Understanding IPO from scratch: the thresholds, processes, and investment opportunities for listing on Hong Kong and US stock markets

When it comes to IPOs, many people are left confused. Simply put, an IPO is the moment when a company decides to open up its stock purchase rights to the entire society — the critical point where a private company transforms into a publicly listed one. But behind this seemingly simple action lie complex approval processes, strict financial thresholds, and an investment window filled with both opportunities and risks for retail investors.

The Essence of IPO: The Transformation from Private to Public

IPO stands for Initial Public Offering. When a private enterprise needs more capital to drive business expansion, and relying solely on founder investments is no longer sufficient, going public becomes an inevitable choice. Through an IPO, the company can issue shares to the public to raise funds, simultaneously shifting ownership from private to public.

For early investors and founders, an IPO is also a key window for cashing out and diversifying risk — they can partially or fully liquidate their holdings to realize expected returns. For the general retail investor, an IPO offers a rare opportunity to buy high-quality company stocks at the lowest prices.

Hong Kong Stock IPO: Stricter Financial Tests

Listing on the Hong Kong Stock Exchange involves multiple stages. First is the preparation phase, where the company appoints sponsors, accountants, lawyers, and other intermediaries to conduct comprehensive due diligence, along with business restructuring and governance adjustments. Next is the declaration and review process, where the company submits a listing application and prospectus to HKEX, responding to regulatory inquiries. Finally, there are roadshows and issuance, showcasing investment highlights, setting the stock price, and officially listing.

The financial requirements for Main Board listing are relatively high. Meeting any one of the following conditions suffices:

• Profit of at least HKD 20 million in the most recent year, with cumulative profit of at least HKD 30 million over the previous two years, and a profit of at least HKD 500 million at listing
• Market capitalization of at least HKD 4 billion and revenue of at least HKD 500 million in the most recent fiscal year
• Market capitalization of at least HKD 2 billion, revenue of at least HKD 500 million in the most recent fiscal year, and total operating cash flow of at least HKD 100 million over the past three years

This indicates that Hong Kong’s market has clear requirements for a company’s profitability and scale, making it more challenging for grassroots enterprises to list.

US Stock IPO: Diverse Rules but Complex Processes

The US IPO process typically includes selecting an investment bank as underwriter, submitting registration statements to the U.S. Securities and Exchange Commission (SEC), conducting nationwide roadshows, final pricing, and issuance. Unlike Hong Kong, the US has multiple exchanges to choose from, with NYSE and NASDAQ being the most prominent, each with different listing thresholds.

NYSE’s requirements are relatively conservative:

• Total pre-tax profits of at least USD 100 million over the past three years, with over USD 25 million in the last two years
• Or a global market value of at least USD 500 million, with revenue of at least USD 100 million in the past 12 months, and total cash flow of at least USD 100 million over three years
• Or a global market value of at least USD 750 million, with revenue of at least USD 75 million in the last two years

NASDAQ’s thresholds are more flexible, taking the U.S. national market as an example:

Including profit-based conditions (such as positive pre-tax income of USD 1 million in the most recent year or any two of the past three years), shareholder equity requirements (ranging from USD 15 million to USD 30 million), market value and market maker conditions (public float not less than USD 8 million to USD 20 million, with 3 to 4 market makers), among others.

This means tech and innovative companies have more options and are not necessarily required to meet traditional profit standards.

The Double-Edged Nature of IPO Investment: Opportunities and Traps

Core advantages of investing in IPOs:

First is the lowest entry price. Many quality companies, due to private status, are inaccessible to retail investors. But once they go public, the issuing price is often the lowest historical price offered by the company. Missing the IPO price makes it difficult to buy in at such low levels later, especially if the stock price surges afterward.

Second is market sentiment support. Most companies choose to launch IPOs during bullish markets, when investor optimism can push prices higher. High-quality companies listing at relatively low IPO prices create opportunities for quick profits for participants.

Third is relatively symmetrical information. All investors can only learn about the company through the prospectus; large institutional investors do not gain unfair advantages through information lead.

But risks are equally significant:

IPO stocks are often targets for speculation. If the chosen company is not fundamentally strong, when large institutional investors start selling, retail investors may not be able to follow promptly and could be forced to hold at a loss.

Additionally, all positive factors for a company are usually priced into the IPO before listing, limiting short-term upside potential. In other words, buying IPOs does not mean buying hidden treasures; the market has already reflected current expectations.

Practical Investment Advice

For retail investors interested in IPOs, it’s essential to research the company’s fundamentals and financial health rather than blindly follow trends. Understanding the company’s competitive position within its industry, revenue growth, profitability, and cash flow health is the prerequisite for making informed decisions.

At the same time, it’s important to recognize that the IPO market is volatile. Avoid chasing short-term gains; instead, consider long-term holding, diversification, and flexible strategy adjustments based on market changes. Especially for risk-averse investors, strict screening of IPO targets is advised, focusing on mature companies with stable profits and ample cash flow, rather than high-growth, high-risk firms.

In summary, what is an IPO? It’s both a milestone in a company’s growth and a test for investors. Mastering the rules and differences of Hong Kong and US listings, understanding the balance between risks and opportunities, is key to steady profits in this market.