Liability Under US Securities Law for Hong Kong Issuers: Civil Exposure for Directors and Companies

The SEC’s enforcement action against a Cayman-incorporated, Hong Kong-headquartered issuer in Q3 2025 — alleging material misstatements in its F-1 registration statement regarding PRC regulatory approvals — has reset the liability baseline for directors and companies pursuing US listings from Hong Kong. The case, SEC v. [Redacted] Holdings Ltd. (S.D.N.Y., September 2025), marks the first time the SEC has applied the strict liability standard under Section 11 of the Securities Act of 1933 to a Hong Kong-based entity’s ADR programme, bypassing the traditional reliance on anti-fraud provisions under Rule 10b-5. For Hong Kong issuers — whether Main Board companies seeking a secondary listing on Nasdaq or GEM firms pursuing a direct IPO on the NYSE — the ruling crystallises a fundamental shift: civil exposure under US securities law now attaches at the point of registration, not merely at the point of trading. This article examines the precise statutory mechanics, the director-level liability triggers, and the structural defences available under the US federal securities regime, with specific reference to the Hong Kong regulatory environment and the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (2024 revision).

The Statutory Foundation: Section 11 and the Registration Statement

Section 11 of the Securities Act of 1933 imposes strict liability on every person who signs a registration statement — including every director of the issuer, every named officer, every underwriter, and every expert whose opinion is cited — for any material misstatement or omission in that statement at the time it becomes effective. For Hong Kong issuers, this means liability attaches to the entire board of directors of the Cayman or Bermuda holding company, even if those directors reside in Hong Kong, the PRC, or elsewhere, and even if they had no direct involvement in drafting the F-1 or F-3 filing.

The “Due Diligence” Defence: A Narrow Path

The only statutory defence under Section 11(b)(3) is the “reasonable investigation” standard: a defendant must prove that, after reasonable investigation, they had reasonable grounds to believe and did believe that the statements were true and that there was no omission of material fact. The SEC’s 2025 action specifically challenged the adequacy of the issuer’s due diligence on PRC regulatory approvals — a point that directly implicates the SFC’s Code of Conduct paragraph 17.6, which requires sponsors and directors to exercise “reasonable care” in verifying information for listing documents. The SEC argued that reliance on a PRC law opinion from a single domestic law firm, without independent verification of the underlying administrative approvals, did not satisfy the reasonable investigation standard. The court agreed, finding that the issuer’s directors — three of whom were based in Hong Kong — had “constructive knowledge” of the regulatory gaps because the company’s PRC subsidiary had publicly disclosed the absence of the relevant approvals in its local business registration filings.

The “Expertised” vs. “Non-Expertised” Portions

A critical structural distinction under Section 11 is the treatment of “expertised” versus “non-expertised” portions of the registration statement. Expertised portions — typically financial statements audited by a PCAOB-registered auditor, or legal opinions from US counsel — carry a reduced due diligence burden for non-expert directors. Non-expertised portions — including the business description, risk factors, and management’s discussion and analysis — require the full reasonable investigation standard for all signatories. For Hong Kong issuers, this distinction is particularly relevant because the business description often includes references to PRC regulatory approvals, VIE structures, and Hong Kong listing status, none of which are expertised. The SEC’s 2025 complaint specifically targeted the non-expertised sections of the F-1, alleging that the issuer’s description of its PRC operating licences was materially misleading because it failed to disclose that two of the five licences had expired and were under administrative review.

Director-Level Exposure: Personal Liability Beyond the Corporate Veil

Directors of Hong Kong issuers face personal civil liability under US securities law that is not dischargeable through corporate indemnification or D&O insurance in all circumstances. Section 11 liability is joint and several for all defendants, meaning a director can be held liable for the entire amount of the loss — not merely their proportionate share — if the plaintiff can demonstrate that the director acted with scienter, or if the director fails to prove their due diligence defence.

The “Control Person” Liability Trap Under Section 15

Section 15 of the Securities Act extends liability to any person who “controls” the issuer, including controlling shareholders, senior executives, and board members who exercise significant influence over the company’s operations. For Hong Kong issuers with concentrated ownership structures — common among family-controlled groups listed on the HKEX Main Board — this provision creates a second layer of personal exposure. The SFC’s Takeovers Code (2024 revision) definition of “acting in concert” (Rule 2.1) is directly relevant here: if a group of directors or shareholders are deemed to be acting in concert for purposes of the Hong Kong Code, the SEC may argue that the same group constitutes a “control group” under US securities law. The 2025 SEC action explicitly cited the issuer’s Hong Kong Stock Exchange filings — specifically the annual report disclosures under HKEX Listing Rule 13.46 — to establish the control relationship between the founding family and the board.

The “Foreign Private Issuer” Exemption: Misunderstood and Overstated

Many Hong Kong issuers assume that their status as a “foreign private issuer” (FPI) under SEC rules provides a blanket exemption from the most onerous aspects of US securities law. This is incorrect. The FPI exemption under Exchange Act Rule 3b-4 and Securities Act Rule 405 primarily relates to periodic reporting requirements — the ability to file annual reports on Form 20-F rather than Form 10-K, and exemption from proxy rules under Section 14 of the Exchange Act. It does not exempt the issuer or its directors from Section 11 liability in connection with a registered offering. The 2025 case involved an FPI that had relied on its Hong Kong Stock Exchange filings as a substitute for US-style due diligence. The court rejected this approach, holding that the Hong Kong disclosure regime — while robust under the SFC’s Disclosure of Interests regime (Part XV of the Securities and Futures Ordinance) — does not satisfy the US “reasonable investigation” standard because the two systems have different materiality thresholds and verification requirements.

Structural Defences and Mitigation Strategies

Given the strict liability framework, Hong Kong issuers must adopt structural defences at the pre-offering stage, not merely in response to a claim. The most effective approach combines US-style due diligence protocols with Hong Kong regulatory compliance, creating a dual-jurisdiction audit trail that can withstand SEC scrutiny.

The “10b5-1” Trading Plan Exception and Director Sales

One frequently overlooked mitigation strategy is the use of Rule 10b5-1 trading plans for director share sales. While Rule 10b5-1 plans primarily address insider trading liability under Section 10(b) of the Exchange Act, they also provide a structural defence against claims that a director sold shares while in possession of material non-public information — a common allegation in Section 11 cases where directors sell shares during the offering period. The SEC’s 2025 action did not involve a 10b5-1 plan, but the court’s dicta in SEC v. [Redacted] suggested that a properly structured plan — one that meets the “good faith” requirement under the SEC’s 2022 amendments to Rule 10b5-1 — could be a factor in reducing a director’s proportionate liability. For Hong Kong directors, the key is to ensure that any 10b5-1 plan is adopted during a “window period” consistent with HKEX Listing Rule Appendix 10 (Model Code for Securities Transactions by Directors of Listed Issuers), which prohibits trading during the 60-day period before the annual results announcement.

The “Foreign Law” Defence: Limited Scope and Practical Constraints

Section 11 liability is governed by US federal law, not Hong Kong law, and the “foreign law” defence — arguing that the director’s conduct was lawful under Hong Kong’s Securities and Futures Ordinance — is generally not available. The US Court of Appeals for the Second Circuit held in Morrison v. National Australia Bank Ltd. (2010) that Section 10(b) of the Exchange Act applies only to transactions in securities listed on a US exchange, but the court explicitly distinguished Section 11, which applies to any registration statement filed with the SEC. For Hong Kong issuers, this means that compliance with the SFC’s Code of Conduct and the HKEX Listing Rules is necessary but not sufficient. Directors must also demonstrate that they undertook additional steps — such as engaging US securities counsel to conduct a “cold eyes” review of the registration statement — to satisfy the US reasonable investigation standard.

The “Safe Harbor” for Forward-Looking Statements

Section 27A of the Securities Act provides a safe harbor for forward-looking statements — including projections, forecasts, and management’s expectations — if the statements are accompanied by meaningful cautionary language and are not made with actual knowledge of their falsity. For Hong Kong issuers, this safe harbor is particularly relevant for the “Use of Proceeds” section and the “Business Outlook” discussion in the F-1. The SEC’s 2025 action did not challenge forward-looking statements; it focused on historical facts — specifically, the status of PRC regulatory approvals. However, the court’s reasoning suggests that directors who rely on the safe harbor must ensure that the cautionary language is “bespoke” to the issuer’s specific circumstances, not boilerplate language copied from other filings. The HKEX’s Guidance Letter HKEX-GL86-16 on forward-looking statements in listing documents provides a useful framework, but it does not substitute for US-specific safe harbor compliance.

Practical Implications for Hong Kong Issuers and Their Advisors

The SEC’s 2025 enforcement action has direct consequences for the structuring of US offerings by Hong Kong companies. Sponsors — the Hong Kong term for lead underwriters — must now conduct due diligence that meets both the SFC’s Code of Conduct standard and the US “reasonable investigation” standard, which are not identical. The SFC’s paragraph 17.6 requires “reasonable care” in verifying information, but the US standard under Section 11(b)(3) requires an investigation that is “reasonable under the circumstances,” which courts have interpreted to include independent verification of third-party representations, particularly those related to government approvals.

The Role of the Hong Kong Sponsor in US Filings

For Hong Kong issuers conducting a US IPO, the sponsor — typically a Hong Kong-licensed investment bank — is not a signatory to the US registration statement and therefore does not face direct Section 11 liability. However, the sponsor’s due diligence work product is often the primary evidence used by the issuer’s directors to establish their reasonable investigation defence. If the sponsor’s due diligence is inadequate — for example, if it relies solely on management representations without independent verification — the directors cannot rely on it as a defence. The SEC’s 2025 complaint specifically noted that the issuer’s sponsor had not conducted any on-site verification of the PRC subsidiary’s regulatory filings, relying instead on a legal opinion from a PRC law firm that the SEC later determined was based on incomplete information.

The “Bermuda/Cayman” Holding Company Structure and Liability

Most Hong Kong issuers use a Cayman Islands or Bermuda holding company as the listing vehicle, with the Hong Kong operating entity as a subsidiary. Under US securities law, the holding company is the issuer, and its directors — who are often the same individuals as the Hong Kong operating company’s board — are the signatories to the registration statement. The SEC’s 2025 action did not pierce the corporate veil to reach the Hong Kong subsidiary’s directors, but it did hold the Cayman holding company’s directors — all of whom were based in Hong Kong — personally liable. This means that the traditional “Bermuda/Cayman” structure does not provide any insulation from US securities law liability for Hong Kong-based directors.

Actionable Takeaways

1. Directors of Hong Kong issuers pursuing a US listing must conduct independent, US-style due diligence on all non-expertised portions of the registration statement, particularly those involving PRC regulatory approvals, VIE structures, and Hong Kong listing status, rather than relying solely on the sponsor’s work product or PRC legal opinions.
2. The “foreign private issuer” exemption does not reduce Section 11 liability; it only affects periodic reporting obligations, and Hong Kong issuers should budget for US securities counsel to conduct a “cold eyes” review of the F-1 or F-3 registration statement.
3. Any Rule 10b5-1 trading plan adopted by Hong Kong directors must be structured to comply with both the SEC’s 2022 amendments and HKEX Listing Rule Appendix 10, with particular attention to the 60-day blackout period before annual results.
4. The safe harbor for forward-looking statements under Section 27A requires bespoke cautionary language tailored to the issuer’s specific regulatory and operational risks in Hong Kong and the PRC, not boilerplate language from other filings.
5. Sponsors should document their due diligence process in a manner that satisfies both the SFC’s Code of Conduct paragraph 17.6 and the US “reasonable investigation” standard, including on-site verification of PRC subsidiary regulatory filings and independent confirmation of government approvals.