IPO stands for Initial Public Offering, and it refers to the first time a company ‘goes public’ and makes its shares available for sale to the public. An IPO is a rite of passage for a company, and it marks a key stage of development for business owners. IPOs are also difficult to launch, which is why we have created this guide for investors and business owners to understand the Hong Kong IPO process better.

This article will explain why businesses make the decision to go public, why Hong Kong is a great location to launch an IPO, and the requirements to go public in the city. It will also detail the steps a business can take to go public, and the documents required for a first listing.

If you are interested in investing in IPOs or expanding your business, read on.

Why businesses go public

There are many reasons a business may decide to go public and launch an IPO, including:

To raise capital

Firstly, the main reason businesses go public is to raise capital to fund further development of their company, services, and products. This is especially true of companies that are ready to expand their operations and need to raise money.

To generate publicity

When a company is expanding, going public and listing on an exchange can bring them a great deal of publicity that is mostly positive. Doing well financially is also a prerequisite for going public, which means that your future business partners will be assured and be more inclined to work with you.

To cash in on a company

Finally, sometimes a company goes public because its founder or a venture capitalist that backs the company is ready to cash in on a successful venture and move on to the next one.

Why go public in Hong Kong?

A well-suited environment

Hong Kong has always been one of the top contenders of being the world’s Number One IPO venue. In fact, in the past 13 years, the city has ranked in the top spot for 7. This is due to its international business scene, its cosmopolitan environment, and the government’s general openness to innovation and entrepreneurship.

In the past few years, Hong Kong has seen over 120 high-growth companies listed. This has resulted in investors raising over $550 billion HK of IPO funds. High-growth tech companies in particular have found great success in the city, and their total market cap contribution has increased from 1.2% in 2017 to an impressive 8.2% as of 2020.

A high concentration of high-net-worth individuals

Another strength of Hong Kong as an IPO hotspot comes from the city’s high concentration of high-net-worth individuals. In the past few years, the Asian city has surpassed New York City with its population of the super wealthy, which has a combined wealth of $1.3 trillion US. Many of these individuals are businessmen in their own right, ranging from property tycoons to venture capitalists. Businesses looking to launch IPOs in the city will certainly not suffer from a lack of investors.

Proximity to mainland China

Many also launch their IPO in Hong Kong due to the city’s proximity to mainland China. This allows Hong Kong to be a gateway to trade and investment opportunities in the mainland, where there are plenty more self-made wealth and many up-and-coming businessmen. For companies looking to tap into the Asian market – particularly the Chinese market – listing on the Hong Kong Stock Exchange can also help draw in publicity and increase brand visibility.

Two main ways of listing

There are two main ways to list your company in Hong Kong, depending on your revenue, market capitalization, and management structure. There are two listing boards:  the main board and the GEM (Growth Enterprise Market).

The main board

The main board is Hong Kong’s ‘standard’ board, and larger companies will find it suitable to list themselves there. Its criteria include:

• A trading record of at least three financial years
• Unchanged management for the last two financial years
• Unchanged ownership in the past financial year
• Satisfaction with either the profit test, the market capitalization/revenue test, or the market capitalization/revenue/cash flow test.

The GEM

The GEM is slightly more relaxed, and it is a great way for up-and-coming companies to find a way to go public. It is by no means a ‘lesser’ version of the main board, nor is it a stepping-stone. Its criteria include:

• An aggregate operating cash flow of at least HKD 30 million in the past two years
• A market capitalization of at least HKD 150 million
• Unchanged management for the last two financial years
• Unchanged ownership in the past financial year
• Public float of at least 25%

Steps you take to go public

When you have decided on the board on which you will list, you can take your first steps to launch your IPO. This is a long and complex process, and business owners should not take it lightly nor expect to go public in just a few months.

Stage 1: Preparation

The first step to listing is initial preparation. This is where you, as a business owner, pull together an assessment of your company and its order and structure. You will usually begin this step 1 to 2 years prior to your IPO launch, as it will take plenty of time to get your affairs in order.

 You will need to do your due diligence in ensuring all your information and documents are correct. This is very important, as failure to ensure full transparency of your company’s operations will result in a rejected application. You should also host a kick-off meeting and set a realistic timetable for when you wish to complete certain stages of the IPO.

It is also during this stage that you will prepare your prospectus. The listing board (either one) requires a full prospectus from companies that are planning to go public. The prospectus should contain all financial, legal, and managerial information pertaining to the company, and the total accuracy of all information.

When you have done your preparation, you can submit your prospectus to the SEHK (Hong Kong Stock Exchange). You must ensure your prospectus is complete and you must also submit the right form (Form A1 for main board listings and Form 5A for GEM listings). You should do this no less than 80 days before your listing date.

Stage 2: Vetting

After you’ve submitted your prospectus and application, the SEHK will vet your company to make sure all the information you’ve provided is correct. If there’s any information missing, they will ask you to provide more documents.

When the SEHK has accepted your documents and application, they may also ask you to revise your prospectus to clarify certain points. Once all your issues and their comments have been resolved, you will be asked to attend a hearing. This usually takes place around 20 days before the listing.

Stage 3: Marketing

If the SEHK approves your application with no additional criteria to be met, you will be able to start marketing your IPO. This is an important step as this is when you find potential investors and business partners to invest in your shares. Many businesses take their senior management on a roadshow where they will tour the country or several countries meeting with important figures in business. This is when they establish their connections and build relationships.

Companies will also appeal to the public and raise awareness of their brand and offering. This is to attract as many investors as possible. It is at this stage that companies can gauge the public’s interest and determine how many shares to release and how to price their shares.

Stage 4: Offering

Finally, the company registers its completed prospectus with the Hong Kong Registrar of Companies. Three and a half days later, they fix their share price and quantity, sign the underwriting agreement, and launch their IPO.

The bottom line

Going public is a huge milestone for many companies, and Hong Kong is a great place to do it thanks to its strong entrepreneurial spirit and cosmopolitan environment. Its proximity to mainland China also offers companies many opportunities, especially those looking to expand to the Chinese market. The IPO process is a long and arduous one, but it is well worth it. If you are planning to go public, make sure you do your due diligence and provide accurate information to the SEHK at every step of the way for a smooth listing process.