Initial Public Offering Guide: What is an IPO, Listing Requirements Explained, and Investment Return Analysis

What Does IPO Mean? An In-Depth Understanding of the First Public Offering

Basic Meaning of IPO

IPO stands for Initial Public Offering. In Chinese, it is “首次公开发行”. When a private company reaches a certain stage of development, it often faces a critical decision: whether to open up shares to the public for financing. This process of transforming from a private enterprise into a publicly listed company is the core of an IPO.

From a financing perspective, the initial investment and early funding support from founders can promote the company’s initial growth, but to accelerate business expansion, relying solely on internal capital accumulation is far from sufficient. At this point, raising funds from the public through an IPO becomes an inevitable choice for growth.

Significance of IPO for Companies and Investors

For the issuing company, an IPO signifies a major change in ownership structure—from a private ownership with one or few shareholders to dispersed public shareholding. Simultaneously, this process provides founders and early investors with channels for cashing out and liquidity management.

For investors, an IPO opens opportunities to participate in the growth of high-quality enterprises. Previously, shares of high-quality non-listed companies could only be held by institutional investors. Now, retail investors can subscribe to these shares. Through an IPO, investors gain access to purchase company stock, while the company completes capital supplementation, debt repayment, and brand enhancement via equity financing.

Hong Kong Stock IPO Listing Overview: Process and Conditions

Complete Process of Hong Kong Stock IPO

Preparation for a Hong Kong stock listing begins with selecting intermediaries. The company needs to appoint sponsors, accountants, lawyers, valuers, and other professional teams to collaboratively advance the entire process.

Next is the due diligence phase, where intermediaries thoroughly review the company’s share ownership, assets, and financial status. Concurrently, drafting of key documents such as the prospectus and legal opinions takes place.

Business restructuring and corporate governance optimization are critical review steps. The company must be well-prepared in terms of assets, shareholding structure, and organizational governance to meet regulatory requirements.

Subsequently, the company submits application materials to the China Securities Regulatory Commission (CSRC) and the Hong Kong Stock Exchange, participates in roadshows, and sets the offering price. The final steps include registration of the issuance and commencement of trading.

Financial Requirements for Main Board IPOs in Hong Kong

To list on the Hong Kong Main Board, a company must meet any one of the following conditions:

1. Profit in the most recent year not less than HKD 20 million, with cumulative profit over the previous two years not less than HKD 30 million, and profit at the time of listing not less than HKD 500 million.

2. Expected market capitalization at listing not less than HKD 40 billion, with revenue in the most recent fiscal year not less than HKD 5 billion.

3. Expected market capitalization at listing not less than HKD 20 billion, with revenue in the most recent fiscal year not less than HKD 5 billion, and total operating cash flows over the past three fiscal years not less than HKD 100 million.

Analysis of US Stock IPO Conditions and Process

Initiation of US Stock IPO

The US stock IPO process begins with the company recruiting investment banks or underwriting teams. These financial institutions provide comprehensive services including IPO guidance, document preparation, pricing, and distribution.

The company must submit registration statements and prospectuses to the U.S. Securities and Exchange Commission (SEC) for review and feedback. During this process, the company and intermediaries respond to multiple rounds of inquiries and requests from regulators.

Roadshows are a key part of the US IPO process. Management introduces the business model, competitive advantages, and growth prospects to potential investors, collecting market feedback to determine the final offering price.

NYSE Listing Standards

The New York Stock Exchange (NYSE) has relatively strict financial requirements. A company must meet any one of the following:

1. Pre-tax net profit (excluding non-recurring gains) over the past three fiscal years totaling at least USD 100 million, with each of the last two years exceeding USD 25 million.

2. A global market capitalization of at least USD 500 million, with annual revenue in the last 12 months not less than USD 100 million, and cash inflows over the past three fiscal years totaling at least USD 100 million, with each of the last two years not less than USD 25 million.

3. A global market capitalization exceeding USD 750 million, with annual revenue in the last two fiscal years not less than USD 75 million.

NASDAQ Listing Requirements

The NASDAQ’s requirements are relatively flexible, allowing companies to choose to meet any one of the following:

1. Achieve positive pre-tax income of USD 1 million in the most recent full fiscal year or any two of the last three years, with shareholders’ equity of at least USD 15 million, a public market value of at least USD 8 million, and at least three active market makers.

2. Shareholders’ equity of at least USD 30 million, with a two-year operating history, a public market value of at least USD 18 million, and at least three active market makers.

3. Total market value of listed securities of at least USD 75 million, with a public market value of at least USD 20 million, and at least four active market makers.

4. Total assets and annual income in the most recent full fiscal year or any two of the last three years reaching USD 75 million, with a public market value of at least USD 20 million, and at least four active market makers.

Opportunities and Risks of IPO Investment

Advantages of Investing in IPO New Stocks

First, IPOs open the door for retail investors to access high-quality non-listed companies. Many companies that initially kept a low profile due to funding difficulties can now be invested in by the public. IPO prices often represent the most cost-effective entry point—usually the lowest price at which the company actively offers shares. Missing this window can lead to higher costs later, as post-listing stock prices may rise rapidly.

Second, most companies tend to initiate IPOs during favorable market conditions and optimistic industry outlooks. This means that listed companies are often in a growth phase, increasing the likelihood of profits from stock price appreciation. High-quality enterprises entering the public eye at relatively low IPO prices create opportunities for short-term gains.

Third, information during the IPO stage is relatively symmetrical. All investors mainly rely on publicly available documents like the prospectus, making it difficult for large institutional investors to gain an information advantage. This relatively fair environment provides retail investors with a platform to compete with institutions.

Risks to Watch Out for in IPO Investment

Despite the attractiveness, IPO investments carry potential risks. First, choosing the wrong company is a major risk. If the company lacks genuine investment value, even a successful IPO can lead to a situation where large institutional and well-funded investors start taking profits, leaving retail investors holding shares at high prices and facing losses.

Second, price overvaluation is a concern. Many companies’ positive factors and growth potential are already reflected or even exaggerated in the IPO pricing. In such cases, subsequent stock price increases are limited, and short-term gains may fall short of expectations.

Third, the IPO market itself is volatile. Macroeconomic conditions, industry trends, and market liquidity all influence new stock performance. Investors should be cautious of valuation bubbles caused by overheated markets and avoid blindly chasing gains.

Practical Advice for Participating in IPO Investment

For investors considering IPO participation, it is recommended to thoroughly research the company’s fundamentals—including business model, competitive position, financial health, and management team. Making decisions based solely on hype or short-term price expectations is unwise.

Second, maintain a cautious attitude and avoid excessive pursuit of short-term gains. The logic of IPO investment should be based on long-term growth potential rather than speculation. Strategies like long-term holding, diversification, and periodic adjustments can effectively reduce risks associated with failed IPOs.

Finally, as market conditions evolve, investors should continuously monitor macroeconomic trends and industry developments, adjusting their portfolios flexibly according to actual market situations. Rational, cautious, and well-informed investors are more likely to achieve steady returns in the opportunity-rich field of IPOs.