21 February 2019
No amount of regulatory measures can protect small investors if they do not take precautions on their own. Photo: China Daily
No amount of regulatory measures can protect small investors if they do not take precautions on their own. Photo: China Daily

How an IPO bled small investors

Winning Tower Group Holdings (08362.HK), a food supplier, issued 350 million shares in an initial public offering (IPO) on Hong Kong’s Growth Enterprise Market (GEM).

Everything was normal with the deal except for one thing—all the shares were placed to retail subscribers.

Initially, Winning Tower planned to offer 90 percent of the shares through private placement and 10 percent to the public. That is the typical ratio in most IPO deals in Hong Kong. But in a sudden move, the company allocated all shares to the retail tranche, foregoing private placement.

Previously, it had been a common practice for small-cap IPOs to allocate most or even all shares through the placing tranche to affiliated investors. Such counters could then be easily manipulated.

As the Hong Kong Stock Exchange kicked off GEM board reform last month, one of the objectives was to stem such practice by banning allocating IPO offerings exclusively to the placing tranche.

Given this, it was expected that Winning Tower would just set aside 10 percent of the new shares for the public.

But what actually happened was something totally different.

Since share prices of a number of previous IPOs where all stock was allocated to the placing tranche have soared after listing, small investors were eager to participate in similar deals. Knowing Winning Tower will set aside 10 percent of new shares for the public, small investors flocked to it.

Many investors placed heavy bets using margin financing, hoping to make a killing. It’s reported that Winning Tower recorded nearly 20 times over-subscription.

With numerous brokers willing to offer 10 times leverage, an investor can subscribe for HK$1 million worth of new shares with just HK$100,000 of his/her own money.

But there was a nasty surprise as Winning Tower decided eventually to sell all new shares only to the public, leaving many subscribers with a lot more shares than they expected to get.

On the listing day on June 30, Winning Tower slumped 28 percent. Most margin buyers are believed to have been forced to liquidate their positions with heavy losses.

As a matter of fact, the company outlined in its 400-page prospectus that it could allot all shares to public tranche if there is 10 times over-subscription.

But such clause was rarely acted upon in the past, with the provision seen as just a move to protect underwriters in case of under-subscription in global placement.

More than 700 million shares changed hands on the first day of trading of Winning Tower, more than double the total offering of 350 million shares.

The large trading volume led to suspicion that some big stakeholders may have deliberately allocated all shares to retail investors and then used a selloff to buy back at low prices on the secondary market.

In theory, individual investors may find it difficult to make a complaint given that the clause was explicitly stated in the prospectus. Very few of them would read through the thick prospectus anyway.

Ironically, despite the bourse operator’s plan to tighten listing rules of GEM, some companies always manage to find a way to get around them as this case shows.

The lesson for small investors following the Winning Tower saga is this: they should learn to take precautions on their own rather than rely on the regulator to come up with some genius mechanism to protect them.

This article appeared in the Hong Kong Economic Journal on July 3

Translation by Julie Zhu

[Chinese version 中文版]

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Hong Kong Economic Journal columnist

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