Yesterday the Hong Kong Stock Exchange issued interim guidance on pre-IPO investments, focusing on the time by which such investments would need to be made in order to be acceptable to the Exchange. This bulletin provides a summary of the guidance and its implications for new listing applicants.

The new timing requirements

The guidance states that the Exchange will generally require, except in very exceptional circumstances, that pre-IPO investments on terms which are more favourable than that which will be available to investors at IPO, to be completed either (a) at least 28 clear days prior to the filing date of the first A1 listing application form or (b) 180 clear days before the first trading day of the new applicant's securities. Completion, for these purposes, means when the funds are irrevocably settled and received by the listing applicant. In calculating the clear days, the A1 filing date, the first trading day and the date of completion of the investment must be excluded.

Listing applicants seeking pre-IPO investors where the terms are more favourable than that which will be available to the IPO investors will need to ensure that any investment is funded and completed sufficiently in advance of the A1 filing so that 28 clear days will have elapsed. Where the listing timetable slips, companies seeking investment after the first A1 filing will need to work backwards from the expected listing date to ensure that the funding is received at least 180 clear days before the first trading day.

Exceptional circumstances to be considered on a case-by-case basis

The Exchange acknowledges that there may be circumstances, such as where a listing applicant is in severe financial distress, where it is justified to issue securities to pre-IPO investors on more favourable terms than those to be offered to investors at the IPO. The Exchange will consider such cases on their own facts and circumstances.

Early consultation with the Exchange encouraged

The Exchange is encouraging potential new listing applicants to consult with the Exchange before A1 filing. This is good news as, despite the efforts by the Exchange to clarify its approach to pre-IPO investments, this area is still one beset with uncertainty as regards other aspects covered in the Exchange's listing decisions. The prudent approach is to get the Exchange's confirmation on the terms and timing of any pre-IPO investment to avoid the risk of the transaction being unwound or the IPO timetable being delayed.

Background to the interim guidance

The need for further guidance has stemmed from market uncertainty as to the Exchange's approach to pre-IPO investments following two recent cases dealt with by the Listing Committee. In these cases, the Exchange considered the terms of the pre-IPO investments should be retracted or the listings delayed as they contravened the general principles in rule 2.03(2) and (4) of the Listing Rules that the issue and marketing of securities be conducted in a fair and orderly fashion and that all holders of listed securities be treated fairly and equally.

Relevant factors highlighted by the Exchange in these cases were that the investment agreements were signed at the time of A1 with delayed settlement close to the Listing Committee hearing date and prices at a deep discount to the IPO price. The pre-IPO investors would have received much more favourable terms than investors in the IPO, while bearing not a significantly different risk.

The new interim guidance now sets clear parameters on timing for pre-IPO investments to be made where the terms offered are more favourable than those available at IPO.

Consultation pending

The guidance is labelled "interim" pending consultation on possible amendments to the Listing Rules in this area. We would welcome this as an opportunity to clarify the rules and practices of the Exchange.

A copy of the news release setting out the interim guidance can be found here.

For further information on pre-IPO investments, please see chapter 12 of our Hong Kong IPO guide 2010 and our e-bulletin dated 16 October 2007 which summarises the principles arising from the Listing Decision Series 59.