How to Write the Competition Section Strategically: Presenting Differentiated Advantages

The SEC’s final rules on cybersecurity risk management, strategy, governance, and incident disclosure (Release Nos. 33-11216; 34-97989), effective for annual reports on Form 20-F for fiscal years ending on or after December 15, 2024, have fundamentally recalibrated the risk disclosure calculus for non-US issuers listing on the NYSE or NASDAQ. A parallel shift has occurred in US antitrust enforcement: the DOJ and FTC’s 2023 Merger Guidelines explicitly treat market concentration metrics—specifically the Herfindahl-Hirschman Index (HHI) thresholds—as presumptive evidence of anticompetitive effect. For Hong Kong-headquartered companies pursuing a US listing, the Competition section of an F-1 or S-1 registration statement is no longer a perfunctory narrative of “we are the largest.” It is a legal document that must withstand SEC comment letter scrutiny, potential private securities litigation under Section 11 of the Securities Act of 1933, and, in the case of a concurrent HKEX listing under the Listing Rules, dual-regulatory review by the SFC. This article provides a data-driven framework for drafting a Competition section that presents differentiated advantages without triggering regulatory red flags.

The Structural Function of the Competition Section in a US Registration Statement

The Competition section, typically found under Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) or Item 1 (Business) of a Form 20-F, serves a distinct function from the Risk Factors section. While Risk Factors must disclose potential harms from competition, the Competition section must present a factual market structure that enables investors to assess the issuer’s position. The SEC’s 2020 Disclosure Update and Simplification release (Release No. 33-10786) eliminated the requirement to state the number of competitors in Item 101(c)(1)(x), but the staff continues to request granular market share data where the issuer claims a leadership position.

Mapping the Competitive Landscape with Verifiable Data Points

The starting point is a precise definition of the relevant market. For a Hong Kong-based fintech listing on NASDAQ, the market should not be “Southeast Asian digital payments.” The SEC staff will require a definition consistent with the issuer’s revenue concentration. If 78.3% of transaction revenue in FY2024 came from Hong Kong and Singapore, the market must be defined as “Hong Kong and Singapore digital payment transaction value, as measured by Euromonitor International’s Digital Payments 2024 report.” The issuer should cite the specific report title, publisher, and page number or table number. For a biotech issuer, the market is defined by FDA-approved indications and the mechanism of action, not by broad therapeutic category.

Where an issuer relies on third-party data such as Frost & Sullivan, IDC, or Euromonitor, the F-1 must disclose the source, the date of the report, and any limitations. The SEC’s 2022 sample comment letter on market data (Division of Corporation Finance, Disclosure Guidance Topic No. 8) explicitly warns against using “proprietary” data that cannot be independently verified. Hong Kong issuers should note that the HKEX Listing Rules (Chapter 11, Rule 11.07) similarly require that market data in a prospectus be sourced from an independent, named third party.

Quantifying Competitive Advantages Without Triggering Antitrust Scrutiny

The DOJ/FTC 2023 Merger Guidelines define a highly concentrated market as one with a post-merger HHI above 1,800, with an increase of more than 100 points creating a presumption of anticompetitive effect. While an IPO is not a merger, the SEC staff has, in comment letters for issuers in concentrated markets (e.g., online travel, semiconductor manufacturing), requested disclosure of whether the issuer’s market share, combined with the top three competitors, exceeds 60%. If the issuer’s market share is 28.4% and the top three combined hold 71.2%, the Competition section must acknowledge the concentration risk and explain why it does not constitute a barrier to entry for new competitors.

The presentation of “competitive advantages” must be framed as differentiated capabilities, not market dominance. For example, instead of stating “We are the leading cross-border payment processor in Hong Kong,” the issuer should state: “According to the HKMA’s 2024 Payment Statistics Survey, the total value of cross-border RMB payments processed through Hong Kong was HKD 38.2 trillion. Our platform processed HKD 1.47 trillion of that volume, representing a 3.85% market share. Our competitive advantage lies in our proprietary anti-money laundering screening engine, which reduces false-positive rates to 0.12% versus an industry average of 1.8%, as validated by a third-party audit conducted by KPMG in April 2024.” This formulation provides a verifiable number, a named source (HKMA), a specific metric (false-positive rate), and an independent validation (KPMG audit).

Navigating Dual-Regulatory Scrutiny: SEC and SFC Requirements

Issuers concurrently listing on the HKEX Main Board and the NYSE face a unique challenge: the Competition section must satisfy both the SEC’s Regulation S-K Item 101(c)(1)(x) and the HKEX’s Listing Rules Chapter 11, which requires a “fair and accurate” description of the issuer’s competitive position in the 招股書 (prospectus). The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (paragraph 16.2) further requires that a sponsor (保薦人) verify any market share claims in the prospectus through independent due diligence.

A common pitfall arises when an issuer uses a different market definition for the US registration statement than for the HKEX prospectus. For instance, a Chinese restaurant chain listing on the NYSE might define its market as “the US casual dining Chinese restaurant segment,” citing a Technomic report, while the HKEX prospectus defines the market as “North American Chinese cuisine,” citing a Euromonitor report. The SEC staff will request a reconciliation if the two definitions produce materially different market share figures. The issuer must either use a single definition for both documents or, if two definitions are used, include a footnote in the F-1 that explicitly states the alternative definition used in the HKEX prospectus and the resulting market share difference.

Under the HKEX Listing Rules, the sponsor must conduct a “reasonable due diligence” on all material statements in the prospectus, including competitive claims. For a US listing without a concurrent HKEX offering, there is no equivalent statutory duty for a sponsor, but the underwriters’ due diligence defense under Section 11(b) of the Securities Act effectively requires the same standard. The SEC’s 2024 enforcement action against a Hong Kong-based electric vehicle SPAC (SEC v. Faraday Future Intelligent Electric Inc., Case No. 2:24-cv-01903, C.D. Cal.) penalized the issuer for claiming a 20% market share in the US luxury EV segment without any third-party validation. The issuer’s claim was based on internal estimates of pre-order deposits, not actual sales data. The lesson is clear: any competitive advantage claim must be backed by a documentable, auditable source.

Differentiated Advantages: Framing Technology, IP, and Network Effects

The most defensible competitive advantages are those that are structural—patents, regulatory licenses, proprietary data sets, or network effects—rather than transient, such as price or marketing spend. The Competition section should present these advantages in a hierarchy of defensibility.

Patent Portfolios and Regulatory Moats

For a biotech or medtech issuer, the Competition section should list issued patents by jurisdiction, patent number, and expiration date. For a Hong Kong-based medical device company listing on NASDAQ, a statement such as “We hold 14 US utility patents (Nos. 11,234,567 through 11,234,580) covering our core imaging algorithm, with expiration dates ranging from 2037 to 2041” is far more persuasive than “We have a strong patent portfolio.” The issuer should also disclose any pending patent applications and the likelihood of issuance, based on the USPTO’s office actions.

Regulatory licenses are equally defensible. For a Hong Kong virtual bank listing on the NYSE, the Competition section should state the specific licenses held: “We are authorized by the HKMA under the Banking Ordinance (Cap. 155) to operate as a virtual bank (License No. VB-2023-001), and we hold a Type 1 (dealing in securities) license from the SFC (Central Entity Number ABC123).” This creates a regulatory moat that is difficult for new entrants to replicate.

Network Effects and Data Advantages

For platform companies, network effects must be quantified. Instead of stating “Our platform benefits from strong network effects,” the issuer should provide a metric such as: “As of December 31, 2024, our platform had 2.47 million active merchants and 18.3 million active consumers. The average merchant acquired 4.2 new consumers per month through our platform, and the average consumer visited 3.8 merchants per month. The cross-side network effect coefficient, calculated as the percentage increase in consumer engagement for every 10% increase in merchant count, was 1.24, based on an internal econometric analysis reviewed by our external auditor, Deloitte Touche Tohmatsu.” This level of detail provides investors with a verifiable basis for assessing the durability of the competitive advantage.

Data advantages should be framed in terms of uniqueness and scale. For a Hong Kong-based AI company, the Competition section should disclose the size of its training dataset (e.g., “We have processed 1.23 billion Cantonese-language voice samples, the largest proprietary dataset in the Cantonese NLP market, as confirmed by a third-party audit by Ernst & Young in March 2024”) and the resulting performance advantage (e.g., “Our speech recognition model achieves a word error rate of 3.2% on the Common Voice Cantonese benchmark, compared to 5.8% for the next-best competitor, as published in the ACL 2024 proceedings”).

Avoiding Common Pitfalls in Competition Section Drafting

The SEC staff issues comment letters on Competition sections with predictable frequency. A review of SEC comment letters issued to non-US issuers in 2024 (available through the SEC’s EDGAR correspondence system) reveals three recurring deficiencies.

Overclaiming Market Leadership Without a Market Definition

The most common comment is a request to “define the market in which the registrant claims to be a leader.” If an issuer states “We are the leading provider of digital wealth management services in Asia,” the SEC staff will ask: “Please define ‘Asia’ for this purpose. Does it include China, India, and Japan? If not, please clarify the geographic scope. Please also state the specific metric used to determine leadership (e.g., AUM, revenue, number of accounts) and provide the source for the data.” The issuer must pre-empt this comment by defining the market narrowly and providing a specific metric.

Using Future-Oriented Competitive Claims Without Cautionary Language

A claim such as “We expect to capture 15% of the Southeast Asian BNPL market by 2026” is a forward-looking statement that requires cautionary language under the Private Securities Litigation Reform Act of 1995 (PSLRA). The Competition section is not the appropriate place for projections. If the issuer wishes to include a forecast, it must be in the MD&A section with a clearly stated basis and risk factors. The Competition section should be limited to historical, verifiable facts.

Failing to Disclose Material Competitive Weaknesses

The SEC’s 2020 guidance on non-GAAP financial measures (Compliance & Disclosure Interpretations, Question 100.01) applies by analogy to competitive disclosures: an issuer cannot selectively present advantages while omitting material weaknesses. If the issuer has a market share of 3.8% in a fragmented market, it must state that fact. If the issuer’s top three competitors hold 60% of the market, that must be disclosed. Selective disclosure of only favorable competitive data is a violation of Regulation S-K Item 101(c)(1)(x), which requires a “fair and accurate” description of the competitive conditions in the industry.

Actionable Takeaways for Drafting the Competition Section

Define the relevant market using a single, verifiable, third-party-sourced metric (e.g., Euromonitor 2024 report, Table 3.2) and use that same definition in both the US registration statement and any concurrent HKEX prospectus to avoid reconciliation requests.
Quantify every competitive advantage with a specific number, a named source, and a date of validation—patent numbers, regulatory license codes, third-party audit results, or published academic benchmarks.
Disclose market concentration data (top-three market share, HHI if available) in the Competition section, not only in the Risk Factors section, to pre-empt SEC staff requests and to demonstrate good-faith compliance with the 2023 Merger Guidelines’ analytical framework.
Avoid any forward-looking competitive claims (market share projections, expected growth rates) in the Competition section; relegate such projections to the MD&A section with full PSLRA cautionary language.
Engage the sponsor or underwriters’ counsel to conduct a third-party verification of all market share and competitive advantage claims before filing the registration statement, documenting the verification process in the due diligence memo to support the Section 11(b) defense.