The Initial Public Offering (IPO) is a momentous event for any company, as it marks the first time that it offers its shares to the public. It’s a complex process, but it’s an excellent opportunity for a company to raise funds for expansion and growth.

Hong Kong’s IPO scene has experienced significant growth in recent years. According to data from the Hong Kong Stock Exchange (HKEX), the total funds raised through IPOs in Hong Kong reached HK$407.1 billion (US$52.3 billion) in 2020, up from HK$311.2 billion (US$40.1 billion) in 2019.

In this article, we will explore how Hong Kong has managed to create a vibrant IPO scene and the factors that contribute to the city’s popularity for new businesses looking to go public. We will also explore the benefits of investing in an IPO, and how you can, as a retail trader, participate in the market.

What makes Hong Kong a popular IPO listing place?

Hong Kong is a business-friendly environment for launching IPOs due to several reasons, from its strong regulatory framework and business-friendly environment to its proximity to mainland China. As one of the most developed cities in the world, it is also home to a significant number of high-net-worth and ultra-high-net-worth individuals who have the means to invest in new ventures.

Business-friendly environment

Hong Kong’s legal system is based on common law and is renowned for its transparency, fairness, and stability. The city’s legal system is also business-friendly, making it an attractive destination for companies looking to go public.

On top of that, the city has a simple and low tax regime, with a maximum tax rate of 16.5% for corporations. Additionally, there are no taxes on dividends, capital gains, or interest income.

Strong regulatory framework

The Hong Kong Securities and Futures Commission (SFC) is the regulator responsible for overseeing the city’s securities market. The SFC is known for its strict regulatory framework, which provides investors with a high level of protection and ensures the integrity of the market. This gives companies launching an IPO peace of mind when they go public.

Proximity to mainland China

Hong Kong is strategically located in the heart of Asia, which makes it an ideal location for companies to tap into the vast potential of the Asian market. The city also serves as a gateway to the mainland Chinese market, which is a significant attraction for companies that are looking to expand their businesses into China and appeal to the Chinese market.

Large number of institutional investors

Finally, there is a substantial number of high-net-worth and ultra-high-net-worth individuals in Hong Kong, and many of them are institutional investors interested in investing in new ventures. This creates a deep and liquid capital market, with a significant pool of capital available for investment. Companies listing in Hong Kong can therefore benefit from strong investor demand, which can help to drive up their valuations.

Characteristics of the Hong Kong listing boards

An important thing both businesses and investors must know is that there are two listing boards in Hong Kong: the Main Board and the Growth Enterprise Market (GEM).

The Main Board is the main stock exchange in Hong Kong, and it is designed for larger, well-established companies with a proven track record of profitability and a strong financial position. Companies listed on the Main Board must meet strict requirements for size, financial strength, and profitability.

The GEM, on the other hand, is a secondary board for smaller and less-established companies. It is designed to provide a platform for start-ups and other emerging companies to access capital markets and raise funds from investors. Companies listed on the GEM must meet less stringent requirements than those on the Main Board, but they are subject to a higher level of risk and volatility.

The IPO process in Hong Kong for businesses

For businesses, the IPO process in Hong Kong generally follows these steps. It can take months or even a year to get all the documents ready and for the application to be submitted and approved. Therefore, businesses who plan to go public should make their arrangements as early as they can, in case of complications or delays.

Selection of underwriters

A company looking to go public will first select underwriters, who will manage the IPO process and help to sell the shares to investors. These are licensed professionals who will be familiar with IPOs and have helped other companies go public in the past.

Due diligence

The underwriters will then conduct due diligence on the company to ensure that it is suitable for listing and to determine the potential valuation of the company. This ensures undergoing a thorough investigation of how the company is run, its management teams, and its past financial statements to ensure the company is being run ethically and appropriately.

Filing of prospectus

The company will file a prospectus with the Hong Kong Stock Exchange (HKEX) containing information about the company and the IPO. This is an extensive process, and it will take weeks for the HKEX committee to review and approve the prospectus.

Pricing and allocation

The underwriters will set the price for the shares and allocate them to investors.

Trading commences

The shares will be listed on the HKEX, and trading will begin.

How to participate in IPO investing as a retail investor

As a retail investor, there are a few steps you can take to participate in IPO investing.

Find a suitable broker

First, you’ll need to find a brokerage firm that offers access to IPOs. If you are an existing client of a broker, you can check their website or contact their customer service to see if they offer IPO access.

Research the IPO

Before investing in an IPO, it’s important to do your due diligence and research the company. Look into the company’s financials, management team, competitors, and growth prospects. You can find this information in the company’s prospectus, which is filed with the SEC.

Place your order

Once you’ve found an IPO you’re interested in and have done your research, you can place an order through your broker. IPOs can be highly competitive, so it’s important to place your order as soon as possible. Some brokers offer pre-IPO access, which allows you to place an order before the IPO goes public.

Wait for allocation

After you’ve placed your order, you’ll need to wait to see if you have been allocated any shares. It is important to note that not all retail investors will receive an allocation, as demand for IPOs can be high. If you are not allocated any shares, your order will be cancelled, and you will receive a refund.

Monitor your investment

Once you’ve received your allocation, it’s important to monitor your investment and stay up to date on news related to the company. It’s also a good idea to set stop-loss orders or take-profit orders to manage your risk.

A few words in closing

Overall, Hong Kong is a haven for businesses looking to launch IPOs and for investors alike, due to its business-friendly environment, strong regulatory framework, proximity to mainland China, and its existing deep and large capital pool. As a retail trader, participating in IPO investing as a retail investor can be a great way to invest in new and innovative companies. However, it’s important to do your research and manage your risk carefully to make the most of your trading experience.