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Pre-IPO Investments: Update to the HKEx Guidance Letter HKEx-GL43-12

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13 June 2013

On 23 July 2013, the Hong Kong Stock Exchange issued an update to Guidance Letter No 43 of October 2012. While none of the clarifications on what features of pre-IPO investments are allowed or disallowed as set out in Guidance Letters No 43 and No 44 of October 2012 were substantially altered, this update requires clear statements to be included in pre-IPO instruments that put or exit options may only be exercised if listing does not occur. 

The update also sets out the disclosure requirements of pre-IPO investments in listing documents and the consequences if pre-IPO investments do not comply with the principles set out in the Interim Guidance, the Guidance Letters Nos 43 or 44 of October 2012, or with listing decision HKEx-LD15-2011 (which is expressly stated to continue to apply). 

Substantive updates to Guidance Letter No 43

Atypical rights granted to pre-IPO investors

In our bulletin of 31 October 20131 (the October Bulletin), we summarised the various features of pre-IPO Investments which the Hong Kong Stock Exchange (the Exchange) considers acceptable when they consider listing applications of listing applicants in which investors have made pre-IPO investments, each as described in the two guidance letters in relation to pre-IPO investments issued in October 2012 (Guidance Letter HKEx-GL43-122 and Guidance Letter HKEx-GL44-123, together, the Pre-IPO Guidance Letters), the Interim Guidance in October 2010 (the Interim Guidance) and Listing Decision LD15-2011 in July 20114  (the LD-15), all of which continue to be effective.

In Guidance Letter HKEx-GL43-12, the Exchange confirms that while pre-IPO investments may continue to survive the listing of a listing applicant, certain atypical special rights granted to the pre-IPO investors but which are not shared by other shareholders of the listing applicant must be extinguished upon listing. 

In the latest update to Guidance Letter HKEx-GL43-12 issued on 23 July 2013 (the Guidance Letter Update), the Exchange has not changed its approach to the treatment of pre-IPO investors' atypical rights (i.e. they must be extinguished upon listing of the listing applicant) but has specifically clarified:

  1. the reason why put or exit options are disallowed is because they are directly contrary to the principle that pre-IPO investments must be irrevocably settled within the period set forth in the Interim Guidance; and
  2. that pre-IPO investments instruments containing put or exit options must include an explicit statement that such put or exit option is only exercisable if listing of the listing applicant does not take place and not in any other event. 

In light of the clarifications, trigger events for the exercise of put or exit options will need to be carefully formulated going forward.  We note, however, that the requirement for clarifying the trigger event should not change our previous view that put or exit options should be distinguished from redemption rights that are exercisable by pre-IPO investors under convertible or exchangeable instruments prior to or at maturity at a fixed IRR (which, in our view and based on the explanation set out in the October Bulletin, is allowed). 

Disclosure in listing documents

The Guidance Letter Update includes two new sections which pre-IPO investors, Sponsors and listing applicants should be aware of.   The first is a list of key matters which the Exchange expects to be disclosed and described in the listing document in relation to pre-IPO investments.  These matters relate to the fundamental features of the pre-IPO investments made in the listing applicant and the relationship the pre-IPO investors have with the listing applicant or connected persons.  The disclosure of these key matters is, however, not new and these matters have always been required to be disclosed by listing applicants under the current listing requirements.    

Consequences of non-complying pre-IPO investments

The last section which the Guidance Letter Update included is the potential consequences if the Exchange finds a pre-IPO investment to not comply with the various pre-IPO investments principles published by the Exchange.  In summary, where a pre-IPO investment contravenes:

  1. the Interim Guidance, the only two options for the listing applicant are to (A) defer listing; or (B) unwind the pre-IPO investment; and
  2. the principles in relation to how the return and economics of the pre-IPO investors are set as described in Guidance Letter HKEx-GL44-12, the only two options for the listing applicant are to (A) amend the terms of the pre-IPO investments; or (B) unwind the pre-IPO investment.

An important point to note in relation to (ii)(A) above is that the Exchange considers that any amendment to the terms of a pre-IPO investment constitutes a new transaction and, therefore, the time restriction set out in the Interim Guidance will re-start to count from the date the amendment took effect unless a legal opinion is furnished to the effect that the amendment to the terms does not constitute a new agreement.  

It is not entirely clear as to what the Exchange expects in terms of the form and content of such legal opinion but it is unlikely that the Exchange is looking for a formal legal opinion as to the legal effect of the amendments.  The better view is that the Exchange is simply looking for counsel to explain the degree of the amendments and whether or not such amendments are material enough to constitute a new agreement in respect of the terms of the pre-IPO investments. 

Practically, where pre-IPO investments are required to be amended because some of the economics or their terms are not in compliance with the various pre-IPO investments principles set out by the Exchange, most (if not all) amendments to these economics or terms to bring the pre-IPO investments in line with the acceptable principles would be considered material enough to re-set the clock in respect of the timing prescribed under the Interim Guidance.  It would be difficult for law firms to provide any explanation or "legal opinion" to the Exchange that there is no "new" agreement in respect of the terms of the pre-IPO investments. 

Taking into account the above and in view of the Exchange's more stringent approach relating to acceptance of Form A1 applications, it would be prudent for listing applicants and pre-IPO investors to ensure that, where possible, pre-IPO investments are structured to be in compliance with the various principles set out in the Pre-IPO Guidance Letters, the Interim Guidance and LD-15 before such investments are made so as to minimise any delays in the listing timetable.   


The Guidance Letter Update clarifies some of the Exchange's latest requirements in relation to pre-IPO investments in particular, from a documentation and disclosure perspective.  The Guidance Letter Update also provides pre-IPO investors and listing applicants potential solutions if the Exchange finds the pre-IPO investments not in compliance with the various guidelines published by the Exchange.  Given the solutions are limited and, in most instances, contrary to the interests of both the pre-IPO investors and the listing applicants, it would be in the interest of pre-IPO investors and listing applicants to ensure that the pre-IPO investments are, on the outset, structured in a way that would fit within the principles on pre-IPO investments as set out in the Pre-IPO Guidance Letters, the Interim Guidance and LD-15.