Independent Verification of Patents and Technology Licences in Sponsor Due Diligence

The SFC’s 2024-25 enforcement priorities, articulated in its Annual Report published in June 2025, have placed sponsor due diligence on technology assets under direct regulatory scrutiny, following a series of IPO prospectus deficiencies identified in the life sciences and technology sectors. The regulator has specifically flagged the inadequate independent verification of patents and technology licences as a recurring weakness, with at least three enforcement actions in the past 18 months involving sponsors who accepted management-provided summaries without cross-checking against original patent office filings. This shift is not theoretical: the SFC’s 2024 Enforcement Report recorded a 40% year-on-year increase in investigations related to sponsor work on intellectual property (IP) assets, and the Market Misconduct Tribunal (MMT) has upheld the principle that sponsors bear primary responsibility for the accuracy of patent disclosures in listing documents under the Securities and Futures Ordinance (SFO), Cap. 571. For a sponsor firm, the margin between a compliant due diligence file and a regulatory referral now hinges on the verifiability of each patent claim, each licence term, and each assignment chain — not on the persuasiveness of management’s narrative.

The Regulatory Framework: Why Patents Are a Sponsor Liability, Not a Technical Footnote

The SFC’s Codified Expectation Under the Code of Conduct

The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the Code), specifically paragraph 17.6 and the accompanying Sponsor Due Diligence Guidelines (December 2021 revision), imposes a standard of “reasonable due diligence” that extends to all material information in a listing document. Paragraph 17.6(d) of the Code requires a sponsor to “take reasonable steps to satisfy itself that the statements made in the listing document are accurate and complete in all material respects.” The SFC has made clear, through its thematic inspection findings published in SFC Circular to Sponsors on Due Diligence for IP Assets (March 2023), that patent claims and technology licence agreements are material statements when they form the basis of a company’s revenue model, competitive advantage, or valuation.

The circular specifically states that sponsors must “independently verify the existence, validity, and enforceability of patents and licences” by consulting original sources — not merely reviewing a summary table prepared by the applicant or its patent counsel. This standard is higher than a simple “management representation” check. The SFC’s enforcement case against the sponsor of a biomedical IPO in 2024 (publicly referenced in the SFC Enforcement Bulletin, Q1 2025) showed that accepting a patent attorney’s opinion without independently confirming the patent’s registration status with the relevant patent office (in that case, the China National Intellectual Property Administration, CNIPA) constituted a failure of due diligence. The sponsor was fined HKD 12 million and the responsible officers were suspended for 12 months.

The HKEX Listing Rules: Disclosure Obligations on Patent Materiality

The HKEX Main Board Listing Rules, specifically Rule 11.07 and the Guidance Letter HKEX-GL86-16 (updated 2023), require that a listing document contain “all information necessary to enable an investor to make an informed assessment of the activities, assets and liabilities, financial position, management and prospects of the issuer.” Where patents or technology licences are a material asset — as they are for nearly all biotech, medtech, and deep-tech applicants under Chapter 18A or Chapter 18C — the listing document must disclose the patent number, jurisdiction, expiry date, and any encumbrances. The sponsor’s duty is to verify that these disclosures are accurate.

The HKEX has issued at least two decision letters in 2024 (referenced in the HKEX Listing Decision LD122-2024 and LD124-2024) where the Exchange rejected draft prospectuses because the sponsor had not independently verified the patent chain of title. In LD122-2024, the applicant claimed ownership of 15 patents, but the sponsor’s due diligence file contained only a legal opinion from a PRC law firm. The HKEX required the sponsor to obtain direct confirmation from CNIPA’s online database and to reconcile each patent assignment deed against the recorded grantor and grantee. The listing was delayed by four months while the sponsor re-performed the work.

The Three Critical Verification Points: Existence, Ownership, and Enforceability

Existence: Confirming the Patent is Registered and In Force

The most basic verification step — confirming that a patent number corresponds to a granted patent that has not lapsed — is the area where the SFC has found the most failures. A sponsor cannot rely solely on a patent attorney’s certificate or a management-prepared schedule. The SFC’s March 2023 circular mandates that the sponsor, or its external expert (such as a patent agent or IP due diligence specialist), must directly access the relevant patent office database — whether CNIPA for PRC patents, the United States Patent and Trademark Office (USPTO), the European Patent Office (EPO), or the Hong Kong Intellectual Property Department (IPD) — and capture a screenshot or PDF of the patent’s current status page.

The verification must include the following data points for each patent listed in the prospectus: the patent number, the filing date, the grant date, the expiry date (adjusted for any annuity payment lapses), the current legal status (granted, pending, expired, or abandoned), and the recorded owner. The sponsor must then compare this data against the applicant’s representation. Any discrepancy — for example, a patent shown as “granted” in the prospectus but listed as “pending” in the patent office database — must be investigated and resolved, with the sponsor documenting the resolution in its due diligence file.

Practical guidance from the SFC’s thematic inspection report suggests that sponsors should maintain a “patent verification checklist” that includes the date of access, the URL or database identifier, and the name of the person who performed the check. The checklist should be signed off by the sponsor’s compliance officer and the relevant deal team member. For portfolios exceeding 20 patents, the SFC expects the sponsor to apply a risk-based sampling approach, but the sample must be statistically meaningful — at least 30% of the portfolio, or a minimum of 10 patents, whichever is greater.

Ownership: Tracing the Chain of Title from Inventor to Applicant

Patent ownership is often the most contested issue in sponsor due diligence, particularly for PRC-based applicants where invention assignment agreements may be incomplete or unregistered. The SFC’s enforcement action in 2024 (referenced in the SFC Enforcement Bulletin, Q2 2025) involved a scenario where the applicant claimed ownership of a patent that had been invented by a former employee who had not signed a written assignment agreement. The sponsor had accepted a management representation that the employee’s employment contract contained an implied assignment clause. The MMT ruled that the sponsor should have obtained a copy of the employment contract, reviewed the specific clause, and confirmed that the employee had no residual rights under the PRC Patent Law (Article 6 and Article 8).

The verification standard requires the sponsor to trace the chain of title from the original inventor(s) to the applicant entity. This involves:

• Obtaining copies of all invention assignment agreements between inventors and the applicant.
• Checking that each assignment is recorded with the relevant patent office (for PRC patents, recordal with CNIPA is mandatory under the PRC Patent Law Implementing Regulations, Article 14).
• Confirming that any joint ownership arrangements (common in university spin-outs) are governed by a written agreement that specifies each party’s rights to license, assign, and enforce the patent.

For patents that have been acquired from a third party, the sponsor must obtain the asset purchase agreement or patent assignment deed and confirm that the transaction was at arm’s length. The HKEX’s LD124-2024 decision letter specifically required the sponsor to obtain a valuation report for the acquired patents to support the consideration paid, and to confirm that no undisclosed encumbrances (such as pledges to banks or security interests to licensors) existed.

Enforceability: Licence Terms, Royalty Obligations, and Termination Triggers

Technology licences — particularly in-licences from universities, research institutes, or foreign entities — are a common feature of biotech and medtech IPO applicants. The sponsor’s verification must go beyond reading the licence agreement. The SFC’s March 2023 circular requires the sponsor to assess whether the licence is “valid, binding, and enforceable” under the governing law — typically PRC law or Hong Kong law — and whether any termination triggers could reasonably be activated.

Key verification steps include:

• Confirming that the licence is registered with the relevant patent office if registration is required (for PRC patent licences, recordal with CNIPA is mandatory under the PRC Patent Law, Article 15, and failure to record renders the licence unenforceable against third parties).
• Reviewing the royalty payment history to confirm that the applicant has been making payments on time and in the correct amounts. The sponsor should obtain bank statements or payment receipts for at least the last two years.
• Identifying any “change of control” or “material adverse change” clauses that could give the licensor the right to terminate upon an IPO or a subsequent change in the applicant’s shareholding structure. If such clauses exist, the sponsor must obtain a waiver or consent from the licensor before the listing document is published.
• Assessing whether the licence is exclusive or non-exclusive, and whether the applicant has the right to sub-license. Any restriction on sub-licensing could materially affect the applicant’s business model if it intends to grant sub-licences to distributors or partners.

The SFC’s enforcement case against the sponsor of a pre-revenue biotech applicant in 2023 (settled by consent, with a HKD 8 million fine) centred on the sponsor’s failure to identify a termination clause in an in-licence agreement that allowed the licensor to terminate if the applicant failed to achieve a specific development milestone. The milestone was missed six months before the IPO filing, but the sponsor had not verified the milestone status. The licence was terminated by the licensor three weeks after the listing, rendering the applicant’s sole product candidate unlicensed.

Practical Implementation: Building the IP Verification Workflow into the Sponsor’s Due Diligence Programme

Engaging External Experts: When and How to Use Patent Agents and IP Lawyers

The SFC does not require sponsors to become patent experts, but it does require them to exercise independent judgement. The Code of Conduct, paragraph 17.6(e), permits a sponsor to rely on expert reports, provided the sponsor “takes reasonable steps to satisfy itself that the expert is competent and independent.” For patent verification, the sponsor should engage a qualified patent agent or IP lawyer who is registered with the relevant patent office (e.g., a PRC patent agent registered with CNIPA, or a US patent attorney registered with the USPTO).

The engagement letter must clearly define the scope of work: the expert is to verify the existence, ownership, and enforceability of each patent and licence listed in the prospectus, and to provide a written report that includes the verification methodology, the sources consulted, and any discrepancies found. The sponsor must not allow the expert to rely solely on the applicant’s representations — the expert must independently access patent office databases.

The sponsor should also obtain a confirmation from the expert that they have no conflict of interest with the applicant, the applicant’s directors, or the applicant’s other professional advisers. The SFC’s thematic inspection in 2023 found that one sponsor had engaged a patent agent who was also the applicant’s patent prosecution counsel, creating an inherent conflict. The sponsor was required to re-perform the verification with an independent expert.

Documenting the Verification: The Due Diligence File as a Regulatory Defence

The quality of the sponsor’s due diligence is judged not by the outcome, but by the process. The SFC’s enforcement actions consistently focus on whether the sponsor’s file contains evidence of the steps taken, not just the conclusions reached. For patent and licence verification, the file should contain:

• A copy of each patent certificate or patent office database screenshot, with the date and time of access noted.
• A copy of each invention assignment agreement and patent assignment deed, with a reconciliation table showing the chain of title.
• A copy of each licence agreement, with the key terms (royalty rate, territory, exclusivity, termination triggers) extracted into a summary table.
• The expert’s report, with the expert’s CV and confirmation of independence.
• The sponsor’s internal sign-off, including the deal team’s review memo and the compliance officer’s approval.

The SFC’s Sponsor Due Diligence Guidelines (December 2021) recommend that the sponsor maintain a “due diligence log” that records each verification step, the person responsible, the date completed, and any issues escalated. For patent verification, the log should include a column for the patent office database accessed and the result of the query.

Actionable Takeaways for Sponsor Compliance Teams

1. Direct database access is non-negotiable — every patent and licence in the prospectus must be verified against the relevant patent office’s online register, with a dated screenshot retained in the due diligence file.
2. Chain of title must be documented from inventor to applicant — obtain and review all invention assignment agreements and patent assignment deeds, and confirm recordal with the patent office where required by law.
3. Licence termination triggers must be stress-tested — identify any change-of-control, milestone, or material adverse change clauses, and obtain waivers or consents from licensors before the prospectus is filed.
4. Engage an independent IP expert — do not use the applicant’s patent prosecution counsel; ensure the expert’s scope of work is defined in a written engagement letter and that independence is confirmed.
5. Maintain a patent verification log — record the date, source, and result of each verification step, and obtain compliance officer sign-off before the listing document is submitted to the HKEX.