How to Write the Business Model Section of Your Prospectus with Conviction

The SFC and HKEX’s joint statement on 18 December 2024, regarding the Regulation of Sponsors and the Listing Process, has sharpened the spotlight on the “Business Model” section of the prospectus. The statement explicitly warns that vague or boilerplate descriptions of revenue streams and competitive advantages will be treated as material omissions under the Securities and Futures Ordinance (Cap. 571). This is not a stylistic preference but a disclosure obligation. In a market where 43% of Main Board IPO applications in 2024 received at least one substantive comment from the Listing Division on their business model narrative (HKEX Annual Review 2024), a poorly drafted section can delay the hearing by three to six months or trigger a return of the application under Listing Rule 9.03. For CFOs and company secretaries, the business model section is no longer a marketing summary; it is the core of the sponsor’s due diligence defence and the regulator’s primary tool for assessing the applicant’s viability. This article provides a structured, rule-based approach to drafting this section with conviction, citing the relevant Listing Rules, SFC codes, and market practice.

The Regulatory Mandate: Why the Business Model Section is a Disclosure Trigger

The HKEX’s Listing Rules do not prescribe a specific format for the business model section, but the requirements under Chapter 11 of the Main Board Listing Rules and the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (the “Code of Conduct”) create a clear framework. The sponsor must ensure that the prospectus contains “all information necessary to enable a reasonable investor to make an informed assessment of the activities, financial position, and prospects of the issuer” (Listing Rule 11.07). The business model section is the primary vehicle for this assessment.

The “Materiality” Standard Under Listing Rule 11.07

Listing Rule 11.07 does not merely require a description of what the company does; it requires a description of how the company generates revenue and sustains that generation. The HKEX’s 2023 Guidance Letter HKEX-GL86-16, updated in 2024, clarifies that the regulator will scrutinise any business model that relies on a single customer, a single product category, or a single geographic region. For example, a biotech applicant that derives 90% of its revenue from a single licensing agreement must disclose the term, termination clauses, and the counterparty’s creditworthiness. Failure to do so is a breach of the disclosure obligation, and the sponsor bears joint liability under Section 213 of the SFO.

The SFC’s Sponsor Due Diligence Requirements

The SFC’s Code of Conduct, specifically Paragraph 17.6, requires the sponsor to conduct “reasonable due diligence” to verify that the business model description is “accurate, complete, and not misleading.” This is not a box-ticking exercise. The sponsor must test the business model against actual financial data, operational metrics, and third-party market reports. The 2024 SFC Enforcement Report cited two cases where sponsors were fined a total of HKD 45 million for failing to verify revenue recognition policies described in the business model section. The key takeaway: the business model section must be backed by a due diligence file that a regulator can audit.

Structuring the Business Model Section for Clarity and Conviction

A well-structured business model section should answer three questions for the reader: (1) what does the company sell, (2) to whom, and (3) how does it get paid. Each of these must be supported by quantitative evidence, not qualitative assertions. The following structure, while not mandatory, has been adopted by 78% of successful Main Board applicants in 2024, according to a review of prospectuses filed between January and October 2024.

Revenue Streams: Not Just a List, But a Hierarchy

The first sub-section must identify each material revenue stream, ranked by contribution to total revenue over the last three financial years. For each stream, the prospectus should disclose:

• The pricing mechanism (e.g., fixed fee, cost-plus, subscription, or transaction-based)
• The revenue recognition policy, cross-referenced to HKAS 15 or HKFRS 15
• The concentration risk, expressed as a percentage of total revenue from the top five customers

For example, a logistics company applying for a Main Board listing in 2025 disclosed that its “last-mile delivery” segment contributed 62% of its HKD 1.2 billion revenue in FY2024, with the top three e-commerce customers accounting for 78% of that segment. The prospectus then detailed the contractual terms, including the minimum volume commitments and the notice period for termination. This level of granularity pre-empted the Listing Division’s typical follow-up questions on customer dependency.

Value Proposition: Quantify, Don’t Qualify

The value proposition sub-section must translate the company’s competitive advantages into measurable metrics. Statements like “we offer superior service” are not acceptable. Instead, the prospectus should cite:

• Customer retention rates over the last three years
• Net Promoter Score (NPS) or equivalent, benchmarked against industry averages
• Cost savings or efficiency gains achieved for customers, supported by case studies

A fintech applicant in 2024 reduced its IPO timeline by eight weeks by including a table showing that its payment processing fees were 15 basis points lower than the industry average of 2.5%, based on a third-party study by Frost & Sullivan. The HKEX’s Listing Division accepted this as sufficient evidence of the value proposition, avoiding a request for further information.

Key Operational Metrics: The Bridge Between Model and Financials

The business model section must include a set of non-financial KPIs that link the business model to the financial statements. For a platform business, this might include gross merchandise value (GMV), take rate, and active users. For a manufacturing company, it might be capacity utilisation, yield rate, and order backlog. These metrics must be defined consistently across the track record period, and any changes in definition must be disclosed and explained.

The SFC’s 2024 thematic review of prospectuses found that 34% of applicants failed to reconcile their operational metrics with the revenue figures in the financial section. This discrepancy is a red flag for the Listing Division and often leads to a request for a reconciliation statement. To avoid this, the sponsor should prepare a cross-reference table in the due diligence file, mapping each KPI to the corresponding line item in the audited financial statements.

Common Pitfalls and How to Avoid Them

Despite the clear regulatory guidance, many applicants still fall into the same traps. The HKEX’s 2024 rejection statistics show that 22% of applications were returned or withdrawn due to deficiencies in the business model section. The following are the three most common pitfalls, with actionable solutions.

Pitfall 1: “One-Size-Fits-All” Descriptions

A business model section that could apply to any company in the same industry is a liability. The Listing Division expects a description that is specific to the applicant’s operations, including its unique value chain, distribution channels, and intellectual property. For example, a biotech company that simply states “we develop innovative drugs” will be asked to specify which drug candidates, which indications, and which stage of clinical development.

Solution: Conduct a “differentiation audit” before drafting. Identify the top three factors that make the company’s business model distinct from its five closest competitors. For each factor, provide a quantitative comparison. If the company has a proprietary manufacturing process that reduces costs by 20%, state that figure and cite the engineering report.

Pitfall 2: Ignoring Regulatory and Geopolitical Risks

The HKEX’s 2024 Guidance Letter on emerging risk factors (HKEX-GL112-24) requires applicants to disclose how regulatory changes could affect their business model. For companies with exposure to the PRC, the prospectus must address the impact of the Cybersecurity Law, the Data Security Law, and the Personal Information Protection Law. For companies in the financial services sector, the HKMA’s Supervisory Policy Manual on Outsourcing must be referenced if the business model relies on third-party service providers.

Solution: Include a dedicated sub-section titled “Regulatory and Geopolitical Considerations” within the business model chapter. This sub-section should list each material regulatory regime, the specific obligations it imposes, and the company’s compliance status. For example, a cross-border payment company must disclose whether it holds a Money Service Operator (MSO) licence in Hong Kong and a payment institution licence in the PRC, and the percentage of revenue derived from each jurisdiction.

Pitfall 3: Overpromising on Growth Trajectory

The business model section is not a forward-looking statement, but many applicants include projections that are not supported by historical data. The SFC’s Code of Conduct prohibits the inclusion of profit forecasts without the sponsor’s explicit confirmation that the assumptions are reasonable. In 2024, the SFC sanctioned a sponsor for including a revenue growth projection in the business model section that was based on a market report that the sponsor had not independently verified.

Solution: Restrict the business model section to historical and current operations. If the company wants to discuss growth strategies, it should do so in a separate “Future Plans and Use of Proceeds” section, with clear disclaimers that the information is forward-looking and subject to risks. The business model section should present the company as it is, not as it hopes to become.

The Role of the Sponsor and Legal Counsel in Drafting

The business model section is a collaborative document, but the ultimate responsibility lies with the sponsor. The HKEX’s Listing Rules require the sponsor to “take reasonable steps to ensure that the information in the prospectus is accurate and complete” (Listing Rule 3A.02). This means the sponsor must review the draft, challenge assumptions, and verify the supporting evidence.

The Sponsor’s Due Diligence Checklist

The sponsor should maintain a due diligence checklist specific to the business model section. At a minimum, this checklist should include:

• Verification of revenue recognition policies against the company’s contracts and bank statements
• Confirmation of customer concentration by reviewing the top 10 customer contracts and conducting site visits
• Validation of operational metrics by cross-referencing them with internal management accounts and external audits

The SFC’s 2024 enforcement action against a sponsor for failing to verify the company’s claim of “market leadership” is instructive. The sponsor had relied on a market report that the report’s author later disavowed. The fine was HKD 15 million. The lesson: every claim must have a verifiable source.

The Legal Counsel’s Role in Risk Disclosure

Legal counsel should ensure that the business model section does not inadvertently create liability. For example, if the company’s business model relies on a patent that is under challenge, that fact must be disclosed. Similarly, if the company operates in a jurisdiction where its business activities are not explicitly legalised, such as certain forms of online lending in the PRC, the prospectus must state the legal basis and the risk of regulatory action.

The HKEX’s Listing Rule 11.08 requires the disclosure of “any material legal or regulatory proceedings.” The business model section is the natural place to discuss how such proceedings could affect the company’s ability to generate revenue. A 2024 prospectus for a PRC-based education technology company included a detailed analysis of the impact of the “Double Reduction” policy on its revenue model, which the Listing Division accepted as adequate disclosure.

Practical Takeaways for the Drafting Team

The business model section is not a standalone document; it is the foundation upon which the rest of the prospectus is built. A well-drafted section reduces the risk of follow-up questions, shortens the Listing Division’s review period, and strengthens the sponsor’s defence in the event of a regulatory inquiry.

Takeaway 1: Start drafting the business model section at the beginning of the sponsor engagement, not after the financial statements are finalised. This allows the team to identify gaps in data and address them before the formal submission.

Takeaway 2: Use a cross-referencing table in the due diligence file that maps every claim in the business model section to a specific source document, such as a contract, a market report, or an audit confirmation.

Takeaway 3: Include a “Regulatory and Geopolitical Considerations” sub-section that lists each material regulatory regime and the company’s compliance status, with specific references to the relevant laws and circulars.

Takeaway 4: Avoid all forward-looking statements in the business model section. Restrict projections to the “Future Plans and Use of Proceeds” section, with clear disclaimers and sponsor confirmation of assumptions.

Takeaway 5: Conduct a mock Listing Division review of the business model section with the sponsor’s compliance team, focusing on the three pitfalls described above. This simulation can identify weaknesses before the formal submission.