Hong Kong SFC enforcement chief: IPO quality slips as volume rises; setting red lines early is more efficient than post-hoc action

Hong Kong — Michael Duignan, Executive Director of the Enforcement Division at the Securities and Futures Commission (SFC), has cautioned that IPO quality often deteriorates unnoticed amid rapidly rising trading volumes. This concern prompted the SFC to issue a circular to sponsors in January this year, identifying key issues and drawing clear boundaries to preempt risks.

"Fast and Efficient" Regulatory Approach

Explaining why the January circular set out such detailed requirements rather than addressing problems case by case after they emerge, Duignan said the approach reflects a "fast and efficient" regulatory philosophy.

He noted that weak due diligence leads to poor-quality listing documents, and issuers with such deficiencies are highly prone to becoming enforcement cases. "A 'wait-and-see' approach to post-event handling is neither fast nor efficient," Duignan said. "By the time enforcement action is 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 structural root causes of misconduct — including capacity, competence, and incentives. This, he added, leaves violators with no excuse to claim they were "taken by surprise" when enforcement action is eventually taken.

"Easier Said Than Done"

Duignan acknowledged that the 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.

"The most intelligent and fastest enforcement action is actually one that doesn't need to be taken at all," Duignan said — provided regulators have clearly communicated the red lines to the market in advance.

Three Key Risks Identified in January Circular

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

• Formalistic due diligence — Listing document preparation has become a "checklist" exercise lacking substantive review
• Overstretched personnel — Key staff handling an unreasonable number of ongoing transactions simultaneously
• Unauthorised approval loopholes — In some cases, approvals were made by unqualified personnel

"Overburdened" Threshold: Six Transactions

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

Key measures include:

• Definition of "overburdened" — Any key person supervising six or more ongoing transactions will be flagged as an "overburdened key person"
• Staff 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 plan submission — Firms flagged as "of concern" must complete an internal review within three months and submit a corrective plan signed by the core function head