Hong Kong tightens listing oversight to build lasting trust

Tighter IPO scrutiny by the city’s securities regulators may delay deals but could strengthen investor trust over the longer term

By Lee Shih Ta

“A market can be competitive in the long run only if it is fair, transparent and trusted.” Julia Leung, CEO of the Hong Kong’s Securities and Futures Commission (SFC), directly linked trust with competitiveness when presenting the regulator’s market development plan in September. For Hong Kong, which is actively courting new listings, fundraising depends on more than access and efficiency. It also rests on investor confidence in the IPO process and corporate disclosures.

That trust is becoming a focus of Hong Kong’s recent tightening of its listing oversight. The SFC has stepped up investigations into suspicious IPO arrangements and called on sponsors to improve their due diligence, echoing efforts by U.S. regulators and exchanges to prevent manipulation of small-cap IPOs. As listing activity picks up, opaque subscription and funding arrangements can make it difficult for investors to distinguish genuine demand from manipulated enthusiasm.

Similar risks have prompted tighter oversight in the U.S. In May, the Securities and Exchange Commission (SEC) approved a Nasdaq rule requiring IPOs by issuers meeting its definition of China-based companies to raise at least $25 million. In June, it approved another rule allowing the exchange to delist stocks in the interest of investor protection after the SEC suspends trading over suspected manipulation. While their approaches differ, both markets are strengthening oversight before and after listings occur to preserve confidence in capital raising.

Hong Kong’s actions span pre-listing reviews and post-listing enforcement. On Oct. 13, the SFC took action against two groups of individuals and related companies suspected of involvement in fraudulent IPO schemes, restricting dealings in assets totaling about HK$4.66 billion ($594 million) in designated accounts. The investigations concern the IPOs of Chabaidao (2555.HK), Cloudbreak Pharma (2592.HK) and Tianju Dihe (2479.HK). The regulator ordered trading in Chabaidao’s shares suspended that day; the other two companies were suspended in September this year and April last year, respectively.

Chabaidao said it was urgently seeking legal advice and would cooperate in addressing the regulator’s concerns, adding that its business operations remained normal.

Separately, reviews of 65 listing applications were put on hold in the first nine months of this year, with 14 resuming by Oct. 1. The concerns involved application materials, due diligence and issues concerning the applicants themselves. A review being put on hold does not mean the company is suspected of fraud.

These measures can affect investor confidence in both directions. Investigations and trading suspensions expose weaknesses in the listing process and may make investors more cautious about other IPOs in the near term. But leaving problems unresolved could also drive investors away because they cannot assess the risks. The effectiveness of oversight therefore depends on how quickly concerns are resolved and whether investors believe similar cases will be handled consistently.

The cost of market trust

The SFC suspects that some IPO proceeds may have been indirectly channeled back to key placing investors or their connected parties through investments in financial products and undisclosed agreements, creating a false impression of subscription demand. The investigations remain ongoing.

If substantiated, such arrangements would undermine price discovery. Institutional subscriptions are often seen as an assessment of a company’s value, and other investors also look to the response to a placement. If subscribers receive undisclosed financial support, the risks they bear differ from those faced by ordinary investors, potentially distorting the demand visible to the market.

Chabaidao listed in April 2024 at HK$17.50 per share. By Oct. 12 this year, its last trading day before the suspension, the stock had fallen to HK$4.035, about 77% below its offer price. The decline alone does not establish IPO fraud or market manipulation. Responsibility remains subject to findings of the investigation.

Investigations and suspensions may make investors more cautious about IPOs in the short term, but leaving problems unresolved can also drive capital away. Regulatory effectiveness depends on resolving concerns promptly and treating similar cases consistently.

Higher barriers or stronger gatekeeping?

Hong Kong’s recent demands for stronger checks by IPO sponsors differ from directly raising profit or market capitalization requirements. Sponsors are already expected to understand how companies make money, verify major transactions and pursue red flags. In January, Leung warned that some sponsors may have weakened their gatekeeping role in the pursuit of deal volume and urged them to keep their workload in line with their resources.

Even without changes to formal listing qualifications, however, deeper scrutiny can raise the practical cost of going public. Companies must spend more time documenting transactions and explaining fund flows, potentially delaying their listings. These costs are particularly significant for businesses with limited cash and in urgent need of funds.

Intermediaries may also change their behavior. Greater liability risks could lead sponsors to charge more, take on fewer mandates or favor larger clients whose information is easier to verify. That could reduce the risk of overstretching their resources, but it may also limit the options available to smaller companies or those with complex businesses. Regulators need to monitor whether reasonable scrutiny gradually gives way to layers of additional checks intended to shield intermediaries from liability.

Markets must still leave room for commercial risk. Losses, unproven technology and falling share prices after listing can all occur in the normal course of investing. Reviews should make those risks clear to investors, while keeping assessments of a company’s prospects separate from judgments about the reliability of its disclosures.

Reliable gatekeeping could also lower financing costs. Greater confidence in IPO disclosures and subscription arrangements would help investors distinguish between companies and reduce the discounts they demand because of broader doubts about the market. That potential long-term benefit still needs to be demonstrated through sustained participation, financing costs and market quality.

Secretary for Financial Services and the Treasury Christopher Hui said in May that market facilitation and quality were equally important. Balancing the two requires companies to know what evidence they must submit, which concerns could hold up a review and how the process can proceed once those concerns are resolved. Reducing duplicate procedures and avoiding shifting requirements would also allow professional resources to focus on substantive risks.

Hong Kong’s appeal as a listing destination depends on companies wanting to come and investors willingness to commit capital repeatedly. Targeted regulatory tightening can sustain that relationship. Whether its costs are justified will depend on clear, timely and consistent implementation. Improvements in both market integrity and fundraising efficiency are needed to turn a listing boom into a lasting source of capital.

Lee Shih Ta is an editor at Bamboo Works.

You can contact him at shihtalee@thebambooworks.com

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