How to Read “Use of Proceeds” in an IPO Prospectus

Use of proceeds means how the company plans to spend the net money it receives from the IPO.

The company doesn’t keep every dollar raised from investors. First, it has to pay listing expenses, underwriting fees, legal fees, accountants, printing, advisers, and all the other expensive machinery behind a Hong Kong listing. What remains is the net proceeds.

For example, if an IPO raises HK$1 billion and listing expenses are around HK$80 million, the net proceeds may be about HK$920 million. The prospectus should then explain how that HK$920 million will be split.

HKEX guidance says the Use of Proceeds section should disclose specific uses of listing proceeds and help investors understand the applicant’s future plans. That sounds formal, but the investor version is simple: show me the plan, not just the slogan.

In my experience, the use of proceeds section often tells you what the IPO is really about.

A company may say it wants to list to raise its profile, strengthen its brand, and access capital markets. Fine. Every prospectus says something like that. But the actual money allocation is harder to dress up.

Expansion usually means the company is trying to grow.

R&D means it is investing in future products or technology.

Debt repayment may mean it wants to clean up the balance sheet.

Working capital means it needs cash for daily operations.

Acquisitions mean management wants to buy growth from outside.

None of these are automatically good or bad. The thing is, the use of proceeds should match the company’s business model, financial position, and IPO valuation. If the story and the money plan do not line up, I usually slow down.

Many IPO companies say they will use proceeds for expansion. This can mean opening new stores, building factories, increasing capacity, entering new markets, hiring sales teams, or upgrading distribution channels.

Look, expansion can be a good sign if the company has already proved that the model works. A profitable restaurant group using IPO money to open more stores in cities where it already understands demand is easier to accept than a company suddenly announcing a huge expansion into markets it barely knows.

Before getting excited, ask a few grounded questions:

Has the company expanded successfully before?

Is there evidence of real customer demand?

Will the expansion hurt margins before it helps profits?

How long will the new stores, factories or markets take to generate revenue?

Is the expansion plan realistic, or just something that sounds good in a prospectus?

A strong prospectus should explain the expansion plan with enough detail. “Business expansion” on its own is too easy to write and too hard to trust.

For technology, biotech, specialist technology, EV-related, software, or advanced manufacturing IPOs, R&D spending is often a major use of proceeds.

That can be positive. R&D may support new products, patents, clinical trials, platform development, production technology, or commercialisation. But let’s not pretend every R&D budget is automatically valuable. Some companies spend heavily for years and still fail to turn research into revenue.

For biotech IPOs, check whether the money is going into clinical trials, regulatory approvals, drug development, manufacturing preparation, or commercialisation. For tech companies, check whether the proceeds support real products, customer adoption, or defensible technology — not just vague “technology enhancement”.

My simple test is this: will this R&D spending create future revenue, or is it mainly keeping the company alive until the next funding round?

Some companies use part of the IPO proceeds to repay bank loans or other borrowings. New investors sometimes see this and immediately think it is negative. I would not go that far.

Debt repayment can make sense. It may reduce interest costs, improve cash flow, and make the balance sheet healthier. If a company borrowed to fund expansion and now wants to refinance through equity, that may be reasonable.

But if most of the IPO money is going into debt repayment, I become more cautious. Is the company listing to grow, or is it listing because it needs relief?

Ask:

Why did the company borrow so much in the first place?

Will debt repayment materially improve profitability or cash flow?

Will enough proceeds remain for growth after repayment?

Is the IPO solving a balance-sheet problem rather than funding a business opportunity?

Debt repayment is not a deal-breaker. But it needs a good explanation.

Almost every prospectus includes some allocation for working capital or general corporate purposes. That is normal. Businesses need cash for inventory, staff, raw materials, sales channels, logistics, and day-to-day operations.

The problem is when the wording is too broad. HKEX guidance says vague phrases like “working capital” or “general corporate purposes” are not specific enough unless supported by reasonably detailed explanation.

In practical terms, a small working-capital allocation is fine. A large allocation with no detail makes me uncomfortable.

Better disclosure tells you whether the money will be used for inventory purchases, payroll, sales expansion, rental deposits, supplier payments, or operating expenses. Weak disclosure just says “general working capital” and moves on. As an investor, I prefer detail over nice wording.

Some IPO companies raise money to acquire other businesses, brands, technology, production facilities, or distribution channels.

Acquisitions can speed up growth, but they can also create expensive mistakes. Many management teams love talking about acquisition opportunities. Fewer are good at integrating businesses after buying them.

Check whether the company has identified acquisition targets. If the targets are not identified, the plan is more speculative. Also ask whether the company has a history of successful acquisitions. If not, management is asking investors to trust them with a skill they may not have proven yet.

Useful questions include:

Are the targets already identified?

What type of business does the company want to buy?

Will the acquisition improve revenue, margins, technology or market access?

Could management overpay?

Will the acquisition create integration risk?

A vague plan to “pursue acquisition opportunities” is not the same as a real acquisition strategy.

A useful Use of Proceeds section should not only list percentages. It should show amounts, purposes, and expected timing.

For example, this is not very helpful:

• 40% for expansion
• This is much better:

40% for opening 50 new stores over the next three years, including rental deposits, renovation, equipment and hiring

HKEX guidance also expects applicants to break down proceeds for each initiative and include the expected timing of utilisation, preferably in bullet or table form.

This matters after listing too. A company’s annual reports, interim reports and announcements can later show whether it actually used the IPO money as promised. In experience, this is one of the easiest ways to see whether management does what it said it would do.

The use of proceeds is about how the company will spend the IPO money. It is different from the IPO offer structure, but the two are connected in practice.

A Hong Kong IPO is usually split between the Public Offer for investors like us and the International Placing or bookbuilding tranche for institutional and professional investors. The prospectus will also explain the initial public tranche, allocation basis, and whether a clawback mechanism applies.

Under HKEX’s updated IPO framework, issuers may use Mechanism A or Mechanism B for the public subscription tranche. Mechanism A starts with a smaller public allocation and may claw back more shares to the public if demand is strong. Mechanism B starts with at least 10% for the public tranche and has no clawback mechanism. The important point is this: these mechanisms affect how many shares may be available to public applicants, not whether the company’s use of proceeds is good.

So don’t confuse strong subscription or low allotment chance with a strong business plan. A hot IPO can still have a weak use of proceeds. And a less hyped IPO can still have a sensible capital plan.

When I read this section, these are the signs that make me slow down:

A large amount is allocated to vague working capital.

Most proceeds are used to repay debt without a clear explanation.

Expansion plans are aggressive but thin on details.

Acquisition plans sound ambitious but targets are not identified.

R&D spending is large but milestones are unclear.

A material portion of proceeds has no specific plan.

The use of proceeds does not match the company’s stated strategy.

Listing expenses look unusually high compared with the deal size.

None of these automatically means the IPO is bad. But they are reasons to read the prospectus more carefully and not rely on market hype.

Yes, a listed company may change how it uses IPO proceeds after listing. Business conditions change. Plans fail. New opportunities appear.

But material changes matter. HKEX guidance says any material change in use of proceeds is generally price sensitive and should be announced if not previously disclosed. In other words, investors should be told when the plan changes in a meaningful way.

This is why I don’t stop reading after listing day. If you hold the stock longer term, check the annual report, interim report, and announcements. See whether management actually used the IPO money as planned.

When reading Use of Proceeds, I’d ask five simple questions:

Is the plan specific?

Does the plan support real growth?

Is the allocation reasonable?

Is the timeline clear?

Is the company mainly raising money to grow, or to patch financial pressure?

If the answers are clear, the section can support the IPO case. If the answers are vague, I would demand a larger margin of safety — or simply skip it.

The Use of Proceeds section is one of the most useful parts of a Hong Kong IPO prospectus. It tells you what the company plans to do with investor money.

A strong use of proceeds should be specific, logical, timed, and connected to the company’s growth strategy. A weak one is vague, overly general, or mainly about fixing financial pressure.

Before subscribing to a HK IPO, don’t only ask whether the company is popular or whether the public offer is oversubscribed. Ask a more practical question: what will this company do with the IPO money, and does that plan actually make sense?

That one question can save you from a surprising number of weak IPO stories.