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Hong Kong SFC and Stock Exchange to Tackle IPO Misconduct, Inflated IPO Prices to Meet Listing Requirements

21st May 2021 | Hong Kong

Hong Kong Securities and Futures Commission (SFC) and Hong Kong Stock Exchanges & Clearing (HKEX) have announced plans to tackle IPO misconduct, in view of problematic issues in recent IPOs.  The problematic issues include new IPOs barely meeting market capitalization listing requirement, very high P/E ratio relative to peers, high underwriting commission averaging 12% compared to average of 4% in 2017, high listing expenses and high concentration of shareholders. (IPO ~ Initial Public Offering, P/E ~ price-to-earnings ratio)

” Hong Kong SFC and Stock Exchange to Tackle IPO Misconduct, Inflated IPO Prices to Meet Listing Requirements “


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Inflated IPO Price to Meet Listing Requirements

SFC IPO Misconduct Chart 2
Hong Kong SFC – Artificial arrangements to satisfy listing criteria

In some IPOs, the initial listing requirements may be only satisfied by artificial means, such as allocating shares to controlled shareholders at an inflated IPO price to satisfy the minimum market capitalization requirement. 

For listing on Hong Kong Stock Exchange, the mainboard listing requires a market capitalization of HKD 500 million ($64 million) and GEM listing requires a market capitalization of $150 million ($19 million).  (GEM ~ Growth Enterprise Market)


Ramp and Dump Schemes

SFC IPO Misconduct Chart 1
Hong Kong SFC – Ramp and Dump Scheme

The IPO misconduct also includes questionable arrangements that enabled market manipulation of the shares such as through the “Ramp and Dump Scheme.” 

Through individuals or syndicates, they may use channels such as social media to promote the shares, attracting investors to buy the shares, and driving up the share price.

The original or early shareholders of the shares, will be able to sell the shares, causing the price to collapse especially when trading volume decrease, and with no real fundamentals and genuine investor interests in the share. 


New Regulatory Measures on IPOs

SFC IPO Misconduct Chart 3
Hong Kong SFC – Average underwriting fees

To address the improper behaviour, problematic applications with red flags are now subject to heightened scrutiny.  If necessary, the regulators will use their regulatory powers to object to or reject an application.

The Hong Kong SFC will work closely with Hong Kong Stock Exchange to review each listing applicant’s valuation, such as comparing its price-to-earnings ratio against listed peers, to assess compliance with the minimum market capitalisation and other initial listing requirements.

The Hong Kong SFC has also stepped up its supervision of firms taking part in IPO bookbuilding and placing activities. It will conduct in-depth inspections of those involved in problematic new listings and will take enforcement action against any IPO-related misconduct.


Hong Kong Securities Futures Commission Logo

Hong Kong SFC Chief Executive Officer, Ashley Alder:

“Listing applicants and firms involved in the IPO process have important roles to play in upholding the quality and integrity of the stock market in Hong Kong.  Today’s joint statement signals our determination to combat market misconduct in new listings and we will not hesitate to act if there are red flags indicating a lack of genuine investor interest in an IPO.

In the run-up to the effective date of the new profit thresholds, we will place particular focus on new listing applications which rely on aggressive profit forecasts to justify their expected valuations.”





About Securities and Futures Commission (HK)Hong Kong Securities Futures Commission Logo

The Securities and Futures Commission (SFC) is an independent statutory body set up in 1989 to regulate Hong Kong’s securities and futures markets.

We derive our investigative, remedial and disciplinary powers from the Securities and Futures Ordinance (SFO) and subsidiary legislation. Operationally independent of the Government of the Hong Kong Special Administrative Region, we are funded mainly by transaction levies and licensing fees.

Visit: Hong Kong Securities and Futures Commission


Hong Kong Exchange Clearing Logo

About HKEX

Hong Kong Exchanges and Clearing Limited (HKEX) is one of the world’s major exchange groups, and operates a range of equity, commodity, fixed income and currency markets.  HKEX is the world’s leading IPO market and as Hong Kong’s only securities and derivatives exchange and sole operator of its clearing houses, it is uniquely placed to offer regional and international investors access to Asia’s most vibrant markets.

HKEX is also the global leader in metals trading, through its wholly owned subsidiaries, The London Metal Exchange (LME) and LME Clear Limited.  This commodity franchise was further enhanced with the launch of Qianhai Mercantile Exchange (QME), in China, in 2018.

HKEX launched the pioneering Shanghai-Hong Kong Stock Connect programme in 2014, further expanded with the launch of Shenzhen Connect in 2016, and the launch of Bond Connect in 2017.

Visit: www.hkexgroup.com

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