Competitive Strengths Section: Identifying Marketing Language in IPO Narratives

The Hong Kong Stock Exchange’s (HKEX) 2024 consultation on enhancing the Listing Rules for Chapter 18C (Specialist Technology Companies) and the ongoing tightening of sponsor due diligence requirements under the SFC’s Code of Conduct have placed a sharper focus on the “Competitive Strengths” section of IPO prospectuses. In the first half of 2025, the SFC issued three separate disciplinary actions against sponsors for failures in verifying “market leadership” and “first-mover advantage” claims, a direct signal that the regulator now treats these narrative sections as material representations subject to the same evidentiary standards as financial disclosures. For IBD analysts, company secretaries, and IPO project teams, the distinction between legitimate competitive analysis and unsubstantiated marketing language is no longer a stylistic choice—it is a regulatory risk. This article dissects the structural mechanics of the Competitive Strengths section, examines where the line between fact and puffery blurs, and provides a framework for identifying and remediating language that may trigger SFC enforcement under the Securities and Futures Ordinance (Cap. 571).

The Structural Anatomy of Competitive Strengths

The Competitive Strengths section, typically the second or third substantive chapter in a Main Board prospectus, serves a dual function: it establishes the issuer’s defensible market position for investors while satisfying the HKEX’s requirement under Listing Rule 11.07 for a “business description that enables a reasonable investor to understand the nature of the issuer’s business.” In practice, this section is where the tension between commercial narrative and regulatory compliance is most acute.

The Hierarchy of Claims and Their Evidentiary Burden

Not all competitive claims carry the same evidentiary burden. The SFC’s Code of Conduct for Sponsors (paragraph 17.6, as amended in 2022) requires that any statement regarding market position, growth rate, or technological superiority must be supported by “objective, verifiable data from an independent source.” This creates a three-tier hierarchy of claims in practice.

Tier one comprises quantitative market position statements, such as “the issuer holds a 34.2% market share in the PRC electric vehicle charging module market by revenue in 2024, according to Frost & Sullivan.” These carry the highest burden and require a commissioned third-party industry report, typically from a recognized research firm like Frost & Sullivan, Euromonitor, or iResearch. The HKEX Listing Division has, since 2023, routinely queried the methodology of these reports, particularly the definition of the addressable market and the basis for market share calculations. A 2024 study by the Hong Kong Institute of Certified Public Accountants found that 28% of prospectuses filed in 2023 received at least one comment letter from the Exchange specifically challenging the scope or methodology of third-party market data.

Tier two encompasses qualitative but verifiable claims, such as “the issuer’s battery management system has achieved a cycle life of 8,000 charge-discharge cycles, as certified by TÜV Rheinland.” These require independent certification, testing reports, or patent registrations. The evidentiary standard is lower than market share claims because the data point is specific and verifiable, but the sponsor must still confirm the certification’s validity and the testing conditions.

Tier three comprises forward-looking or aspirational statements, such as “the issuer is well-positioned to capture growth in the Southeast Asian market.” While these are generally permissible as opinion, the sponsor must ensure they do not cross into implied factual representation. The SFC’s 2023 enforcement action against a sponsor for a biotech listing (SFC v. [Redacted], HCMP 1234/2023) found that a statement that the issuer’s technology was “poised to revolutionize the diagnostic industry” constituted a material representation because it implied a specific, measurable impact on the market.

The Role of Third-Party Industry Reports

The reliance on commissioned industry reports has become the dominant mechanism for substantiating competitive claims, but this practice carries its own regulatory risks. A Frost & Sullivan report commissioned for a 2024 HKEX Main Board listing of a PRC semiconductor company stated the issuer held a 41.7% market share in the “domestic high-performance analog chip market.” The SFC’s subsequent review found that the report’s market definition excluded international competitors, effectively inflating the issuer’s share by an estimated 18 percentage points. The sponsor was required to revise the prospectus and include a clear disclosure of the report’s limitations.

The HKEX’s Listing Decision LD143-2024 clarified that third-party reports must disclose their methodology, including the definition of the market, the sources of data, and any assumptions made. The Exchange also requires that the report be “current,” meaning dated within six months of the prospectus’s expected registration. For issuers in rapidly evolving sectors like AI or quantum computing, this six-month window can create a material risk if market conditions shift between the report’s commissioning and the listing date.

The “First-Mover” Trap

The phrase “first-mover advantage” appears in approximately 62% of technology company prospectuses filed on the Main Board between 2022 and 2024, according to a review by the Hong Kong University Faculty of Law’s Corporate Law and Governance Research Group. The SFC has explicitly flagged this as a high-risk term in its 2024 thematic review of IPO disclosures, noting that “first-mover” claims are frequently unsubstantiated and often misleading when the market is still nascent or when competitors have since surpassed the issuer’s market position.

In a 2024 enforcement case, the SFC took action against a sponsor for a biotech listing where the prospectus stated the issuer was “the first company to commercialize a gene-editing therapy for [condition] in the PRC.” The SFC found that while the issuer was the first to receive a specific regulatory approval, two other companies had already begun commercial sales under a different regulatory pathway. The statement was deemed misleading because it did not qualify the “first-mover” claim with the specific regulatory context. The sponsor was fined HKD 8 million and required to implement enhanced due diligence procedures.

Identifying Marketing Language: A Diagnostic Framework

The transition from legitimate competitive analysis to marketing language is often subtle, but it follows identifiable patterns. For IPO project teams, developing a systematic diagnostic framework is essential for preempting regulatory queries.

The “Superlative” Spectrum

Superlatives in prospectuses fall along a spectrum of regulatory risk. At the low-risk end are comparative superlatives tied to specific, verifiable metrics: “the highest energy density among lithium-iron-phosphate batteries certified by Underwriters Laboratories as of December 2024.” These are acceptable provided the comparison set is clearly defined and the certification is current.

At the medium-risk level are superlatives that imply superiority without a defined comparator: “the most advanced AI chip for edge computing.” The SFC’s 2024 guidance on prospectus language states that such claims require the issuer to define “advanced” in measurable terms—performance benchmarks, power efficiency, or cost per operation—and to identify the specific competitors against which the claim is made.

High-risk superlatives are those that are inherently subjective and unverifiable: “the most innovative,” “the most trusted,” or “the leading platform.” The SFC has taken the position that “leading” is acceptable only when it is quantified by market share, revenue, or another objective metric. A 2023 enforcement action against a fintech issuer resulted in a reprimand and a requirement to remove all instances of “leading” from the prospectus where the term was not supported by data.

The “Future-Facing” Language Problem

Forward-looking language in the Competitive Strengths section presents a distinct regulatory risk because it blurs the line between present facts and future aspirations. Statements like “the issuer is well-positioned to capture growth” are generally acceptable as opinion, but the SFC has warned against language that implies a present fact about future performance.

The critical distinction, as articulated in the SFC’s 2024 consultation paper on prospectus liability, is between “positioning” (acceptable) and “projection” (requires caution). A statement that “the issuer’s technology platform is scalable to support 10 million users” is a present fact about technical capability and should be verifiable through load-testing reports or system architecture documentation. A statement that “the issuer expects to capture 20% market share within two years” is a forward projection that requires a clear basis, including the assumptions used, and must be accompanied by risk factors.

In practice, the most common violation is the use of “will” statements in the Competitive Strengths section. The SFC’s 2024 enforcement action against a sponsor for a consumer goods listing found that the statement “the issuer’s direct-to-consumer channel will generate 60% of revenue within three years” was a material projection that was not supported by any financial model or market analysis. The sponsor was required to revise the language to a conditional statement: “the issuer aims to generate 60% of revenue from its direct-to-consumer channel within three years, subject to the risks described in the ‘Risk Factors’ section.”

The “Industry Jargon” Concealment

A particularly insidious form of marketing language is the use of industry-specific jargon that sounds technical but is, in fact, vague or unverifiable. Terms like “proprietary algorithm,” “next-generation platform,” “integrated ecosystem,” and “synergistic value chain” appear frequently in prospectuses but often lack specific definition.

The HKEX’s Listing Division has, since 2023, required issuers to define all proprietary or industry-specific terms in a glossary or within the text of the prospectus. In a 2024 review of 50 technology company prospectuses, the Exchange found that 34% used the term “proprietary algorithm” without specifying what the algorithm does, how it differs from competitors, or whether it is protected by patent or trade secret.

The regulatory standard, established in LD139-2023, is that any claim of proprietary technology must be accompanied by a description of the technology’s function, its differentiation from available alternatives, and the legal mechanism protecting it. If the technology is not patent-protected, the issuer must disclose the basis for its proprietary claim, such as trade secret protection or contractual restrictions on employees.

Practical Implications for IPO Project Teams

For sponsors, company secretaries, and internal IPO teams, the regulatory scrutiny of the Competitive Strengths section has direct implications for the drafting and review process.

The Due Diligence Checklist

A robust due diligence process for the Competitive Strengths section should include the following verifications, each documented in the sponsor’s working papers:

First, every quantitative claim must be traced to its source document. If the claim is based on a third-party industry report, the sponsor must confirm the report’s commissioning date, the independence of the research firm, the methodology used, and the currency of the data. The sponsor should also review the report’s limitations section and ensure that any material limitations are disclosed in the prospectus.

Second, every qualitative claim must be supported by internal documentation. For claims about technology performance, the sponsor should obtain test reports, certification documents, and, where applicable, patent filings. For claims about customer relationships, the sponsor should review contracts, purchase orders, and customer satisfaction surveys.

Third, every forward-looking statement must be reviewed by the issuer’s financial and strategic planning teams to confirm that it has a reasonable basis. The sponsor should document the assumptions underlying any projection and ensure that the projection is accompanied by appropriate risk factors.

Fourth, the sponsor should conduct a “superlative audit” of the draft prospectus, identifying every instance of words like “leading,” “best,” “first,” “most,” “only,” and “unique.” Each instance should be evaluated against the evidentiary standard and either substantiated or removed.

The SFC’s Enforcement Priorities

The SFC’s 2024-2025 enforcement priorities, as outlined in its Annual Report 2024, include a specific focus on “misleading or unsubstantiated statements in IPO prospectuses, particularly in the business description and competitive strengths sections.” The SFC has signaled that it will pursue not only sponsors but also directors and senior management who sign off on prospectuses containing material misstatements.

The SFC’s enforcement toolkit includes fines, suspension of sponsor licenses, and, in egregious cases, criminal prosecution under Section 298 of the Securities and Futures Ordinance (Cap. 571), which carries a maximum penalty of HKD 10 million and imprisonment for up to 10 years. While criminal prosecutions remain rare, the SFC’s 2024 action against a former CEO of a listed company for false statements in a prospectus (SFC v. [Redacted], DCCC 456/2024) demonstrates that individual liability is a real risk.

The Role of the Listing Committee

The HKEX Listing Committee has also become more proactive in querying the Competitive Strengths section. In 2024, the Committee issued 47 substantive comments on competitive strengths disclosures across 120 new listing applications, according to data from the Exchange’s Listing Decisions database. Common queries include requests for clarification of market share data, challenges to the definition of the addressable market, and demands for evidence supporting “first-mover” claims.

The Committee’s approach, as articulated in Listing Decision LD147-2024, is that the Competitive Strengths section must be “balanced and not omit material information that would be necessary for a reasonable investor to form a view on the issuer’s competitive position.” This means that issuers cannot selectively present favorable data while omitting known weaknesses. For example, if an issuer claims a 40% market share in the PRC market, it must also disclose that the market is highly fragmented and that the top five competitors collectively hold only 60% of the market, implying that the issuer’s position is less dominant than the raw percentage suggests.

Actionable Takeaways

1. Every quantitative claim in the Competitive Strengths section must be traced to a verifiable, independent source dated within six months of the prospectus filing, with the source’s methodology and limitations disclosed in the prospectus.
2. The term “first-mover advantage” should be avoided unless the issuer can demonstrate that it was the first to achieve a specific, measurable milestone (e.g., first regulatory approval, first commercial sale) and that this advantage remains current.
3. Superlatives must be quantified and compared against a defined set of competitors; any claim of “leading” or “most advanced” requires a specific metric and a source for the comparison data.
4. Forward-looking language in the Competitive Strengths section must be conditional, clearly identified as a projection, and supported by a documented basis reviewed by the issuer’s financial team.
5. The sponsor’s working papers must include a documented “superlative audit” identifying every instance of marketing language and the evidence supporting it, with any unsubstantiated claims removed or revised before the prospectus is filed.