Pre-IPO Investments

A key part of the IPO process is securing subscribers for shares or other securities either before or as part of the IPO. Strategic investors provide valuable interim capital to companies on route to a listing and lend credibility to an offer encouraging further institutional and public interest. These investments may occur in advance of the listing (“pre-IPO”) or alternatively the investor may agree to commit to acquiring part of the IPO shares on the commencement of dealing of a company’s shares (“cornerstone”). Investments may be made in ordinary shares or in other securities such as convertible bonds or preference shares.

For mineral companies, particularly exploration stage companies, pre-IPO placements are often an integral part of the company’s development strategy. Pre-IPO equity can be applied towards the finalization of a definitive feasibility study (the Hong Kong Stock Exchange Listing Rules (“HKEX Listing Rules”) require that estimates of mineral reserves are supported by at least a pre-feasibility study) or towards the development of plant and infrastructure.

The Hong Kong Stock Exchange (“HKEX”) published a Guidance Letter on pre-IPO investments which was updated in March 2017. The Guidance Letter streamlines and clarifies the principles adopted by the HKEX in reviewing pre-IPO investments.

The HKEX Listing Rules do not deal specifically with pre-IPO investments. The HKEX has in the past based its decisions on whether to allow the terms and conditions of particular pre-IPO investments to survive listing on whether they meet the requirements of HKEX Listing Rules 2.03(2) and (4) of the Main Board and Rules 2.06(2) and (4) of the Growth Enterprise Market (GEM). These Rules require that the issue and marketing of securities is conducted in a fair and orderly manner and that all holders of listed securities are treated fairly and equally.

Pre-IPO investors may be offered special rights by the listing applicant or its shareholders. Special rights which do not extend to all other shareholders are not permitted survive after listing to comply with the general principle of even treatment of shareholders under the HKEX Listing Rules. The Guidance Letter provides various examples of which special rights must terminate upon listing and which may survive listing and on what terms they may survive listing. The HKEX’s Guidance Letter on pre-IPO investments can be accessed here.

Pre-IPO investors are generally requested by the listing applicant to ‘lock-up’ their pre-IPO shares for a period of six months or more. These shares subject to the lock-up will be counted as part of the public float provided HKEX Listing Rule 8.24 (GEM Rule 11.23) is complied with.

A listing applicant with a pre-IPO investment which is made within (i) 28 clear days of the first submission of the first listing application form (“First Filing”); or (ii) after the First Filing and before the listing applicant’s listing, the listing applicant may not list until 120 days from the later of the completion of such pre-IPO investment or subsequent divestment.

Clear days exclude the day the pre-IPO investment is completed, the day the listing application form is submitted and the first day the applicant’s securities are traded. Pre-IPO investments are considered to be completed when the funds for the underlying shares are irrevocably settled and received by the applicant (in the case of an issue of shares by the applicant) or existing shareholders (jn the case of an issue of shares by existing shareholders).

The HKEX’s Guidance Letter on pre-IPO investments can be accessed on the HKEX’s website here.