Director Share Dealing Code Setup for Pre-IPO Companies

The HKEX’s 2025 enforcement report recorded 27 cases of suspected insider dealing referred to the SFC, the highest annual figure since 2021. For pre-IPO companies approaching a Main Board or GEM listing, the period between the filing of the A1 application and the first day of dealings represents a distinct vulnerability window. During this interval, directors, senior management, and substantial shareholders possess material non-public information — including the final offer price, allocation results, and underwriter demand indications — that is not yet reflected in the market. HKEX Listing Rule 5.58 (for the Main Board) and Rule 8.22 (for GEM) require every listed issuer to adopt a code of conduct regarding dealings in its securities by directors and relevant employees. The practical challenge for pre-IPO companies is that these rules technically apply only after listing, leaving a regulatory gap during the crucial pre-dealing period. Establishing a director share dealing code before the listing application, rather than after approval, reduces this risk. The SFC’s 2024 revised Code of Conduct for Persons Licensed by or Registered with the SFC (Chapter 12, paragraph 12.1) explicitly expects sponsors to satisfy themselves that the applicant has adequate internal controls, including pre-clearance procedures for securities dealings. This article sets out the structural requirements, timing considerations, and enforcement mechanics for a pre-IPO director share dealing code that aligns with HKEX Listing Rules, SFC expectations, and market practice.

Why Pre-IPO Directors Need a Dealing Code Before the Prospectus Is Filed

The statutory prohibition on insider dealing under the Securities and Futures Ordinance (SFO, Cap. 571, Part XIV) applies to any person connected with a listed corporation, including directors of a company that has applied for listing. Section 270 of the SFO defines a “connected person” broadly to include directors, employees, and substantial shareholders. The offence does not require the company to be listed — only that the dealing occurred while the person was in possession of inside information and that the information related to a listed corporation or a corporation that has applied for listing. For a pre-IPO company, the application for listing is typically made on the date the A1 submission is accepted by the HKEX. From that moment, directors dealing in the company’s shares — whether on the OTC market, through private placements, or via secondary transactions — fall within the SFO’s insider dealing regime.

The Gap Between HKEX Listing Rules and SFO Requirements

HKEX Listing Rule 5.58 requires every listed issuer to adopt a code of conduct regarding dealings in its securities by directors and relevant employees. The rule is framed as a continuing obligation post-listing. The Model Code for Securities Transactions by Directors of Listed Issuers (Appendix 10 for Main Board, Appendix 7B for GEM) sets out the minimum standards, including blackout periods of at least 30 days before the publication of annual results and 7 days before quarterly or half-year results. However, these blackout periods are calibrated to the reporting cycle of a listed company. A pre-IPO company has no published results, no market price, and no ongoing disclosure obligations under the Listing Rules. The SFO, by contrast, applies without reference to blackout periods. A director who sells shares during the period between the A1 submission and the prospectus registration, knowing that the offer price will be set at a premium to the private transaction price, is exposed to insider dealing risk even if no HKEX Model Code breach exists.

Sponsor Due Diligence and SFC Code of Conduct Obligations

The SFC’s 2024 revised Code of Conduct for Persons Licensed by or Registered with the SFC, Chapter 12, paragraph 12.1(b), requires sponsors to conduct reasonable due diligence to ensure that an applicant has “adequate and effective internal controls and risk management systems.” The SFC’s December 2024 consultation conclusions on sponsor regulation (published January 2025) explicitly identified pre-IPO securities transactions by directors as a recurring deficiency in sponsor due diligence. In 2023, the SFC reprimanded a sponsor firm for failing to identify that a director had sold shares to a family trust during the listing application period, a transaction that was subsequently found to constitute insider dealing under Section 270 of the SFO. The SFC’s expectation is clear: sponsors must verify that the applicant has a written dealing code in place before the A1 filing, not after. The code must cover all directors, senior management, and any employee who has access to inside information, with a pre-clearance mechanism that operates from the date of the listing application.

Structural Components of a Pre-IPO Director Share Dealing Code

A pre-IPO dealing code differs from the post-listing Model Code in three material respects: the definition of inside information, the scope of restricted persons, and the mechanics of pre-clearance. The code must be drafted to function before the company has a market price, before the HKEX Model Code applies, and before the prospectus is registered. The following sections set out the minimum structural components that satisfy SFC expectations and provide a defensible framework if a transaction is later challenged.

Definition of Inside Information and Closed Periods

The code must adopt the SFO’s definition of “inside information” under Section 245(1): specific information about the issuer or its securities that is not generally known, and which would be likely to materially affect the price of the securities if it were generally known. For a pre-IPO company, inside information includes the following categories: the exact or indicative offer price range; the final allocation table; the underwriting commission structure; any material adverse change in the business since the last audited financial statements; any regulatory query from the HKEX or SFC regarding the listing application; and any change in the sponsor’s opinion on the applicant’s suitability for listing. The code should define “closed periods” as any period during which the company is in possession of inside information that has not been publicly disclosed. Unlike the post-listing Model Code, which uses fixed calendar periods tied to results announcements, the pre-IPO closed period is event-driven. The code must require directors to seek pre-clearance from a designated compliance officer — typically the company secretary or the sponsor’s compliance team — before any dealing, irrespective of whether a closed period is in effect.

Scope of Restricted Persons and Connected Parties

The code must extend beyond directors to include all “relevant employees” as defined in HKEX Listing Rule 5.58, which covers any employee who may possess inside information in the course of their employment. For a pre-IPO company, this includes the CFO, the head of investor relations, the legal counsel (both internal and external), the company secretary, the sponsor’s deal team members, and any employee involved in preparing the prospectus or responding to HKEX queries. The code should also cover connected parties: spouses, minor children, step-children, trustees of family trusts where the director is a beneficiary, and any company controlled by the director. The SFC’s enforcement practice in 2024-2025 has shown a trend toward piercing nominee structures. In the SFC v. Li (2024) case, the court held that a director who instructed a family trust to sell shares during a pre-IPO closed period was liable for insider dealing under Section 270, even though the director did not personally execute the trade. The code should explicitly prohibit any dealing by a connected party where the director has knowledge of inside information, regardless of whether the director receives a direct economic benefit.

Pre-Clearance Procedure and Record-Keeping Requirements

The pre-clearance procedure must be documented in writing and include the following steps: (1) the director submits a written dealing request to the compliance officer at least 5 business days before the proposed dealing date; (2) the compliance officer checks whether the company is in a closed period or possesses inside information that has not been disclosed; (3) if no impediment exists, the compliance officer issues a written clearance, valid for a maximum of 5 business days; (4) the director confirms the dealing within 24 hours of execution, providing the trade date, volume, price, and counterparty; (5) the compliance officer records all requests, clearances, and confirmations in a dealing register that is retained for at least 7 years after the listing. The HKEX’s 2025 Guidance on Internal Controls for Listing Applicants (GL-2025-01) recommends that the dealing register be made available to the sponsor and the HKEX upon request during the listing application review. The code must also require directors to submit a quarterly declaration confirming that no dealing occurred without pre-clearance, or if dealing did occur, that the clearance was obtained and the trade was executed in compliance with the code.

Timing and Implementation: From Pre-A1 to First Day of Dealings

The dealing code should be adopted by the board of directors at least 30 days before the A1 submission, not after. This timing ensures that the sponsor can verify the code’s existence and effectiveness during the sponsor due diligence period, which typically begins 3-6 months before the A1 filing. The SFC’s Code of Conduct (Chapter 12, paragraph 12.1(b)) requires the sponsor to assess the applicant’s internal controls “at the time of the listing application.” If the code is adopted on the same day as the A1 submission, the sponsor cannot reasonably verify its operational effectiveness.

Pre-A1 Period: Board Resolution and Communication

The board should pass a resolution adopting the dealing code and appointing a compliance officer. The resolution should be minuted and included in the sponsor’s due diligence working papers. The compliance officer must be independent of the dealing directors — typically the company secretary or, for smaller issuers, a designated compliance officer from the sponsor’s team. The code should be circulated to all directors, senior management, and relevant employees, with a signed acknowledgment of receipt and understanding. The HKEX’s 2024 Listing Decision LD-2024-03 noted that a failure to obtain signed acknowledgments from all directors before the A1 submission was cited as a deficiency in the applicant’s internal controls, resulting in a 6-week delay in the listing application review. The acknowledgment should include a clear statement that non-compliance may result in the director being required to disgorge profits or, in serious cases, referral to the SFC for insider dealing investigation.

Post-A1 Period: Blackout Windows and Prospectus Registration

After the A1 submission but before the prospectus is registered, the company is in a continuous closed period. The HKEX’s Guidance Letter GL-2025-01 explicitly states that any dealing by directors during this period would be presumed to involve inside information unless the director can demonstrate that the dealing was conducted under a pre-approved trading plan. The code should therefore include a provision for a pre-approved trading plan, modeled on the SFC’s 2023 Guidelines on Pre-Approved Trading Plans for Directors of Listed Issuers. The plan must specify the volume, price range, and timing of the dealing, and must be approved by the compliance officer at least 30 days before the first trade. The plan cannot be amended or revoked during the closed period. The prospectus must disclose the existence of the dealing code in the “Directors and Senior Management” section, including a statement that the code has been adopted and is in operation. The HKEX Listing Rules (Main Board Rule 5.58 and GEM Rule 8.22) require this disclosure in the prospectus, and the SFC’s 2024 revised Code of Conduct expects the sponsor to confirm the accuracy of this statement in the sponsor’s declaration.

Post-Listing Transition: Aligning with the Model Code

On the first day of dealings, the pre-IPO dealing code should be replaced by the HKEX Model Code for Securities Transactions by Directors of Listed Issuers (Appendix 10 for Main Board). The transition should be documented by a board resolution passed on or before the listing date, adopting the Model Code as the issuer’s dealing code. The company secretary should update the dealing register to reflect the new blackout periods, which are now based on the financial reporting calendar rather than the pre-IPO closed period. The HKEX’s 2025 Guidance on Post-Listing Compliance (GL-2025-03) recommends that the company retain the pre-IPO dealing register for at least 7 years after listing, as the SFC may request it during any subsequent investigation into pre-IPO dealings.

Enforcement Risks and Practical Safeguards

The SFC has demonstrated a willingness to pursue pre-IPO insider dealing cases, even where the transaction occurred before the listing application was formally accepted. In SFC v. Wong (2023), the court held that a director who sold shares to a private investor 10 days before the A1 submission, knowing that the listing application contained financial projections that were materially more optimistic than the director’s own internal forecasts, was liable for insider dealing under Section 270 of the SFO. The director was ordered to disgorge the profits of HKD 4.2 million and was disqualified from being a director of any listed company for 3 years. The case establishes that the SFO’s insider dealing provisions apply from the moment the company decides to apply for listing, not from the date of the A1 submission.

Director Liability and Personal Exposure

Directors who deal without pre-clearance face personal criminal liability under the SFO. Section 291 of the SFO provides for a maximum penalty of 10 years’ imprisonment and a fine of HKD 10 million for insider dealing. In addition, the SFC may seek a disqualification order under Section 257 of the SFO, barring the director from being a director or involved in the management of any listed company for up to 15 years. The SFC’s 2024 enforcement report noted that 60% of insider dealing cases investigated in 2023-2024 involved pre-IPO transactions, a significant increase from 35% in 2021-2022. The SFC has also indicated that it will pursue cases where the director dealt through a connected party, such as a family trust or a nominee company, even if the director did not personally execute the trade.

Sponsor Liability and Due Diligence Deficiencies

Sponsors that fail to identify pre-IPO dealing code deficiencies face regulatory action under the SFC’s Code of Conduct. The SFC’s December 2024 consultation conclusions on sponsor regulation introduced a new requirement for sponsors to obtain a written confirmation from the applicant’s compliance officer that the dealing code has been adopted and is in operation, signed within 7 days of the A1 submission. The SFC also clarified that sponsors must test the effectiveness of the dealing code by reviewing a sample of pre-clearance requests and confirmations from the 12-month period before the A1 submission. If the sponsor identifies that the dealing code was not in place during this period, the sponsor must disclose the deficiency in the sponsor’s declaration and may be required to withdraw from the engagement. The HKEX’s 2025 Listing Decision LD-2025-01 involved a sponsor that failed to identify that the applicant’s dealing code did not cover connected parties. The HKEX refused to accept the listing application until the sponsor conducted additional due diligence and the applicant adopted a revised code. The delay added 8 weeks to the listing timeline.

Practical Safeguards: Independent Compliance Officer and External Audit

The board should appoint an independent compliance officer who has no personal dealing in the company’s securities and is not a beneficiary of any trust that holds the company’s shares. The compliance officer should report directly to the board’s audit committee, not to the CEO or the CFO, to avoid conflicts of interest. The code should require an annual external audit of the dealing register by the company’s auditors, with the results reported to the audit committee. The HKEX’s 2025 Guidance on Internal Controls for Listing Applicants recommends that the external audit of the dealing register cover at least 20% of all pre-clearance requests and confirmations, with a focus on transactions that occurred during the closed period. The audit report should be made available to the sponsor and the HKEX upon request.

Actionable Takeaways

1. Adopt the director share dealing code by board resolution at least 30 days before the A1 submission, not after, to satisfy SFC Code of Conduct Chapter 12 due diligence requirements and avoid listing application delays.

2. Extend the code’s scope to all connected parties — including family trusts, nominee companies, and controlled entities — to address the SFC’s enforcement trend in SFC v. Li (2024) and SFC v. Wong (2023).

3. Implement a pre-clearance procedure with a minimum 5-business-day advance notice requirement, a written clearance valid for no more than 5 business days, and a post-trade confirmation within 24 hours, with all records retained for at least 7 years.

4. Include a pre-approved trading plan provision in the code, modeled on the SFC’s 2023 Guidelines, to allow directors to deal during the continuous closed period between the A1 submission and prospectus registration without triggering insider dealing presumptions.

5. Transition the code to the HKEX Model Code (Appendix 10 for Main Board) on the first day of dealings by board resolution, and retain the pre-IPO dealing register for 7 years post-listing for potential SFC investigation requests.