Investment banks face much tougher regulation when helping companies list in Hong Kong under rules being introduced by the city's market regulator.
The Securities and Futures Commission wants to make sponsors of initial public offerings criminally liable for false information presented by companies they help to bring public.
Ashley Alder, SFC chief executive, said the change would "incentivise sponsors to raise standards, pick the right deals and manage them well, which should in turn reduce risks for investors and all those involved in IPOs".
Under the plan - which requires approval by Hong Kong's legislature - liability would depend on whether a sponsor "knowingly or recklessly approved a prospectus containing an untrue statement, which was materially adverse" for investors.
Mr. Alder said he was hopeful that legislation would be enacted in time to meet a deadline of Oct. 1 next year when the regulator will introduce other reforms.
Those changes would force investment banks to complete due diligence before a company can make a formal application to list. The draft prospectus that the bank submits on behalf of the company would be made public, similar to the practice in the US, pushing more of the vetting process on to deal sponsors.
The SFC will also introduce a mandatory cut-off point of two months before a listing application, after which no new sponsors can be appointed. Any sponsor who quits a deal will have to explain the decision to the regulators, just as auditors must do when they resign from an auditing assignment.
The regulatory overhaul comes at a time when investors have become increasingly concerned about the quality of accounting at Chinese publicly traded companies.
Mr. Alder said the regulator wanted to ensure that "Hong Kong's listed market remains a quality market".
The proposal comes at a pivotal time for Hong Kong as a centre for listings. This year, the city dropped to fourth in the global IPO league table, having been at the top for the previous three years, as deals have dried up or been postponed amid weak demand.
Hong Kong only narrowly beat Kuala Lumpur, the Malaysian capital, in the rankings, thanks to the $3.1-billion (U.S.) offering of Chinese insurer PICC, which began trading last Friday.
As the stream of big ticket Chinese state-owned enterprise listings comes to an end, Hong Kong is expected to see more small and medium-sized privately owned Chinese companies come to market.
The SFC recommendations follow a period of consultation, which began earlier this year. Mr Alder said that while there had been "some resistance" from the banking industry on the issue of criminal liability, there was "no real dispute" that there had been a problem with the existing sponsorship regime.
Additional reporting by Rahul Jacob and Jennifer Hughes in Hong Kong