美股招股观察

What Is the Fees and Expenses Section? Cost Allocation Between Issuer and Selling Shareholders

The SEC’s adoption of the Pay Versus Performance disclosure rules in 2022, effective for most filers by 2025, has forced a granular re-examination of the Fees and Expenses section in F-1 registration statements. For Hong Kong-based issuers pursuing a US listing via NYSE or NASDAQ, the cost allocation between the company and selling shareholders is no longer a back-office formality—it directly impacts the underwriter’s discount structure, the issuer’s net proceeds, and the selling shareholders’ taxable gains. In 2024, the average total expense ratio for US IPOs of Asia-Pacific companies was 7.2% of gross proceeds, according to data from the University of Florida’s IPO research database, with issuer-borne costs typically exceeding selling shareholder-borne costs by a factor of 3:1. This article dissects the mechanics of the Fees and Expenses section, drawing on SEC Regulation S-K Item 511 and standard underwriting agreements, to provide a framework for cost allocation that satisfies both US disclosure requirements and Hong Kong’s SFC Code of Conduct for sponsors.

The Regulatory Framework Governing Fee Disclosures

The Fees and Expenses section in a US IPO prospectus is governed by SEC Regulation S-K Item 511, which mandates a tabular breakdown of estimated expenses payable by the issuer in connection with the offering. The SEC’s 2023 Staff Legal Bulletin No. 14M clarified that this disclosure must distinguish between costs borne by the issuer and those borne by selling shareholders, with particular attention to expense reimbursement provisions in the underwriting agreement. For Hong Kong issuers, this intersects with the SFC’s Code of Conduct for Sponsors (paragraph 17.1), which requires that fee arrangements between the sponsor and the issuer be transparent and not create conflicts of interest.

SEC Requirements Under Regulation S-K Item 511

Item 511 of Regulation S-K requires the issuer to disclose, in a reasonably detailed table, each category of expense expected to be paid in connection with the offering. The categories typically include SEC registration fees, FINRA filing fees, stock exchange listing fees, printing and engraving costs, legal fees and expenses, accounting fees and expenses, transfer agent fees, and miscellaneous costs. The total must be expressed in both absolute dollar terms and as a percentage of the gross proceeds from the offering. For offerings involving selling shareholders, the SEC has taken the position that expenses attributable to the sale of secondary shares—such as incremental legal fees for the selling shareholders’ counsel and underwriting discounts on those shares—must be clearly identified as borne by the selling shareholders, not the issuer.

Interaction with Hong Kong’s SFC Code of Conduct

The SFC’s Code of Conduct for Sponsors (paragraph 17.1) requires that the sponsor’s fee arrangement with the issuer be disclosed in the listing document in a manner that allows investors to assess any potential conflicts. For US-bound Hong Kong issuers, this means the sponsor’s fee must be itemized separately from the underwriter’s discount in the Fees and Expenses table. In practice, the sponsor fee—typically ranging from HKD 8 million to HKD 15 million for a Main Board-equivalent US listing—is treated as an issuer expense and included in the “legal fees and expenses” line item. The SFC’s 2024 thematic review of sponsor fees found that 72% of sampled cases included a success fee component tied to the offering size, which must be disclosed as a percentage of gross proceeds in the US filing.

The Underwriting Agreement’s Role in Cost Allocation

The underwriting agreement, typically governed by New York law, is the primary document that defines which party bears which costs. The standard form used by US underwriters—based on the S-1 filing template—allocates the underwriting discount and commission between the issuer and selling shareholders on a pro-rata basis relative to the number of shares each sells. However, expenses such as the underwriter’s legal fees, due diligence costs, and road show expenses are often split unevenly. A 2024 analysis of 50 F-1 filings by Hong Kong issuers on the US Listing Desk database showed that in 68% of cases, the issuer bore 100% of the underwriter’s legal fees and 80% of road show costs, while selling shareholders bore only the incremental underwriting discount on their shares.

Detailed Breakdown of Cost Categories and Allocation Mechanics

The Fees and Expenses section is not a single line item but a mosaic of cost categories, each with distinct allocation rules. Understanding the interplay between these categories is critical for CFOs and company secretaries to avoid under-disclosure or misallocation that could trigger SEC comment letters.

Underwriting Discount and Commission

The underwriting discount is the largest single cost, typically 5.5% to 7.0% of gross proceeds for US IPOs of Hong Kong issuers in 2024-2025. This discount is split between the issuer and selling shareholders based on the number of shares each sells. For example, if an issuer sells 10 million shares and selling shareholders sell 2 million shares in a 12-million-share offering, the issuer bears 83.3% of the total underwriting discount. The SEC requires that this allocation be stated explicitly in the prospectus, typically in a footnote to the Fees and Expenses table. The underwriting agreement also includes a non-accountable expense allowance, usually 1% of gross proceeds, which is paid to the underwriter for expenses not otherwise reimbursed. This allowance is always borne entirely by the issuer.

Legal fees for US counsel, Hong Kong counsel, and PRC counsel are the second-largest cost category, averaging USD 1.5 million to USD 2.5 million for a standard US IPO of a Hong Kong company. The allocation of these fees depends on the nature of the work. US counsel fees for drafting the registration statement, reviewing the underwriting agreement, and responding to SEC comments are generally borne by the issuer. However, legal fees incurred specifically for selling shareholders—such as reviewing their lock-up agreements or preparing their beneficial ownership schedules—are charged to the selling shareholders. In practice, many underwriting agreements include a provision that the issuer will advance all legal fees and then seek reimbursement from selling shareholders post-closing. This creates a working capital requirement that CFOs must model in their cash flow projections. Accounting fees, including the auditor’s comfort letter and review of pro forma financial information, are uniformly borne by the issuer.

Regulatory Filing Fees and Listing Costs

SEC registration fees are calculated as 0.0001298 of the aggregate offering amount (as of 2025), and FINRA filing fees are USD 2,500 plus 0.000138 of the offering amount, capped at USD 125,000. These fees are always paid by the issuer. NYSE or NASDAQ initial listing fees range from USD 150,000 to USD 295,000, depending on the number of shares listed, and are also issuer-borne. For selling shareholders, the only regulatory cost is the incremental SEC fee on their portion of the offering, which is typically de minimis. The HKEX’s Listing Fee for a Main Board issuer is not applicable to US listings, but the SFC’s transaction levy of 0.0027% of the offering value (per the Securities and Futures (Levy) Order) applies if the issuer is also listed in Hong Kong.

Road Show, Marketing, and Printing Costs

Road show expenses, including venue rental, travel, catering, and investor presentation materials, are a significant variable cost. For a Hong Kong issuer conducting a US road show across New York, Boston, San Francisco, and Los Angeles, these costs typically range from USD 300,000 to USD 600,000. The underwriting agreement usually allocates road show costs to the issuer, except for travel expenses of selling shareholders’ representatives, which are borne by the selling shareholders. Printing and engraving costs for the prospectus, including EDGAR filing fees, are typically USD 100,000 to USD 200,000 and are issuer-borne. A 2024 study by the US Listing Desk found that 85% of Hong Kong issuers under-disclosed road show costs in the Fees and Expenses section, leading to SEC comment letters requesting a breakdown of “miscellaneous” line items.

Practical Implications for Hong Kong Issuers and Selling Shareholders

The allocation of costs in the Fees and Expenses section has direct financial and tax consequences for both the issuer and selling shareholders. Misallocation can lead to understated net proceeds, unexpected tax liabilities, or SEC enforcement actions.

Impact on Net Proceeds and Use of Proceeds Disclosure

The issuer’s net proceeds, as disclosed in the prospectus, are calculated by subtracting the issuer-borne portion of the underwriting discount and all other issuer-borne expenses from the gross proceeds. If the issuer incorrectly allocates selling shareholder costs to itself, net proceeds will be understated, potentially misleading investors about the company’s capitalization. The SEC’s Division of Corporation Finance issued a comment letter to a Hong Kong biotech issuer in 2024 for understating net proceeds by USD 1.2 million due to misallocation of legal fees. The issuer was required to amend the F-1 and refile the prospectus, delaying the offering by three weeks.

Tax Implications for Selling Shareholders

For Hong Kong-based selling shareholders, the allocation of expenses affects the calculation of capital gains tax under the Inland Revenue Ordinance (Cap. 112). Section 14 of the Ordinance allows deductions for expenses incurred in the production of chargeable profits. If selling shareholders bear costs such as legal fees or underwriting discounts, these can be deducted from their gains. However, the Hong Kong Inland Revenue Department (IRD) has issued guidance (DIPN 60) that expenses must be directly attributable to the sale to be deductible. Selling shareholders who rely on the issuer’s prospectus disclosure without obtaining a separate expense allocation schedule risk losing the deduction. In practice, the underwriting agreement should include a schedule that itemizes each selling shareholder’s share of costs.

The SEC’s comment letter practice has become more aggressive on Fees and Expenses disclosures since 2023. A review of 30 comment letters issued to Hong Kong issuers in 2024 revealed that 40% included questions about the allocation of expenses between issuer and selling shareholders. The most common queries were: (1) How are legal fees split? (2) Why is the non-accountable expense allowance not disclosed? (3) What is the basis for the “miscellaneous” line item exceeding 10% of total expenses? Best practice is to include a footnote to the Fees and Expenses table that explicitly states the allocation methodology, including the percentage of each cost category borne by the issuer versus selling shareholders. The underwriting agreement should also include a reconciliation schedule that ties the prospectus disclosure to the actual expenses paid post-closing.

Actionable Takeaways

  • The Fees and Expenses section must be prepared in parallel with the underwriting agreement, not as a standalone disclosure, to ensure the allocation methodology is contractually enforceable and SEC-compliant.
  • CFOs should model a working capital reserve equal to 120% of estimated issuer-borne expenses to cover advances for selling shareholder costs that are reimbursed post-closing.
  • Selling shareholders should require a separate expense allocation schedule in the underwriting agreement to support capital gains tax deductions under the Inland Revenue Ordinance.
  • The “miscellaneous” line item in the Fees and Expenses table should not exceed 5% of total expenses, and any item above USD 100,000 must be separately disclosed.
  • A pre-filing review of the Fees and Expenses section by both US and Hong Kong counsel is essential to avoid SEC comment letters that can delay the offering timeline by three to six weeks.