Circular to licensed corporations on IPO subscription and financing services

On 20 Mar 2025, the Securities and Futures Commission ("SFC") completed a review of risk management practices and control measures of licensed corporations ("LCs") for initial public offering ("IPO") subscription and financing services. The review findings and recommendations were provided in a circular issued in 2023.

The circular outlines the expected standards of conduct for LCs in IPO financing and subscription practices, emphasizing compliance with SFC's guidelines.

Key points include ensuring robust risk management and control measures, addressing compliance issues identified during the review, and adhering to the SFC's standards to safeguard investor interests.

Findings from the Review

The Review identified deficiencies in the IPO financing activities of selected LCs, including accepting client subscription orders without verifying sufficient financial resources. This exposed both LCs and clients to undue financial risks, particularly when clients received shares exceeding their financial capabilities.

Credit controls: LCs prioritized subscription levels or anticipated IPO stock rates over clients' financial positions, leading to over-leveraging and increased risk of client default. A majority set IPO credit limits by applying a multiplier to clients' account balances and public offer size, often exceeding clients' financial capacities.

IPO funding arrangement: Some LCs collected minimal upfront subscription deposits, heavily relying on house money or credit facilities to meet pre-funding requirements, which stressed firms' financial stability and liquidity during the two-day pre-funding period.

Handling subscription deposits: LCs failed to properly segregate subscription deposits. They did not account for deposits not placed with designated banks for pre-funding confirmation, causing under-segregation of client monies. Certain LCs also delayed segregating client money after the balloting process.

Regulatory guidance

In response to findings from the Review, the SFC outlines regulatory standards for investment banks ("LCs") offering IPO financing to mitigate excessive exposure for investors. These standards incorporate capital requirements from the FRR6 and provide guidance on internal control measures to enhance IPO subscription practices.

For IPO financing, LCs should collect minimum upfront subscription deposits of 10% of the subscription amounts from clients who do not pre-fund completely.

LCs should evaluate their financial and liquidity capabilities, as well as the creditworthiness of clients. They must perform financial assessments before an IPO to estimate liquid capital impacts and funding needs. They also need to assess clients' financial capabilities and may collect additional upfront deposits if necessary.

LCs are required to segregate upfront subscription deposits not placed with designated banks for pre-funding confirmation. Additionally, deposits related to unsuccessful IPO applications should be segregated or refunded to clients within one business day of receipt.

Other compliance issues

The Securities and Futures Commission ("SFC") reminds licensed corporations ("LCs") of several compliance issues regarding IPO subscriptions. The SFC expects LCs to ensure that client identification data submitted to FINI is accurate and follow waterfall requirements for applicant identities. LCs should verify client confirmations and perform additional checks if doubts arise. They should also implement measures to prevent multiple subscription orders per client account.

LCs must calculate liquid capital in accordance with FRR provisions, including accounting for all assets and liabilities and recognizing transaction substances. LCs should consult accountants if accounting treatments vary. They should review existing policies for compliance with the latest SFC circular. The SFC will monitor LC compliance through various methods. For inquiries, contact the case officer.