How to Prepare a Draft Prospectus for a Pre-IPO Company: Writing Financial Data and Risk Factors

The SFC and HKEX published their 2025 joint consultation conclusions on 18 February 2025, mandating enhanced IPO disclosure requirements for Pre-IPO investments, placing commissions, and valuation methodologies, effective for listing applications submitted on or after 1 July 2025. This regulatory shift directly impacts how draft prospectuses must present financial data and risk factors, particularly for companies with complex capital structures involving convertible bonds (CBs), preference shares, or SPV-level financing. For a Pre-IPO company targeting a Main Board listing in 2026, the draft prospectus is no longer a mere marketing document — it is a regulatory lodestone that determines sponsor liability under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and the SFC’s Code of Conduct for Corporate Finance Advisors. The financial data section must reconcile audited historical figures under HKFRS with pro forma adjustments for the Pre-IPO round, while risk factors require precise articulation of dilution mechanics, liquidity constraints, and regulatory exposure. This article provides a structural framework for drafting these two critical sections, grounded in current HKEX Listing Rules and SFC guidance notes.

Structuring the Financial Data Section: From Audited Figures to Pro Forma Adjustments

The financial data section of a draft prospectus must serve two distinct purposes: establishing a verifiable historical track record under HKFRS and presenting a forward-looking capital structure that incorporates the Pre-IPO round’s impact. HKEX Listing Rule 4.04 requires that the accountants’ report cover at least three complete financial years immediately preceding the listing application, with the latest period ending no more than six months before the date of the prospectus. For a company completing a Pre-IPO CB issuance in Q3 2025, this means the draft must include audited financials for FY2022, FY2023, and FY2024, plus an interim period ending 30 June 2025 if the application is filed in December 2025.

Reconciling Historical HKFRS Statements with Pre-IPO Round Adjustments

The most common drafting error occurs when issuers present historical financial data without clearly isolating the effects of the Pre-IPO financing structure. Under HKEX Listing Rule 4.08, the accountants’ report must include a statement of adjustments that reconciles the company’s statutory financial statements to the pro forma financial information presented in the prospectus. For a company that issued convertible redeemable preference shares (CRPS) in its Pre-IPO round, the draft must show the impact on earnings per share (EPS) under HKAS 33, including the dilutive effect if the conversion triggers are met. The SFC’s 2025 consultation paper explicitly flagged that 47% of reviewed IPO prospectuses in 2024 failed to adequately disclose the dilution impact of Pre-IPO instruments, leading to revised guidance in the Code of Conduct paragraph 17.2(d).

A practical approach is to create a three-column table in the draft: Column A shows the audited historical figures per the statutory accounts; Column B shows the pro forma adjustments arising from the Pre-IPO round, including the recognition of financial liabilities at fair value through profit or loss under HKFRS 9; Column C presents the adjusted pro forma figures for the prospectus. Each adjustment line item must reference the corresponding note in the accountants’ report, and the sponsor must confirm in the compliance letter that the adjustments are “complete and accurate” under HKEX Listing Rule 3A.05. For CB structures, the conversion option must be bifurcated into a debt host and an equity component under HKFRS 9, with the effective interest rate disclosed in the notes.

Segment Reporting and Revenue Recognition Under HKFRS 15

Pre-IPO companies operating through multiple subsidiaries or VIE structures in the PRC must present segment information in accordance with HKFRS 8, with operating segments defined by the chief operating decision maker (CODM) — typically the CEO or board. The draft prospectus must disclose segment revenue, profit or loss, and total assets for each reportable segment for all periods presented. HKEX Listing Rule 4.09 requires that if the company has changed its segment reporting structure during the track record period, the draft must include a reconciliation showing the effect on prior-period comparatives.

For companies in the technology or biotech sectors, revenue recognition under HKFRS 15 is frequently a point of SFC scrutiny. The draft must disclose the timing of revenue recognition — whether at a point in time or over time — and the methods used to measure progress towards complete satisfaction of performance obligations. If the Pre-IPO company has entered into long-term service contracts or licensing agreements with milestone payments, the draft must include a sensitivity analysis showing the impact on revenue if milestones are not achieved. The SFC’s 2024 thematic review of biotech IPO prospectuses found that 63% of applicants needed to revise their revenue recognition disclosures after the first round of SFC comments.

Drafting Risk Factors: Precision, Materiality, and Regulatory Compliance

The risk factors section is the most legally sensitive part of the draft prospectus, as it forms the basis for the statutory liability of directors under Section 40 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) and the sponsor’s duty of care under the SFC’s Code of Conduct. The SFC’s 2025 consultation conclusions emphasised that risk factors must be “specific to the issuer and its business” rather than generic boilerplate, and that each risk must be cross-referenced to the relevant disclosure in the financial data or business sections.

Dilution and Capital Structure Risks from Pre-IPO Instruments

For a Pre-IPO company that has issued CBs, warrants, or convertible preference shares, the draft must include a dedicated risk factor addressing the potential dilution of existing shareholders’ interests. This risk factor must quantify the maximum potential dilution assuming full conversion of all outstanding instruments, expressed as a percentage of the enlarged share capital. HKEX Listing Rule 2.03(2) requires that the prospectus contain “all information necessary to enable an investor to make an informed assessment” of the issuer’s financial position, and dilution risk falls squarely within this requirement.

The draft should also disclose the conversion price adjustment mechanisms, including any anti-dilution provisions, reset clauses, or price protection features. If the Pre-IPO CB includes a conversion price reset linked to the IPO offer price, the risk factor must explain the mechanics and the potential impact on the conversion ratio. For example, a CB with a 20% discount to the IPO price and a full-ratchet anti-dilution clause could result in a conversion price as low as HKD 8.00 per share if the offer price is set at HKD 10.00, leading to a 25% increase in the number of shares issuable upon conversion. This level of specificity is expected under the SFC’s guidance on “material risks” in paragraph 6.3 of the Code of Conduct.

Liquidity, Going Concern, and Covenant Compliance Risks

Pre-IPO companies often carry significant debt on their balance sheets, particularly if they have used CBs or bridge loans to fund operations before the listing. The draft must include a risk factor addressing the company’s ability to meet its debt service obligations if the IPO is delayed or downsized. This risk factor should reference the debt service coverage ratio (DSCR) based on the pro forma financial data, and disclose any financial covenants in the Pre-IPO loan agreements, including leverage ratios, interest coverage ratios, and minimum cash balance requirements.

Under HKEX Listing Rule 4.12, if the company’s auditors have identified a material uncertainty related to going concern in the track record period, the draft must include a separate risk factor and the auditors’ report must be included in full. The SFC’s 2025 consultation paper noted that 12% of IPO applications in 2024 were withdrawn or rejected due to inadequate disclosure of going concern issues, particularly in the real estate and retail sectors. For a Pre-IPO company with negative operating cash flows in the latest interim period, the draft must disclose the cash runway in months based on the net proceeds from the IPO and the projected burn rate, with a sensitivity analysis showing the impact of a 30% reduction in IPO proceeds.

Cross-Referencing Financial Data and Risk Factors for Coherence

A well-drafted prospectus creates a logical chain between the financial data, the risk factors, and the use of proceeds section. Each significant assumption in the pro forma financial data should have a corresponding risk factor that explains the downside scenario, and each risk factor should be quantifiable where possible. The SFC’s 2025 guidance on “integrated disclosure” requires that the draft prospectus include a cross-reference table mapping each risk factor to the relevant note in the financial statements and the corresponding section in the business overview.

Mapping Assumptions to Risk Scenarios

For a Pre-IPO company that assumes a 15% revenue growth rate in its pro forma projections, the risk factors must address the possibility that market conditions or competitive pressures result in growth of only 5%, and the impact on EBITDA and cash flow. The draft should include a table showing the sensitivity of net profit to changes in revenue, cost of goods sold, and operating expenses, with the range of outcomes expressed in HKD millions. HKEX Listing Rule 4.14 requires that any profit forecast in the prospectus be accompanied by a statement from the sponsor confirming that the forecast has been “properly compiled” and that the assumptions are “reasonable,” but the rule does not require a forecast — the draft can present sensitivity analyses without constituting a forecast.

Materiality Thresholds and Omission of Minor Risks

The draft should not include every conceivable risk — only those that are material to the company’s business, financial condition, or prospects. The SFC’s 2025 consultation conclusions established a materiality threshold of 5% of revenue or 10% of net profit for disclosure of individual risk factors, with the exception of regulatory and legal risks, which must be disclosed regardless of materiality. For a Pre-IPO company with annual revenue of HKD 500 million, a risk factor related to a single customer representing 4% of revenue would fall below the threshold and could be omitted, while a risk factor related to a pending PRC regulatory change affecting the entire industry would require disclosure even if the financial impact cannot be quantified.

Practical Checklist for Draft Review Before Submission

Before submitting the draft prospectus to HKEX under the A1 filing, the issuer and sponsor should conduct a structured review of the financial data and risk factors sections against the following criteria: (1) all historical financial data reconciled to audited accounts with clear adjustment notes; (2) pro forma adjustments for the Pre-IPO round properly classified under HKFRS 9 and HKFRS 7; (3) dilution risks quantified with maximum and scenario-based conversion percentages; (4) debt covenant compliance tested under downside scenarios; (5) cross-reference table between risk factors and financial data notes completed; and (6) materiality thresholds applied consistently across all sections. The sponsor’s compliance letter under HKEX Listing Rule 3A.05 must confirm that the draft meets the disclosure requirements of the Listing Rules and the Companies Ordinance, and that all material information has been included.

Actionable Takeaways for Pre-IPO Company CFOs and Sponsors

• Prepare the financial data section as a three-column reconciliation table showing audited historicals, pro forma adjustments for the Pre-IPO round, and adjusted figures, with each line item cross-referenced to the accountants’ report notes.
• Quantify dilution risk from all convertible instruments in the risk factors section using maximum conversion scenarios and sensitivity tables, referencing the specific anti-dilution and reset provisions in the CB or preference share terms.
• Include a debt service coverage ratio and covenant compliance analysis in the risk factors section, with downside scenarios assuming a 30% reduction in IPO proceeds or a six-month delay in listing.
• Create a cross-reference table mapping each risk factor to the corresponding financial data note and business overview section, as required under the SFC’s 2025 integrated disclosure guidance.
• Conduct a materiality assessment using the SFC’s 5% revenue or 10% net profit thresholds before drafting risk factors, and document the rationale for omitting any risks that fall below the threshold.