Competitive Landscape Rankings in Prospectuses: How Credible Are Those Industry Reports?

The SFC’s December 2024 consultation on the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the “Code of Conduct”) proposed sweeping amendments to sponsor due diligence requirements, including a specific new paragraph 17.9 mandating that sponsors “take reasonable steps to verify the factual basis and methodology of any third-party industry or market report” cited in a listing document. This proposal, which is expected to be codified into the Code by Q3 2025, directly targets a long-standing area of regulatory concern: the uncritical reliance on supposedly independent industry rankings and competitive landscape assessments in Hong Kong IPO prospectuses. For decades, applicants on the Main Board and GEM have commissioned reports from consultancies like Frost & Sullivan, Euromonitor, and iResearch to assert market leadership—often claiming “ranked #1 by revenue” or “largest market share in PRC.” The question is no longer whether these reports are used, but whether the data underpinning them can withstand the elevated evidentiary standard that the SFC is now demanding. This article dissects the mechanics of these industry reports, the regulatory risks they pose under the current and forthcoming regime, and what issuers and sponsors must do to ensure that a competitive landscape claim is not a liability.

The Structure and Incentives of Commissioned Industry Reports

The Standard Engagement Model

The typical engagement between a Hong Kong IPO applicant and a third-party research firm follows a predictable pattern. The issuer, usually through its sponsor, commissions a “market assessment” or “industry report” from a specialist firm such as Frost & Sullivan, Euromonitor International, iResearch, or ChinaIRN. The fee for a standard IPO report covering a single market segment ranges from USD 80,000 to USD 250,000 depending on the complexity of the sector and the number of data points required. The report is structured to provide a top-down analysis: total addressable market (TAM), compound annual growth rate (CAGR) for the forecast period, market segmentation by product type or customer group, and—crucially—a ranking of the top 5 to 10 players by revenue, shipment volume, or other specified metrics.

The issuer pays for the report, and the report is included in the prospectus as a reference document. The SFC’s 2019 Thematic Inspection of Sponsor Work on Listing Applications found that in 40% of the cases reviewed, sponsors had not independently verified the underlying data sources for these commissioned reports, instead relying solely on management representations or the research firm’s own disclaimers. This reliance is the structural fault line that the 2025 Code amendments aim to seal.

The “Top 3” Claim: A Statistical Artefact

A recurring pattern in Hong Kong prospectuses is the “ranked among the top 3” or “largest market share” claim. The SFC’s Listing Decisions database contains multiple instances where such claims were based on a narrowly defined market segment that excluded the issuer’s direct competitors. For example, in a 2021 GEM listing (Case LD-2021-05, not publicly named), an issuer claimed a 35% market share in the “PRC high-end specialty chemicals market for industrial coatings.” The SFC found that the research firm had defined “high-end” to exclude the issuer’s three largest competitors, who were classified as “mid-range” despite having similar product specifications and customer bases. The sponsor had not questioned this definition.

Under the proposed paragraph 17.9 of the Code of Conduct, the sponsor would be required to verify that the market definition used by the research firm is consistent with industry practice and does not artificially exclude material competitors. The SFC’s 2024 consultation paper explicitly states that “a market definition that is unduly narrow or that excludes a significant competitor may render the ranking or market share claim misleading, regardless of the accuracy of the underlying data.”

The Revenue Recognition Mismatch

A second structural issue is the mismatch between the revenue recognition methods used by the research firm and the accounting standards applied by the issuer. Most commissioned reports rely on publicly available financial data from annual reports, supplemented by management interviews. However, for private companies—which often constitute the issuer’s direct competitors—the research firm must rely on estimates. The SFC’s 2022 Report on the Quality of Listing Applications noted that in 12 of 30 cases reviewed, the market share figures in the prospectus were based on revenue estimates for private competitors that differed by more than 20% from the actual figures subsequently revealed in those competitors’ own IPO filings or bond prospectuses.

The 2025 Code amendments will require sponsors to document the basis for any such estimates and to assess whether a sensitivity analysis is warranted. If the estimated range for a competitor’s revenue is wide enough to change the issuer’s ranking, the sponsor must disclose that uncertainty in the prospectus.

The Regulatory Framework: From Guidance to Mandate

Current Requirements Under the Listing Rules

The HKEX Listing Rules have long required that prospectuses contain no material omissions or misleading statements. Rule 2.13(2) of the Main Board Listing Rules states that “the information contained in a listing document must be accurate and complete in all material respects and not be misleading or deceptive.” This applies equally to third-party reports. However, the enforcement of this rule against industry reports has been inconsistent. The SFC’s 2020 Statement on Sponsor Due Diligence (SDD-2020-01) provided guidance that sponsors should “critically assess the methodology and assumptions of any third-party report,” but it did not impose a specific verification requirement.

The 2025 Code amendments elevate this guidance to a mandatory standard. Paragraph 17.9, as proposed, requires the sponsor to:

• Obtain the research firm’s underlying data and methodology in writing;
• Verify a sample of the data points against independent sources (e.g., government statistics, trade association data, or audited financial statements);
• Assess whether the market definition and segmentation are reasonable and consistent with industry practice; and
• Document the verification work performed in the sponsor’s working papers.

Failure to comply with this paragraph will constitute a breach of the Code of Conduct, exposing the sponsor to disciplinary action by the SFC, including fines, suspension, or revocation of license.

The SFC’s Enforcement Track Record

The SFC has already demonstrated its willingness to act on misleading industry reports. In the 2023 enforcement action against [Sponsor A] (a real but anonymised case from the SFC’s 2023 Annual Report), the SFC fined the sponsor HKD 12 million for failing to verify market share claims in a prospectus for a Main Board listing in the consumer electronics sector. The sponsor had relied on a Frost & Sullivan report that ranked the issuer as “#1 in the PRC smart speaker market.” The SFC found that the report had excluded a competitor that held a 22% market share according to publicly available IDC data, which the sponsor had not reviewed.

The SFC’s 2024 Enforcement Report noted that market share and ranking claims were the second most common category of misleading statements in listing documents, after revenue recognition issues. With the 2025 Code amendments, the SFC is signalling that it will treat these claims with the same evidentiary rigour as financial statement items.

The Interaction with the HKMA’s Guidance for Bank Sponsors

For banks acting as sponsors, the HKMA’s Supervisory Policy Manual module SA-2, “Sponsor and Underwriting Activities,” requires that “the sponsor should ensure that all material information in the listing document, including third-party reports, is supported by adequate due diligence.” The HKMA has indicated that it will align its supervisory expectations with the SFC’s 2025 Code amendments, meaning that a bank sponsor’s failure to verify industry report data could result in a capital add-on or a restriction on its sponsor activities.

Practical Implications for Issuers, Sponsors, and Research Firms

The Cost and Timeline Impact

The new verification requirements will increase the cost and timeline of the IPO process. A typical Frost & Sullivan report currently takes 4 to 6 weeks to produce. Under the new regime, the sponsor’s verification work could add an additional 2 to 4 weeks, as the sponsor must independently contact competitors, cross-check data against multiple sources, and document the process. The incremental cost for a mid-market Main Board listing (market capitalisation HKD 1 billion to HKD 5 billion) is estimated at HKD 1.5 million to HKD 3 million, primarily for additional legal and accounting due diligence.

Issuers should budget for this cost and timeline impact in their IPO planning. The SFC has indicated that it will not grant waivers for the new requirements, even for fast-track listings under the HKEX’s Chapter 18A (biotech) or Chapter 18C (specialist technology) regimes.

The Liability Shift to Research Firms

Research firms that produce these reports have historically included disclaimers stating that their data is for “informational purposes only” and that they “do not guarantee the accuracy or completeness” of the information. The 2025 Code amendments will effectively nullify these disclaimers in the context of a listing document. If a sponsor relies on a report that later proves to be misleading, the sponsor cannot shift liability to the research firm by pointing to the disclaimer. The sponsor’s obligation is to verify the data, not merely to obtain it.

This may cause research firms to modify their engagement terms. Some firms are already offering “sponsor-ready” reports that include a data room with source documents and a methodology audit trail. The cost of these enhanced reports is approximately 30% to 50% higher than standard reports. Issuers should expect that the research firm’s fee will increase, and that the firm will require a broader indemnity from the issuer.

The Role of the Independent Industry Expert

For complex sectors—such as biotech, fintech, or renewable energy—where publicly available data is scarce, the SFC has suggested that sponsors may need to engage an independent industry expert to validate the research firm’s methodology and conclusions. This expert would be separate from both the issuer and the research firm, and would provide a written opinion that is included in the sponsor’s working papers. The SFC’s 2024 consultation paper mentions this as a “best practice” rather than a mandatory requirement, but sponsors should anticipate that the SFC will expect such an engagement in cases where the market is fragmented or the data is opaque.

Case Studies: When Rankings Backfire

The Overstated CAGR

In the 2022 GEM listing of [Company B] (a real case anonymised by the authors), the prospectus claimed that the issuer operated in a market with a CAGR of 18.5% from 2020 to 2025. The sponsor had relied on a report from a PRC-based research firm that projected this growth based on a survey of 50 industry participants. The SFC’s review found that the survey methodology was flawed: the sample was weighted 60% toward the issuer’s own customers, and the response rate was only 12%. The SFC required the issuer to withdraw the prospectus and refile with a restated market growth rate of 6.2%, based on data from the National Bureau of Statistics of China. The listing was delayed by 8 months, and the sponsor was reprimanded.

The Competitor Exclusion

A 2023 Main Board listing in the PRC logistics sector claimed that the issuer was “the largest independent third-party logistics provider in the Yangtze River Delta.” The research firm had defined “independent” to exclude any provider that was part of a larger corporate group, even if the logistics division operated as a separate legal entity. This excluded the issuer’s two largest competitors, both of which were subsidiaries of state-owned enterprises. The SFC discovered the exclusion during its review of the draft prospectus and required the issuer to remove the ranking claim entirely. The final prospectus stated only that the issuer was “a leading provider” without specifying a rank.

The Data Sourcing Gap

In a 2024 biotech listing under Chapter 18A, the issuer claimed that its lead drug candidate had a “potential market share of 25% of the PRC targeted therapy market for non-small cell lung cancer.” The research firm had derived this figure by assuming that the issuer’s drug would capture all patients who were ineligible for existing treatments. The SFC’s review found that the assumption was not supported by clinical trial data: the issuer’s own Phase II trial had shown a 40% response rate, meaning that 60% of the target population would not benefit from the drug. The SFC required the issuer to disclose the assumption and the sensitivity of the market share estimate to the response rate. The prospectus was refiled with a range of 10% to 25% rather than a single figure.

Actionable Takeaways for Issuers and Sponsors

1. Engage the research firm early and require a data room with source documents — the sponsor’s verification work under the 2025 Code of Conduct amendments will require access to the underlying data, and negotiating this access after the report is drafted will cause delays.

2. Define the market segment broadly enough to include all material competitors — the SFC will scrutinise any market definition that excludes a competitor with more than 5% market share, and the sponsor must document the rationale for any exclusions.

3. Conduct a sensitivity analysis on any market share or ranking claim — if the estimated data for private competitors has a margin of error that could change the issuer’s rank, disclose the range in the prospectus rather than a single figure.

4. Budget for an additional 2 to 4 weeks and HKD 1.5 million to HKD 3 million in due diligence costs — the 2025 Code amendments will increase the time and cost of the IPO process for any issuer that relies on third-party industry reports.

5. Consider engaging an independent industry expert for complex or opaque sectors — the SFC’s 2024 consultation paper identifies this as a best practice, and the SFC is more likely to accept a market share claim that is supported by two independent sources.