What Is IPO Capital Raising? A Comprehensive Beginner’s Guide to Initial Public Offerings

TL;DR: An IPO (initial public offering) is how a private company raises funds from the public by offering shares on a stock exchange. The process covers corporate preparation, regulatory review, roadshow pricing, and public subscription. Retail investors can apply for IPO shares via a White Form, Yellow Form, or electronic channels, but allocation is subject to a ballot and is not guaranteed.

Whenever a company announces a listing, it inevitably sparks heated market discussion. What exactly is IPO fundraising, and how does it work behind the scenes?

An initial public offering is the process by which a company offers its shares to the public for the first time through a stock exchange and raises capital. Before that, the company’s shares are held only by founders, early investors, or private equity funds. Once the listing is completed, the company officially becomes a listed company, and anyone can buy and sell its shares on the exchange.

Fundraising is the core purpose of going public. The proceeds can be used for business expansion, R&D investment, or debt repayment, while early investors can also use the opportunity to realize (cash out) their equity.

The listing process for IPO fundraising

According to official information from Hong Kong Exchanges and Clearing (HKEX), the listing process is divided into three main stages. For a deeper understanding, refer to the complete process for companies going public.

Stage 1: Preparation and application

After deciding to list, the company first appoints a sponsor and advisers—including underwriters, auditors, and lawyers—to help prepare the prospectus and conduct due diligence, and then submits the application documents to HKEX.

Under Rule 8.05 of the HKEX Main Board Listing Rules, there are three financial tests. Applicants must meet one of them:

• Profit test: market capitalization of at least HKD 500 million, with profit of at least HKD 35 million in the most recent year
• Market capitalization/revenue test: market capitalization of at least HKD 4 billion, with revenue of at least HKD 500 million
• Market capitalization/revenue/cash flow test: market capitalization of at least HKD 2 billion, together with the corresponding revenue and cash flow requirements

Stage 2: Regulatory review and hearing

HKEX’s Listing Division conducts a rigorous review of the application documents to assess whether the company meets listing requirements and has made adequate disclosures. After passing the review, the company must attend a Listing Committee hearing. If it passes, it will receive “approval in principle.” The whole process typically takes several months.

Stage 3: Roadshow, pricing, and subscription

Management and the underwriters conduct a “roadshow” for institutional investors, presenting business highlights and collecting indications of interest. Based on market feedback, the final offer price is set within the preset price range, followed by the public subscription stage.

How retail investors can participate in IPO subscriptions

For individual investors, subscribing for new shares is the main way to participate in the fundraising. According to information from the Investor and Financial Education Council (IFEC), retail investors can apply through the following channels:

White Form: Obtain and submit a paper application form through designated banks or brokers. Allocated shares can only be traded after they are credited into the account, so they cannot be sold immediately on the first trading day.

Yellow Form: Submit via an intermediary. Allocated shares are credited directly to a Central Clearing and Settlement System (CCASS) account and can be sold immediately on the first trading day, offering greater flexibility.

Electronic subscription (eIPO): Submit electronically via online banking or a designated platform. Funds are automatically debited from the specified account, making the process convenient.

Some investors choose to use margin financing (“margin subscription”), borrowing from brokers or banks to apply for more lots, thereby increasing their chances of being allotted shares. However, margin financing involves interest costs. If the shares fall below the offer price, investors face the risk of double losses and should assess carefully.

Tip: For a detailed guide to IPO subscriptions, refer to the related article from Longbridge Academy.

Unique mechanisms in Hong Kong IPOs

Allocation mechanism for Pool A and Pool B

In Hong Kong IPOs, public offer applicants are divided into Pool A (subscription amount not exceeding HKD 5 million) and Pool B (exceeding HKD 5 million). Each pool is allocated half of the public offer shares. In Pool A, applicants applying for the minimum of one lot receive priority allocation, helping investors with limited capital improve their chances of getting shares.

FINI digital settlement platform

According to information on HKEX’s FINI platform, this digital settlement system shortens the time from pricing to listing for new shares from T+5 to T+2 trading days, correspondingly reducing the period during which subscription funds are frozen.

Key risks of participating in IPOs

Risk of breaking issue price: It is not uncommon for a new listing to trade below the offer price after it debuts. If valuation or market sentiment falls short of expectations, the share price may decline on the first trading day. Do not assume IPOs will necessarily rise.

Funds being frozen: Subscription funds cannot be used for other purposes during the application period. When applying for multiple IPOs at the same time, be mindful of overall liquidity.

Margin leverage risk: Margin subscription can amplify potential returns, but it also magnifies losses. If the share price falls, you must bear both the price loss and borrowing interest.

Tip: Carefully reading the Risk Factors section in the prospectus is a basic step in protecting your own interests.

FAQs

What is the difference between IPO fundraising and a rights issue?

An initial public offering is a company’s first time offering shares to the public, and it applies to unlisted companies. A rights issue is when a listed company issues new shares to existing shareholders on a pro-rata basis to raise funds. Both are fundraising activities, but they differ in target investors and timing.

Is subscribing for an IPO guaranteed to be profitable?

Not necessarily. IPO performance is affected by multiple factors, including company fundamentals, industry conditions, market sentiment, and whether the pricing is reasonable. Some IPOs have broken issue price on the first day in the past. Investors should make prudent decisions based on their risk tolerance.

How do I assess whether an IPO is worth subscribing to?

You can evaluate it from angles such as industry growth prospects, valuation reasonableness, the sponsor’s reputation, and the level of institutional investor demand. Also focus on the prospectus’s financial summary and risk factors sections.

When are IPO subscription funds returned?

Funds for applications that receive no allocation are generally refunded to the applicant’s account around the listing date, which is noticeably faster than before.

Conclusion

Fundraising is a core mechanism of the capital markets: it enables companies to raise funds from the public while giving retail investors an opportunity to participate early. Understanding the full process—from corporate preparation and regulatory review to roadshow pricing, as well as the White/Yellow Form arrangements and Hong Kong’s Pool A/Pool B allocation mechanism—helps investors make better-informed decisions.

Before subscribing for new shares, be sure to read the prospectus, understand the company’s business, and decide whether to participate based on your own financial situation and risk tolerance. Longbridge Securities provides investment products and services for the Hong Kong and U.S. markets.

Which instrument you choose depends on your investment goals, risk tolerance, market views, and level of experience. Whatever you choose, you must fully understand how it works, its risk characteristics, and trading rules, and establish a sound risk management plan. You can learn more investment knowledge through Longbridge Academy or download the Longbridge App.