What exactly is an IPO? A complete analysis of listing requirements and procedures for Hong Kong and US stocks

What does IPO mean?

In financial reports, you often hear about a company launching an IPO, but the meaning and process behind this abbreviation can still be unclear to many people.

IPO stands for Initial Public Offering, which refers to the entire process of a private company issuing shares to the public for the first time and transforming from a private entity into a publicly listed company. This is not only an important way for companies to raise funds but also a key opportunity for private investors to realize gains and cash out.

From a company’s perspective, when initial investments can no longer support business expansion, the company needs to seek external financing to inject new capital. From an investor’s perspective, going public provides an opportunity to participate in the growth of high-quality enterprises. Through an IPO, high-quality private company equity that was previously inaccessible is opened up to retail investors, while also helping the issuing company achieve multiple goals such as financing, debt repayment, and enhancing its image.

Hong Kong Stock IPO: Listing Conditions and Process

The main steps of the Hong Kong Main Board IPO process include:

The first step is to assemble an intermediary team, including sponsors, accountants, lawyers, and internal control consultants. Then, conduct comprehensive due diligence and audits to verify shareholdings and asset rights, and prepare the prospectus and legal documents.

The second step involves business restructuring and financing, making necessary adjustments to the company’s structure and equity, possibly introducing strategic investors simultaneously.

The third step is to submit application documents to the China Securities Regulatory Commission (CSRC) and the Hong Kong Stock Exchange (HKEX), disclose the prospectus on the HKEX official website, and respond to regulatory inquiries.

The fourth step involves roadshows and pricing, including non-deal roadshows, investor meetings, international roadshows, and finally setting the issue price and conducting a public offering in Hong Kong.

Financial thresholds for listing on the Hong Kong Main Board (meeting any one of the following):

Condition 1: Profit in the most recent year not less than HKD 20 million, with cumulative profits of at least HKD 30 million over the previous two years, and profit at the time of listing must reach HKD 500 million.

Condition 2: Market capitalization of at least HKD 4 billion at the time of listing and revenue of no less than HKD 500 million in the most recent financial year.

Condition 3: Market capitalization of at least HKD 2 billion at the time of listing, revenue of no less than HKD 500 million in the most recent financial year, and total operating cash inflows over the previous 3 financial years of at least HKD 100 million.

US Stock IPO: Listing Conditions and Process

Key steps in the US IPO process:

First, hire an investment bank as the underwriter to guide the entire IPO process. Then, submit an application to the U.S. Securities and Exchange Commission (SEC) and obtain approval. Followed by roadshows, setting the offering price, conducting the public offering, and finally listing and trading on the exchange.

Differences in listing requirements across US exchanges are significant:

New York Stock Exchange (NYSE) requirements:

Path 1: Pre-tax profits (excluding extraordinary items) totaling at least USD 100 million over the past 3 fiscal years, with at least USD 25 million in the last 2 fiscal years.

Path 2: Global market capitalization of at least USD 500 million, revenue of at least USD 100 million in the past 12 months, and total cash inflows of at least USD 100 million over the past 3 fiscal years, with cash inflows in the last 2 fiscal years not less than USD 25 million each.

Path 3: Global market capitalization of at least USD 750 million, with revenue in the last 2 fiscal years of at least USD 75 million each.

Nasdaq requirements (taking the national market as an example):

Option 1: In any of the last 1 full fiscal year or any 2 of the last 3 fiscal years, recurring pre-tax profits of at least USD 1 million, shareholders’ equity of at least USD 15 million, a public float of at least USD 8 million, and at least 3 market makers.

Option 2: Shareholders’ equity of at least USD 30 million and 2 years of operating history, a public float of at least USD 18 million, and at least 3 market makers.

Option 3: Listed securities with a market value of at least USD 75 million, a public float of at least USD 20 million, and at least 4 market makers.

Option 4: In any of the last 1 full fiscal year or any 2 of the last 3 fiscal years, total assets and revenue each of at least USD 75 million, a public float of at least USD 20 million, and at least 4 market makers.

Comparison of Hong Kong and US markets: Overall, US exchanges have more flexible requirements regarding company size, offering multiple pathways; Hong Kong’s requirements for profit and cash flow are more specific and rules are relatively straightforward.

Advantages and Risks of Participating in IPO Investments

Main advantages of investing in new shares:

First, IPOs offer the opportunity to invest in high-quality companies at relatively low prices. Many companies with huge growth potential are restricted by private ownership, making them inaccessible to retail investors. IPO prices are often the most favorable prices offered by the company, and missing the initial offering may result in rapid stock price increases later, significantly raising subsequent entry costs.

Second, most companies choose to go public when the market is bullish, meaning the probability of stock price appreciation after listing is higher. Plus, high-quality companies listing at relatively low prices create opportunities for quick profits for investors.

Third, information is relatively symmetric. All investors mainly learn about the company through the prospectus, and large institutions do not have an information advantage, making it fairer for retail investors.

Main risks of investing in new shares:

First, beware of “new stock traps.” If the chosen company is not of good quality, even if it successfully lists, when large institutions and well-funded investors start selling, retail investors may be unable to quickly follow due to liquidity constraints.

Second, most positive factors for the listed company are already priced into the initial offering, which can severely limit short-term gains for investors.

Recommendations for Participating in IPO Investments

Before investing in IPOs, thoroughly understand the fundamentals and financial status of the target company to know yourself and your opponent. Also, recognize that the IPO market can be highly volatile; avoid chasing short-term gains excessively. Instead, adopt a long-term holding and diversified investment strategy, and adjust flexibly according to market conditions.

Overall, IPO investments can indeed bring substantial returns, but only if investors maintain rational judgment, carefully assess risks, and always base decisions on the company’s fundamentals.