The Hong Kong Stock Exchange's (HKEX) broadening of its listing regime in 2018 has had a clear and almost immediate impact; the HKEX raised the third-highest amount of IPO capital in the world (behind the New York Stock Exchange and the NASDAQ) over the first half of 20191.
The rule change has driven the appetite for Hong Kong Initial Public Offerings (IPOs) among China-based companies. The listing reform opens the gateway for companies from emerging and innovative sectors, with weighted voting right structures, and biotechnology companies without any prior record of revenue or profit now to be listed on the HKEX. It also provides a concessionary listing route for Greater China and international innovative companies listed on qualifying exchanges overseas.
The pre-IPO trust structure is nothing new for Hong Kong's private wealth practitioners; it has always been a vital part of their proposition as a result of the jurisdiction's position as a gateway to the world for Chinese firms. However, the broader listing regime has led to a spike in popularity for the structure. Alice Lau, Executive Director, Head of Private Wealth Services, at Intertrust in Hong Kong explains what a pre-IPO trust is and why they are so popular.
What is a pre-IPO trust?
In the simplest terms, a pre-IPO trust is a trust arrangement set up ahead of an IPO for holding the shares of the company that will be listed. They are established to hold the shares of individual shareholders who hold a significant number of them - such as the founder, CEO, chairman and senior executives - before the company is listed.
Establishing the trust means that an individual's shares in the company to be listed are indirectly held by a trustee, providing all the certainty to the settlor that a standard trust structure would.
What are the benefits of a pre-IPO trust?
Understandably, the time period before an IPO sees directors and senior figures dedicating the bulk of their time to promoting the company, driving its growth and focusing on getting it to market. A pre-IPO trust removes a significant headache in that it is a safe vehicle in which to hold their shares that provides asset protection for the individuals involved and safeguards their futures.
Risk mitigation is a further benefit of a pre-IPO trust; it can protect against fluctuations in the value of the individual's shares and safeguard against the external factors that could derail the IPO process such as death, legal disputes or even a divorce. A trust provides continuity at these times and has a stabilising effect on the IPO itself.
A pre-IPO trust has all of the succession planning benefits of an ordinary trust as a settlor can ensure they and their family have the use and benefit of family assets – in this case their shares. It also helps to avoid probate, maintain privacy irrespective of the number of family members or any changes from one generation to the next.
Finally, segregation of the ownership of the company can be avoided by keeping the shares in a trust. This prevents against diluting control of the company – especially useful in family owned businesses.
What happens after the IPO?
Ordinarily, after the completion of the IPO a proportion of the shares is retained in the trust along with the individual's (often sizeable) windfall from the IPO. The proceeds are then managed and invested by the trustee as any other assets would be.
Who should structure your pre-IPO trust?
Selecting a suitable trustee is not an easy task but it's a hugely important one to get right. A dedicated trustee who understands the objectives of the trust and meets all the legal and regulatory requirements is the minimum requirement. However other factors to consider include:
- whether or not the trustee is located conveniently so the settlor has easy access to them
- the stability of the trustee
- the level of client service provided
- the organisation's track record in trust management.
Also, there are some key questions to ask when considering a trustee, including substance, commitment, expertise and flexibility.
Our Hong Kong team provide pre-IPO trusts to clients across the region and saw a strong increased demand for pre-IPO trust work in 2018. We have strong and stable private wealth professionals who have in-depth industry knowledge and expertise, working with legal advisors, accountants and financial consultants to provide excellent services for our clients.
Intertrust is a global leader in providing tech-enabled corporate and fund solutions to clients operating and investing in the international business environment. The Company has more than 3,500 employees across 30 jurisdictions in Europe, the Americas, Asia Pacific and the Middle-East. Intertrust delivers high-quality, tailored fund, corporate, capital market and private wealth services to its clients, with a view to building long-term relationships. The Company works with global law firms and accountancy firms, multinational corporations, financial institutions, fund managers, high net worth individuals and family offices.
1 Source: KPMG Mainland China and Hong Kong 2019 mid-year review: IPOs and other market trends
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.