Hong Kong SFC Official: IPO Quality Dips as Volume Rises, Enforcement Focuses on Early Prevention

Hong Kong, January 2025 — Michael Duignan, Executive Director of the Enforcement Division at the Hong Kong Securities and Futures Commission (SFC), has cautioned that IPO quality often deteriorates unnoticed when trading volumes surge rapidly. In response, the SFC issued a circular to sponsors in January this year, identifying key issues and setting clear boundaries to mitigate risks proactively.

Proactive Regulation: "Fast and Efficient"

When asked why the January circular laid out such detailed requirements rather than addressing problems as they emerged, Duignan explained that this approach reflects the SFC's "fast and efficient" regulatory philosophy.

Duignan noted that weak due diligence leads to poor-quality listing documents, and issuers with such deficiencies are highly likely to become enforcement cases in the future. He argued that a reactive, "wait-and-see" approach to enforcement is neither fast nor efficient. By the time enforcement actions are taken, substantial harm has already been done, which is unfair to the market.

By issuing a written circular early to set out regulatory expectations, the SFC aims to address the root causes of misconduct—such as capacity, competence, and incentives—before problems escalate. This approach also ensures that violators cannot later claim they were "caught off guard" when enforcement actions are taken.

"The Smartest Enforcement Is No Enforcement at All"

Duignan acknowledged that this philosophy is "easier said than done." Faced with complex cases, incomplete evidence, competing priorities, and time pressures, enforcement officers should not rely solely on a "hard-line" approach. He believes that enforcement does not always require the use of heavy-handed tools. In fact, the smartest and fastest enforcement action may be "no action at all"—provided that regulators have clearly communicated the red lines to the market in advance.

Three Key Risks Identified in the January Circular

The SFC's January circular to sponsors highlighted three major industry risks:

• Formalistic due diligence: The preparation of listing documents has become a "checklist" exercise, lacking substantive review.
• Overstretched personnel: Key personnel are handling an unreasonable number of ongoing transactions simultaneously.
• Unauthorized approvals: In some cases, approvals have been signed off by unqualified individuals.

New Standards: Six Transactions Deemed "Excessive"

To curb these practices, the SFC's circular raised competence thresholds, tightened sponsor licensing examination requirements, and set specific timelines.

Key measures include:

• Definition of "overburdened": Any key personnel supervising six or more ongoing transactions will be flagged as "overburdened."
• Personnel review and reporting: Sponsors must identify unqualified personnel handling ongoing transactions within one week, and report the overall ratio of key personnel to transactions within two weeks.
• Remediation plans: Firms flagged as "of concern" must complete an internal review within three months and submit a corrective plan signed by the core function head.