Getting ready for IPO in Hong Kong requires two to three years of preparation and planning to ensure the company meets the listing requirements.
This guide will explain the pre-IPO requirements and compliance issues companies may encounter in the process, regardless of whether it is your primary or secondary listing.
1. Track record requirements
Before listing your company on the Hong Kong Stock Exchange (HKEx), you need to ensure that it meets the minimum track record requirements, consisting of three tests: the profit test, market capitalisation, revenue and cash flow test, and market capitalisation and revenue test.
Your company must satisfy one of the following three tests:
- Profit test – profit attributable to shareholders of not less than HKD 20 million for the most recent year and not less than HKD 30 million in the two preceding fiscal years
- Market capitalisation, revenue and cash flow test – at least HKD 2 billion market capitalisation at the time of listing, HKD 500 million revenue in the previous fiscal year and HKD 100 million cash flow in aggregate for the three most recent fiscal years
- Market capitalisation and revenue test – at least HKD 4 billion market capitalisation at listing and HKD 500 million revenue in the previous fiscal year
The company must undergo a reorganisation to ensure that the company’s structure meets the public market requirements at least one year before the listing date. It should also transfer all contractual rights, licenses and assets to the listing group.
Other restructuring considerations include:
- Assets – the company should make sure that they are entitled to and have the right to use all assets required to operate the business.
- Constitutional documents – the company should amend its constitutional documents to comply with the HKEx listing rules. Provisions that apply to private companies may not apply to public companies.
- Intellectual property – the company should ensure that they own or have the right to use intellectual property related to the business. It is also necessary to register any trademarks.
3. Due diligence
You must appoint sponsors two months before the submission of the listing application. Their primary role is to represent the company, conduct due diligence on the company, shareholders and management, and ensure that the prospectus is accurate and contains all required information.
During due diligence, the sponsor should perform the following:
- Oversee the preparation of the listing document
- Thoroughly understand the listing applicant, including its background, business, history, structure and systems
- Understand the industry the listing applicant operates, including characteristics of the industry and competitors
- Examine the qualifications and competence of the directors
- Examine the accuracy and reliability of financial information, including financial statements of major subsidiaries, internal financial records, tax certificates, regulatory filings and public records
- Interview major stakeholders, including the listing applicant’s customers, suppliers, creditors and bankers
- Undertake a physical inspection of assets
You can find other sponsors’ due diligence requirements in Practice Note 21 of the Listing Rules.
4. Pre-IPO investment agreements
The Interim Guidance requires pre-IPO investments to be completed and fully settled either 28 clear days before the first submission of the first listing application form or 180 clear days before the first day of trading the applicant’s securities.
The company must dismiss any special rights given to pre-IPO investors which do not extend to other shareholders.
Some special rights that must be terminated are:
- Price adjustments
- Put or exit options
- Director nomination rights
- Veto rights
5. Kick-off meeting
At least six months before listing, the company must arrange a meeting with all parties to assemble an IPO team and kick off the IPO process. The meeting must include introducing the team and their roles and responsibilities, setting a timetable to establish key milestones, discussing the offerings’ size and structure, and discussing other accounting, legal or regulatory issues.
6. Prospectus drafting
The IPO team will need to prepare the listing prospectus and the details that need to be included based on the Listing Rules.
The prospectus should include the following content:
- Accountants’ report
- Application and allocation methods
- Business, management discussion and analysis
- Corporate information
- Future plans
- History and development
- Industry overview
- Risk factors
- Selling restrictions
- Shareholders’ information
- Statutory and general information
- Use of proceeds
Before submitting the prospectus, the sponsor should conclude that the information is complete. If the prospectus is inaccurate, incomplete or misleading, those responsible for the prospectus will be subject to civil and criminal liabilities.
7. A1/5A submission
You should submit the A1 form (for mainboard) and 5A form (for GEM) 80 days before the listing date to the HKEx. The application should contain drafted details of the prospectus.
Compliance issues & challenges companies face
Companies must have a track record of operating under the same management for at least three years; this includes its board of directors and the senior management team. Subsidiaries must also have been operating for at least three financial years before the IPO. If the company makes any changes to the management three years before IPO, the company may be unsuitable for listing.
Private companies must obtain all the necessary licenses and permits required under applicable laws that apply to the company. Without licenses or permits, the company may be deemed unsuitable for listing.
Companies raising capital in advance of an IPO by bringing on pre-IPO investors should consider the pre-IPO investment criteria, including the duration which investments may be made and the special rights that must be terminated when the company goes public. Suppose amendments are made to the conditions near the IPO date and occur after the date falling 28 business days before filing the listing application. In that case, HKEx will require the company to wait for at least 180 days before the IPO.
Sponsors must perform due diligence meetings with stakeholders with the company’s assistance to discover any potential issues. However, stakeholders may or may not be willing to participate. Suppose they cannot conduct due diligence meetings. In that case, the IPO sponsors may question the credibility of the information provided by the company and be unable to make confirmations to HKEx.
Pre-IPO check: Is your company ready for listing?
Acclime Hong Kong provides initial health checks of your finances for any possible compliance issues before engaging with key persons in the listing process.
Our pre-IPO planning consultancy includes:
- IPO readiness assessment
- Advising on the appointment of other professionals involved in the IPO
- Performing due diligence with the relevant professionals on your business and financial affairs
- Advising on your capital structure, invitation structure, marketing theme, the timing of the IPO and more to maximise investor acceptance and shareholder value
- Management of the IPO process, including coordination of other professionals involved in the process
You can read more about our IPO services here.
Every pre-IPO step is essential, and companies must make sure that they meet all the necessary requirements set out in the Listing Rules. Otherwise, any non-compliance could result in the company not being suitable for listing and delay your ambitions to get listed on the Hong Kong Stock Exchange.
We recommend that you engage with a professional service provider who will be able to guide you throughout the screening and listing process. Feel free to contact Acclime to discuss your IPO plans.
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