotland is a tapestry woven with threads of camaraderie, trust, and collective progress. In a world where human connection often takes a backseat to technological advancements, Scotland reminds us of the profound impact of meaningful interactions. By embracing the power of networking, we can navigate the business landscape more confidently, united by a shared purpose of fostering growth, connectivity, and a better future for all.

Prologue

The costs of a conventional initial public offering (“IPO”), principally underwriting fees, can amount to over 20% of the money raised. Some private companies, rather than taking the time and expense of going through the listing process themselves, essentially buy a listing off the shelf by merging with a listed shell company. The listing industry has developed various ways to do this – some legitimate, others fraudulent.

Last year, Hong Kong formalized the practice of shell manufacturing with the introduction of a SPAC regime, largely basing its provisions on current US market practice. Problematically, analyses of US markets show that SPAC mergers tend to significantly underperform typical IPOs, with the proportion of investors’ funds that are consumed by service providers being much higher even than in a conventional IPO. As a result, although service providers and fundraisers may profit handsomely, SPACs are a toxic product for retail and professional investors alike, often sparing only those who dump their holdings at the first opportunity.

Act I, Scene I: An ill-omened pedigree

Listed shells have plagued the Hong Kong stock exchange (“HKEX”) for decades, long before the vehicles were re-branded as SPACs. Shell manufacturing typically involves the listing of a company without any genuine intention of raising capital for existing operations. Usually, it is a relatively small business, such as a family-owned trading firm, with barely sufficient turnover (real or fabricated) to satisfy the minimum listing criteria. Controlling shareholders sell their shares after the IPO and expiry of a regulatory lock-up period, and the directors have a change of heart regarding the business plan disclosed in the prospectus. Sometimes, they sell the company’s business back to its original owners, who walk away with a profit, leaving a listed shell with no operations.

Shareholders of the shell can usually sell at a premium to book value. At best, this premium represents the opportunity for quick access to public capital markets without the inconvenience of jumping through the regulatory hoops of an IPO. At worst, the premium is speculative froth arising from illegal market activity. Listed companies with few assets tend to have low revenue and few shareholders. The shares are likely to have a low trading volume, making them especially vulnerable to market manipulation and price volatility. A classic “penny stock fraud” involves the quiet accumulation of such shares, then noisy promotion by boiler room brokers through spam emails and cold calls. New demand drives up the price, allowing scammers to sell their shares at a profit before the demand and price again collapses.

The directors of the shell company, having divested the original business, later buy another. That business thereby becomes a public company via a “backdoor listing”, circumventing the regulatory vetting of the usual listing process. Backdoor listings are susceptible to fraud. This is because directors of the listed shell can make an acquisition with relatively little disclosure and oversight. In an IPO, key information must be disclosed in a prospectus, and underwriters mitigate their risk by undertaking due diligence. Without this independent verification, it is easier for the business that is going public to falsify its earnings and inflate its stock price. The directors of the listed company acquiring that business might be misled by the falsification, indifferent to it, or complicit in it.

Previously, the Securities and Futures Commission (“SFC”) and HKEX tried clamping down on shell manufacturing and backdoor listings. They increased their scrutiny of suspicious listing applications, such as those with assets consisting substantially of cash, and threatened to suspend or de-list companies with insufficient business operations. With backdoor listings attracting unwelcome regulatory attention, however, the scions of at least two Hong Kong billionaires turned away from Hong Kong markets to list SPACs in the US instead. This development, two or three years ago, spurred Hong Kong authorities to rethink their regulatory approach.

Act I, Scene II: A peek behind the curtain

As investment vehicles without any existing business, SPACs are simply listed shell companies in a different costume. Many are launched by high-profile financiers, known as “founders”, “sponsors”, or “promoters”. After raising capital through an IPO, the SPAC swallows one or more private companies (“de-SPAC targets”), a process known as “de-SPACing”. Although sometimes referred to as an “acquisition”, the deal is usually structured as a reverse merger, in which shareholders and management of the target gain control of the SPAC. The merged “successor company” is listed, and the target thereby becomes publicly owned and traded.

For investors, one of the purported benefits of SPACs is that they provide an opportunity to exploit a valuation arbitrage between private and public equity markets by participating in private equity-like investment. However, that benefit has usually proven illusory, with the structure of SPACs creating substantial costs, misaligned incentives between promoters and other shareholders and, ultimately, losses for investors who continue to hold shares after de-SPACing.

Theoretically, investigation and analysis by promoters should enable them to identify promising targets among private companies that might struggle to go public through a conventional IPO. An IPO may be problematic, for example, because the company’s business is unusual or complicated, making it difficult for the company and its underwriters to agree on an IPO price. Another potential advantage of SPACs is that, within basic regulatory parameters, there is great scope for customization of the commercial terms governing each structure. In practice, however, SPACs have proven resistant to commercial innovation and have become quite standardized.

For promoters, the irresistible attraction is that they acquire equity in the SPAC on far more favourable terms than investors in the IPO or subsequent investors on the open market. The standard arrangement is that promoters are issued 20% of the post-IPO shares for mere nominal consideration. For example, if IPO investors buy 80 million shares for $10 each, the promoters receive 20 million shares essentially for free, resulting in a total issue of 100 million shares with $8 underlying each of them. Those 20 million shares, referred to as “the promote”, are the promoters’ reward for their efforts and risking their capital to set up the SPAC and complete a de-SPAC transaction. Promoters may also receive earn-out rights, entitling them to additional free shares if the successor company achieves specified revenue, profit or share price targets.

In most cases, SPAC promoters cannot use any IPO proceeds to pay the costs of the IPO and of finding a de-SPAC target. Instead, promoters themselves fund the SPAC’s working capital. For example, a SPAC may use a loan facility from its promoters, and also sell “promoter warrants” for $1 each. Each warrant may entitle the promoters, one year after de-SPACing, to purchase one share for $11.50. Warrants are typically exercisable on a cashless basis, meaning the promoters, in this example, can surrender their warrants in exchange for shares of equivalent value to the amount by which the market price of the shares exceeds $11.50. Although used primarily as a mechanism to pay the SPAC’s expenses, rather than as compensation for the promoters, the warrants will yield a profit if the successor company’s share price exceeds the exercise price by more than $1.

IPO investors, meanwhile, are customarily issued free warrants alongside the shares, similarly entitling the warrant holder to purchase newly issued shares in the future at a certain price. This compensates IPO investors for using their cash, like underwriters, to help launch the SPAC.

A proposed SPAC merger can only proceed after receiving majority shareholder approval. Shareholders rarely withhold approval because their warrants become worthless if no merger is completed. If the promoters fail to finalize a merger within a predetermined period, usually two years, all shares (other than the promote) are redeemed at the IPO price plus interest. The SPAC’s net asset value – consisting chiefly of the IPO proceeds, until then held in trust – then falls to zero, so the promote and all debt of the company become worthless. Consequently, promoters have an overwhelming incentive to ensure de-SPACing occurs, even if the terms are unfavourable to other investors. Given the costs they incur versus the equity received, promoters can enjoy very fat returns. This is possible even if the SPAC acquires targets for more than they are worth and the successor company’s share price subsequently tumbles.

While promote shares are locked-up, other shareholders are entitled to cash out, at the IPO price plus interest, after a merger is announced and before it is completed. Consequently, until de-SPACing, IPO shareholders enjoy a capital-guaranteed investment with potentially attractive returns, plus a free “equity kicker” in the form of warrants. If shares are trading above the IPO price, these investors typically sell them. Otherwise they typically redeem them after the merger announcement. According to a study published in 2022 (Klausner, Ohlrogge and Ruan), the investors in SPAC IPOs in the US are predominantly hedge funds and “nearly all” of them sell their shares before de-SPACing. However, most retain their warrants until they become exercisable, usually 30 days after de-SPACing. The authors found that the warrants delivered average annualized returns from the IPO until de-SPACing of 11.6%. While this may be an attractive low-risk return, it is a potential trap for retail investors. If an investor misses a notice of redemption and fails to exercise the warrants, they become worthless. The inattentive or inexperienced investors’ loss is the other investors’ windfall.

Some of the equity lost to redemptions before de-SPACing is offset with private investments in public equity (“PIPE”) by independent institutional investors. The promoters and the target undertake a promotional roadshow, much like a company going public through a conventional IPO. Although shares are typically issued to PIPE investors at a discount, the funds raised at this stage often exceed non-redeemed equity from the SPAC IPO. PIPE financing therefore can sharply reduce SPAC costs as a percentage of net cash delivered to the successor company.

Even with significant PIPE financing, the costs of the SPAC process are typically “more than twice as high” as a conventional IPO. The promote, earn-outs and warrants, which substantially dilute other shareholders’ share of the underlying cash, are the most eviscerating expense. Further costs include underwriting fees, typically charged at 5.5% of the IPO proceeds, without adjustment even if most of the shares are redeemed before de-SPACing. The underwriter and other service providers may also tap the SPAC for advisory fees. Redemptions then deplete the amount of underlying cash, thereby amplifying the costs for each remaining shareholder.

Klausner et al’s study of 47 de-SPAC transactions occurring from January 2019 to June 2020 found that the average net cash underlying each SPAC share (issued at $10) was just $4.10. This means that more than half of the value per share was dissipated through fees and other compensation.

Until a merger is announced, SPAC shares tend to trade at roughly their IPO price of $10, because the redemption right creates a price floor. A year after de-SPACing, however, most successor companies’ share prices have underperformed by an amount roughly comparable to the cash per share that has been extracted by service providers, “with the remaining value [on a market-adjusted basis] roughly equal to the net cash a SPAC contributes to a merger.” While SPACs might be dazzling upon first appearance, they typically bomb at the box office. 

Act II, Scene I: SPACs bomb in America

SPACs were the hottest thing on Wall Street in 2020, a financial fad accounting for more than half of all US IPOs. Many SPACs included celebrities in their management teams, and investors were captivated. SPACs raised a record US$83 billion that year, and a further US$162 billion in 2021.

The hype soured with a succession of high profile failures. For example:

• Rapper Jay-Z became “chief visionary officer” of The Parent Company, “the largest, most socially responsible and culturally impactful cannabis company in California,” with a market capitalization over US$1 billion after a de-SPAC merger. Two years later, its share price has fallen 98%.

• Two decades ago when asked on TV about her alleged involvement in securities fraud, Martha Stewart famously replied, “I want to focus on my salad.” Now embracing a “secular shift to vegetable-based diets”, Stewart is a director of AppHarvest Inc – “an applied technology company that could integrate a wide range of systems for the common purpose of providing a much-needed resource” and that, at the end of the day, grows tomatoes in a greenhouse. It went public through a SPAC deal in 2021 with a valuation over US$1 billion. Its share price has fallen 99%.

• Basketballer Shaquille O’Neal was “special advisor” to the SPAC that took WeWork Inc public. The merger valued WeWork at about one fifth of its US$47 billion valuation preceding a failed IPO attempt two years earlier, when the company was panned as “a real estate arbitrage startup that thinks [it’s] disrupting consciousness by making secondary leases and giving out beer.” Twenty months after going public, its share price has fallen a further 98%.

• Car sharing company Getaround Inc listed through a SPAC merger in December 2022. Its share price has fallen 97%.

• When Donald Trump’s media company announced a merger with Digital World Acquisition Corp, the SPAC’s share price jumped from $10 to $175, giving the proposed successor company an implied market valuation over US$19 billion. It then emerged that the parties signed a “letter of intent” less than three weeks after the SPAC’s IPO, raising suspicions they had secretly discussed the merger months earlier. While the SPAC shares are now trading around $13, the possibility of fraud charges could further dampen investors’ enthusiasm.

Overall in 2021, while the S&P 500 rallied 27%, a share price index of de-SPACed companies (DESPACTR) tumbled 45%. In 2022, DESPACTR fell another 71%.

SPACs’ popularity has contributed to their decline. This is because they compete with each other in the hunt for target companies, while under pressure to de-SPAC before deadlines otherwise requiring money be returned to investors. Deals get riskier or more expensive as promoters get desperate. A surge of lawsuits has emerged from the wreckage, with investors and regulators suing SPAC promoters, directors and advisers for allegedly making misleading disclosures, failing to vet deals properly, or committing fraud.

Act II, Scene II: Hong Kong arrives late to the festival

On HKEX in 2021, the amount of money raised in IPOs shrank 18% from the previous year. In contrast, global IPO fundraising jumped 87%, having enjoyed a major boost from another record year of SPAC listings in New York. With the progeny of Hong Kong’s four (plus) big families eager to join the SPAC stampede, the Hong Kong government wished to help them do it at home. In March 2021, Financial Secretary Paul Chan cued SFC and HKEX to explore new listing regimes, including SPACs. The regulators obliged, in December that year publishing consultation conclusions and announcing that SPAC listing applications would be welcomed from the following month.

Standard features of SPACs that developed as a matter of market practice in the US were in Hong Kong codified in listing rules, with the addition of some convoluted and apparently arbitrary restrictions. For one thing, only professional investors may subscribe, and at least 75% of shares must be subscribed by institutions. Retail investors can buy the company’s shares on HKEX only after it has de-SPACed. HKEX concluded SPACs are not suitable for retail investors because, “As a SPAC is a cash shell without any operations, the price of its securities is much more likely, relative to an operating company, to be driven by speculation and rumour.” This assertion was contradicted by another, in HKEX’s consultation paper, that “Prior to a De-SPAC Transaction, the volatility in the share prices of most US listed SPACs is similar to that of a bond, with low volatility at a constant valuation around their IPO share price.”

Although SPAC share prices sometimes increase (like an “IPO pop”) on the announcement or completion of a de-SPAC transaction, prices typically start deflating immediately thereafter – the very time retail investors will be allowed in. The floor of around $10 disappears, and subsequent issues of free or discounted shares from earn-outs and warrants exert downward price pressure. In other words, Hong Kong regulators have decided to reserve a potentially lucrative risk-free asset class exclusively for professional investors, while allowing retail investors the opportunity to pay higher prices, without downside protection, in the secondary market after de-SPACing.

Another dubious requirement is that SPACs in Hong Kong must have a net asset value of at least HK$1 billion upon listing. This is intended “to ensure high quality Successor Companies are listed.” Without any evidence of correlation between size and quality (HKEX’s consultation referred only to “high quality” promoters), by whatever metric that might be measured, it was a weak justification. Coupling a small SPAC with a big PIPE decreases the severity of a SPAC’s dilution, with a lower proportion of the total amount being pocketed by promoters and underwriters. So the minimum SPAC IPO requirement is likely detrimental to SPAC investors.

While the US has no regulatory requirement for PIPE investment, Hong Kong rules stipulate that PIPE must amount to at least 25% of the target’s value, declining to a minimum of 7.5% for targets over HK$7 billion. On application, HKEX may permit a lower percentage for targets over HK$10 billion. At least half of the PIPE must come from at least three institutional investors with assets under management of at least HK$8 billion. Although these appear to be arbitrary arithmetic criteria with no empirical justification, the implication is that regulators consider these to be the thresholds necessary for ensuring that PIPE investors perform sufficient due diligence on target companies. Regulators hope PIPE will provide a price validation mechanism, preventing SPAC promoters from shortchanging the other SPAC shareholders by acquiring targets at an excessive valuation.

Hong Kong has a further regulatory overlay to the due diligence process, requiring every listing applicant to engage at least one licensed IPO sponsor. Under the new SPAC regime, that requirement applies both to the SPAC and later to its successor company. The intention is that successor companies’ sponsors will perform due diligence on target companies “to the same extent as is performed for an IPO”.

As well as one or more IPO sponsors, each Hong Kong SPAC will almost inevitably have one or more SFC-licensed firms among its promoters. For one thing, some of the functions undertaken by promoters might constitute regulated activity. HKEX’s consultation conclusions dodged this issue, merely reminding promoters to consider whether there are any licensing implications. Also, listing rules now impose an eligibility or suitability test on promoters, in that HKEX “must be satisfied as to the character, experience and integrity of all SPAC Promoters and that each is capable of meeting a standard of competence commensurate with its position.” The intention is to exert tighter regulatory control over promoters than in the US, where endorsements by celebrities became so common that the Securities and Exchange Commission issued an alert cautioning investors not to make decisions based solely on celebrity involvement.

Supposedly, HKEX adopts a “holistic approach” in conducting the suitability assessment, taking into account “all relevant circumstances”. These include a listing rule that at least one of the SPAC’s promoters must be a firm licensed by SFC to provide corporate finance advice or asset management services. HKEX says promoters may seek a waiver of the requirement, for example on the basis that they have equivalent overseas accreditation. However, this guidance is inconsistent with listing rules requiring that the SPAC’s board include at least two SFC-licensed individuals, at least one of whom must be a director representing the SFC-licensed promoter. In view of the inconsistency (in which the rules should take precedence over the guidance), and the fact that SFC licensees are subject to SFC disciplinary proceedings (meaning they can easily be held accountable for perceived breaches of standards), it seems unlikely that regulatory authorities will readily allow the waiver. Consequently, in practice, suitability assessment will likely be left largely to SFC’s Licensing Department, which performs the task formulaically based on granular criteria (solvency, regulatory history, qualifications and years of experience) set out in its Guidelines on Competence.

HKEX’s first SPAC – Hong Kong’s off-Broadway SPAC premiere – listed on 17 March 2022, by which time the SPAC mania in America had already long turned rotten. Hong Kong’s stricter suitability requirements for promoters notwithstanding, the first SPACs to file listing applications were peppered with local personalities better known for their wealth or their political connections than their asset management experience. They included Kenneth Lau (hereditary legislator and Heung Yee Kuk chief) and his sisters; Norman Chan (former head of the Monetary Authority); Katherine Tsang (sister of Hong Kong’s second chief executive); and Li Ning (Olympic medalist).

Despite an initial flurry of applications, only five SPACs have listed, none raised more than the minimum HK$1 billion, and none have announced a de-SPAC transaction. The SPAC regime has failed to arrest the decline in equity fundraising on HKEX, with total IPO funds raised in 2022 plunging a further 68% from the previous year.

Denouement

Regulators in Hong Kong historically have seen prevention, suspension and delisting of shell companies as one way to improve market quality. So it is ironic that, with the introduction of a SPAC regime, they have now formalized the practice of shell manufacturing. In a further irony, seemingly to protect society’s grassroots from the more rapacious urges of the monied class, retail investors are excluded from this asset class altogether. They will be permitted to buy only after the shell becomes an operating company – precisely the moment that the smart money knows it’s time to sell.

While a honeypot to some celebrities, tycoons and their professional advisors, SPACs have by and large been disastrous for everybody else. A preponderance of failed SPACs in America suggests it is a deeply flawed structure. There is nothing yet to indicate that the experience in Hong Kong will be much brighter. 

A version of this article first appeared in the April and May 2023 issues of the Hong Kong Lawyer, the official journal of The Law Society of Hong Kong.

The BRI, also known as One Belt and One Road (OBOR), comes from recent efforts to bring back and revitalize the ancient trade routes from China on land across central Asia and by sea through the Indo-Pacific. It has long grown beyond that original scope and has essentially become China’s official mode of engagement not only with Asia and Africa but also with Latin America and the Caribbean and in Europe into the Balkans. 

Its origins are in the earlier policy of encouraging China firms to “go out” or “go out into the world.” CCP General Secretary Xi Jinping is credited for coining the term BRI in 2013. Chinese officials make no secret that the word “Initiative” (倡议) rather than Plan was chosen to downplay the geopolitical aspects and allay foreign concerns. 

The core of the discussion about the BRI is the extent to which it is a vehicle for projecting China’s geo-political power and influence globally or an economic construct involving the export of Chinese skills, products, and investment capital, albeit often facilitated by politics. We can readily acknowledge that the truth lies somewhere in between.

From the outset, a key element of the BRI has been China’s national goal of locking in supplies of strategic minerals through the investment in resources such as bauxite (raw material for aluminum) in Guinea and, most recently, in lithium (essential for EV batteries) in Zimbabwe. In Africa, the BRI has been coordinated politically since 2018 through the Forum on China-Africa Cooperation and the state-to-state relations that flow from it. With many of China’s infrastructure projects in Africa, footage shows political leaders from both sides standing in the background while the companies sit at the signing table. China Exim Bank and China Development Bank (CDB) provide much of the financing through long-term loans and buyer credits. CDB also has investment funds, such as the China Africa Development Fund, which provide equity investment alongside those made by China firms. 

Chinese state power’s pull in the BRI can be seen by examining the ignoble case of a small, little-known Chinese firm, originally state-owned but later hybrid state-private, based in Hefei, Anhui Province. The Chinese government originally brought it to the tiny Caribbean nation of Grenada to build a sports stadium to reward Grenada for ditching Taipei and recognizing Beijing. Using the cloak of a France-based holding company, the firm grew large in Africa, first through Chinese government-paid infrastructure contracts but later through hotels and supermarkets and finally through diamond mining in Zimbabwe in cahoots with the local military. After Mugabe’s death, this firm was dispossessed and kicked out of Zimbabwe. It defaulted on RMB 6.7 BN of Chinese domestic bonds. Chinese rating agencies completely failed to provide any warning. It provides a telling vignette of the interplay between business and politics in the BRI and the risks and poor outcomes that can result. 

 Chinese banks have become much chastened not just by what has happened to their customers who venture into the BRI but also by the fact that they have loaded up BRI host countries, such as Laos, Sri Lanka, and Zambia, with debt that cannot be easily repaid. Faced with this reality, China recently declined to provide financing for a Chinese railway project in Uganda, with it being transferred to a Turkish firm. But there is pressure on China to speed up its efforts at loan restructuring and debt relief.    

Beyond its political dimensions, there is an essentially economic and business-driven side to the BRI. In its early days, the BRI provided an export outlet for primary industry areas and consumer goods manufacturing, where an unbalanced development surge created domestic over-capacity. But today, it has far transcended that role. 

China is exporting the engineering skills it has developed and fine-tuned through its massive domestic infrastructure upgrade program. These skills range from the construction of airports, railways, roads, and bridges to cellular network infrastructure (such as the one bridging the digital divide in Angola), green technology, and smart city software for city management (including surveillance). This infrastructure focus extends to state-of-the-art tunnel boring technology and the locomotives and rolling stock that runs over the railways. Most importantly, China, which traditionally was not seen as strong in project management, is now adept at completing these projects on budget and on time. 

Beyond the project stage, China is also exporting management skills, for instance, in running ports such as Piraeus, which is critical to enabling the entry of white goods (many from Haier and Hisense in Qingdao) into Southern Europe. It is also making direct investments along the path of the BRI in the manufacturing industry, such as electric vehicles in South Africa and mobile phones in Ethiopia. Those Chinese Tecno phones are designed for the local African market, and some have a keyboard in Amharic. 

The BRI bears some similarity to what we saw in the 1970s when South Korea, on a much smaller scale, actively promoted manpower exports through construction projects in Saudi Arabia. Chinese labor is brought into BRI projects, and the public in host countries vents about China not doing enough local capability building. The Chinese government and firms such as Huawei are indeed active in providing scholarships for Africans to study in China. Huawei also makes much of its manufacturing localization in North Africa. At the same time, some observers see these skills transfer as tokenistic, less about sparking technology development in Africa and more about simply bolstering the firm’s brand and reputation.       

When we assess the enormous economic push that the BRI presents, coupled with the political trappings that go into shoehorning Chinese firms into deals, the next question is the extent to which China backs up its BRI presence with military force or even the threat of it. China is a leading contributor to troops to UN peacekeeping missions. But beyond that? So far, China’s BRI bears no resemblance to the military might that followed the British East India Company into India in the 19^th century. China has a military base in Djibouti mainly to protect shipping lanes. The USA and six other nations also have bases in Djibouti. There is some ambiguity about China’s future role in Cambodia’s Ream naval base, which China is upgrading. But so far, China’s overseas military presence is inconsequential compared to that of the USA, which has 800 military bases in 70 nations and territories.

Some citizens in BRI nations are delighted at the gleaming new transportation and telecommunications infrastructure that China has created. African officials will tell you they welcomed China because “the USA did not come knocking.” The West left a vacuum that China has been happy to fill. But you will also find citizens of these nations who bitterly resent their asymmetrical relationship with China. They fume at the lack of transparency in BRI contracts and the environmental impact of deals that are stitched up with their corrupt political elites.  

Chinese leaders correctly view the economic heft of the BRI as a path to increase geo-political influence and international clout. That, in turn, inevitably creates friction with incumbent world powers who feel they are being challenged or even displaced. Even with the absence of military might to underpin its export of goods and capital, the BRI signals a radical shift in the global balance of power. Furthermore, the way China interacts in the BRI with smaller or weaker nations raises legitimate concerns.

The key to discussing the BRI is to identify its essence. The BRI’s fundamental nature is an international expression of China’s industrial and technological rise. Some find it hard to accept China’s new-found strength, which is especially threatening since it is now based on true technological innovation rather than just the old mode of catch-up and imitation.  That said, it is preferable to eschew cold war-style containment of China, which is both dangerous and highly unlikely to work, and instead to provide an accommodation that allows China to take its place in the world economy.   

Originally published on The Pacific: http://www.thepacific.org/index.php/Blog/single/id/1117.html  

About The Author

Dr. Paul G. Clifford is Non-resident Senior Fellow at the Harvard Kennedy School and author of The China Paradox. At the Front Line of Economic Transformation. He has worked in China in banking, strategy consulting and high tech. He was educated as a historian at the University of London and at Peking University.