Source: Hong Kong Government special administrative region – 4
Following is a question by the Hon Robert Lee and a written reply by the Secretary for Financial Services and the Treasury, Mr Christopher Hui, in the Legislative Council today (May 13):
Question:
There are views that although the initial public offering (IPO) market has been buoyant recently, the success rate in subscribing for IPO shares by retail investors remains on the low side, and that there is room for further improvement in the pricing and allocation mechanisms for new listings. In this connection, will the Government inform this Council:
(1) given that the Hong Kong Exchanges and Clearing Limited (HKEX) implemented in August 2025 a series of optimisation measures regarding IPO price discovery and open market, which included adjusting the clawback allocation to the public subscription tranche, whether the authorities are aware if the HKEX has conducted a comparative analysis of the post-listing share price volatility and performance, as well as the proportion of IPO shares allocated to retail investors before and after the implementation of the new requirements; if not, of the reasons for that;
(2) whether the authorities will urge the HKEX to review the effectiveness of the optimised clawback mechanism for IPO shares, and study the introduction of an open competitive bidding mechanism for IPO shares to allow all investors (except cornerstone investors) to participate in bidding before the listing of IPO shares, so as to enhance the fairness of IPO allocation; if not, of the reasons for that;
(3) in reply to my question on November 15, 2023, the authorities indicated that the Securities and Futures Commission (SFC) had advised the Hong Kong Institute of Certified Public Accountants to provide guidelines to its members on the accounting method of IPO subscription and the computation of liquid capital where necessary; whether the authorities have since co-ordinated with the SFC and accounting professional bodies to provide clear and uniform guidance to the industry; if so, of the progress of the relevant work; and
(4) whether it knows if the relevant regulatory bodies will, by comparing the regulatory regimes of other markets, review Practice Note 21 of the Listing Rules concerning the due diligence performed by sponsors and avoid overly stringent regulations, so as to reduce unnecessary due diligence work, thereby lowering the listing costs of enterprises; if not, of the reasons for that?
Reply:
President,
With Hong Kong being a major global listing platform, the Government has been driving the Securities and Futures Commission (SFC) and Hong Kong Exchanges and Clearing Limited (HKEX) to enhance Hong Kong’s listing regime continuously, with a view to maintaining international competitiveness and attracting more quality enterprises to list in Hong Kong.
In consultation with the SFC and the HKEX, the reply to the four parts of the question is as follows:
(1) and (2) To strengthen the robustness of the pricing and allocation mechanism for new shares, the HKEX implemented the enhanced initial public offering (IPO) allocation and pricing mechanism in August 2025 following market consultation. Notably, the HKEX requires issuers to allocate at least 40 per cent of the initial allocation of offer shares to the bookbuilding placing tranche at IPO, while issuers may select the allocation mechanism for the public subscription tranche (i.e. Mechanism A or Mechanism B (Note 1)) according to their needs. The arrangement aims to increase the participation of price-setting investors, thereby improving the price discovery process and ensuring that the regime aligns with international market standards, while accommodating the business characteristics and funding needs of different issuers as well as market conditions to attract more quality companies to list in the capital market in Hong Kong. In addition, the proportion of institutional investors in market trading has risen significantly in recent years as compared with the 1990s when the clawback mechanism was introduced. Taking into account the evolving investor composition participating in the market, the new arrangement also balances the demand of different types of local and international investors in subscribing for IPO shares.
Since the implementation of the new requirements in August 2025, as at end April 2026, more than 80 out of the 109 IPOs recorded share prices that either rose or remained unchanged on the first trading day, representing close to 80 per cent of the total which is higher than around 70 per cent prior to the implementation of the new requirements. Apart from 12 cases adopting the bespoke mechanism applicable to Specialist Technology Companies (Note 2), two adopted Mechanism A (with final allocation to the public subscription tranche at 35 per cent), while 95 adopted Mechanism B (with an initial allocation of 10 per cent to the public subscription tranche, and final allocation ranging between 10 per cent and 15 per cent (Note 3)). As issuers may determine the allocation mechanism for public subscription having regard to their business circumstances, industry characteristics and prevailing market conditions under the new mechanism, the arrangements for individual issuers’ IPOs vary. The overall allocation ratio at different times is therefore not directly comparable.
In implementing the enhanced IPO pricing and allocation mechanism, the HKEX has taken into account the needs of different investors (including those in the public subscription tranche). The new mechanism strikes a reasonable balance between ensuring meaningful participation by price-setting investors in IPOs and maintaining retail investor involvement, including ensuring a bookbuilding placing tranche of a meaningful size that helps enhance price discovery to benefit all investors participating in IPOs. As the participation of independent institutional investors can contribute to more robust price discovery, we note that major global markets generally adopt the bookbuilding placing mechanism for IPOs and public offerings conducted by way of open bidding are very limited. The Government, together with the SFC and the HKEX, will continue to closely monitor the implementation of the new requirements as well as the effectiveness of the relevant pricing and allocation mechanisms, and will keep track of international market developments and local market needs to ensure the healthy development of the local market.
(3) Regarding the accounting treatment of IPO subscriptions and calculation of liquid capital, the Government has co-ordinated the SFC and the Hong Kong Institute of Certified Public Accountants (HKICPA) to actively engage with the securities industry to understand brokers’ arrangements in relation to IPO subscription business, including workflow, funding preparation and financial calculations. Notably, the SFC raised issues concerning accounting treatment of IPO subscriptions with its Securities Regulatory Advisory Panel at a meeting with the HKICPA in October 2023, and acknowledged that licensed corporations have different operating models resulting in variations in accounting treatment. The SFC issued a circular in November 2023 reminding licensed corporations to record all assets and liabilities in accordance with generally accepted accounting principles in a manner that reflects the actual transactions and arrangements, and to calculate liquid capital based on such records in compliance with the Securities and Futures (Financial Resources) Rules (the Rules).
The SFC subsequently issued another circular on IPO matters in March 2025, introducing the requirement of collecting a minimum of 10 per cent upfront subscription deposits. Generally speaking, when a licensed corporation provides IPO financing to clients and collects the minimum upfront subscription deposits in accordance with the circular, the receivable arising from such financing may be included as liquid assets under section 21(5) of the Rules.
If individual licensed corporations and their accountants or auditors have any questions regarding the calculation of liquid capital or other relevant provisions in the circular, the SFC may communicate and follow up on their specific circumstances.
(4) As an international equity market, both market facilitation and quality are equally important. In respect of listing applications, the primary role of sponsors is to ensure that listing applicants comply with the Listing Rules and other applicable laws and regulatory requirements, and that listing documents provide sufficient details and information to enable investors to fully understand the listing applicants’ business, financial position, profitability and associated risks. The gatekeeping role of sponsors in the listing process is crucial to maintaining the quality of Hong Kong’s market and investor confidence in the IPO market. Under the requirements of the Hong Kong laws, only licensed corporations that are licensed by the SFC to carry out Type 6 regulated activity (advising on corporate finance) and meet the eligibility criteria set out in the Sponsor Guidelines may act as listing sponsors.
To gain a thorough understanding of listing applicants and ensure compliance with the regulatory requirements, sponsors should adopt reasonable due diligence procedures in respect of listing applications. In conducting due diligence inquiries, sponsors must have regard to paragraph 17 of the Code of Conduct for Persons Licensed by or Registered with the SFC (the Code of Conduct) and the Practice Note 21 of the Listing Rules (the Practice Note). The Code of Conduct provides guidance that sponsors should exercise reasonable judgement, having regard to all relevant facts and circumstances, on the nature and scope of due diligence based on the facts and circumstances. To this end, the HKEX sets out its expectations of sponsors’ general due diligence practices in the Practice Note. However, as each listing applicant is unique, sponsors must determine the appropriate scope and extent of due diligence for each case.
In fact, with the significant increase in new listing applications in 2025, the SFC and the HKEX have observed a decline in the quality of draft listing documents. Accordingly, they issued a joint letter to relevant sponsors in December 2025 highlighting matters requiring attention (including the quality of listing application documents and sponsors’ resources). The SFC subsequently issued a circular in January 2026 expressing concern over serious deficiencies in certain listing documents and sub-standard conduct by some sponsors. The SFC is currently reviewing the documents and information submitted by sponsors pursuant to the circular, and has commenced thematic inspections of sponsors.
The SFC and the HKEX will continue to closely review sponsors’ work and the quality of listing applications, and will take appropriate regulatory action where necessary to uphold Hong Kong’s reputation as a leading international fundraising centre.
Note 1: Under Mechanism A, issuers will set the initial allocation ratio to the public subscription tranche at 5 per cent. If over-subscription for the public tranche reaches 15 times or above, the allocation ratio is 15 per cent; if over-subscription for the public tranche reaches 50 times or above, the allocation ratio is 25 per cent; if over-subscription is 100 times or above, the allocation ratio is 35 per cent. Under Mechanism B, issuers pre-select an allocation percentage to the public subscription tranche with a minimum of 10 per cent (and a maximum of 60 per cent) of the offer shares, but without a clawback mechanism.
Note 2: Under the bespoke mechanism for Specialist Technology Companies, the initial allocation ratio to the public subscription tranche is 5 per cent. If over-subscription for the public tranche reaches 10 times or above, the allocation ratio is 10 per cent; if over-subscription reaches 50 times or above, the allocation ratio is 20 per cent.
Note 3: Final allocation percentages are calculated based on the total number of shares initially on offer.