The Hong Kong Exchange and Clearing Limited (HKEx) recently provided interim guidance on pre-IPO investments to clarify uncertainties among market practitioners in relation to pre-IPO investments. It is anticipated that HKEx will issue a consultation paper on possible amendments to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong Limited (Listing Rules) in this regard.
In recent years, many IPOs staged in Hong Kong involve pre-IPO investments. Pre-IPO investors are normally offered with preferential terms such as:
- various combinations of guaranteed discounts to the IPO share price;
- put options that continue after listing;
- payment provisions that are conditional on in-principle approval for listing being granted; and
- changes to the terms of pre-IPO investments made after in-principle approval for listing had been granted.
The approach adopted by HKEx
There are no specific provisions in the Listing Rules governing the terms and conditions of pre-IPO investments. However, HKEx has been relying on various provisions in the Listing Rules and in particular, Main Board Listing Rule 2.03/ GEM Listing Rule 2.06 in assessing whether the pre-IPO investments are conducted in accordance with the Listing Rules.
Listing Decision Series 36, 55 and 59 shed some guidance on HKEx's approach in reviewing pre-IPO investments. However, there continued to be uncertainties among market practitioners in identifying consistent requirements on pre-IPO investments. Pending a full review on the current Listing Rules on pre-IPO investments, HKEx issued an interim guidance to clarify the existing uncertainties.
The essence of Main Board Listing Rule 2.03/ GEM Listing Rule 2.06 is to ensure that all holders of listed securities are to be treated fairly and equally. It is noted that some of the pre-IPO investment agreements were signed on the date of submission of the listing application forms, with settlement taking place later and close to the Listing Committee hearing date. Whilst the Listing Committee does not consider such pre-IPO investments made shortly before listing to be objectionable and it further reckons that, under certain circumstances, it is appropriate to afford special rights to pre-IPO investors (such as where the listing applicant is in severe financial distress), it is noted that at times, the additional benefits conferred upon pre-IPO investors do not correspond with the extra risks being assumed by them. As such, the Listing Committee will assess any pre-IPO investment arrangements on a case-by-case basis and may require revisions to the terms of such arrangements (or a delay of the listing timetable) if it considers that the pre-IPO investor enjoys special rights or is being treated more favourably than other IPO investors that are not consistent with the additional risks faced by them.
The interim guidance
As there are currently no specific guidelines as to HKEx's approach in assessing the acceptable terms and conditions of pre-IPO investments, market practitioners can only rely on the general principle stated in Main Board Listing Rule 2.03/ GEM Listing Rule 2.06 and a limited number of listing decisions when proceeding with pre-IPO investments. The uncertainties of whether the pre-IPO investment would be acceptable by HKEx might hinder the progress of pre-IPO investment, which might be a key to a successful IPO. The concerns of market practitioners are well received by HKEx and, pending on a full consultation on this subject matter, HKEx issued an interim guidance to ease some of the market's concerns.
Under the interim guidance, unless in very exceptional circumstances, HKEx will normally require the pre-IPO investments to be completed either:
- at least 28 clear days before the date of the first submission of the first listing application form; or
- 180 clear days before the first day of trading of the listing applicant's securities.
HKEx would consider a pre-IPO investment to be completed when the funds are irrevocably settled and received by the listing applicant. It is further noted when calculating the number of "clear days", the following days are to be excluded:
- the day of the pre-IPO investment completion;
- the day of the submission of the listing application form; and
- the first day of trading of securities.
The interim guidance laid down the timeframe for when pre-IPO investments could be made. However, subject to a full consultation and the revision of Listing Rules on this topic, market practitioners are still facing uncertainties as to other issues in relation to pre-IPO investments (such as the amount of discount on IPO price is allowed, and the kinds of special rights that could be granted to pre-IPO investors, etc). In this regard, we recommend listing applicants should, as a matter of prudence, seek prior consultation with HKEx on their views of the pre-IPO investment arrangement before submitting their listing applications.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.