CSE issues rules for sponsors of entities to be listed on Empower Board in Alternate Market Segment

The Colombo Stock Exchange recently issued rules relating to sponsorsof entities to be listed on the Empower Board in the Alternate Market Segment. Empower Board is the CSE’s newest listing platform which is dedicated for SMEs who are seeking for funds and has at least two years of operating history immediately preceding the date of application for listing. There are other financial requirements i.e. stated capital and net asset value. Another requirement for listing on the Empower Board is that the application to list securities must be made through a sponsor approved by the CSE. 

In general, a sponsor can be a range of providers and entities supporting the goals and objectives of an individual or company.They invest in companies, create demand for listed securities, underwrite for public offering and more.When a company decides to go public, sponsor assists with the listing application and also their involvement provides credibility for new investors who would want to invest through the IPO. Leading IPO sponsors in financial markets are typically investment banks which add another positive measure for investors to make their investment decisions.

The CSE’s recent rules issued for sponsors are however limited to the sponsors of entities to be listed on the Empower Board in the Alternate Market Segment. As per rules, every company applying to list on the Empower Board must appoint a sponsor to make the application to list securities. Eligibility, role and other continuing obligations of a sponsor under the CSE Listing Rules are discussed below. 

Criteria for approval as a sponsor 

Sponsor services can be provided only by the CSE approved parties. Therefore, an individual or a corporate that intends to provide sponsor services must apply to the CSE by completing the application form given in Part B of Appendix E of the Listing Rules along with the required documents which include a copy of the Certificate of Incorporation, board resolution authorising the application for approval as a sponsor and a declaration by the applicant declaring that the applicant has complied with the applicable Listing Rules. The applicant should have minimum of five years of experience in the field of investment banking or corporate finance, out of which one year of experience should be in handling listing applications of issuers or capital raising services. The sponsor should also have necessary infrastructure facilities including systems and controls in place to ensure it carries out its obligations as per CSE requirements. Approval granted to a sponsor is valid only for a period of three years from the date of granting or renewing the approval.

The approval of a sponsor is at the sole discretion of the Exchange and can be given unconditionally or with conditions.Generally, an Exchange will consider variety of factors including applicant’s employees’ skills, knowledge and expertise necessary for it to provide services in accordance with the Exchange requirements, the nature, scale and complexity of applicant’s business and the volume and size of transactions it undertakes, etc.In assessing whether an applicant can be approved as a sponsor, the Exchange may also consider, where relevant, the guidance or advice on the listing rules given by the applicant in circumstances other than in providing sponsor services in addition to the applicant’s ability to demonstrate its competence. 

The applicant will also have to satisfy the CSE on system and control requirements. Although the rules do not detail these requirements, in general, sponsors need to have certain systems and controls in place including clear and effective reporting lines and management responsibilities, appropriate staffing arrangements and systems and controls for compliance, management of conflicts of interests, record management and appropriate training and guidance for employees to provide sponsor services. 

Role and obligations of a sponsor 

The sponsor’s role is to advise, guide and assist the listing entity relating to both initial listing activities and post-listing activities, for a period not less than the release of the second annual report of the entity after listing its securities on the Empower Board. A sponsor must in relation to its sponsor services act with integrity, due care and skill at all times.

The sponsor will be responsible for overall management of the listing process and should assess the suitability of the company that is seeking to list its shares through an extensive due diligence process. It is important to make the senior management of a sponsor responsible for monitoring and guiding the progress and standard of due diligence. The listing application and the documents prepared in conformity with the Listing Rules is crucial in the listing process and the sponsor is responsible for this task and also to ensure that the prospectus contains sufficient information and disclosures for investors to make an informed assessment of the listing entity and its financial condition.The sponsor must guide the listing entity and its directors regarding their initial and continuing listing obligations and ensure that its client complies with the CSE listing requirements at all times. To do this, a sponsor must take reasonable steps to satisfy itself that the directors of the listed entity understand their responsibilities and obligations under the listing rules requirements.

Through these obligations, it is expected to enhance various aspects of the sponsor’s role in the listing process and to ensure that the sponsors thoroughly understandthe listing entity’s business and listing requirements, carry out comprehensive due diligence and submit substantially complete prospectus to the Exchange. The sponsor is the main contact point with the Exchange and is obliged to submit necessary documents in a timely manner and liaise with the Exchange in relation to the listing application of the listing applicant. 

The CSE Sponsor Rules require that the sponsors take reasonable steps as are sufficient to ensure that any information they provide to the Exchange in carrying out the sponsor service is, credible, accurate and updated in all material respects. Due to significant deficiencies in due diligence carried out by the sponsors, some countries like Hong Kong has amended its regulations to include statutory civil and criminal liability for IPO sponsors which provide misleading information in a prospectus.

To comply with the CSE obligations, the sponsors, among other things, will have to prove that they have appropriately used its own knowledge, judgment and expertise to review and challenge the information provided by the listing applicant or any related third party. In this context, while sponsors can seek assistance and assurances from third party experts, sponsors are ultimately responsible for due diligence and this responsibility cannot be delegated.

Identifying and managing conflicts 

The sponsor is required to perform its duties independently with no conflicts of interests with the listing applicant it sponsors. In the event of a possible conflict of interest, the sponsor needs to resolve the conflict satisfactorily or the sponsor will be prevented from acting as a sponsor for the listing applicant. Generally to manage a conflict of this nature, a sponsor should ensure that the conflict of interest does not adversely affect the ability of the sponsor to perform its functions properly and market confidence in the sponsor.

To comply with this requirement of the Exchange, a sponsor must take all reasonable steps to put in place and maintain effective organisational and administrative arrangements and compliance controls for proper management of conflict of interest matters. The circumstances that could create a perception in the market that a sponsor may not be able to perform its duties as required or compromise the ability of a sponsor to fulfil its obligations should be given due consideration in identifying the conflicts of interest of a sponsor.

Immediate disclosures/notification to the Exchange

The CSE requires the sponsors to disclose any material information that can make an impact on the performance of the sponsor and such disclosures include material information relating to significant ownership changes of the sponsor, director or key management change or any acquisition or disposition of securities by a sponsor in a listed entity which it sponsors.

The CSE does not require the sponsors to provide any regular compliance notifications whereas some countries require the sponsors to submit annual written notifications to the Exchange confirming that the sponsor continues to satisfy the criteria for approval as a sponsor. However, these requirements might come through future CSE circulars. 

Trading restrictions

A sponsor should not use unpublished price sensitive information for trading in the securities of a listed entity which it sponsors. Even after publishing of such price sensitive information via the Exchange, the sponsors are prohibited from trading in securities of a listed entity which it sponsors for a period not less than two market days which is calculated by excluding the day of disclosure. In order to comply with this provision and insider trading provisions of the SEC Act, a sponsor must ensure that it has necessary compliance controls and mechanism in place to protect information and to monitor its trading activities including that of the employees. 

Review by the Exchange 

The sponsor’s compliance with the rules, its performance and service standards will be reviewed by the Exchange on a continuous basis.An approval granted to a sponsor can be revoked at the discretion of the Exchange in considering the public interest and its performance review status. Such revoke is disclosed to the market and a sponsor can be disallowed from re-applying for a certain period by the Exchange.

In order to ensure a smooth listing process, it is important that the listing applicants select a professional and reputed sponsor.It is vital that a sponsor has sufficient resources and expertise to comply with listing requirements and continuous sponsor obligations. Sponsors also need to be aware of insufficient engagement and oversight by senior management, gaps and overlaps in working with many parties throughout the listing process, unnecessary reliance of information provided by the listing applicant, third parties and other experts. The role of a sponsor is unique and crucial to any market and its investors. Given that the SMEs may not have all the expertise that the entities listed on the main Board of the CSE have, sponsors’ compliance with the new CSE sponsor rules is of utmost importance to promote investments in these SME entities by the general public.

(The writer is a capital market compliance professional with over 10 years of combined experience in commercial law and compliance in the financial services industry.She is an Attorney-at-Law and the Head of Compliance of a reputed investment banking group in Sri Lanka.Anusha’s local and foreign employments and professional affiliations include reputed Sri Lankan financial services groups, US Securities and Exchange Commission (Office of Compliance Inspections & Examinations) and State Street Global Advisors, USA.Anusha has a LL.B Second Class Honours (Upper) Degree from the University of Colombo, LL.M in Commercial Law from the University of Melbourne, Australia and a Fellowship in Finance and Banking from the University of Boston, USA.)