According to Zhitong Finance APP, Michael Duignan, Executive Director of the Enforcement Division at the Hong Kong Securities and Futures Commission (SFC), cautioned that as trading volumes surge rapidly, IPO quality often deteriorates imperceptibly. For this reason, the SFC issued a circular to sponsors in January this year, identifying the problems while drawing clear boundaries to prevent risks in advance.

Addressing why the January circular set out such detailed rules rather than dealing with issues one by one after they emerged, Duignan explained that this reflects the regulatory philosophy of being "swift and effective." Duignan noted that weak due diligence leads to poor-quality listing documents, and such issuers are highly prone to becoming enforcement cases down the road. Taking a "wait-and-see" approach to post-hoc handling is neither swift nor effective; by the time enforcement proceedings actually begin, substantive harm has already been done, which is unfair to the market. By setting out regulatory expectations in writing through an early circular, and by addressing structural factors such as capacity, competence, and incentives to correct the deep-rooted causes of misconduct, regulators can ensure that violators will no longer be able to deflect blame by claiming they were "caught by surprise" when action is taken.

Duignan acknowledged that this philosophy is "easier said than done." Faced with complex cases, incomplete evidence, competing priorities, and time pressure, enforcers should not rely solely on "head-on confrontation." Duignan believes that enforcement does not necessarily require wielding a heavy hammer—the smartest and fastest enforcement action is, in fact, "not having to take action at all"—provided that the regulator has already clearly defined the red lines for the market in advance.

Three major hidden dangers in the new stock market flagged by the SFC's January circular

The circular issued by the Hong Kong SFC to sponsors in January this year identified three major industry concerns: First, due diligence has become formulaic. The preparation of listing documents has degenerated into a "checklist"-style routine, lacking substantive review. Second, staff are overstretched. Key personnel are handling far more ongoing transactions simultaneously than is reasonably manageable. Third, there are gaps in unauthorized sign-offs. In some cases, sign-offs were even made by unqualified personnel.

Supervising six transactions simultaneously constitutes "overburdening"

To curb these unhealthy practices, the SFC's circular explicitly raised the competence threshold, tightened the licensing examination requirements for sponsors, and set specific timetables. Regarding the definition of "overburdening," any key personnel simultaneously supervising six or more ongoing transactions will be flagged as an "overburdened principal." On the staffing review and reporting front, sponsors must identify and handle unqualified personnel working on ongoing transactions within one week, and report the overall ratio of key personnel to transactions within two weeks. On the rectification plan submission front, companies flagged as "of concern" must complete an internal review within three months and submit a corrective plan signed by the heads of core functions.