Alibaba's talks with the HKEx have focused on its dual-class share structure, where stakes held by management have more voting power than other shares. That structure clashes with the HKEx's charter, which says all shareholders should have equal rights.

Alibaba sought a compromise earlier by saying that it only wanted to secure the right for its partners to nominate the majority of its board members. The HKEx pondered the proposal over the past few weeks.

Exchanges in the US, including the New York Stock Exchange and Nasdaq, permit dual-class shareholding structures. But the prevalence of class action lawsuits over corporate disclosure and negative perceptions of Chinese companies represent a barrier.

Hong Kong, in comparison, has had fewer legal battles and a long record of hosting red chips, or Chinese mainland companies incorporated overseas and listed in Hong Kong. Alibaba is incorporated in the Cayman Islands.

Alibaba is more familiar with Hong Kong. Alibaba.com, the online trading unit of the group, was listed in there previously and privatized last year.

It's something of a tradition for the founders of Internet companies to retain control of their organizations after they go public. Mark Zuckerberg retained control of Facebook Inc after an IPO last year by having his shares carry 10 times the voting rights of ordinary shares.

Google Inc's founders had similar arrangements.

Hong Kong needs a heavyeight such as Alibaba to revitalize its faltering IPO market. The territory was the top global destination for IPOs from 2009 to 2011, but its chances of regaining the crown this year are slim as Chinese growth slows. Many companies have postponed their IPOs in Hong Kong this year as market sentiment weakens.

In July, Nexteer Automotive Group Ltd delayed an IPO in Hong Kong that could raise as much as HK$2.5 billion ($322 million).