Hong Kong SFC mandates stricter IPO financing regulations

Hong Kong's Securities and Futures Commission (SFC) has instructed stock brokerages to improve their practices in financing clients for initial public offerings (IPOs). The SFC's review found many risky financing methods that increase the chances of financial losses for both the brokers and their clients. Starting now, brokers must collect a 10 percent upfront deposit from clients who do not fully fund their IPO orders. They also need to evaluate clients' financial situations and separate these deposits to make refunds easier for unsuccessful bids. Retail investors in Hong Kong borrowed over HK$1.8 trillion, or about US$231.6 billion, to invest in a major IPO for a fresh-drinks chain, Mixue. They experienced extraordinary demand, with 5,258 times the number of shares available. Another group borrowed HK$474 billion for shares from the toymaker Blok Group, resulting in nearly 6,000 times the shares offered. The SFC pointed out that some brokers were accepting orders without confirming clients had enough resources. This puts both parties at risk, especially if too many shares are assigned to clients who cannot pay. The SFC is worried about these practices and had previously urged financial institutions to manage their risks better when dealing with IPO funding. In November 2023, the SFC sent out a similar warning in light of a new platform, the Fast Interface for New Issuance (FINI). This platform allows brokers to prepay only for the maximum number of shares they could receive, rather than the entire amount needed for excess orders. Some brokers had even offered zero-interest loans to draw in buyers.