7 March 2013
It is not uncommon for Hong Kong IPOs, especially in difficult market conditions, to invite cornerstone investors such as well-known institutions, sovereign wealth funds and celebrities to subscribe for shares under the placing tranche so as to enhance popularity and investors' confidence. The major benefit available to cornerstone investors is preferential placings - a guarantee that such investors will receive an allocation of shares regardless of the final offer price.
Although sometimes the existence of cornerstone investors can make an IPO very successful, or can be material to the success of an IPO, Hong Kong Exchanges and Clearing Limited (HKEx) does not agree that additional benefits besides preferential placings should be granted to such investors in view of the "fair and equal" principle under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited. To clarify its position, HKEx published Guidance Letter "HKEx-GL51-13" on 22 February 2013 to remind listing applicants that:
Preferential placings at the final IPO price to cornerstone investors are acceptable, but granting other direct or indirect benefits (by side letters or otherwise) - such as waiving brokerage commissions, granting put options, investing the IPO proceeds in funds managed by the cornerstone investors, or entering into any other agreements not on arm's length commercial terms - in relation to the shares acquisition will result in such cornerstone investors being recategorised as pre-IPO investors and subject to the corresponding requirements. Please refer to our previous Legal Updates, "Hong Kong Stock Exchange Issues Guidance on Pre-IPO Investments", and "Pre-IPO Investments: The Dos and Don'ts" for details of pre-IPO investment requirements.
Entering into arm's length commercial arrangements to provide benefits to strategic investors, such as major customers and suppliers, is acceptable, but details of such arrangements require full disclosure in the listing documents.
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