Circular to licensed corporations on IPO subscription and financing services

The Securities and Futures Commission (SFC) has recently completed a review (Review) of the risk management practices and control measures of selected licensed corporations (LCs) in relation to their initial public offering (IPO) subscription and financing services, as well as their compliance with the SFC’s circular issued in 2023¹. This circular sets out the findings from the Review and provides guidance to LCs on the expected standards of conduct for IPO financing and IPO subscription practices.

Findings from the Review

The Review identified deficiencies in the IPO financing activities of the selected LCs, including the acceptance of clients’ subscription orders before ensuring that they have sufficient financial resources to settle their obligations related to their subscriptions². Some of the LCs’ imprudent and aggressive financing practices exposed themselves and their clients to undue financial risks, including the risk of client default when the number of shares allotted to clients exceeds their financial capabilities. This concern and other deficiencies relating to IPO subscription activities identified in the Review are summarised below.

Credit controls

The Review found that the selected LCs primarily focused on the subscription levels or anticipated subscription rates of IPO stocks, rather than the financial positions of clients³ when providing IPO financing to them.

Such practices could result in over-leveraging for clients and subject the LCs to increased client default risk. In particular,

• a majority of the LCs set IPO credit limits for clients by applying a multiplier to the clients’ account balances and making reference to the public offer size of an IPO. These IPO credit limits were often significantly higher than the clients’ financial capabilities.

• most LCs provided IPO financing to clients mainly based on a pre-set leverage ratio as determined by the LCs after considering factors such as the over-subscription level of an IPO. Certain LCs could not provide any written justification to support these arrangements.

IPO funding arrangement

A few selected LCs collected minimal upfront subscription deposits on non-fully funded IPO subscription orders, relying excessively on the firms’ house money or credit facilities to meet the pre-funding requirement.

These practices put significant pressure on the financial stability and liquidity of the firms⁴, particularly for the two-day period between pre-funding confirmation and the release of the residual pre-funding monies from designated banks after money settlement of the allotted shares.

Handling subscription deposits

The selected LCs generally failed in proper and timely segregation of the subscription deposits received from clients. The SFC observed that:

• the LCs did not take into account the subscription deposits that were not placed with designated banks for pre-funding confirmation⁵ in their daily client money segregation process, causing under-segregation of client monies in segregated bank accounts.

• certain LCs failed in timely segregation of the client money that was released from designated banks or lending intermediaries after the balloting process and before refunding to clients within one day following the receipt by the LCs. 

Regulatory guidance

In light of the findings from the Review and to mitigate the risk of excessive exposure for investors, the SFC sets out below the standards of conduct expected of LCs in providing IPO financing, after taking into account the capital requirements under the FRR⁶. The SFC also provides LCs with guidance on relevant internal control measures to strengthen their IPO subscription practices.

IPO financing activities

(a)  Minimum upfront subscription deposits

For IPO subscription orders that clients do not pre-fund in full, LCs are expected to collect from the clients minimum upfront subscription deposits of 10% of the subscription amounts.

(b)  Financial risk management

LCs are reminded to evaluate their own financial and liquidity capabilities as well as the creditworthiness of their clients when providing IPO financing to clients. In particular, LCs should:

(i)         perform financial and liquidity assessments prior to an IPO to estimate the liquid capital impact and funding needs for determining their IPO strategies, including the maximum amount of IPO financing and the utilisation of internal funds or external borrowing for financing clients’ subscriptions; and

(ii)       assess the financial capabilities of clients before granting IPO financing to them, and where necessary, collect more upfront subscription deposits than the minimum level set out in paragraph (a) above.

Segregation of subscription deposits

LCs are reminded to properly segregate upfront subscription deposits that are not placed with designated banks for pre-funding confirmation. Additionally, LCs should segregate subscription deposits related to unsuccessful IPO applications in segregated bank accounts or repay clients within one business day after the receipt of the funds⁷.

Other compliance issues

Separately, the SFC also wants to remind LCs of several important considerations in relation to the IPO subscriptions.

(a)  Investor identification requirement under FINI

LCs should take reasonable steps to ensure that the client identification data (CID) submitted to FINI for IPO subscriptions is accurate. These steps include but are not limited to:

(i)        adhering to the waterfall requirements of FINI⁸ when submitting CID of applicants for IPO shares;

(ii)       seeking clients’ confirmations that there are no other identity documents of a higher priority in the waterfall⁹ and maintaining a proper audit trail; and

(iii)      performing additional verification steps if the information collected during the know-your-client process calls into question the credibility of the confirmations in (ii) above.

LCs should implement reasonable control measures to prevent a client from submitting multiple subscription orders for an IPO through the client’s accounts maintained with the same firm.

(b)  Computation of liquid capital

LCs are required to calculate their liquid capital in accordance with the provisions under the FRR. Section 3 under Part 2 of the FRR stipulates that an LC should account for all assets and liabilities in accordance with generally accepted accounting principles and in a way that recognises the substance of a transaction, arrangement or positions for the purpose of the FRR. In particular, for LCs which provide IPO financing to clients for pre-funding confirmation and recognise the balance as “amounts receivable from clients for subscription of securities”, they could include this receivable balance in liquid assets in accordance with section 21(5) of the FRR after collecting the minimum upfront subscription deposits set out in paragraph (a) under “IPO financing activities” above.

Given that operations and arrangements vary among LCs, the accounting treatments for their IPO subscription and financing services may differ. Where necessary, LCs should consult certified public accountants to determine the appropriate accounting treatments and how the FRR apply to them in their specific circumstances.

LCs should critically review their existing policies and procedures to ensure proper implementation of and full compliance with this circular for IPOs with offering periods commencing after the date of this circular¹⁰. The SFC will continue to supervise LCs’ regulatory compliance in their IPO subscription and financing activities through offsite monitoring, on-site inspections and thematic reviews.

Should you have any queries regarding this circular, please contact your case officer.

Intermediaries Supervision Department
Intermediaries Division
Securities and Futures Commission

End

SFO/IS/011/2025