What is an Initial Public Offering? Detailed explanation of IPO and a guide to listing on Hong Kong and US stock markets

The True Meaning and Core Role of IPO

In financial markets, the abbreviation IPO appears frequently. So what exactly does IPO mean? IPO stands for Initial Public Offering. In Chinese, it is expressed as “首次公开发行” or “首次公开募股.” Simply put, it refers to the process by which private companies issue shares to the public, officially transforming into a listed company.

This transformation involves a fundamental change in the company’s ownership structure—from private control gradually transitioning to public participation. For founders and early investors, IPO not only represents a financing opportunity but also a golden period to convert paper wealth into real gains.

Why do companies go public? The core driving force is funding needs. Early-stage startups rely on founder investments and angel financing, but once the company reaches a certain scale, relying solely on these funds is far from enough to support business expansion. Through IPO financing, the company can raise substantial capital for debt repayment, business expansion, R&D investment, and brand building. Additionally, IPO grants shareholders liquidity, allowing them to sell part or all of their private shares for profit and diversify investment risks.

Extending the Meaning of IPO: Different Perspectives of Market Participants

From the perspective of public investors, IPO signifies new investment opportunities. High-quality stocks of unlisted companies are usually held only by institutional investors and high-net-worth individuals, leaving ordinary investors unable to participate. However, IPO breaks down this barrier, enabling millions of retail investors to purchase shares of these high-quality companies at relatively low initial prices.

From the viewpoint of market regulators, IPO is a comprehensive process of information disclosure and review. Through strict review mechanisms, regulatory agencies ensure the financial authenticity and operational compliance of listed companies, thereby protecting investors’ rights.

The Process and Listing Conditions of Hong Kong Stock IPO

Complete IPO Process

Hong Kong stock IPOs typically involve several key stages. First is the appointment phase, where the listed company needs to engage sponsors, accountants, lawyers, and other intermediary institutions to form a professional team. Next is due diligence, where intermediaries conduct comprehensive audits of the company’s shares, assets, and financial status, and develop a detailed timetable.

Subsequently, corporate restructuring and governance adjustments are made to meet regulatory requirements. Then, the company submits application documents to the China Securities Regulatory Commission and the Hong Kong Stock Exchange. After releasing the prospectus on the HKEX website, the company must respond to regulatory inquiries.

Roadshows and pricing are critical steps. Through non-deal roadshows, investor meetings, and international roadshows, the company introduces itself to potential investors. The final offering price is determined based on market feedback. The process concludes with the formal IPO and listing.

Main Board Listing Conditions in Hong Kong

Hong Kong listing sets quantitative financial thresholds. A company can apply if it meets any of the following:

• Profitability criterion: Profits of at least HKD 20 million in the most recent year, with cumulative profits of at least HKD 30 million over the previous two years, and profits of no less than HKD 500 million at the time of listing.

• Market value and revenue combination: Market capitalization of at least HKD 4 billion at listing, with revenue of no less than HKD 500 million in the most recent fiscal year.

• Start-up or cash-burning stage companies: Market value of at least HKD 2 billion at listing, revenue of at least HKD 500 million in the most recent fiscal year, and total cash inflows from operating activities of no less than HKD 100 million over the past three fiscal years.

The Application Process and Listing Thresholds for US Stock IPOs

Key Steps in US Stock IPOs

The US IPO process differs from Hong Kong. First, the company needs to hire an investment bank as underwriter or underwriting team, which guides the entire IPO process. Next, the company must submit registration applications and financial statements to the U.S. Securities and Exchange Commission(SEC).

During SEC review, the company may need multiple revisions to respond to regulatory inquiries. After passing the review, it enters the pre-roadshow phase, where investment banks and senior management communicate with institutional investors. Following the official roadshow, underwriters determine the final offering price based on the order book, and then the listing is completed.

NYSE Listing Requirements

The New York Stock Exchange has three main criteria, any one of which a company can meet:

• Profitability focus: Pre-tax profits (excluding non-recurring gains and losses) of at least $100 million over the past three fiscal years, with each of the last two fiscal years exceeding $25 million.

• Scale and cash flow emphasis: Global market capitalization of at least $500 million, revenue of at least $100 million in the past 12 months, and total cash inflows from operating activities of at least $100 million over the past three fiscal years, with each of the last two fiscal years not less than $25 million.

• Growth-oriented companies: Global market capitalization of at least $750 million, with revenue of no less than $75 million in the last two fiscal years.

NASDAQ Listing Standards

NASDAQ, representing the national market, has four flexible listing conditions:

• Condition 1: In any of the last 12 months or any two of the last three fiscal years, the company has had recurring pre-tax profits of at least $1 million, shareholders’ equity of at least $15 million, a public float of at least $8 million, and at least 3 active market makers.

• Condition 2: Shareholders’ equity of at least $30 million, two years of operating history, a public float of at least $18 million, and at least 3 active market makers.

• Condition 3: Listed securities with a market value of at least $75 million, a public float of at least $20 million, and at least 4 active market makers.

• Condition 4: In any of the last 12 months or any two of the last three fiscal years, total assets and revenue of at least $75 million, a public float of at least $20 million, and at least 4 active market makers.

Opportunities and Risk Assessment of Investing in IPO New Stocks

Core Advantages of Participating in IPOs

First, IPO prices often represent the lowest historical points. Many high-growth potential quality companies are privately held before listing, making retail investors unable to participate. Once in the public market, IPO prices are usually the cheapest for the company’s stock. Missing this phase, the stock price is likely to rise rapidly afterward, and re-entry costs will significantly increase.

Second, timing advantage in the market is evident. Companies typically choose to go public when the market is booming and investor sentiment is high, increasing the likelihood of stock price appreciation. High-quality companies listing at relatively low prices create quick profit opportunities for early investors.

Third, information symmetry is relatively high. All investors, including retail and institutional, mainly rely on the prospectus for information. Large institutions do not possess significant informational advantages, making it relatively fair for retail investors.

Unavoidable Investment Risks

IPO hype risk is worth noting. Even if the company performs poorly in the future, short-term gains may still occur due to market speculation and capital inflows. However, when large institutions and well-funded investors start to sell, retail investors may be forced out at lower prices due to trading volume limitations and slow reactions, resulting in losses.

Another potential risk is that the pricing has fully reflected expectations. Positive factors of the company, after market evaluation, are likely already incorporated into the initial listing price. This means the upside potential in the short term may be limited, and short-term gains could be constrained.

Rational Advice for Investing in IPOs

As the IPO market becomes increasingly active, more investors are attracted to this field. To succeed in IPO investing, maintaining a rational attitude is essential.

Investors must thoroughly understand the company’s fundamentals, financial status, competitive advantages, and industry prospects before participating. Financial data, management team introductions, and risk warnings in the prospectus are important references. Do not be swayed by short-term price increases; instead, judge based on long-term value.

Given the high volatility of the IPO market, diversification is an effective way to reduce risks. Avoid investing too much capital in a single IPO; instead, allocate funds reasonably according to your risk tolerance. Maintain a cautious mindset, avoid chasing short-term gains excessively, and develop a long-term holding plan with flexible adjustments based on market changes.

In summary, understanding the meaning of IPO and mastering related knowledge is just the first step. True investment success requires a combination of in-depth research, risk awareness, and a long-term perspective to achieve substantial returns in this market full of opportunities and challenges.