Pre-IPO trusts in Hong Kong

We look at the process from the investor / key shareholder’s perspective, rather than focussing on fundraising.

06 October 2020

Many mainland Chinese, Asian and local families and entrepreneurs are looking to publicly list in Hong Kong.

There’s a significant uptick in listings on the Hong Kong Stock Exchange from 2020 onwards. Preparing for an IPO is both exciting and complex. While pre-IPO planning requires the expertise of numerous professional parties, their combined attention tends to be on ensuring the business is in the best possible position for listing. There’s often a significant ‘to do’ list that comes pre-IPO, including performance analysis and improvement, internal restructuring, adapting governance and internal controls so they’re appropriate for a listed business, implementing new processes and marketing to potential investors.

In the background, a family, founder or entrepreneur is often working hard to get the business ready for an IPO. What’s more commonly overlooked, but is equally important, is the need for the family or individual to assess and plan for their own financial situation before, during and after the listing.

IPOs are huge milestones for a business and the family that have run them. Take the Nongfu Spring IPO in 2020, as an example. The IPO was so successful that the company’s founder was at one point, the richest man in China. Successful IPOs can mean a sudden influx of liquidity, which needs to be well planned.

Pre-IPO Trusts

Pre-IPO trusts remain the most common and advantageous structure for families and business owners. Thinking ahead is important: setting up the appropriate structures can take some time as a lot of different factors need to be considered and appropriate advice sought from tax and legal advisors. Miss the window of opportunity, and accumulated wealth from the IPO isn’t structured as efficiently or securely as would otherwise have been the case.

The biggest advantage of a pre-IPO trust is that it is a straightforward and secure structure in which owners can hold the shares of their as yet, unlisted company.

Pre-IPO, there’s a lot going on, and small details make all the difference. Even something like a relatively minor legal dispute can cause significant problems. Larger issues like divorce, death and other events can bring the whole project to a swift halt. If shares are held in a trust, however, the risk of these events stopping the IPO going ahead are significantly diminished.

After the listing, the same trust can be used for succession planning, tax efficiency and risk mitigation. Another benefit is that when a trust holds the shares of a company, a family or entrepreneur can safeguard against the family losing its control of the business in the future through events like third party creditors’ claims, because the founder no longer has direct ownership of the shares.

Choosing a trustee for your pre-IPO trust

It’s important for families, founders or entrepreneurs to choose their trustee carefully, which is why we always suggest getting the selection process started as soon as possible. We also talk to clients about the bigger picture: it’s important that a trustee has significant experience in different aspects of succession planning, cross-borders tax considerations as well as a good understanding of corporate and regulatory aspects of an IPO to handle the listing process.

We look at the process from the investor / key shareholder’s perspective, rather than a focus from the fundraising perspective. Our clients want us to support their move from their current situation as a unicorn company or family-owned business into a listed business that generates significant income. A trustee that is comfortable dealing with both those situations is important. Likewise, ZEDRA is also considered given our track record supporting entrepreneurs and families structure intergenerational wealth, our approach to governance, and our ability to offer local and international solutions.

For more information, please contact us.

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