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Indicative timeline for an IPO in Hong Kong

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Aug 19 2024

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An indicative timeline setting out the main steps for a company undertaking an initial public offering (IPO) in Hong Kong with a listing on the Hong Kong Stock Exchange. This note covers both Hong Kong and non-Hong Kong issuers. It is particularly suitable for non-Hong Kong lawyers advising on a cross-border IPO in Hong Kong.

Reproduced from Practical Law with the permission of the publishers. For further information, visit www.practicallaw.com.

An indicative timeline setting out the main steps for a company undertaking an initial public offering (IPO) in Hong Kong with a listing on the Hong Kong Stock Exchange. This Note covers both Hong Kong and non-Hong Kong issuers. It is particularly suitable for non-Hong Kong lawyers advising on a cross-border IPO in Hong Kong.

When advising on an initial public offering (IPO) in Hong Kong with international or cross-border aspects, non-Hong Kong lawyers must understand when key actions take place. This is especially true if:

A Hong Kong company is conducting an IPO and listing in Hong Kong and those advising on the sale of the securities in other jurisdictions want to understand the timing expectations in Hong Kong
A non-Hong Kong company is conducting an IPO and listing in Hong Kong and the company's home jurisdiction advisers want to understand the timing expectations in Hong Kong

This Note highlights the key actions that take place and the key documents necessary for an IPO in Hong Kong. It provides an indicative timeline for a Hong Kong-incorporated issuer or an overseas issuer conducting an IPO in Hong Kong on the Main Board of the Hong Kong Stock Exchange (Stock Exchange).

The timeline does not cover the pre-IPO preparations that an issuer typically undertakes before kicking off an IPO process, such as:

Corporate restructuring
Appointment of sponsors and other professional parties
Finalising the composition of the board of directors
Appointment of company secretary
Establishment of board committees
Setting up employee benefit plans

Key actions

The timeline below covers the following key actions or events that must occur as the issuer (also referred to as the listing applicant) prepares to conduct an IPO.

Kick-off meeting

An IPO process officially starts with a kick-off meeting. During a kick-off meeting, professional parties meet and discuss the proposed timetable and work streams of the IPO. Usually, the management of the listing applicant gives an overview presentation about the business and financial status of the issuer.

Submission of sponsors' engagement letters to The Stock Exchange

Every listing applicant must appoint a sponsor (usually an investment bank) to assist it with its listing application.

The sponsor must be licensed or registered under the Securities and Futures Ordinance (SFO) and permitted to undertake work as a sponsor.

The issuer can appoint one sponsor, or more than one joint sponsors. In either case, at least one sponsor must be independent of the issuer. The Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules) set out a series of tests under which a sponsor would not be considered independent.

Under the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct), any licensed or registered person engaged in bookbuilding and placing activities are called "capital market intermediaries" (CMIs). CMIs who are acting as the head of syndicate are "overall coordinators" (OCs). The Code of Conduct requires at least one OC (or its affiliate within the same group), which is independent to the issuer, to also act as a sponsor (Sponsor-OC). This is known as the sponsor coupling requirement. The Sponsor-OC's engagement letter must specify the roles and responsibilities of the Sponsor-OC, the fee arrangements (in particular the "fixed fee" allocation among the OCs), and the fee payment schedules.

The sponsors must submit the sponsors' engagement letters to the Stock Exchange at least two months before the listing application.

Once appointed, a sponsor must notify the Stock Exchange in writing of its appointment as soon as practicable. It must submit the Sponsor Engagement Notification Form (SE001), together with a copy of the sponsor's engagement letter, to the Stock Exchange through the Stock Exchange e-Submission System (HKEX-ESS). Once the Stock Exchange receives the notification, it will notify the sponsor of the earliest time at which the listing applicant can submit the listing application.

If the Stock Exchange considers that a sponsor has not notified the Stock Exchange of its appointment as soon as practicable, it may treat the date of the notification as the date of the sponsor's formal appointment when determining whether the listing applicant met the two months requirement. Normally, the Stock Exchange expects notification within five business days from the date of the sponsor engagement letter.

Legal and financial due diligence

The Listing Rules and the Code of Conduct require sponsors to conduct reasonable due diligence inquiries on the listing applicant. Practice Note 21 of the Listing Rules sets out the Stock Exchange's expectations of the due diligence sponsors should perform. The sponsors are also expected to conduct due diligence in accordance with the standards set out in paragraph 17 of the Code of Conduct.

Sponsors must maintain records of their due diligence work to demonstrate their compliance with the relevant rules and regulations to the Stock Exchange and the Securities and Futures Commission (SFC).

Verification

The Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) imposes prospectus liabilities. The issuer's directors and any person who has authorized the issue of a prospectus (including the sponsors) can be liable if there is any untrue statement or material omission in a prospectus. The SFO also imposes civil and criminal liabilities on a person if there is disclosure of false or misleading information that induces transactions.

To assist the issuer, its directors, and sponsors in fulfilling their obligations to check that the listing document is accurate and complete in all material respects and not misleading or deceptive, verification procedures will be performed. Every statement in a prospectus will be verified, by reference to independent documentary evidence if possible.

Verification of the application proof prospectus must be completed in all material respects before the sponsor files a listing application on behalf of a listing applicant. The application proof prospectus must be substantially complete except for information that, by its nature, can only be finalised and incorporated later. Before bulk printing the final prospectus, the listing applicant, its directors, and the relevant professional parties will sign the verification notes. The verification notes show the allocation of the responsibilities for checking the accuracy of each statement to the relevant parties.

The sponsors (and the sponsors' legal counsel) will lead the verification process. The sponsors should maintain records of their verification works (for example, the verification notes and the supporting documents) as they might need to put forward a defence that they had reasonable grounds to believe the statements included in the prospectus were true.

Listing application

The Listing Rules list the documents that the listing applicant must file at the Stock Exchange and the SFC at the time of the listing application (A1 filing).

The listing application documents include:

Application proof prospectus
Listing application form (Form A1), which sets out the basic information of the listing applicant and the proposed offering structure
Profit forecast memorandum and cash flow forecast memorandum
Final or advanced draft waiver applications (if needed)
Contact information and personal particulars of the listing applicant's directors or supervisors and other officers
Initial listing fees
Other Stock Exchange forms

The listing applicant, the sponsors, and the relevant professional parties will prepare the listing application package.

The application documents should be submitted to the Stock Exchange through HKEX-ESS. The sponsor must obtain a company case number from the Stock Exchange at least three business days before submitting a listing application. The sponsor must complete the electronic version of the listing application form M103 and submit it through HKEX-ESS in advance of the filing.

The listing applicant must also submit a redacted version of the application proof prospectus to the Stock Exchange for publication on the Stock Exchange website. All offer-related information will be redacted in this version.

Completion of pre-IPO investments

The listing applicant is permitted to receive certain forms of pre-IPO investments for various purposes, such as raising funds for general working capital. Generally, the Stock Exchange does not object to pre-IPO investments in the issuer.

According to the Stock Exchange's Guide For New Listing Applicants, all pre-IPO investments in the issuer must be completed at least 28 clear days before the date of listing application. If not, the Stock Exchange will delay the listing date until 120 clear days after the completion or divestment of the last pre-IPO investments (120 Day Delay Rule). Pre-IPO investments are considered completed only when the funds for the underlying shares are settled and received by the company or the existing shareholders.

There are also certain restrictions which apply to pre-IPO investments. Under the Listing Rules, all shareholders must be treated fairly and equally. The Stock Exchange will require special rights which do not extend to all shareholders to be removed or altered before listing.

Generally, pre-IPO investors who divest before the listing application will not disrupt the listing process nor affect the equal treatment of shareholders post-listing, and there will be no penalty to the listing applicant. However, if the divestment of an existing shareholder involves another shareholder purchasing the shares, the Stock Exchange may consider this a pre-IPO investment made by the other shareholder. If so, the listing applicant will be subject to the 120 Day Delay Rule.

The following divestment rights must be terminated before the listing application:

Any divestment right granted by the listing applicant or the controlling shareholder to the pre-IPO investor (such as put options, redemption, or repurchase rights)
Any right permitting the listing applicant or the controlling shareholder to repurchase shares of the pre-IPO investor

If the listing applicant fails to comply with the requirements on termination of divestment rights, the applicant is subject to the 120 Day Delay Rule from the date of exercise or termination of any divestment right existing on the date of the listing application.

Parties should consider the terms of pre-IPO investments carefully before entering into any pre-IPO investment agreement. The Stock Exchange will review the terms of pre-IPO investments during the listing application vetting process. If the Stock Exchange considers that the pre-IPO investment breaches the general principle of equal treatment of shareholders under the Listing Rules, it might require the listing applicant to modify the terms of the pre-IPO investments. This might delay the listing process.

Vetting by regulators

Under the Listing Rules, listing applicants must submit every application for listing to the Listing Division of the Stock Exchange (Listing Division). The Listing Division can either reject the application or recommend it to the Listing Committee of the Stock Exchange (Listing Committee) for its approval or rejection. The Listing Division conducts detailed vetting of the listing application based on eligibility, suitability, compliance with the rules, and sufficient disclosure.

Under the dual filing arrangements, a listing applicant must also file the application with the SFC via the Stock Exchange. The SFC can raise any concern under the Securities and Futures (Stock Market Listing) Rules (SMLR) and is empowered to object to a listing application.

The regulators will raise comments and queries on the listing application. The listing applicant and the relevant parties will prepare responses to address the regulators' comments and queries and revise the draft prospectus if necessary.

The regulators will generally provide a first round of comments within 15 business days from receipt of listing application. There is no pre-set time frame for the overall vetting of the listing application. The time frame depends on various factors, such as the listing applicant's response time and quality of response.

Regulatory vetting applicable to China-based issuers

Many issuers listed or applying for listing on the Stock Exchange are based in the PRC. (For the purpose of this Note, the "PRC" or "China" refers to the mainland region of the People's Republic of China and does not include Hong Kong.)

The Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies and related guidelines (PRC Regulations) published by the China Securities Regulatory Commission (CSRC), which came into effect on 31 March 2023, requires China-based companies (whether incorporated in China or in other jurisdictions) seeking to list on the Stock Exchange to file a filing report, a legal opinion, and other relevant materials with the CSRC within three working days after filing its listing application. The CSRC will, upon satisfaction of the submitted documents, within 20 working days after receiving the filing documents, conclude the filing procedure and publish filing results on its website. In practice, it might be difficult for the parties to ascertain the exact timeline for the filing procedures, in particular with regards to issuers which adopt variable interest entity (VIE) structures, as the CSRC would need to seek comments and approvals from the relevant departments.

Listing hearing

Once the listing applicant has addressed all the regulators' comments or queries, the Listing Division recommends the listing application to the Listing Committee. The Listing Committee reviews the application and determines whether the listing applicant is suitable to proceed with its IPO.

The listing applicant must submit certain documents to the Stock Exchange before the expected hearing date. For example, the issuer must submit any final waiver application to the Stock Exchange, at least four clear business days before the expected hearing date. If the issuer is a PRC-based company, it is required to submit a copy of the notification on completion of the PRC filing procedures issued by the CSRC.

If the Listing Committee approves a listing, the Stock Exchange will issue a notification of approval in principle to the listing applicant.

Roadshow and book building

During the roadshow, the management of the listing applicant will meet key investors to present the investment case for the listing applicant.

Underwriters usually conduct book building at the same time as the roadshow. Book building is a price discovery process to determine the IPO offer price based on potential investors' interest in and orders for shares in the offering. The Code of Conduct includes conduct requirements for intermediaries involved in book building activities.

A red-herring prospectus, which is a near-final prospectus without offer pricing terms, will be distributed to potential investors to assist in the book building and roadshow.

Prospectus registration

Under the CWUMPO, the listing applicant must register a prospectus at the Companies Registry before distributing it to the public in Hong Kong.

The listing applicant's Hong Kong legal counsel will submit the relevant documents to the Companies Registry at least one business day before the publication of the prospectus. From July 2024, listing applicants (and their advisers) must submit documents electronically for application for authorization of prospectus registration.

Apart from the final proof prospectus, the documents required for prospectus registration include:

Application forms signed by designated signatories
Certified copies of material contracts of the listing applicant
Written consents of the experts named in the prospectus
Translation certificates

Pursuant to the Listing Rules, a listing applicant must give at least 14 days' notice to the Stock Exchange of the proposed date of prospectus registration.

Publication of Hong Kong Prospectus

According to the Stock Exchange's paperless listing and subscription regime, from 5 July 2021, all listing documents will be published solely in an electronic form and the new listing subscriptions will be made through online electronic channels.

Public offering and international offering

A Hong Kong IPO usually includes a Hong Kong public offering and an international offering. A Hong Kong public offering is open to members of the public in Hong Kong. It will last for at least three and a half days. An international offering, also known as the "placing tranche," is for institutional and professional investors.

Generally, 10% of the total offer shares is initially allocated to the Hong Kong public offering tranche. The remaining 90% of the total offer shares are allocated to the placing tranche, subject to clawback arrangements (see Allocation).

Pricing

Once the book building is completed, the final offer price will be agreed between the listing applicant, the selling shareholders (if any), and the underwriters.

Allocation

The allocation of offer shares to investors in the Hong Kong public offering will be based on the level of valid applications received under the Hong Kong public offering. Allocation can be by ballot if the Hong Kong public offering is over-subscribed.

The allocation of offer shares in the international offering will be in accordance with the book building process.

The allocation of the offer shares between the Hong Kong public offering and the international offering is subject to adjustment. Paragraph 4.2 of Practice Note 18 of the Listing Rules requires a clawback mechanism to be put in place. If the Hong Kong public offering is significantly over-subscribed, shares initially allocated to the international offering tranche will be clawed back to the Hong Kong public offering tranche, according to prescribed percentages. For example, when the total demand for shares in the Hong Kong public offering tranche is 100 times or more the initial allocation, the number of shares under the Hong Kong public offering tranche will be increased to 50% of the shares initially available under the IPO.

Bring down due diligence

The underwriters and their counsel usually conduct a bring down due diligence call with the management of the listing applicant before listing. The management must confirm whether there have been any material changes or updates to the answers provided at previous due diligence interviews.

Listing

Dealings in shares on the Stock Exchange commence on the listing date.

Stabilisation

The stabilising manager can over-allocate or effect transactions to stabilise or support the market price of the shares at a higher level after the listing date. All stabilisation actions must end on the 30th day after the last day for lodging an application under the Hong Kong public offering. The stabilisation manager must conduct stabilisation activities in accordance with the Securities and Futures (Price Stabilising) Rules.

The listing applicant or the selling shareholder may grant the underwriters an over-allotment option (more commonly known as the "greenshoe"). Under the greenshoe, the issuer agrees to issue and allot shares, or the selling shareholder agrees to sell additional shares, of up to 15% of the IPO offer shares to cover over-allocations.

Key documents

The timeline below covers the following key documents that must be produced as the issuer prepares to conduct an IPO.

Prospectus (Listing Document)

The Listing Rules, the SFO, the CWUMPO, and various guidance materials issued by the Stock Exchange set out the content requirements for a prospectus.

The key sections of a prospectus are:

Business, history and development, industry overview, the directors and senior management, and risk factors
Financial information, setting out management's discussion and analysis of historical financial information of the listing applicant (MD&A)
Offering information, including the structure of the global offering and underwriting
Statutory and general information, covering corporate information, a regulatory overview, and share capital
Expert reports, which includes the accountants' report, profit forecast (if any), valuation report (if any), and technical reports (such as for mining companies)

Usually, the underwriters' counsel will lead the drafting of offering-related sections such as the structure of the global offering and underwriting. The issuer's counsel will prepare company-related sections such as history and development, and statutory and general information. Typically, the issuer's counsel will also draft the business and MD&A sections and will have overall control of the prospectus. However, there are no set rules for this, and the underwriters' counsel can also take up these roles.

Under the CWUMPO, a listing applicant for a Hong Kong IPO must have a bilingual prospectus (in both English and Chinese). Professional printers usually translate the prospectus and also help with professional typesetting and printing. Prospectuses are usually drafted in English and then translated into Chinese. Some issuers prefer to have certain prospectus sections (such as the business section) drafted in Chinese first and then translated into English.

A listing applicant must submit an application proof prospectus to the Stock Exchange at the time of listing application.

After the listing applicant submits the listing application, a redacted version of the application proof prospectus will be available on the Stock Exchange website.

Paragraph 18 of Practice Note 22 to the Listing Rule may permit a listing applicant to make a confidential filing if the listing applicant has been listed on a recognized overseas exchange. The Stock Exchange will consider a request for confidential filing on the basis of the issuer’s individual circumstances and the merits of the case. In a confidential filing, there is no requirement to publish the application proof on the Stock Exchange website.

A listing applicant must submit a post-hearing information pack (PHIP), which is a near-final prospectus, to the Stock Exchange for publication on the Stock Exchange website. The listing applicant must submit the PHIP no later than whichever is earlier of:

The distribution of any red-herring document to institutional or professional investors.
The time at which book-building commences.

Accountants' report

A listing applicant must include an accountants' report in the prospectus. The Listing Rules require the accountants' report to include the listing applicant's financial results for the three financial years immediately preceding the issue of the prospectus (track record period). The Listing Rules also requires that the latest financial period report for a listing applicant must have ended fewer than six months before the date of the prospectus. This means that stub period financial information will be required if the track record financial statements ended more than six months before the date of the prospectus.

The reporting accountants of the listing applicant will prepare the accountants' report. They must prepare it in accordance with one of the following accounting standards:

Hong Kong Financial Reporting Standards (HKFRS)
International Financial Reporting Standards (IFRS)
For PRC incorporated companies, China Accounting Standards for Business Enterprises (CASBE)

The Stock Exchange may, subject to its discretion, allow a report to be drawn up otherwise than in conformity with the above accounting standards.

Profit forecast memorandum and cash flow forecast memorandum

It is optional for a listing applicant to include a profit forecast in a prospectus. It is rare for listing applicants to include profit forecasts or estimates voluntarily.

If the listing applicant does not include a profit forecast in a prospectus, it must still submit profit and cash flow forecast memorandums to the Stock Exchange at the time of listing application. This is to demonstrate the listing applicant's suitability. The profit forecast memorandum must cover the period up to the forthcoming financial year end date after the date of listing. For example, for a listing date of 30 June 2024, for a 31 December financial year end company, the profit forecast memorandum must cover up to 31 December 2024. The cash flow forecast memorandum must cover at least 12 months from the expected date of publication of the prospectus. The board of the listing applicant prepares these memoranda, typically with the assistance of professional parties.

If the prospectus does contain a profit forecast, the profit forecast memorandum should cover the same period as the profit forecast in the application proof prospectus. The profit forecast must state the principal assumptions on which it is based.

Waiver applications (if required)

If the listing applicant is unable to comply with any requirements of the Listing Rules, the SFO, the CWUMPO, or other applicable laws and regulations, the listing applicant can apply for a waiver from strict compliance with one or more of these requirements. At their discretion, the Stock Exchange or the SFC can waive the listing applicant's compliance with these requirements on a case-by-case basis.

The listing applicant must submit an advanced draft of any waiver application to the Stock Exchange at the time of listing application. It must submit any final waiver application to the Stock Exchange at least four clear business days before the expected listing hearing date. The listing applicant's or the underwriters' Hong Kong legal counsel usually draft waiver applications. The listing applicant must disclose details of the waivers in the prospectus.

Cornerstone investment agreements

Cornerstone investors are usually larger institutions or well-known individuals that are guaranteed to receive an allocation of shares in an IPO, irrespective of the final offer price.

The listing applicant and the cornerstone investors will enter into placing agreements (cornerstone investment agreements) before the publication of the prospectus. The Asia Securities Industry and Financial Markets Association (ASIFMA) has published a standard form cornerstone investment agreement which the market tends to follow.

To facilitate over-allocation in the international offering, the cornerstone investors may agree the delivery of the shares for which they have subscribed later than the listing date. Some investors are unwilling to agree to late delivery terms. Even if there is a delayed delivery arrangement, investors cannot delay payment for the shares and must pay before the listing date.

Under the Stock Exchange's Guide For New Listing Applicants, the listing applicant must disclose details of cornerstone investment agreements, including the identities and background of the investors, in the prospectus.

Cornerstone investment agreements are "material contracts" of the listing applicant and must be available on the Stock Exchange's and the issuer's websites for at least 14 days after the publication of the prospectus.

Pre-deal research reports

The research analysts of syndicate members prepare pre-deal research reports. The distribution of pre-deal research reports should follow research report guidelines which are usually prepared by the underwriters' counsel.

The Code of Conduct and the SFC Corporate Finance Adviser Code of Conduct (CFA Code) impose obligations on research analysts, sponsors, and issuers regarding pre-deal research reports.

Underwriting agreements

Pursuant to the Listing Rules, an offer for subscription must be fully underwritten. Under the Hong Kong underwriting agreement, in the event that there are insufficient investors acquiring the offer shares, the Hong Kong underwriters for the Hong Kong public offering agree to purchase the Hong Kong public offering shares. Similarly, under the international underwriting agreement, the international underwriters agree to purchase the international offering shares if those shares are undersubscribed.

The listing applicant, the underwriters, and the selling shareholders (if any) enter into the underwriting agreements. The underwriters' legal counsel usually prepares the underwriting agreements.

The Hong Kong underwriters and the international underwriters will also enter into agreements among underwriters. These are separate agreements governing their rights and obligations in relation to each other and the IPO.

Lock-up undertakings

The underwriters usually require the major shareholders and directors of the listing applicant to agree to a "lock-up." This restricts their ability to sell their shares in the company for an agreed period after the IPO.

For a Hong Kong IPO, the lock-up period is usually 180 days, but the parties may agree to a different lock-up period.

Controlling shareholders (persons holding more than 30% of the issuer) are subject to a regulatory lock-up rule. They must not dispose of:

Any shares during the first six months after listing
Any shares that would result in such person ceasing to be a controlling shareholder of the company during the second six months after listing

(Listing Rule 10.07)

The contractual lock-up period can be longer than the regulatory lock-up period.

International offering circular

The final international offering circular will be distributed to institutional investors after pricing. This is the offering document used in the international offering tranche. It consists of the Hong Kong prospectus and an international wrap which includes additional disclosure specifically for international investors, such as risk factors and regulatory disclosure relevant to investors in certain jurisdictions.

Legal opinions

Legal counsel of the listing applicant and of the underwriters are required to provide certain legal opinions, for example, with regard to the due incorporation of the issuer and due authorization of the offering of shares.

Offerings made under Regulation S or Rule 144A under the U.S. Securities Act of 1933 (U.S. Securities Act) are exempt from the registration requirements under the U.S. Securities Act. Usually in a listing with a Rule 144A offering, the underwriters will require the issuer's and the underwriters' US legal counsel to provide a 10b-5 letter giving negative assurance about the contents of the offering document.

Accountants' comfort letters

Comfort letters are issued by reporting accountants of the listing applicant which provide certain assurance with respect to the accuracy of the financial information included in the prospectus. Comfort letters also set out the applicable accounting standards and reporting procedures.

The underwriters usually require delivery of comfort letters as condition precedent documents of the underwriting agreements. They will also require reporting accountants to provide bring-down comfort letters at the closing of the offering. These confirm that the original comfort letters are still valid as of the closing date.