Use of Proceeds Analysis: Linking Capital Allocation to Post-IPO Performance

The SFC and HKEX published a joint consultation conclusion in December 2024 mandating that all Main Board and GEM IPO prospectuses filed after 1 July 2025 must include a quantified, time-bound use of proceeds (UoP) plan with specific milestones for capital deployment, replacing the historically vague “general working capital” and “potential acquisitions” language that covered approximately 62% of all IPO proceeds raised on HKEX between 2020 and 2023, per HKEX data. This regulatory shift, codified in amendments to the Listing Rules (Main Board Rule 2.03(2) and GEM Rule 2.03(2)), directly addresses a persistent anomaly: the HKEX’s own 2023 post-IPO performance review found that issuers who allocated more than 40% of proceeds to “undefined expansion” underperformed the Hang Seng Index by an average of 18.7 percentage points in their first 12 months of trading. The new rules compel sponsors and issuers to treat the UoP section not as boilerplate compliance but as a binding capital allocation contract with the market—a shift that fundamentally alters the due diligence burden for sponsors under the SFC Code of Conduct for Corporate Finance Advisors (paragraph 17.1) and creates a direct, auditable link between the prospectus narrative and post-listing financial performance.

The Structural Weakness of Pre-2025 UoP Disclosures

The historical treatment of UoP sections in Hong Kong IPO prospectuses reflected a structural misalignment between regulatory intent and market practice. Between 2018 and 2023, the HKEX’s Listing Committee reviewed 847 IPO applications and found that 73% contained UoP descriptions that the committee deemed “insufficiently specific” in its 2023 annual report. The most common formulation—allocating proceeds to “research and development” or “potential strategic acquisitions”—created an information asymmetry where investors could not assess whether management’s stated strategy actually materialized.

The “General Working Capital” Loophole

The single largest structural weakness was the “general working capital” category. HKEX data from its 2023 Post-IPO Performance Study shows that 41% of all proceeds raised on the Main Board between 2020 and 2023 were allocated to this category, with an additional 21% allocated to “future acquisitions” without identified targets. This created a circular logic: issuers raised capital for unspecified purposes, then reported post-IPO performance that could not be evaluated against any stated benchmark. The SFC’s Enforcement Division noted in its 2024 Annual Report that it had commenced 12 investigations into potential misrepresentations in UoP sections between 2021 and 2023, though no enforcement actions were ultimately taken due to the “insufficient specificity” of the original disclosures.

Quantifying the Performance Gap

The HKEX’s 2023 analysis of 312 IPOs that listed between 2019 and 2022 provides the clearest evidence of the UoP-performance link. Issuers who allocated less than 20% of proceeds to specific, named projects (e.g., “Phase 2 factory expansion in Dongguan, Guangdong Province, with a 24-month completion timeline”) had a median 12-month post-IPO return of -14.3%. In contrast, issuers who allocated more than 60% to specific projects with named counterparties and timelines achieved a median return of +8.7%. The gap of 23.0 percentage points is statistically significant at the 95% confidence level, per the HKEX’s internal regression analysis cited in the consultation paper. This suggests that the UoP section functions as a de facto signal of management quality and capital discipline.

The July 2025 Regulatory Framework: What Changes

The joint SFC-HKEX consultation conclusion, published on 18 December 2024, introduces three binding requirements that fundamentally restructure the UoP section. First, every material use of proceeds must be quantified to the nearest HKD 1 million and tied to a specific project, facility, or contractual obligation. Second, each allocation must include a “milestone timeline” showing expected deployment within 12, 24, and 36 months from listing date. Third, any allocation exceeding 15% of total proceeds to “general corporate purposes” requires explicit justification in the prospectus and must be capped at 25% of total proceeds for Main Board listings (Listing Rule 2.03(2)(a)).

Sponsor Due Diligence Obligations

The SFC’s revised Code of Conduct for Corporate Finance Advisors, effective 1 July 2025, paragraph 17.1(b), now requires sponsors to verify the feasibility of each UoP milestone. This means sponsors must obtain and review: (i) signed contracts or letters of intent for any acquisition or capital expenditure exceeding 10% of total proceeds; (ii) third-party cost estimates for construction or R&D projects; and (iii) independent valuation reports for any asset acquisition where the consideration exceeds 25% of the issuer’s pre-IPO net asset value. The SFC’s 2024 thematic inspection of 15 sponsor files found that only 3 had obtained any third-party verification of UoP assumptions, creating a compliance gap that the new rules explicitly close.

Ongoing Disclosure Obligations

The new rules also introduce mandatory post-listing UoP reporting. Main Board Rule 13.20A, effective from 1 January 2026, requires issuers to file a “Use of Proceeds Status Report” in their annual reports and interim reports, comparing actual deployment against the milestones stated in the prospectus. Any deviation exceeding 20% from a stated milestone triggers an immediate disclosure obligation under Rule 13.20A(3), and the issuer must explain the variance and provide a revised timeline. The HKEX’s 2023 consultation response noted that 67% of issuers surveyed opposed this requirement, but the regulator concluded that the “investor protection benefits outweigh the compliance costs.”

Sector-Specific UoP Dynamics: Biotech and Tech

The impact of the new UoP rules varies significantly across sectors, with biotechnology and technology issuers facing the most substantial compliance challenges. These sectors historically relied on the most generic UoP language, and the new specificity requirements force a fundamental restructuring of how these companies present their capital allocation strategies.

Biotech: The R&D Allocation Problem

Biotech issuers on HKEX Chapter 18A (biotech listings) allocated an average of 68% of IPO proceeds to “research and development” between 2018 and 2024, per HKEX data. Under the new rules, this blanket allocation is no longer permissible. Issuers must now break down R&D spending by specific drug candidate (e.g., “Biosimilar X-202 for oncology indication Y, Phase 2 clinical trial completion by Q3 2026”), with cost estimates verified by the clinical research organization (CRO) contract. The HKEX’s 2024 guidance note on Chapter 18A applications explicitly states that “R&D allocation without named drug candidates and CRO contracts will be considered insufficient” (HKEX Guidance Letter HKEX-GL118-24, paragraph 8.3). This creates a particular challenge for pre-revenue biotech issuers, who may have multiple early-stage candidates but limited ability to provide precise cost projections. The SFC’s 2024 review of 22 Chapter 18A prospectuses found that 19 contained R&D allocations that would not meet the new standard.

Technology: The Acquisition Ambiguity

Technology issuers, particularly those with VIE structures involving PRC operating entities, historically used the “potential acquisitions” category to maintain strategic flexibility. Between 2020 and 2023, technology issuers on the Main Board allocated an average of 34% of proceeds to “future acquisitions” without identified targets, per HKEX data. The new rules require that any acquisition allocation exceeding 15% of total proceeds must be supported by a letter of intent or term sheet with a named counterparty. For VIE-structured issuers, this creates a specific challenge: the acquisition target is often a PRC domestic company, and the letter of intent must be legally binding under PRC contract law to satisfy the sponsor’s due diligence obligations under the SFC Code of Conduct. The HKEX’s 2024 consultation response acknowledged this issue and confirmed that “letters of intent governed by PRC law are acceptable provided they are enforceable under the relevant PRC legal framework.”

Cross-Border Considerations and the PRC Dimension

The new UoP rules have particular implications for PRC-based issuers using the H-share or Red-chip structures, which together accounted for 78% of HKEX IPO proceeds in 2024, per HKEX data. The regulatory intersection between HKEX’s new requirements and PRC’s State Administration of Foreign Exchange (SAFE) rules creates compliance complexities that issuers and sponsors must address during the prospectus drafting stage.

SAFE Circular 37 and Capital Outflows

PRC-based issuers who raise proceeds in Hong Kong and intend to deploy them in the PRC must obtain SAFE registration under Circular 37 (2014) for the outbound investment structure. The new UoP rules require issuers to state in the prospectus whether SAFE approval has been obtained or is pending for each PRC-denominated deployment. The HKEX’s 2024 consultation response explicitly references this requirement, stating that “any use of proceeds involving cross-border capital flows must disclose the regulatory approval status and any material risk of delay or denial” (HKEX Consultation Conclusions, December 2024, paragraph 4.3.1). This creates a binding disclosure obligation where previously issuers could simply state “subject to regulatory approvals” without specifics.

The VIE Cash Flow Chain

For VIE-structured issuers, the UoP section must now detail the contractual cash flow chain from the Hong Kong-listed entity to the PRC operating company. This includes: (i) the specific VIE agreement provisions governing profit repatriation; (ii) any PRC tax implications of the capital transfer (e.g., withholding tax on dividends under the PRC Enterprise Income Tax Law); and (iii) the timeline for funds to reach the operating entity. The HKEX’s Guidance Letter GL118-24, paragraph 11.2, requires that the UoP section include a “flow-of-funds diagram” for any allocation exceeding HKD 100 million that crosses the PRC border. This represents a significant departure from previous practice, where such details were buried in the risk factors section and rarely quantified.

Actionable Takeaways

1. Issuers filing prospectuses after 1 July 2025 must have signed contracts or letters of intent for any acquisition or capital expenditure allocation exceeding 10% of total proceeds, as the SFC Code of Conduct paragraph 17.1(b) now requires sponsor verification of these documents.

2. Biotech issuers under Chapter 18A must break down R&D allocations by named drug candidate with CRO-verified cost estimates, as HKEX Guidance Letter GL118-24 paragraph 8.3 explicitly deems generic “R&D” allocations insufficient.

3. Any deviation exceeding 20% from a stated UoP milestone triggers an immediate disclosure obligation under Main Board Rule 13.20A(3), effective 1 January 2026, requiring the issuer to explain the variance and provide a revised timeline.

4. PRC-based issuers using VIE structures must include a flow-of-funds diagram in the UoP section for any allocation exceeding HKD 100 million that crosses the PRC border, per HKEX Guidance Letter GL118-24 paragraph 11.2.

5. The “general working capital” category is now capped at 25% of total proceeds for Main Board listings under Listing Rule 2.03(2)(a), and any allocation exceeding 15% requires explicit justification in the prospectus.