HKEX Expectations for Transparency of Sponsor Fees in the Listing Application

The Hong Kong Exchange (HKEX) has intensified its scrutiny of sponsor fee arrangements in listing applications, a shift that directly impacts the viability and timeline of IPO transactions in 2025. This focus is not a new rule but a marked enforcement of existing expectations under the Listing Rules, specifically driven by the Exchange’s assessment of sponsor independence and the integrity of the listing process. The catalyst is a series of recent Listing Decisions and SFC enforcement actions that have exposed opaque fee structures, particularly in cases involving pre-IPO investments or reverse takeovers, where sponsor fees are contingent on the success of the application. For sponsors holding SFC Type 6 (6/6A) licences, the implication is clear: fee transparency is no longer a compliance checkbox but a core determinant of whether a listing application will be deemed fit for vetting. The Exchange now expects a detailed, itemised breakdown of sponsor fees in the listing application, including any deferred or success-based components, to be disclosed to the Listing Division at the A1 submission stage. This article examines the regulatory basis, the specific mechanics of this expectation, and the practical steps sponsors must take to avoid application delays or outright rejections.

Regulatory Basis: Listing Rules and SFC Code Provisions

The HKEX’s expectation for sponsor fee transparency is grounded in two primary regulatory instruments: the HKEX Listing Rules and the SFC Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the SFC Code). The relevant provisions are not new, but their application to fee structures has been sharpened through recent enforcement actions.

Listing Rule 3A.02 and the Sponsor’s Duty of Independence

Listing Rule 3A.02 requires every listing applicant to appoint a sponsor that is independent of the applicant. The HKEX’s interpretation of “independence” in this context extends beyond corporate relationships to the financial arrangements between the sponsor and the applicant. In a 2024 Listing Decision (HKEX-LD-2024-005), the Exchange explicitly stated that a sponsor’s fee structure that creates a financial incentive to overlook material deficiencies in the applicant’s disclosure or due diligence would compromise independence. The Exchange cited the example of a sponsor whose fee was structured as a fixed base plus a success fee equal to 20% of the total funds raised, arguing that such an arrangement could incentivise the sponsor to minimise due diligence scope to reduce costs and expedite the listing. The decision concluded that the applicant had to either restructure the fee to be entirely fixed and pre-paid, or provide a detailed justification to the Listing Division demonstrating that the success fee did not impair independence. This decision, while not a formal rule change, establishes the Exchange’s current enforcement position.

SFC Code of Conduct Paragraph 17.2(d) and Fee Disclosure

Paragraph 17.2(d) of the SFC Code requires sponsors to disclose in the sponsor’s declaration the “nature and amount” of any fees paid or payable by the applicant to the sponsor. This provision has been interpreted by the SFC in its 2023 circular on sponsor due diligence (SFC/IS/2023-01) to require a breakdown of fees by workstream—specifically, due diligence, legal documentation, regulatory liaison, and any advisory services. The SFC further clarified that a single line item for “sponsor fees” is insufficient; the disclosure must itemise the fee for each major phase of the sponsor’s work. The 2023 circular also noted that any fee that is contingent on the listing being approved or on the size of the offering must be explicitly stated as such, with the contingency terms clearly defined.

Mechanics of the Fee Disclosure Expectation

The practical application of these regulatory expectations is most evident during the A1 submission process and subsequent Exchange queries. The HKEX Listing Division now routinely requests a fee breakdown as part of its initial review of the listing application.

A1 Submission Requirements

At the A1 submission stage, the sponsor must include in the sponsor’s declaration a detailed fee schedule. This schedule must include:

• Fixed fees: The exact amount of the fixed fee, broken down by workstream (e.g., due diligence: HKD 2,500,000; legal documentation: HKD 1,200,000; regulatory liaison: HKD 800,000).
• Contingent fees: Any fee that is contingent on the listing being approved, the size of the offering, or the achievement of a specific milestone. The contingency terms must be stated in full, including the calculation method and the trigger event.
• Deferred fees: Any fee that is payable after the listing date, including the timing and amount of each deferred payment.
• Reimbursable expenses: A cap on reimbursable expenses, with a requirement to disclose any expense exceeding 10% of the total fee.

The Exchange has indicated that a failure to provide this breakdown at A1 will result in a formal query, which can delay the application by at least two to four weeks. In a 2024 case involving a biotech applicant, the Exchange issued a “deficiency letter” under Listing Rule 9.03(1) because the sponsor’s declaration only stated a total fee of HKD 8,000,000 without any breakdown. The application was returned to the sponsor for resubmission, adding 18 days to the timeline.

Post-A1 Queries and the “Success Fee” Trap

The most contentious area is the use of success fees. The Exchange’s position, as articulated in HKEX-LD-2024-005, is that a success fee is permissible only if the sponsor can demonstrate that the fee structure does not compromise its independence. The burden of proof rests on the sponsor. The Exchange will consider factors including:

• The percentage of the success fee relative to the total fee. A success fee exceeding 30% of the total fee is presumed to impair independence unless rebutted.
• The trigger event for the success fee. A fee triggered solely by the listing approval is viewed more favourably than one triggered by the size of the offering, as the latter creates a direct incentive to inflate the offering size.
• The existence of a clawback mechanism. If the sponsor fails to meet its due diligence obligations, the success fee should be subject to a clawback, with the terms clearly stated.

In practice, the Exchange has required sponsors to restructure success fees into fixed fees in several 2024 applications, particularly for applicants with complex pre-IPO structures or a history of regulatory issues. For example, in the case of a PRC-based technology company with a VIE structure, the sponsor initially proposed a fee of HKD 5,000,000 fixed plus HKD 2,000,000 success fee (29% of total). The Exchange queried the arrangement, and the sponsor ultimately converted the entire fee to a fixed HKD 7,000,000, with the success fee component eliminated.

Cross-Border Considerations and Jurisdictional Nuances

The fee transparency expectation is particularly relevant for cross-border listings, where the sponsor’s fee structure may involve entities in multiple jurisdictions. The HKEX and SFC have been consistent in requiring that the fee disclosure cover all entities in the sponsor group that provide services to the listing applicant, regardless of where those entities are incorporated.

BVI, Cayman, and Bermuda Structures

For listing applicants incorporated in the British Virgin Islands (BVI), Cayman Islands, or Bermuda, the sponsor must disclose fees paid to any entity in the sponsor group that is registered in those jurisdictions. This is because the Exchange views the entire sponsor group as providing the service, and any fee paid to a subsidiary in a low-tax jurisdiction could be seen as an attempt to obscure the true cost of the sponsor’s work. In a 2024 case involving a Cayman-incorporated applicant, the sponsor had paid a consulting fee of USD 500,000 to a BVI subsidiary for “advisory services.” The Exchange required the sponsor to justify this fee as part of the sponsor fee disclosure, and the sponsor ultimately had to refund the amount and restructure the fee as part of the fixed sponsor fee.

PRC Onshore Fees

For PRC-incorporated applicants, the sponsor must also disclose any fees paid to the PRC-based sponsor entity or its affiliates. This is governed by the PRC Securities Law and the CSRC’s regulations on sponsor services, which require that sponsor fees be reasonable and not contingent on the listing outcome. The HKEX and SFC have coordinated with the CSRC to ensure that the fee disclosure in the Hong Kong application is consistent with the PRC regulatory requirements. In practice, the Exchange has required sponsors to provide a reconciliation of the Hong Kong sponsor fee and the PRC sponsor fee, with an explanation of any differences.

Practical Implications for Sponsor Compliance

For sponsors holding SFC Type 6 (6/6A) licences, the regulatory shift has direct operational consequences. The requirement for fee transparency is not a one-time disclosure but an ongoing compliance obligation that affects the entire lifecycle of the listing application.

Internal Fee Approval Processes

Sponsor firms must now implement internal approval processes for fee structures before submitting an A1 application. This includes a review by the sponsor’s compliance officer to ensure that the fee arrangement does not create a conflict of interest or impair independence. The compliance officer should document the rationale for the fee structure, including a comparison with market benchmarks for similar transactions. The HKEX has indicated that it expects the sponsor’s compliance officer to certify the fee disclosure in the sponsor’s declaration, similar to the certification required for due diligence.

Fee Restructuring as a Pre-A1 Step

Given the Exchange’s scrutiny, sponsors should consider restructuring fee arrangements before the A1 submission to avoid queries. This means:

• Converting any success fee into a fixed fee, or at least capping the success fee at 20% of the total fee.
• Eliminating any fee that is contingent on the size of the offering.
• Ensuring that all reimbursable expenses are subject to a cap, with the cap disclosed in the sponsor’s declaration.

The cost of restructuring is typically borne by the sponsor, as the applicant may resist a higher fixed fee. However, the cost of a delay caused by an Exchange query—often two to four weeks—is far greater in terms of market timing and reputational risk.

Documentation and Record-Keeping

Sponsors must maintain detailed records of fee negotiations and the rationale for the fee structure. This includes board minutes of the sponsor’s internal approval committee, emails between the sponsor and the applicant regarding fee terms, and any legal advice obtained on the fee structure. The SFC has the power to request these records during an inspection or enforcement action, and a failure to produce them can result in disciplinary action under the SFC Code.

Actionable Takeaways

Based on the current regulatory environment, sponsors should take the following steps to ensure compliance:

1. Disclose a full fee breakdown by workstream in the sponsor’s declaration at A1, including fixed, contingent, and deferred components, with exact amounts and calculation methods.
2. Cap any success fee at 20% of the total fee and ensure the trigger event is solely the listing approval, not the offering size or any other variable.
3. Eliminate any fee paid to a sponsor group entity in a low-tax jurisdiction (BVI, Cayman, Bermuda) unless it is fully justified and disclosed as part of the sponsor fee.
4. Obtain a compliance officer certification of the fee disclosure before A1 submission, with documented rationale for the fee structure.
5. Maintain a complete record of fee negotiations and internal approvals, including board minutes and legal advice, for at least seven years post-listing.
6. For PRC-incorporated applicants, reconcile the Hong Kong sponsor fee with the PRC sponsor fee and provide a written explanation of any differences.
7. Consider restructuring any fee arrangement that includes a success fee exceeding 20% of the total fee before A1 submission to avoid a formal Exchange query and potential application delays.