## What is an IPO? An In-Depth Explanation of the Core Logic of Going Public

### From private financing to public listing—what is an IPO

**Basic Definition of IPO**

An IPO (Initial Public Offering) refers to the process where a privately held company issues shares to the public for the first time, becoming a listed company to raise funds. Simply put, when a private enterprise completes its accumulation phase and decides to raise capital from the public, it initiates the IPO process.

The driving force behind this transition is quite straightforward: in the early stages, relying on founders and small shareholders' capital investments can support business development, but as expansion requires more funds, the bottleneck of private financing becomes apparent. At this point, raising funds through a public listing becomes the most effective way to break through. By issuing shares to the public, the company can quickly raise substantial capital for debt repayment and business expansion, while also providing liquidity opportunities for early investors through equity trading.

From another perspective, an IPO represents a significant transfer of ownership—from private to public. This means that ordinary investors have their first chance to buy shares of high-quality companies, no longer kept behind information barriers.

### Comparison of Listing Standards and Processes: Hong Kong Stock Market vs. US Stock Market

**Pathways and Thresholds for Listing in Hong Kong**

The Hong Kong Stock Exchange (HKEX) has relatively flexible financial requirements for Main Board listings, primarily assessing a combination of three indicators:

Profitability Assessment: Profit of HKD 20 million in the most recent year, or a total profit of over HKD 30 million in the previous two years with a profit of no less than HKD 500 million at the time of listing;

Market Capitalization and Revenue Dual Criteria: Market value of over HKD 4 billion at listing, along with revenue of HKD 500 million in the most recent fiscal year;

Cash Flow Stability: Market value threshold of HKD 2 billion, annual revenue of HKD 500 million, and a cumulative operating cash flow of over HKD 100 million over three years.

The overall process for listing in Hong Kong includes: engaging sponsors, accountants, lawyers, and other intermediaries → conducting comprehensive due diligence and asset verification → business and equity restructuring and governance improvement → submitting applications and prospectus to the Securities and Futures Commission (SFC) and HKEX → organizing roadshows and pricing → official IPO issuance → listing and trading on HKEX.

**US Stock Market Listing Differentiation Standards**

The US capital markets are divided mainly between NYSE and NASDAQ, with distinct listing requirements:

New York Stock Exchange (NYSE) emphasizes profit performance and cash flow health: three-year pre-tax profit (excluding extraordinary items) totaling over USD 100 million, with each of the last two years exceeding USD 25 million; or a global market value of USD 500 million, 12-month revenue of USD 100 million, three-year cumulative cash flow of USD 100 million, with each of the last two years' annual cash flow not less than USD 25 million; or a market value of USD 750 million with annual revenue exceeding USD 75 million in the last two years.

NASDAQ places more emphasis on shareholders' equity and market maker participation: recurring pre-tax profit of USD 1 million (in any one year or any two years within the last three), shareholders' equity of USD 15 million, public market capitalization of USD 8 million with at least three market makers; or shareholders' equity of USD 30 million, two years of operational history, public market cap of USD 18 million, and at least three market makers; or listed securities market value of USD 75 million, public market cap of USD 20 million, and over four market makers; or total assets plus revenue of USD 75 million in any one year or any two years within the last three, public market cap of USD 20 million, and over four market makers.

Overall, US stock requirements for profit, cash flow, and market value are more stringent, while Hong Kong offers more diverse pathways for listing.

### Opportunities and Risks in Investing in New IPO Stocks

**Three Major Advantages of Participating in New Stocks**

First, new stocks are an excellent entry point for retail investors to access high-quality companies. Many high-growth potential enterprises do not open to retail investors during private funding stages, but after listing, purchasing at IPO prices often represents the most economical entry. The IPO issue price is carefully set by the issuer and is usually below the secondary market price after listing. Missing this price window can lead to rapid stock price increases, making subsequent entry more costly.

Second, the timing of listing often reflects market sentiment. Most high-quality companies choose to go public during bullish market periods, providing investors with a relatively positive market environment expectation based on fundamental analysis. Coupled with favorable initial prices, investors have a higher chance of realizing substantial gains in the short term.

Third, the advantage of information transparency. The main sources of information for investors are official disclosures like the prospectus. Large institutional investors do not have significantly more information than retail investors, which helps achieve a certain level of "information symmetry."

**Three Major Risks Not to Be Ignored**

However, the attractiveness of IPO investments hides significant risks. The first risk stems from uncertainty about company quality. Even if a company successfully lists, if its fundamentals are not solid, when large funds start to withdraw, retail investors often lack the speed and ability to sell, risking being trapped.

The second risk is that valuation has already been priced into the issue price. All positive factors—growth potential, industry outlook, management capability—are usually fully reflected in the IPO price, limiting short-term profit opportunities for investors and even risking a "break" (price falling below issue price).

The third hidden risk is market volatility. IPO sectors tend to be highly volatile and attract speculative capital. Chasing hot topics blindly, overemphasizing short-term gains, and ignoring company fundamentals are common pitfalls leading to losses.

### Rational Participation in IPO Investment: Recommendations

For any investor, thorough preparation before participating in an IPO is crucial. First, deeply understand the company's fundamentals—business model, competitive advantages, financial health, and growth prospects. While the prospectus provides comprehensive information, investors need certain financial analysis skills.

Second, recognize your own risk tolerance and investment horizon. IPO stocks are suitable for investors who can bear moderate risks and have patience for medium- to long-term holding, not for conservative investors seeking stable cash flow.

Finally, develop a habit of diversification. Even if you are optimistic about a particular IPO, do not allocate too much capital to a single stock. Building positions gradually and diversifying across multiple projects can effectively reduce the impact of individual mistakes.

In summary, IPOs are an important way to participate in corporate growth and achieve phased gains, but only with rational analysis, cautious decision-making, and risk management. The market always favors prepared investors.