Introduction

On Thursday 25 October 2012, the Hong Kong Stock Exchange (the “Exchange”) issued two new Guidance Letters on pre-IPO investments. Consolidating and restating the Exchange’s latest policies in this area, these letters will hopefully clarify many of the uncertainties associated with the vibrant market in pre-IPO investments, very often a key component in Hong Kong listings as well as private equity investment practice.  

The Guidance Letters are GL43-12 (Guidance on Pre-IPO Investments) and GL44-12 (Guidance on Pre- IPO Investments in Convertible Instruments).  

The references to “Rule” in this briefing are of the Listing Rules of the Main Board, although the same treatment will be given by the Exchange to pre-IPO investments to be listed on the Main Board as well as the GEM Board.  

28-day / 180-day rule

Ever since 13 October 2010, with the introduction of the Interim Guidance on Pre-IPO Investments (“Interim Guidance”), pre-IPO investments must be completed – i.e. funds must be irrevocably settled and received by the company – either (a) at least 28 clear days before the submission of the A1 listing application or (b) at least 180 clear days before the day dealing in the listed securities commences.

This rule remains unchanged and will be applicable to all but very exceptional cases (e.g. the applicant being in severe financial distress).  

Can the investor reduce / eliminate his investment risk?

The Exchange has set out its policies on the following typical provisions frequently proposed for pre-IPO investments. These have some important ramifications in practice which we set out in the “Remarks” column below:

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Can a shareholder’s / bondholders’ contractual right survive the listing?

As for various shareholders’ rights typically considered for pre-IPO investors, the Exchange’s position and our observations are summarized below:

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What are the additional restrictions for convertible instruments?

Generally, the guidance confirms that there is no requirement for all convertible instruments (including convertible or exchangeable bonds, notes or loans and convertible preference shares) (“Convertibles”) to be converted at the time of listing, but special rights must be removed before listing and full disclosure must be made. Companies and their counsel should note this when negotiating the investment.  

Pre-IPO investments by way of Convertibles are subject to important constraints in addition to those discussed above. These are summarized as follows:

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Do the pre-IPO investors’ shares count towards public float?

Despite the lock-up undertaking typically given by pre-IPO investors, the shares subject to the lock-up are considered part of the public float so long as Rule 8.24 is satisfied – namely, the acquisition of the shares are not financed directly or indirectly by a connected person of the company.

Past decisions superseded

The Exchange clarified that the Listing Decisions issued on the subject of pre-IPO investments before the date of the Interim Guidance (13 October 2010) have been superseded. A list of the superseded decisions is set out in the Appendix to this briefing.

Listing Decisions continuing to be effective

A number of Listing Decisions in this area will continue to be effective. These include:

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