Hong Kong SFC's Duignan: IPO quality declines as volume surges; preemptive guidance beats reactive enforcement

Hong Kong, January 2025 — Michael Duignan, Executive Director of the Enforcement Division at the Securities and Futures Commission (SFC), has cautioned that IPO quality often declines imperceptibly as trading volumes surge. 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"

Explaining why the January circular laid out such detailed requirements rather than addressing problems as they emerged, 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 likely to become enforcement cases. "A reactive, 'wait-and-see' approach is neither fast nor efficient," Duignan stated. "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—targeting structural factors such as capacity, competence, and incentives—the SFC aims to correct the root causes of misconduct. This approach also ensures that violators cannot later claim they were "caught off guard" when enforcement actions are 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 swift enforcement action is sometimes no action at all—provided the regulator has clearly communicated the red lines to the market in advance," he said.

Three Key Risks Identified in the 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 personnel are handling an unreasonable number of ongoing transactions simultaneously.
• Unauthorised approvals: In some cases, approvals were signed off by unqualified individuals.

Six Transactions Deemed "Excessive Burden"

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

Key measures include:

• Definition of "excessive burden": 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.