We wrote in October 2010 about the approach taken to Pre-IPO investments by Hong Kong Exchanges and Clearing Limited (HKEx).
Certain terms and pricing arrangements of Pre-IPO investments are considered acceptable by HKEx, while others are not. The determining factor is the "fair and equal" principle under the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (Listing Rules). Pre-IPO investments should not be used as a means to create a preference tranche of shares for early investors, because doing so would be unjust and unfair to those who invest at IPO. All this seemed fine, except that when structuring a Pre-IPO investment, there remained some uncertainty for market practitioners, who had to figure out exactly what terms could or could not go into the arrangement and what terms would survive IPO. Going back and forth, between Listing Decisions and published precedents, became unavoidable rituals before the conclusion was inevitably reached that each case had to be decided based on its own facts.
On 25 October 2012, HKEx published two guidance letters, "HKEx-GL43-12" and "HKEx-GL44-12" (Guidance Letters), to help remove some of the uncertainty surrounding this area by cataloguing which Pre-IPO investment terms and which Pre-IPO convertible instruments pricing arrangements are allowed, and which ones are not.