An Initial Public Offering (IPO) is an essential process for a company to go through, allowing it to raise funds from the public by selling shares. However, it can be a complex and hazardous endeavour, particularly in countries like Hong Kong, with its unique regulatory landscape. It’s, therefore, crucial that those familiarising themselves with IPOs understand how they work to reduce potential risks and maximise any opportunities available.
In Hong Kong, the two regulatory bodies involved in overseeing IPOs are the Stock Exchange of Hong Kong (SEHK) and the Securities and Futures Commission (SFC). The SEHK oversees all trading activity between buyers and sellers on their stock exchange. At the same time, the SFC provides an additional layer of regulation and protection to ensure investors are informed and able to make educated decisions when participating in IPOs.
The pre-IPO stage
The first step for any company pursuing an IPO is the pre-IPO stage. This step involves filing documents with the SEHK, including a prospectus which provides vital information about the offering, such as pricing, business processes and risk factors that potential investors may face. Companies must also comply with stringent listing rules set by Hong Kong Exchanges & Clearing Limited (HKEX), which protects investors from market abuse or manipulation.
Once these steps have been completed, companies must obtain approval from the SFC before their IPO can proceed on the stock exchange. The timeline required for this process depends on predetermined factors such as the size of the offering, but it typically takes a couple of months.
The lead-up to an IPO
The lead-up to an IPO sees company representatives engaging with potential investors through road shows and presentations. Companies must also conduct due diligence before offering to ensure that any existing relationships or contracts relating to the stock are adequately disclosed.
Once all necessary paperwork has been submitted and approved, companies can begin actively marketing their shares for sale via brokers and other intermediaries. A ‘book follows this build’ process where buyers submit bids detailing how many shares they would like to purchase and at what price. Once this information is collected, it determines each block of shares’ final pricing and allocation before the IPO.
The day of the IPO pricing
On the day of pricing, shares are then made available for trading on the stock exchange. The performance of a company’s shares in the days and weeks following its IPO is an important indicator of how investors view its prospects and potential opportunities. Companies must therefore ensure they have adequate measures to track post-IPO performance and adjust if required.
Finally, companies should remember that specific terms may be attached to their offering about resale or transfer restrictions, so they must understand any such requirements before proceeding.
The benefits of using a broker when investing in IPOs
Purchasing shares offered in an IPO can be tricky, so seeking professional advice from a broker is recommended. A broker can guide you through the process and help you decide which companies to invest in. They also provide access to research reports and analyses unavailable to private investors. Additionally, brokers may be able to negotiate better prices or terms with issuers, meaning they can get their clients more favourable deals than those available on the open market. If you are keen to get started investing in IPOs, Saxo is a good option.
What are the risks associated with investing in IPOs?
As with all investments, there are risks associated with investing in IPOs. Companies may need more track records to accurately predict future performance. The stock price can be volatile due to speculation or simply a lack of knowledge about the company’s operations. Investors need to understand restrictions on their ability to transfer shares before purchasing them. Additionally, economic conditions can impact an IPO’s success, leading to significant losses if companies fail to meet expectations.
By understanding how the Hong Kong IPO market works, investors can make informed decisions that help them achieve their financial goals. As with any investment decision, doing your research is vital, and it’s important to remember that risks are always involved. Therefore, take the time to familiarise yourself with IPOs to understand how they work to reduce potential risks and maximise returns.