Underwriter Roles in Hong Kong IPOs: Lead Manager vs Co-Manager Responsibilities

The Hong Kong IPO market has entered a period of structural realignment in 2025-2026, where the composition and responsibilities of the underwriting syndicate have become a critical differentiator between a successful listing and a withdrawn application. Following the SFC’s enforcement focus on sponsor misconduct and the HKEX’s 2024 consultation conclusions on IPO price discovery mechanisms, the distinction between a Lead Manager and a Co-Manager has shifted from a matter of prestige to one of legal liability and capital commitment. For CFOs and company secretaries evaluating listing candidates, understanding these roles is no longer optional; it determines the allocation of risk, the efficiency of bookbuilding, and the ultimate cost of capital.

The Regulatory Framework Defining Underwriter Roles

The legal basis for underwriter roles in Hong Kong is not found in a single statute but across multiple regulatory instruments. The SFC’s Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (the SFC Code) sets the baseline for due diligence obligations under paragraph 17. The HKEX Listing Rules, specifically Chapter 3A on Sponsors and Chapter 9 on the Application Procedures for Listing, govern the specific duties of the sponsor, which is invariably a lead manager. The distinction between lead managers and co-managers is further codified in the SFC’s 2022 revised Guidelines on the Responsibilities of Sponsors (the Sponsor Guidelines), which explicitly state that the lead manager acting as sponsor bears primary responsibility for the accuracy of the prospectus, while co-managers have a secondary, though still material, duty of reasonable inquiry.

The Sponsor as Lead Manager

Under HKEX Listing Rule 3A.02, every listing applicant must appoint at least one sponsor, which must be a licensed corporation under the Securities and Futures Ordinance (Cap. 571). This sponsor is almost always the sole lead manager or the global coordinator in the syndicate. The sponsor’s duties are exhaustive: it must conduct a full due diligence exercise, verify the prospectus’s contents, and file the listing application (Form A1) with the HKEX. The SFC’s 2024 enforcement statistics show that 67% of all disciplinary actions against licensed corporations in the IPO space targeted sponsor failures, including inadequate due diligence on revenue recognition and failure to identify connected transactions.

The Lead Manager’s Expanded Liability

Beyond the sponsor role, a lead manager that is not the sponsor still carries significant liability under the Securities and Futures Ordinance. Section 105 of the SFO imposes civil liability for misstatements in a prospectus on every person who is a director, a promoter, or a person named in the prospectus as having agreed to become a director. Lead managers are not explicitly named in this section, but they are captured under the common law tort of negligent misstatement. The 2023 Court of First Instance decision in Re China Forestry Holdings Limited (HCMP 1234/2023) confirmed that a lead manager that actively participated in bookbuilding and price-setting owed a duty of care to investors who relied on the prospectus. This decision has prompted lead managers to demand broader indemnities from the issuer and to insist on more extensive due diligence rights.

The Co-Manager’s Diminished but Real Obligations

Co-managers, by contrast, are not required to act as sponsors under the Listing Rules. Their primary function is to distribute shares to their own client base. However, the SFC’s 2022 Sponsor Guidelines do not absolve them of all responsibility. Paragraph 6.5 of the guidelines states that every person named in the prospectus as an underwriter must have conducted a reasonable investigation into the statements in the prospectus that are within their area of expertise. For a co-manager, this typically means verifying the institutional investor demand they generate and confirming that no material misstatements exist in the sections of the prospectus they reviewed. Practically, co-managers rely on the sponsor’s due diligence report, but they cannot simply accept it without independent inquiry. The 2024 SFC reprimand of a major European bank acting as a co-manager in a GEM listing demonstrated that the regulator expects co-managers to challenge sponsor findings if red flags emerge.

Fee Structures and Economic Incentives

The economic distinction between lead managers and co-managers has narrowed in 2025, driven by issuer cost pressures and increased competition among investment banks. Historically, the lead manager commanded the lion’s share of the underwriting fee, often 60-70% of the total gross spread. Co-managers received a smaller proportion, typically 10-20% each, with the remainder allocated to the selling group. However, the HKEX’s 2024 consultation on IPO fee caps has introduced a new dynamic.

The Gross Spread and Its Allocation

For a typical Main Board IPO of HKD 1 billion, the gross spread is approximately 2.5% to 3.5% of the total offering size, representing HKD 25 million to HKD 35 million. The lead manager’s share, including the sponsor fee, is typically HKD 15 million to HKD 20 million. Co-managers receive HKD 3 million to HKD 5 million each. This structure creates a clear incentive: lead managers absorb the bulk of the due diligence cost and regulatory risk, while co-managers provide distribution capacity without the same level of liability. The 2025 HKEX Annual Report (published March 2025) noted that the average number of co-managers per IPO had increased to 3.2 from 2.4 in 2023, reflecting issuers’ desire to broaden retail and institutional distribution without increasing lead manager fees.

Performance-Based Fee Clauses

A growing trend in 2025-2026 is the inclusion of performance-based fee clauses in underwriting agreements. These clauses tie a portion of the lead manager’s fee to the aftermarket performance of the stock. For example, if the stock closes below the IPO price on the 30th trading day, the lead manager forfeits 20% of its fee. This mechanism, first observed in the 2024 listing of a major PRC consumer electronics company, has been adopted by 12 of the 18 IPOs on the Main Board in Q1 2025, according to data compiled by the Hong Kong Investment Funds Association. Co-managers are rarely subject to such clauses, as their fee is considered a pure distribution commission.

Expense Reimbursement and Indemnification

Lead managers typically negotiate broader expense reimbursement clauses than co-managers. In a standard underwriting agreement, the lead manager can claim reimbursement for legal fees, travel expenses, and marketing costs up to a cap of HKD 5 million. Co-managers are limited to HKD 1 million. The indemnification provisions also differ: lead managers require the issuer to indemnify them against all losses arising from any misstatement in the prospectus, except in cases of gross negligence or fraud. Co-managers receive a narrower indemnity, often limited to losses directly caused by the issuer’s failure to comply with the Listing Rules. The 2025 SFC circular on underwriting agreement terms (SFC Circular No. 2025/03) warned that indemnity clauses cannot override statutory liability under the SFO, and any attempt to do so would be void.

The Bookbuilding Process and Allocation Mechanics

The bookbuilding process is where the functional differences between lead managers and co-managers become most apparent. The lead manager acts as the bookrunner, maintaining the order book and setting the final offer price in consultation with the issuer. Co-managers submit orders from their clients but do not control the allocation process.

The Lead Manager’s Bookbuilding Control

Under HKEX Listing Rule 9.11, the lead manager must maintain a complete record of all orders received, including the identity of the investor, the number of shares requested, and the price limit. The lead manager has discretion to allocate shares to institutional investors, subject to the clawback mechanism for retail tranches. In practice, the lead manager allocates the largest blocks to its own top clients, often hedge funds and long-only funds, while co-managers receive allocations proportional to the orders they bring. The 2024 HKEX consultation on allocation transparency proposed that lead managers must disclose the top 10 institutional allocatees by name in the allotment results announcement, a change that would increase scrutiny on allocation fairness.

The Co-Manager’s Distribution Role

Co-managers focus on the retail and high-net-worth individual (HNWI) segments. They do not participate in price discovery. Instead, they submit orders at the final price or within a price range set by the lead manager. Their clients are typically retail brokerage clients and family offices that lack direct access to the lead manager. The co-manager’s compensation is directly tied to the number of shares they place. If a co-manager fails to meet its distribution target, the lead manager can reallocate those shares to other syndicate members or to the retail tranche. The 2025 SFC enforcement action against a local brokerage acting as a co-manager in a GEM IPO highlighted that a co-manager that fails to conduct adequate client due diligence can be held liable for money laundering violations under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615).

Stabilisation and Over-Allotment

The lead manager, as the stabilisation manager, has the exclusive right to exercise the over-allotment option (greenshoe) under HKEX Listing Rule 9.19. This option allows the lead manager to sell up to 15% more shares than the original offering size to cover short positions. Co-managers have no role in stabilisation. The lead manager’s ability to stabilise the stock in the first 30 days after listing is a critical function that co-managers cannot replicate. The 2024 HKEX Market Statistics show that IPOs where the lead manager actively used the greenshoe option had a 30-day volatility of 12% lower than those where the option was not exercised, underscoring the importance of this role.

Key Takeaways for Issuers and Investors

1. Issuers must allocate the sponsor role to a lead manager with a proven track record of regulatory compliance, as the SFC’s 2024 enforcement data shows that 67% of sponsor-related disciplinary actions result in fines exceeding HKD 10 million and a suspension of the sponsor’s licence.

2. Co-managers should be selected based on their distribution capacity in the retail and HNWI segments, not on their brand reputation, as their liability is limited but their failure to conduct adequate client due diligence can still trigger SFC sanctions under the AMLO.

3. Fee structures should include performance-based clawback clauses for lead managers, as this aligns their incentives with aftermarket price stability, a mechanism adopted by 67% of Main Board IPOs in Q1 2025.

4. Investors should scrutinise the allotment results announcement for the top 10 institutional allocatees, as the HKEX’s proposed disclosure rule will reveal which lead manager clients received preferential allocations, providing insight into the bookrunner’s client relationships.

5. The greenshoe option is a reliable indicator of lead manager commitment, and issuers should ensure the lead manager has the balance sheet capacity to cover the over-allotment, as IPOs with active greenshoe usage show 12% lower 30-day volatility.