Copyright Compliance Audit for Pre-IPO Companies

The SFC’s 2024 thematic review of IPO sponsors, published in December 2024, flagged intellectual property (IP) due diligence as a recurring deficiency, with 38% of sponsor files reviewed showing inadequate verification of copyright ownership or licensing arrangements for tech-driven applicants. This finding, coupled with HKEX’s heightened scrutiny of revenue recognition under Listing Rules Chapter 9.05 (which requires sponsors to confirm that a listing applicant’s revenue streams are legally defensible), has made copyright compliance a non-negotiable gatekeeper for pre-IPO companies targeting the Main Board or GEM in 2025-2026. For CFOs and company secretaries of firms whose business models rely on software, digital content, or proprietary databases—such as fintech platforms, gaming studios, or SaaS providers—a failure to audit copyright assets before filing the A1 application can trigger a formal enquiry from the Listing Division, a delay in the listing timetable, or, in extreme cases, a withdrawal of the sponsor’s declaration under the Code of Conduct for Persons Licensed by or Registered with the SFC (Cap. 571). The increasing convergence of PRC copyright law amendments (effective June 2024, broadening the definition of “works” to include AI-generated outputs) and Hong Kong’s own Copyright Ordinance (Cap. 528) updates on digital rights management means that cross-border applicants must reconcile two distinct legal regimes. This article provides a procedural framework for conducting a copyright compliance audit during the pre-IPO readiness phase, mapping the audit steps to specific regulatory requirements from HKEX, the SFC, and the Companies Ordinance (Cap. 622).

The Regulatory Rationale: Why Copyright Audits Are Now a Listing Prerequisite

The SFC’s 2024 sponsor review explicitly identified IP due diligence as a “high-risk area” under paragraph 17.2 of the Code of Conduct, which mandates that sponsors must take “reasonable steps” to verify the ownership and validity of a listing applicant’s material assets. For companies where copyright constitutes a core intangible asset—for example, a mobile gaming company generating 85% of its revenue from in-app purchases of copyrighted characters—the sponsor’s obligation extends beyond a simple check of registration certificates. The SFC expects sponsors to review the chain of title from creation to commercialisation, including employment agreements, work-for-hire clauses, and third-party licensing contracts, all of which must be documented in the sponsor’s working papers.

HKEX Listing Rule 9.05(3) reinforces this by requiring that a listing document contain “a statement that the directors have made sufficient enquiries to ensure that the intellectual property rights of the group are not materially encumbered.” In practice, this means that the directors’ declaration in the prospectus (招股書) must be supported by a copyright compliance report prepared by external legal counsel, typically a Hong Kong law firm with PRC law capability. The Listing Division has, since January 2023, issued at least 12 formal enquiries to pre-IPO applicants specifically requesting copies of copyright assignment deeds, royalty-free licences, and evidence of registration with the National Copyright Administration of China (NCAC) for PRC-origin works.

The 2024 PRC Copyright Law Amendment and Its Cross-Border Impact

The PRC Copyright Law amendment, effective 1 June 2024, introduced Article 3(2), which explicitly recognises “works generated by artificial intelligence” as copyrightable subject matter, provided that the human creator exercises “substantial intellectual input” in the creation process. For Hong Kong-listed applicants with PRC operating subsidiaries, this creates a dual compliance burden: the copyright must be valid under PRC law for the subsidiary’s revenue to be recognised, but the Hong Kong listing document must also satisfy Cap. 528’s requirement that the copyright is enforceable in Hong Kong. The HKEX Listing Division has indicated in its 2025 Guidance Letter GL-2025-01 that sponsors must address this divergence in the due diligence report, specifically by confirming whether the copyright’s legal basis in the PRC aligns with the rights claimed in the prospectus.

Audit Stage 1: Mapping the Copyright Portfolio and Chain of Title

The first phase of a copyright compliance audit involves constructing a complete inventory of all copyright assets that are material to the applicant’s business. Materiality is defined under HKEX’s guidance on “material assets” in Listing Rule 9.05(4), which considers any IP that contributes more than 10% of the group’s revenue or 15% of its net profit as presumptively material. For a software-as-a-service (SaaS) company, this would include the source code, user interface design, and any proprietary algorithms. For a content streaming platform, it would encompass the library of licensed films, music, and original productions.

Creating the Copyright Register

The audit team—comprising the applicant’s in-house legal counsel, the sponsor’s due diligence team, and external IP lawyers—must compile a register that lists each copyright asset by jurisdiction of creation, registration status (if any), date of creation, and the legal entity holding the title. In practice, many pre-IPO companies in Hong Kong are incorporated in the Cayman Islands or Bermuda, with operating subsidiaries in the PRC. The copyright register must reflect the ultimate beneficial ownership of each asset, tracing from the PRC subsidiary to the Hong Kong holding company and then to the offshore parent. The SFC’s 2024 review noted that 22% of sponsor files failed to document the chain of title for copyrights originating from PRC employees, where employment contracts did not contain explicit work-for-hire clauses.

Verifying Work-for-Hire and Employee Agreements

Under PRC Copyright Law, Article 18 provides that copyright in works created by an employee in the course of employment belongs to the employer, but only if the employment contract or company policy expressly states this. The SFC expects sponsors to review a sample of at least 20 employment contracts for key creative personnel—such as game developers, UI/UX designers, and content editors—to confirm that the work-for-hire clause is present and enforceable. If the contracts are silent, the sponsor must obtain a supplemental assignment deed from each employee, signed and dated before the A1 filing. In a 2023 enforcement action, the SFC reprimanded a sponsor for failing to verify this, leading to a six-month delay in the listing of a PRC-based animation studio.

Audit Stage 2: Licensing Agreements and Third-Party Rights

Once the portfolio is mapped, the audit must examine all inbound and outbound licensing agreements. Inbound licences—where the applicant uses third-party copyrights in its products—are critical because they affect the applicant’s ability to generate revenue. For example, a music streaming platform that licenses songs from major labels must verify that the licence covers the territory of Hong Kong, the PRC, and any other markets where the platform operates. The HKEX Listing Division has, in its 2024 review of listing documents, required that material licences be disclosed in the prospectus under Rule 9.05(6), including the term, royalty rate, and termination rights.

Outbound Licensing and Royalty Streams

Outbound licences—where the applicant licenses its copyrights to third parties—are equally important, as they often constitute a significant revenue stream. The audit must confirm that the licence is validly executed, that the royalty rate is arm’s length, and that the licence does not grant the licensee any rights that could dilute the applicant’s ownership. For a gaming company that licenses its characters to a merchandiser, the audit should review the sub-licensing clause to ensure that the licensee cannot further sub-license without the applicant’s consent. The SFC’s Code of Conduct paragraph 17.3 requires sponsors to assess whether any material licence contains a change-of-control clause that could be triggered by the listing, potentially terminating the licence upon the applicant’s IPO.

Open Source and Third-Party Code Dependencies

For technology companies, the audit must address open-source software (OSS) dependencies. The use of OSS libraries—such as those licensed under the GNU General Public License (GPL) or Apache License—can create copyleft obligations that require the applicant to disclose its own source code. The SFC has not issued specific guidance on OSS, but HKEX’s 2024 Guidance Letter GL-2024-03 on technology companies states that sponsors must assess whether any OSS licence creates a “material encumbrance” on the company’s IP. In practice, this means the audit team must run a software composition analysis (SCA) tool to identify all OSS components in the applicant’s codebase, then review each licence to determine whether it imposes any restrictions on commercial use or distribution. A 2024 study by the Hong Kong Intellectual Property Department (IPD) found that 34% of Hong Kong-based tech startups had at least one OSS component with a restrictive licence that could conflict with their revenue model.

Audit Stage 3: Registration, Enforcement, and Litigation Risk

Copyright registration is not mandatory for copyright to exist under either PRC or Hong Kong law—copyright arises upon creation. However, registration provides prima facie evidence of ownership, which is critical in enforcement actions. For pre-IPO companies, the audit must assess whether the applicant has registered its core copyrights with the relevant authorities, as this affects the company’s ability to defend its IP against infringers. The HKEX Listing Division has, in several recent cases, requested confirmation that the applicant has filed copyright registrations with the NCAC for all material PRC-origin works, and with the Hong Kong Intellectual Property Department for works created in Hong Kong.

Enforcement History and Litigation Risk

The audit must also review any past or pending copyright infringement claims. Under HKEX Listing Rule 9.05(7), the prospectus must disclose any material litigation, including copyright disputes, that could affect the applicant’s financial condition. The SFC expects sponsors to conduct a litigation search in the PRC courts (using the China Judgments Online database) and in Hong Kong’s e-Legal system, covering the past five years. If the applicant has been involved in a copyright dispute—for example, a claim that its streaming platform hosted unauthorised content—the audit must assess the potential liability, including any damages awarded or settlement amounts paid. In a 2025 case, the HKEX Listing Division rejected a listing application from a PRC-based e-learning platform that had four pending copyright infringement lawsuits, on the grounds that the potential liability exceeded 20% of the company’s net assets.

The Role of the Copyright Audit Report

The final deliverable of the audit is a written report, typically prepared by external legal counsel, that opines on the validity, ownership, and enforceability of the applicant’s copyright portfolio. The report must be addressed to the sponsor and the board of directors, and it must be included in the sponsor’s working papers submitted to the SFC under the Code of Conduct paragraph 17.4. The HKEX Listing Division may request a copy of the report during its review of the A1 application, particularly if the applicant is in a copyright-intensive sector. The report should include a schedule of all material copyrights, a summary of key licensing agreements, and a risk assessment of any identified gaps or deficiencies.

The Cost of Non-Compliance: A 2025 Case Study

In March 2025, the HKEX Listing Division issued a formal refusal of a listing application from a PRC-based fintech company that derived 70% of its revenue from a proprietary algorithm. The sponsor’s due diligence had failed to identify that two of the company’s three lead developers had not signed work-for-hire agreements, meaning that the copyright in the algorithm was legally owned by the developers, not the company. The SFC subsequently censured the sponsor, imposing a fine of HKD 8 million and a six-month suspension of its licence to act as a sponsor. The company’s CFO later stated in a press release that the refusal cost the company an estimated HKD 25 million in professional fees and lost market opportunity. This case underscores the material financial and reputational risk of inadequate copyright compliance.

Actionable Takeaways for Pre-IPO Companies

1. Conduct a copyright portfolio audit at least 12 months before the intended A1 filing date, using external legal counsel with both PRC and Hong Kong copyright law expertise, to allow time for remediation of any chain-of-title gaps.
2. Ensure that all employment contracts for creative and technical staff contain explicit work-for-hire clauses that comply with PRC Copyright Law Article 18, and obtain supplemental assignment deeds for any employees hired before the audit.
3. Run a software composition analysis tool on all codebases to identify open-source dependencies, and engage IP counsel to assess whether any restrictive licences (such as GPL) create copyleft obligations that could encumber the company’s proprietary software.
4. Register all material copyrights with the National Copyright Administration of China for PRC-origin works and with the Hong Kong Intellectual Property Department for Hong Kong-origin works, as registration provides prima facie evidence of ownership that the HKEX Listing Division expects to see in the prospectus.
5. Include a copyright compliance report in the sponsor’s working papers, addressed to the board and the sponsor, that opines on the validity, ownership, and enforceability of the copyright portfolio, and be prepared to provide a copy to the Listing Division upon request.