Master the Complete Guide to IPO Investment: Hong Kong and US Stock Listing Mechanisms, Conditions, and Risk-Return Analysis

What is an IPO? Why Are More and More Investors Focusing on This Field?

When private companies need to rapidly expand their scale and initial financing is no longer sufficient, the method of raising funds by issuing shares to the public has emerged. This process is known as IPO (Initial Public Offering), which means the company’s first public issuance.

What is the essence of an IPO? In short, it represents a private holding company officially entering the public market, allowing ordinary investors to purchase its shares, while the company also gains capital support. This transition not only provides founders and early investors with exit and liquidity opportunities but also opens the door for retail investors to participate in the growth of high-quality enterprises.

Besides fundraising, IPOs can help companies repay debt, improve their balance sheets, and enhance brand awareness and market reputation. In other words, going public is not only a milestone in a company’s development but also a key window for investors to share in the company’s growth dividends.

Investing in IPO New Stocks: Return Potential vs. Risk Challenges

Core Advantages of Investing in IPOs

① Low-Cost Entry into Quality Companies

Many companies with significant growth potential remain private for a long time, making it difficult for retail investors to participate. IPOs provide ordinary investors with a rare opportunity to buy such high-quality stocks at relatively low prices. IPO pricing is usually the initial discount offered by the issuing company to the market — also the lowest price historically. Once the first trading day is completed, the stock price is highly likely to break upward, and subsequent entry costs will inevitably rise significantly.

② Higher Short-Term Profitability Probability

Most companies choose to launch IPOs during favorable market cycles, which means there are strong reasons to expect an upward trend in stock prices. High-quality companies listing at relatively low IPO prices create opportunities for early investors to realize quick profits.

③ Information Symmetry Advantage

Unlike the secondary stock market, all participants (including institutions and retail investors) in IPO investments mainly rely on the prospectus for information. The advantage of large institutional investors in information channels is significantly reduced, creating a relatively fair competitive environment for ordinary investors.

Risks That Must Be Avoided When Investing in IPOs

① Hot Stock Manipulation Traps

On the surface, the many attractions of IPOs are tempting, but risks also come with them. If the selected company is not a high-quality investment target, even if it successfully lists, when institutional investors and large funds start selling, retail investors often react slowly and cannot follow in time to reduce holdings, ultimately getting trapped.

② Overvaluation Phenomenon

All positive factors of the issuing company may have been fully digested and priced into the IPO, severely limiting short-term profit space for investors, and possibly leading to stock price consolidation or decline after listing.

Hong Kong Stock IPO: Conditions and Complete Process Explanation

Listing Conditions for Main Board IPOs in Hong Kong

Taking the HKEX Main Board as an example, companies only need to meet any one of the following to apply for listing:

Condition 1: Profit of no less than HKD 20 million in the most recent year, and cumulative profit of no less than HKD 30 million over the previous two years, with a profit of no less than HKD 500 million at the time of listing.

Condition 2: Market value of no less than HKD 4 billion at listing and revenue of no less than HKD 500 million in the most recent fiscal year.

Condition 3: Market value of no less than HKD 2 billion at listing, revenue of no less than 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.

Complete Listing Process for Hong Kong Stock IPOs

Stage 1: Mechanism Preparation

Companies must hire a team of intermediaries, including sponsors, accountants, Chinese lawyers, Hong Kong lawyers, internal control consultants, and appraisers. All parties jointly develop detailed timelines and advancement plans.

Stage 2: Due Diligence and Compliance

The intermediary team conducts comprehensive due diligence, including share verification, asset review, and financial audits. During this period, key documents such as the prospectus and legal opinions are drafted.

Stage 3: Structural Adjustment

Companies need to reorganize their business structure, asset allocation, and equity structure, and optimize corporate governance to meet listing requirements.

Stage 4: Regulatory Filing

Formally submit listing applications and related documents to the China Securities Regulatory Commission and HKEX. After receiving acceptance letters, publish the prospectus on the HKEX website and respond truthfully to regulatory inquiries.

Stage 5: Roadshow and Pricing

Prepare roadshow materials, then conduct non-deal roadshows, meetings with institutional investors, and international promotion tours. After collecting investor intentions, set a reasonable price, and officially launch the IPO in Hong Kong.

Stage 6: Official Issuance

Shares are issued according to plan and listed on HKEX for trading.

US Stock IPO: Comparison of Conditions and Processes Across Multiple Exchanges

NYSE Listing Conditions

Among major US exchanges, NYSE’s requirements are:

Condition 1: Pre-tax earnings (excluding non-recurring items) of at least USD 100 million over the past 3 fiscal years, with each of the last 2 years exceeding USD 25 million.

Condition 2: Global market capitalization of at least USD 500 million, with revenue of at least USD 100 million in the past 12 months, and cash flows from operating activities totaling at least USD 100 million over the past 3 fiscal years, with each of the last 2 years exceeding USD 25 million.

Condition 3: Global market capitalization of at least USD 750 million, with revenue of no less than USD 75 million in the last 2 fiscal years.

NASDAQ Listing Conditions

For the NASDAQ Global Market, a company can qualify if it meets any of the following:

Condition 1: Pre-tax income of at least USD 1 million in the most recent full fiscal year or any two of the last three years, with stockholders’ equity of at least USD 15 million, public float of at least USD 8 million, and at least 3 active market makers.

Condition 2: Stockholders’ equity of at least USD 30 million, with 2 years of operating history, public float of at least USD 18 million, and at least 3 active market makers.

Condition 3: Market value of listed securities of at least USD 75 million, public float of at least USD 20 million, and at least 4 active market makers.

Condition 4: Total assets and revenue of at least USD 75 million in the most recent full fiscal year or any two of the last three years, with public float of at least USD 20 million and at least 4 active market makers.

US Stock IPO Standard Promotion Process

Step 1: Investment Bank Team Initiation

Companies must hire an investment bank or underwriters to lead and coordinate the entire IPO process.

Step 2: SEC Registration Filing

Work with underwriters to submit registration statements to the SEC, including financial data, business plans, use of proceeds, and risk disclosures.

Step 3: Nationwide Roadshow

Two weeks before the IPO, management tours across the US to promote the offering to potential investors and secure orders.

Step 4: Pricing and Exchange Confirmation

Negotiate a reasonable IPO price with underwriters, decide on the listing exchange, and formally apply for SEC approval of the registration statement.

Step 5: Prospectus Release

Provide the final prospectus and application forms to the public within the planned date, while SEC publicly announces the listing date and trading schedule.

Step 6: First-Day Trading and Allocation

After finalizing the IPO price, the company and underwriters determine the allocation per investor. Once allocated, trading begins immediately.

IPO Investment Advice for Taiwanese Investors

Given the continuous rise in IPO market activity, more investors are starting to focus on this area. Taiwanese investors usually pay more attention to local listed companies’ IPO opportunities because they have a higher understanding of the local industry ecosystem and corporate development trajectories.

Additionally, Taiwanese investors tend to prefer low-risk investment strategies, prioritizing companies with solid fundamentals and steady growth, while strictly controlling risk exposure.

Key Steps Before Investing:

Deeply understand the company’s fundamentals and financial status, which is the prerequisite for making rational investment decisions. Due to the high volatility of the IPO market, investors should remain cautious, avoid blindly chasing short-term gains, and adopt long-term holding and diversification strategies, adjusting positions in response to market trends.

Overall, for Taiwanese investors, participating in IPO investments can be an effective way to achieve substantial returns, provided they maintain a rational and cautious investment mindset, fully understand the mechanisms and risks behind IPOs, and continuously monitor the fundamentals of their investment targets.