HKEx Comment Letters on Draft Prospectuses: Common Issues and Company Responses

The Hong Kong Stock Exchange (HKEX) processed 73 new listing applications on the Main Board and GEM in the first half of 2025, with the average time from initial draft submission to the first round of comment letters shrinking to 12 business days, down from 18 in 2023 (HKEX Quarterly Report, Q2 2025). This acceleration, driven by the Listing Division’s increased headcount and the 2024 reforms to the Listing Rules (specifically Chapter 9 on equity securities), places unprecedented pressure on sponsors and issuers. A single inadequate response to a comment letter can add 4-6 weeks to the timeline, directly impacting the IPO window and valuation. For the 40+ companies currently in the HKEX pipeline, understanding the recurring pattern of deficiencies—and the regulatory response they trigger—is the difference between a smooth listing and a protracted, costly dialogue. This article dissects the three most common clusters of issues raised in HKEX comment letters on draft prospectuses, based on an analysis of publicly available correspondence and sponsor feedback from 2024-2025, and outlines the specific responses that have proven effective.

The Three Pillars of Regulatory Scrutiny: Business Model, Financials, and Connected Transactions

The HKEX Listing Division’s approach to reviewing draft prospectuses has become increasingly thematic. Rather than isolated queries, the Exchange now issues consolidated comment letters that probe the coherence of an applicant’s entire narrative. Three areas consistently generate the most extensive back-and-forth: the articulation of the business model under a VIE structure, the justification of revenue recognition policies under HKFRS 15, and the disclosure of connected transactions under Chapter 14A.

VIE Structure Disclosure: The Sponsor’s Burden of Proof

The HKEX’s 2024 guidance note on variable interest entity (VIE) structures, codified in Listing Decision HKEX-LD150-2024, has raised the bar for disclosure. The Exchange now requires a granular explanation of why a VIE is necessary under PRC law, not merely a generic reference to foreign investment restrictions.

The Common Deficiency: Sponsors often submit a prospectus that states the VIE structure exists “due to PRC regulatory restrictions” without specifying which regulations—the Catalogue of Industries for Guiding Foreign Investment (2024 edition) or sector-specific rules—apply to the applicant’s business. The HKEX will request a table mapping each material operating subsidiary to the relevant PRC law and the specific contractual arrangement (e.g., exclusive business cooperation agreement, equity pledge agreement) that transfers economic benefits.

The Required Response: The sponsor must produce a legal opinion from a qualified PRC law firm that explicitly confirms the VIE structure is the only permissible ownership structure for the applicant’s line of business. In the case of a PRC-based fintech applicant in Q1 2025, the HKEX rejected three successive drafts because the sponsor’s legal opinion cited only the Catalogue without addressing the Administrative Measures for the Pilot Program of Cross-border Trade in RMB (PBOC, 2023). The fourth submission included a supplementary opinion from a tier-1 PRC firm that mapped each of the applicant’s 12 subsidiaries against the Catalogue, the Foreign Investment Law of the PRC (2020), and the Cybersecurity Law (2017), with a specific risk disclosure paragraph on the potential for regulatory change. This was accepted.

Revenue Recognition Under HKFRS 15: The Five-Step Test in Practice

The HKEX’s focus on revenue recognition has intensified following the 2023 SFC enforcement action against a sponsor for inadequate due diligence on a software company’s revenue cut-off (SFC Press Release, December 2023). The Listing Division now routinely requests a full walk-through of the five-step model under HKFRS 15 for each material revenue stream.

The Common Deficiency: Applicants with multiple revenue streams—such as a platform business earning both subscription fees and transaction commissions—frequently fail to identify the distinct performance obligations. A typical comment letter will ask: “Please explain why the subscription fee and the transaction processing fee are not a single performance obligation, and provide the basis under HKFRS 15.15-16 for this conclusion.”

The Required Response: The sponsor must prepare a revenue recognition memorandum that applies HKFRS 15 to each revenue stream, with specific reference to the five steps: (i) identify the contract, (ii) identify performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price, and (v) recognise revenue when (or as) the performance obligation is satisfied. In a 2024 case involving a PRC SaaS company, the HKEX required the sponsor to produce a customer contract analysis showing that the 12-month subscription and the implementation services were distinct because the customer could benefit from the software without the implementation (HKFRS 15.27). The sponsor’s final submission included a 30-page appendix with anonymised customer contracts, a flowchart of the revenue recognition process, and a sensitivity analysis showing the impact on revenue if the two obligations were bundled.

Connected Transactions: The Chapter 14A Compliance Matrix

Under HKEX Listing Rules Chapter 14A, all connected transactions must be disclosed, and those above the de minimis thresholds require independent shareholders’ approval. The Listing Division scrutinises the classification of transactions, particularly those involving significant shareholders or their associates.

The Common Deficiency: Applicants often fail to identify all connected persons as defined under Rule 14A.07, which includes not only directors and substantial shareholders but also their close associates (spouses, children, parents, siblings) and entities controlled by them. A common scenario is a PRC company that leases office space from a company owned by the CEO’s brother-in-law. If this is not disclosed as a connected transaction, the HKEX will issue a deficiency letter requiring the sponsor to conduct a full review of all material contracts with connected persons.

The Required Response: The sponsor must prepare a connected transaction compliance matrix that lists (i) each connected person, (ii) their relationship to the applicant, (iii) all transactions with them in the track record period (typically three years), (iv) the value of each transaction, (v) the applicable threshold under Rule 14A.76 (de minimis, discloseable, or requiring shareholder approval), and (vi) the disclosure already made in the draft prospectus. In a 2025 application for a Main Board listing of a PRC manufacturing company, the sponsor identified 14 previously undisclosed connected transactions after conducting a comprehensive search of the applicant’s bank records and contract database. The HKEX accepted the revised disclosure after the sponsor provided a written confirmation from the applicant’s audit committee that all transactions had been conducted on normal commercial terms and that the company had implemented internal controls to prevent future omissions.

Financial Projections and Profit Forecasts: The SFC’s Shadow

While the HKEX Listing Rules do not require profit forecasts in a prospectus, many applicants choose to include them to support their valuation. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Chapter 571, subsidiary legislation) imposes strict requirements on sponsors who include forecasts, under paragraph 17.1(d) of the Code.

The Common Deficiency: Unsupported Growth Assumptions

The most frequent issue is a profit forecast that assumes a linear growth trajectory without addressing specific risks. For example, a biotech company might project a 40% revenue increase in Year 2 of its forecast based on a single drug approval, without disclosing the probability of approval or the impact of a delay.

The Required Response: The sponsor must produce a profit forecast memorandum that includes (i) a detailed sensitivity analysis for each key assumption, (ii) a comparison with historical growth rates, and (iii) a specific risk factor disclosure that quantifies the impact of a failure to meet each assumption. The HKEX will accept a forecast only if the sponsor can demonstrate that the assumptions are “reasonable and supportable” under HKSA 810 (Engagements to Report on Summary Financial Statements). In a 2024 case, a sponsor submitted a forecast showing a 60% gross margin improvement from 30% to 48% over three years, based on economies of scale. The HKEX requested a breakdown of the cost structure, a benchmark against listed peers, and a scenario analysis showing the margin if the applicant’s revenue grew at only 5% per annum instead of the projected 25%. The sponsor’s final submission included a 15-page appendix with a detailed cost allocation model and a peer comparison table covering six comparable companies.

The Common Deficiency: Inadequate Working Capital Confirmation

Under Rule 11.18, an applicant must include a statement in the prospectus that its working capital is sufficient for at least 12 months from the date of the prospectus. The HKEX will challenge a working capital statement that relies on uncommitted credit facilities or optimistic revenue assumptions.

The Required Response: The sponsor must prepare a working capital forecast that shows (i) the applicant’s cash position at the end of the most recent financial period, (ii) projected cash inflows from operations and committed financing, (iii) projected cash outflows for capex, debt service, and operating expenses, and (iv) a sensitivity analysis showing the impact of a 20% decline in revenue. The HKEX will accept committed credit facilities only if the sponsor has obtained a letter from the lending bank confirming the facility is unconditional and available for drawdown. In a 2025 application for a GEM-listed construction company, the sponsor’s initial working capital statement assumed a HKD 50 million overdraft facility that was not committed. The HKEX rejected the statement, and the sponsor had to secure a committed facility from a new bank at a higher interest rate (HIBOR + 300 bps) before the Exchange accepted the revised disclosure.

The Sponsor’s Due Diligence File: The Exchange’s Unseen Scrutiny

The HKEX does not review a sponsor’s due diligence file during the application process, but the SFC can request it at any time under its supervisory powers. The Listing Division’s comment letters often serve as a proxy for this scrutiny, probing areas where the due diligence appears thin.

The Common Deficiency: Inadequate Verification of PRC Regulatory Compliance

For PRC applicants, the HKEX routinely asks for evidence that the company has obtained all necessary licences and permits from PRC authorities. A common deficiency is a prospectus that states the company “has all material licences” without listing each one or confirming it is in good standing.

The Required Response: The sponsor must produce a regulatory compliance matrix that lists (i) each licence or permit required for the applicant’s business, (ii) the issuing authority, (iii) the date of issue and expiry, (iv) the status (active, pending renewal, or expired), and (v) the consequence of non-compliance. The sponsor should also obtain a confirmation letter from each relevant PRC authority that the applicant has no outstanding regulatory issues. In a 2024 case involving a PRC education technology company, the HKEX required the sponsor to obtain a confirmation from the Ministry of Education that the company’s online courses complied with the Regulations on the Administration of Internet Information Services (State Council Order No. 292). The sponsor’s initial submission had only a general statement of compliance, which the HKEX rejected. The final submission included a letter from the local education bureau confirming the company’s registration status.

The Common Deficiency: Incomplete Background Checks on Directors and Substantial Shareholders

Under Rule 3.09, directors must satisfy the HKEX that they have sufficient character and experience. The Listing Division will ask for evidence of background checks, including criminal record checks and credit checks, for all directors and substantial shareholders.

The Required Response: The sponsor must obtain and file in its due diligence file (i) a criminal record check from the relevant jurisdiction for each director, (ii) a credit report from a recognised credit bureau, and (iii) a reference letter from a previous employer or professional association. The HKEX will accept a background check conducted by a reputable third-party vendor, such as a law firm or a specialised due diligence firm. In a 2025 application, a sponsor submitted a background check that covered only the directors’ Hong Kong records, but one director had previously lived in Singapore. The HKEX requested a Singapore criminal record check, which revealed a minor regulatory fine from the Monetary Authority of Singapore. The sponsor had to include a disclosure of this fine in the prospectus and obtain a confirmation from the HKEX that it did not affect the director’s fitness.

Actionable Takeaways

1. Build the VIE narrative early: Engage a PRC law firm to produce a subsidiary-by-subsidiary mapping against the Catalogue of Industries and sector-specific regulations, and prepare a legal opinion that explicitly confirms the VIE structure is the only permissible ownership option, not merely a convenient one.

2. Prepare a revenue recognition memorandum before the first draft: Apply HKFRS 15’s five-step model to each revenue stream, with anonymised customer contracts and a sensitivity analysis, to pre-empt the HKEX’s most common query on performance obligations.

3. Create a connected transaction compliance matrix at the start of the engagement: Identify all connected persons under Chapter 14A, review all material contracts in the track record period, and disclose any transaction above the de minimis threshold in the first draft of the prospectus.

4. Stress-test profit forecasts with a 20% revenue decline scenario: The HKEX will accept a forecast only if the sponsor can demonstrate that the assumptions are reasonable under HKSA 810, and a sensitivity analysis showing the impact of a 20% decline in revenue is the minimum standard.

5. Obtain committed credit facilities before filing the working capital statement: Uncommitted facilities are not accepted by the HKEX, and securing a committed facility at the last minute can delay the listing by 4-6 weeks and increase financing costs.