How to Write the Business Section: Presenting Your Business Model and Competitive Advantage

The SEC’s Division of Corporation Finance has, since early 2025, materially intensified its scrutiny of the Business Section (Item 101 of Regulation S-K) in F-1 registration statements filed by non-US issuers. In the first half of FY2025, the SEC issued 147 comment letters on F-1 drafts that specifically challenged the clarity, specificity, and verifiability of business model descriptions and competitive advantage claims, according to a June 2025 analysis by the SEC’s Office of the Advocate for Small Business Capital Formation. For Hong Kong and PRC-based issuers targeting a NYSE or NASDAQ listing, this marks a departure from the more procedural review cycles of 2022-2024. The SEC now requires that every revenue stream be mapped to a specific operational activity, every competitive moat be supported by third-party or audited data, and every risk factor be cross-referenced to a concrete disclosure in the Business Section. A generic description of “AI-driven platform” or “proprietary technology” without a corresponding patent number, customer contract, or revenue attribution is now a guaranteed deficiency. For sponsors, legal counsel, and CFOs, the Business Section is no longer a narrative exercise — it is the single most auditable component of the registration statement, directly influencing the pace of SEC review, the number of amendment rounds, and ultimately the listing timeline.

The Business Model Disclosure: From Narrative to Audit Trail

The SEC’s 2025 focus on business model disclosure has shifted the standard from “describe what you do” to “demonstrate how you generate revenue with verifiable mechanics.” For an F-1 registrant, the Business Section under Item 101(a) must now function as a self-contained audit trail that links every revenue stream to a specific operational activity, customer type, and contractual arrangement.

Revenue Stream Deconstruction by Operational Activity

The SEC expects each revenue line item to be decomposed into its constituent operational activities. A SaaS company, for example, cannot simply state “subscription revenue.” It must specify: (a) the number of active subscription contracts as of the most recent quarter-end, (b) average contract value (ACV) in USD, (c) renewal rate over the trailing 12 months, and (d) the exact billing mechanism — monthly, annual, or usage-based. An issuer that reported HKD 450 million in SaaS revenue for FY2024 would need to show that 68% of that figure came from annual contracts with a weighted-average ACV of HKD 2.3 million, supported by a schedule of the top 10 customers by contract value. The SEC’s Staff Legal Bulletin No. 14M (2024) explicitly warns against “aggregated revenue descriptions that obscure the underlying transaction economics.”

For PRC-based issuers operating through a VIE structure, this requirement becomes more complex. The SEC now demands a separate disclosure of revenue generated by the onshore operating entity versus the Cayman Islands holding company, with a reconciliation to the consolidated financial statements. A 2025 comment letter to a Shenzhen-based edtech issuer required it to restate its Business Section to show that 92% of its HKD 1.2 billion in revenue was generated by the PRC VIE, with the remaining 8% attributable to a Hong Kong subsidiary acting as a billing agent. The registrant was given 14 days to amend its F-1 or face a refusal-to-process order.

Customer Concentration and Dependency Disclosure

Customer concentration is a recurring deficiency in F-1 filings from Hong Kong and PRC issuers. The SEC’s 2025 review protocol now requires a table in the Business Section that lists: (a) each customer accounting for more than 10% of total revenue in any of the past three fiscal years, (b) the percentage of revenue attributable to that customer, (c) the contractual duration of the relationship, and (d) any termination or non-renewal risk. For an issuer with HKD 800 million in total revenue for FY2024, if Customer A contributed HKD 180 million (22.5%), the SEC would require a separate risk factor cross-referencing this concentration and a discussion of the issuer’s dependency mitigation measures.

The SEC’s Division of Corporation Finance, in its 2025 Examination Priorities Report, stated that it will “closely review revenue concentration disclosures for non-US issuers, particularly those with a single customer or a small group of customers representing a material portion of revenue.” For a Hong Kong-based logistics platform filing an F-1 in Q3 2025, the SEC required it to disclose that its top three customers collectively accounted for 58% of its HKD 1.5 billion in FY2024 revenue, with the largest customer — a single PRC e-commerce conglomerate — representing 31%. The issuer was instructed to add a risk factor titled “Dependence on a Limited Number of Customers” and to update the Business Section with a customer concentration table for the prior three fiscal years.

Geographic and Jurisdictional Revenue Attribution

The SEC now requires a geographic breakdown of revenue by jurisdiction, not just by region. For an issuer with operations in Hong Kong, the PRC, and Singapore, the Business Section must state the exact percentage of revenue derived from each jurisdiction for each of the past three fiscal years, with a reconciliation to the tax filings. A 2025 comment letter to a Hong Kong-based fintech issuer required it to restate its revenue attribution after the SEC identified that 23% of its reported “Asia-Pacific revenue” was actually derived from the PRC, while 12% came from Hong Kong, and 65% from Singapore. The issuer had originally grouped all three under “Asia-Pacific” without jurisdictional specificity.

For issuers with a Cayman Islands holding company and a Hong Kong operating subsidiary, the SEC requires a clear statement of which entity enters into revenue-generating contracts with customers. If the Hong Kong subsidiary is the contracting entity, the F-1 must disclose whether the subsidiary holds the necessary licenses under the Hong Kong Companies Ordinance (Cap. 622) and any sector-specific regulations, such as the Money Lenders Ordinance (Cap. 163) for lending activities. A failure to make this jurisdictional attribution can result in a stop-order proceeding under Section 8(d) of the Securities Act of 1933.

The Competitive Advantage Section: Data, Not Marketing

The SEC has, since 2024, systematically rejected competitive advantage claims that are not supported by independently verifiable data. The standard “proprietary technology” or “first-mover advantage” language that appeared in 60% of F-1 filings from non-US issuers in 2023 is now a guaranteed deficiency. The SEC’s 2025 review protocol requires that every competitive moat claim be accompanied by: (a) a third-party market share report, (b) a patent or trademark registration number, (c) a customer satisfaction survey with a defined methodology, or (d) a financial metric such as gross margin, customer acquisition cost (CAC), or lifetime value (LTV) that can be cross-referenced to the MD&A.

A claim that an issuer is “the leading provider of X in Asia” must be supported by a specific market share percentage from a named third-party research firm, with the report’s publication date, methodology, and scope disclosed. The SEC’s 2025 review of a Hong Kong-based logistics platform’s F-1 required it to delete the phrase “leading e-commerce logistics provider in Southeast Asia” because the issuer’s only support was an internal analysis. The SEC instructed the issuer to either: (a) commission a report from Frost & Sullivan, IDC, or a similarly recognized firm, or (b) remove the claim entirely. The issuer chose to commission a Frost & Sullivan report, which showed a 14.7% market share in the cross-border e-commerce logistics segment for Southeast Asia in 2024, and added the report’s methodology and limitations to the Business Section.

For issuers claiming “largest network” or “most extensive coverage,” the SEC requires a specific metric: number of nodes, number of routes, or total square footage of warehouse space, with a comparison to the next two largest competitors. A 2025 F-1 amendment for a PRC-based cold-chain logistics company had to state that its network comprised 47 distribution centers in 22 PRC provinces, compared to its closest competitor’s 38 centers in 18 provinces, based on data from the China Federation of Logistics & Purchasing’s 2024 annual report.

Intellectual Property and Technology Claims: Patent Numbers and Revenue Attribution

The SEC now requires that every claim of “proprietary technology” or “patented process” be linked to a specific patent or trademark registration number, with the jurisdiction of registration (e.g., US Patent No. 11,234,567, PRC Patent No. ZL 2023 1 0456789.0, or Hong Kong Short-Term Patent No. HK1234567). A generic claim that “the Company’s AI algorithm improves delivery efficiency by 30%” must be supported by: (a) the patent number covering that algorithm, (b) a description of the testing methodology, and (c) a revenue attribution showing what percentage of total revenue is generated by services or products that use that algorithm.

A 2025 comment letter to a Hong Kong-based AI logistics issuer required it to delete a claim that its “proprietary route optimization algorithm reduces fuel consumption by 25%” because the issuer had not filed a patent for that algorithm in any jurisdiction. The issuer was given 30 days to file a provisional patent application with the US Patent and Trademark Office or to remove the claim. The issuer chose to file a provisional application and added a statement that the patent was pending, with the application number disclosed.

For issuers with licensed technology, the SEC requires a summary of the license agreement, including: (a) the licensor’s identity, (b) the territory and field of use, (c) the royalty rate and payment terms, and (d) any termination rights. A 2025 F-1 for a PRC-based biotech issuer had to disclose that its core drug candidate was licensed from a US university under an exclusive license for the Greater China region, with a royalty rate of 3.5% of net sales and a minimum annual royalty of USD 250,000, subject to termination if the issuer failed to achieve certain development milestones by December 2026.

Financial Metrics as Competitive Indicators: Gross Margin, CAC, and LTV

The SEC now expects issuers to use financial metrics from the MD&A to support competitive advantage claims in the Business Section. A claim of “superior unit economics” must be supported by: (a) gross margin by product line for the past three fiscal years, (b) customer acquisition cost (CAC) for the most recent fiscal year, and (c) customer lifetime value (LTV) with a defined methodology for calculating LTV. The SEC’s 2025 review of a Hong Kong-based e-commerce platform’s F-1 required it to add a table showing that its gross margin for the cross-border segment was 42.3% in FY2024, compared to an industry average of 34.1% according to a 2024 report by the Hong Kong Trade Development Council (HKTDC). The issuer also had to disclose its CAC of HKD 1,850 per new customer and its LTV of HKD 12,400, resulting in an LTV/CAC ratio of 6.7x.

The SEC will reject a competitive advantage claim based on a single-year metric. The issuer must show a trend over at least three fiscal years. A claim of “improving gross margin” must be supported by a year-by-year breakdown: FY2022: 38.7%, FY2023: 40.2%, FY2024: 42.3%. A claim of “declining CAC” must show the absolute numbers: FY2022: HKD 2,100, FY2023: HKD 1,950, FY2024: HKD 1,850.

Risk Factor Cross-Referencing and Materiality Assessment

The SEC’s 2025 review protocol requires that every risk factor in the Risk Factors section be cross-referenced to a specific disclosure in the Business Section. This is a structural requirement, not a suggestion. A risk factor stating that “the Company faces competition from larger, better-capitalized competitors” must be cross-referenced to the competitive advantage section that discusses market share, barriers to entry, and differentiation. A risk factor stating that “the Company depends on a limited number of customers” must be cross-referenced to the customer concentration table in the Business Section.

The Cross-Reference Table Requirement

The SEC now expects a cross-reference table in the Business Section or as an appendix to the F-1 that maps each risk factor to the corresponding Business Section disclosure. A 2025 comment letter to a PRC-based renewable energy issuer required it to add a table with three columns: (a) Risk Factor Number, (b) Risk Factor Description, and (c) Business Section Cross-Reference. For example, Risk Factor 1 (“Dependence on PRC government subsidies”) was cross-referenced to the Business Section’s disclosure that 34.2% of the issuer’s FY2024 revenue came from subsidies under the PRC’s Renewable Energy Law, with a discussion of the subsidy reduction schedule through 2027.

The SEC’s Division of Corporation Finance, in its 2025 Examination Priorities Report, stated that it will “consider the absence of such cross-references as a deficiency that may require a pre-effective amendment.” For a Hong Kong-based issuer filing an F-1 in Q2 2025, the SEC required a complete restatement of its Risk Factors section to add cross-references to 12 specific paragraphs in the Business Section, covering topics from customer concentration to technology obsolescence.

Materiality Assessment for Omitted Disclosures

The SEC now requires issuers to conduct a formal materiality assessment for any disclosure that is omitted from the Business Section because the issuer believes it is not material. The assessment must be documented in the issuer’s board minutes or in a memorandum from the sponsor. The SEC’s 2025 review of a Cayman Islands-based holding company with PRC operations required it to produce a materiality assessment explaining why it omitted a disclosure about a pending PRC regulatory investigation. The issuer had to state that the investigation, which involved a potential fine of up to RMB 50 million (approximately HKD 54 million), was not material because it represented less than 1% of the issuer’s total assets of HKD 5.8 billion as of December 31, 2024.

The SEC will challenge a materiality assessment that is not supported by a specific financial threshold. A general statement that “the matter is not material” is insufficient. The issuer must state the exact percentage of total assets, total revenue, or net income that the omitted item represents, and explain why that percentage is below the materiality threshold.

Actionable Takeaways for Issuers and Sponsors

Decompose every revenue stream in the Business Section into its operational components — active contracts, ACV, renewal rate, and billing mechanism — and cross-reference each to the financial statements in the MD&A.
Commission a third-party market share report from a recognized firm (Frost & Sullivan, IDC, Gartner) for any competitive advantage claim that uses a superlative such as “leading,” “largest,” or “most extensive.”
File a patent application, either provisional or non-provisional, in the relevant jurisdiction for any technology described as “proprietary” or “patented” before the F-1 is submitted to the SEC.
Create a cross-reference table that maps every risk factor to a specific paragraph in the Business Section, and include this table as an appendix to the F-1.
Document a formal materiality assessment, with specific financial thresholds and percentages, for any disclosure that is omitted from the Business Section because the issuer considers it not material.