Hong Kong’s SFC tells brokers to end ‘imprudent, aggressive’ IPO financing practices

Hong Kong’s market watchdog has asked the city’s stock brokerages to clean up their act in funding their clients in initial public offerings (IPOs), after a review discovered “imprudent and aggressive financing practices” that exposed both parties to financial risks or default.

They would be required to collect an upfront subscription deposit of 10 per cent from clients who do not fully pre-fund their IPO orders, the Securities and Futures Commission (SFC) said in a circular on Thursday. The firms must also assess their financial capabilities and creditworthiness, as well as segregate those deposits to smoothen refunds for unsuccessful bids, it added.

Retail investors in Hong Kong borrowed more than HK$1.8 trillion (US$231.6 billion) from brokerages to bid for China’s largest fresh-drinks chain Mixue, resulting in 5,258 times the number of shares on offer. They also took HK$474 billion in margin financing to bid for shares of toymaker Blok Group, or about 6,000 times the number of shares on offer.

“Some of the imprudent and aggressive financing practices exposed themselves and their clients to undue financial risks, including the risk of default when the number of shares allotted to clients exceeds their financial capabilities,” the SFC said. Other “deficiencies” included accepting clients’ orders before ensuring they had sufficient resources to meet their obligations, it added.

The caution reflects the unease among market regulators. The SFC issued a similar circular in November 2023, urging financial institutions to prudently manage their risks when providing IPO financing and subscription services following the introduction of the Fast Interface for New Issuance (FINI) platform.

The platform allows brokers to prepay for only the maximum number of shares that can be allotted in a public offering, instead of locking in funds for the entire excess amount. Some brokers offered zero-interest margin financing loans to attract customers.