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 ("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 ("Exchange") has re-published its interim guidance on pre-IPO investments which was originally published in October 2010 following a review of the Listing Rules in 2008. The Exchange has re-published this guidance ahead of a possible future consultation on the amendment of the pre-IPO placing guidelines and related Listing Rules.
The Listing Rules do not deal specifically with pre-IPO investments. The Exchange 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 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. The Listing Committee has published Listing Decision Series 36, 55 and 59 relating to pre-IPO investments. For further information on these decisions, please see our newsletter of 3 November 2010 which is available here.
The interim guidance letter on pre-IPO investments states that, generally and with rare exceptions, pre-IPO investments must be completed either:
(a) at least 28 clear days before the date of the first submission of the first listing application form; or
(b) 180 clear days before the first day of trading of the applicant's securities.
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 involved are irrevocably settled and received by the applicant. Exceptional circumstances may exist where it is acceptable for pre-IPO investments to be offered on terms more favourable than those offered to investors at the IPO stage, but the Exchange retains the discretion in giving exceptions to individual cases based on their own facts and circumstances.
While the interim guidance provides clarity on the permitted timing for pre-IPO investments, there is still uncertainty as to the pre-IPO investment terms and conditions which will be allowed for investments complying with the timing requirements. The interim guidance encourages potential listing applicants to consult the Listing Division before submission of the listing application. If there are any potential questions as to the acceptability of any pre-IPO investment, the prudent course will be to approach the Exchange early to avoid having to amend the terms and conditions of the investment later in order for the listing to go ahead.