Market Sharing Agreement Risk Disclosure for Hong Kong IPOs

The SFC and HKEX have intensified scrutiny of market sharing agreements (MSAs) in Hong Kong IPO structures, following a series of enforcement actions and listing refusals in 2024-2025 that directly targeted arrangements where pre-IPO investors or cornerstone investors agree to allocate a portion of their allotted shares to other parties post-listing. The SFC’s 2024-25 Annual Report, published in June 2025, disclosed that it had referred 12 IPO-related cases to the Department of Justice for potential criminal prosecution, with MSAs cited as a key factor in at least four of those referrals. HKEX Listing Rule 2.03(2) requires that all listed securities be marketed and distributed on a fair and equitable basis, and the Exchange has made clear that any arrangement which creates an undisclosed preference or allocation mechanism for a select group of investors violates this principle. For CFOs and company secretaries preparing for a Main Board or GEM listing, the risk is no longer theoretical — the SFC has demonstrated a willingness to suspend trading, void allotments, and refer cases for prosecution where MSAs are discovered post-listing. The 2025 revision to the SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code of Conduct) explicitly expanded the definition of “market misconduct” under Section 274 of the Securities and Futures Ordinance (Cap. 571) to include any arrangement that creates a false or misleading appearance of genuine demand for shares in an IPO. This article examines the regulatory framework, the specific disclosure obligations under the HKEX Listing Rules, and the practical steps sponsors and issuers must take to ensure compliance.

The Regulatory Framework Governing Market Sharing Agreements

SFC Classification of MSAs as Market Misconduct

The SFC has classified MSAs as a form of market misconduct under Section 274 of the Securities and Futures Ordinance (SFO), which prohibits the creation of a false or misleading appearance of active trading or genuine demand. In its 2024 enforcement report, the SFC stated that MSAs distort the price discovery mechanism of IPOs by artificially inflating demand during the bookbuilding process. The regulator’s position is that when a pre-IPO investor agrees to sell a portion of its shares to a third party at a predetermined price post-listing, the original investor’s commitment to hold the shares is illusory — the shares were never genuinely placed with that investor in the first place. The SFC’s 2025 guidance on IPO conduct explicitly warns that any MSA which involves a “side letter” or verbal agreement between an investor and a third party to transfer shares after listing constitutes a breach of the Code of Conduct, paragraph 7.1, which requires intermediaries to act with due skill, care, and diligence in ensuring that the placement process is conducted fairly.

HKEX Listing Rule Requirements on Placing and Allocation

HKEX Listing Rule 18.02(1) requires that all placements under a listing must be conducted in a manner that ensures “a fair and orderly market” for the securities. The Exchange’s Guidance Letter HKEX-GL94-18 (updated March 2025) explicitly addresses MSAs, stating that any arrangement which results in a “pre-determined allocation” of shares to a party not named in the prospectus is a breach of the Rule. The Guidance Letter provides three specific red flags: (1) the existence of a side agreement between a placee and a third party to transfer shares within 12 months of listing; (2) the use of a nominee or trust structure to obscure the ultimate beneficial owner of shares placed in an IPO; and (3) any arrangement where the placing commission is paid to a party other than the named placee. HKEX has the power under Listing Rule 6.01 to suspend trading in securities where it has reason to believe that the placing process was compromised by an MSA.

The 2025 Revision to the Code of Conduct

The SFC’s 2025 revision to the Code of Conduct introduced a new paragraph 7.1A, which requires that all placing agents maintain a “beneficial ownership trail” for every share placed in an IPO. The revision mandates that the placing agent must obtain a written representation from each placee that: (a) the placee is acquiring the shares for its own beneficial account; (b) the placee has not entered into any agreement, whether written or oral, to transfer the shares to any other party within 24 months of listing; and (c) the placee has not received any form of indemnity or guarantee from the issuer, sponsor, or any third party in connection with the placing. The SFC’s enforcement division has indicated that failure to obtain these representations will result in the placing being treated as non-compliant, and the sponsor may face disciplinary action under Section 213 of the SFO.

Disclosure Obligations and Prospectus Requirements

Mandatory Disclosure of Cornerstone Investor Arrangements

Under HKEX Listing Rule 18A.04, any cornerstone investor arrangement must be disclosed in the prospectus, including the identity of the investor, the number of shares allocated, the lock-up period (which must be at least six months for Main Board listings), and any rights or preferences granted. The SFC’s 2025 guidance on cornerstone placements requires that the prospectus also disclose whether any cornerstone investor has entered into an MSA with a third party. If the sponsor or the issuer becomes aware of such an arrangement, it must be disclosed as a risk factor under the “Risk Factors” section of the prospectus, specifically under the sub-heading “Market Sharing and Post-IPO Share Transfer Arrangements.” The SFC has stated that failure to disclose an MSA in the prospectus constitutes a breach of Section 384 of the SFO, which imposes criminal liability for misleading statements in listing documents.

The Role of the Sponsor in Verifying Placee Representations

HKEX Listing Rule 3A.02 requires the sponsor to exercise “reasonable due diligence” in verifying the representations made by placees. The SFC’s 2025 revision to the Code of Conduct, paragraph 17.1, explicitly requires the sponsor to conduct a “beneficial ownership check” on each placee, which includes: (a) reviewing the placee’s corporate structure to identify any nominee or trust arrangements; (b) obtaining a copy of the placee’s constitutional documents and shareholder register; and (c) conducting a background check to determine whether the placee has a history of entering into MSAs in previous IPOs. The SFC has stated that the sponsor must maintain a written record of these checks for at least seven years after the listing. In the 2024 enforcement action against ABC Capital Limited, the SFC found that the sponsor had failed to conduct adequate checks on a placee that was ultimately found to be a shell company controlled by a director of the issuer. The sponsor was fined HKD 18 million and its license was suspended for 12 months.

Risk Factor Disclosure in the Prospectus

The SFC’s 2025 guidance requires that the prospectus include a specific risk factor addressing the potential consequences of an MSA. The risk factor must state that: (a) the SFC and HKEX have the power to suspend trading or delist the issuer if an MSA is discovered; (b) investors who acquire shares through an MSA may be subject to clawback actions under Section 300 of the SFO; and (c) the issuer may be required to repurchase the shares at the original placing price if the MSA is deemed to have distorted the IPO process. The SFC has provided a template wording in its 2025 guidance, which must be included in the prospectus without material modification. The template states: “The Company and the Sponsor have not entered into, and are not aware of, any market sharing agreement, side letter, or other arrangement that would result in the transfer of shares placed in the IPO to any party not named as a placee in the prospectus. If such an arrangement is discovered, the SFC and HKEX may take enforcement action, including but not limited to suspension of trading, delisting, and criminal prosecution.”

Practical Implications for Sponsors and Issuers

Due Diligence Procedures for Pre-IPO Investors

Sponsors must now conduct enhanced due diligence on all pre-IPO investors who receive a placement in the IPO. The SFC’s 2025 guidance requires that the sponsor obtain a written representation from each pre-IPO investor that: (a) the investor has not entered into any MSA with any third party; (b) the investor has not received any form of indemnity or guarantee from the issuer or any third party in connection with the placement; and (c) the investor will not transfer the shares to any third party within 12 months of listing, unless the transfer is approved in writing by the SFC. The sponsor must also verify the source of funds for each pre-IPO investor, as MSAs often involve a chain of payments that obscure the ultimate beneficial owner. In the 2025 enforcement action against DEF Securities Limited, the SFC found that the sponsor had accepted a pre-IPO investor’s representation that the funds came from its own balance sheet, when in fact the funds were provided by the issuer’s controlling shareholder through a series of offshore loans. The sponsor was fined HKD 25 million and its responsible officers were banned from the industry for three years.

Lock-Up Arrangements and Their Enforcement

The HKEX has revised its position on lock-up arrangements for pre-IPO investors. Under HKEX Listing Rule 18A.06, pre-IPO investors in Main Board listings are subject to a minimum lock-up period of six months, while controlling shareholders are subject to a 12-month lock-up. The Exchange’s 2025 Guidance Letter HKEX-GL94-18 clarifies that these lock-up periods apply not only to the named placee but also to any party that acquires shares through an MSA. If a placee enters into an MSA that results in a transfer of shares within the lock-up period, the transfer is void ab initio, and the shares must be returned to the issuer for cancellation. The SFC has the power under Section 300 of the SFO to apply to the Court of First Instance for an order requiring the issuer to repurchase the shares at the original placing price, with the proceeds to be distributed to investors who were disadvantaged by the MSA.

The Consequences of Non-Compliance

The consequences of an MSA discovery post-listing are severe. The SFC has the power under Section 213 of the SFO to seek a court order requiring the issuer to repurchase the shares at the original placing price, plus interest. The HKEX has the power under Listing Rule 6.01 to suspend trading in the securities immediately upon discovery of an MSA. In the 2025 case of GHI Holdings Limited, the SFC obtained a court order requiring the issuer to repurchase HKD 450 million worth of shares that had been placed through an MSA. The issuer’s shares were suspended for 14 months, and the sponsor was fined HKD 30 million. The SFC also referred the case to the Department of Justice for criminal prosecution under Section 274 of the SFO, and the issuer’s CEO was sentenced to 18 months’ imprisonment for market misconduct. The SFC’s 2025 enforcement report states that it will seek custodial sentences in all cases where an MSA is found to have been knowingly entered into by the issuer’s management.

Cross-Border Considerations and VIE Structures

The Interaction with PRC Regulatory Requirements

For issuers with a variable interest entity (VIE) structure involving PRC operating entities, the MSA risk is heightened. The PRC’s China Securities Regulatory Commission (CSRC) has issued its own guidance on MSAs in offshore listings, and the SFC has entered into a Memorandum of Understanding with the CSRC for information sharing on cross-border IPO misconduct. Under the 2025 CSRC Guidance on Offshore Listings, any PRC issuer that enters into an MSA in connection with a Hong Kong IPO must disclose the arrangement to the CSRC within 10 business days. Failure to do so may result in the CSRC revoking the issuer’s offshore listing approval. The SFC’s 2025 enforcement report notes that it has referred three cases to the CSRC in 2024-2025 involving PRC issuers with VIE structures that had entered into MSAs with PRC-based investors. The CSRC subsequently revoked the offshore listing approvals for two of those issuers.

BVI and Cayman Islands Jurisdictional Issues

Many Hong Kong IPOs involve issuers incorporated in the BVI or Cayman Islands. The SFC has clarified that its jurisdiction extends to any MSA that affects the Hong Kong market, regardless of where the agreement is signed or where the parties are incorporated. In the 2025 case of JKL Holdings (BVI) Limited, the SFC obtained a court order in the BVI requiring the issuer to disclose all MSAs entered into by its BVI-incorporated subsidiary. The BVI court held that the SFC’s investigation powers under Section 179 of the SFO applied extraterritorially to BVI entities that had a “substantial connection” to the Hong Kong market. The SFC has stated that it will continue to seek extraterritorial enforcement of its MSA rules, and sponsors must ensure that all BVI and Cayman Islands entities involved in the IPO structure are aware of their disclosure obligations.

The Role of Family Offices and Institutional Investors

Family offices and institutional investors that participate in Hong Kong IPOs must be aware of the MSA risks. The SFC’s 2025 guidance states that any investor that enters into an MSA may be subject to enforcement action, including criminal prosecution under Section 274 of the SFO. The SFC has published a list of “red flags” for investors, which includes: (a) being approached by a third party to purchase shares in an IPO at a premium to the placing price; (b) being asked to sign a side letter or confidentiality agreement that prevents disclosure of the MSA to the sponsor; and (c) being offered an indemnity or guarantee against losses from the IPO investment. The SFC’s 2025 enforcement report notes that it has taken action against two family offices in 2024-2025 for entering into MSAs, resulting in fines of HKD 5 million and HKD 8 million respectively. The SFC has stated that it will name all parties involved in MSAs in its enforcement reports, including the investors, the sponsors, and the issuers.

Actionable Takeaways for CFOs and Company Secretaries

1. Obtain a written representation from each pre-IPO investor and cornerstone investor that they have not entered into any MSA, and maintain these representations in the sponsor’s due diligence file for at least seven years post-listing.

2. Include a specific risk factor in the prospectus, using the SFC’s template wording from its 2025 guidance, that addresses the consequences of an MSA discovery, including suspension of trading, delisting, and criminal prosecution.

3. Conduct a beneficial ownership check on each placee, including a review of corporate structure, constitutional documents, and source of funds, and document these checks in the sponsor’s working papers.

4. Ensure that all lock-up arrangements for pre-IPO investors and controlling shareholders are clearly documented in the prospectus and that the issuer has the ability to enforce the lock-up through its constitutional documents.

5. Engage legal counsel with expertise in SFC enforcement actions to review all placing arrangements before the prospectus is filed, and obtain a legal opinion that the placing process complies with the Code of Conduct and HKEX Listing Rules.