Cornerstone Investor Lock-ups in Hong Kong IPOs: Rules, Terms and Market Practice

What Are Cornerstone Investors and Their Lock-up Rules?

In a Hong Kong IPO, a cornerstone investor is a selected institutional, corporate, or individual investor who agrees to subscribe to a specified number of shares and is typically subject to a lock-up period. During this period, the investor cannot sell the shares. The most common lock-up period is six months, although some deals may use shorter or longer periods.

Common Terms and Market Practice

While the exact terms vary by issue, common provisions include:

• A commitment to hold shares for a set period (often six months from the listing date).
• A fixed allocation of shares at the IPO price, usually announced before the deal launches.
• The lock-up applies to the entire stake acquired as a cornerstone, sometimes including any bonus shares.

Market practice shows that larger IPOs tend to have a higher proportion of cornerstone investors, and lock-ups are often longer for larger deals, sometimes up to twelve months, to provide stability.

Differences by Issue Size

For smaller IPOs, cornerstone lock-ups are sometimes shorter (e.g., three months) or absent entirely. In contrast, large-cap IPOs frequently use six-month or twelve-month lock-ups for cornerstone investors to underpin demand and signal confidence.

The table below summarises typical lock-up durations by issue size, based on observed market practice:

Share Price Behaviour Around Lock-up Expiry

Ahead of lock-up expiry, the market often anticipates an increase in supply as the locked shares become free-trading. This can put downward pressure on the share price. However, the actual impact depends on factors such as the size of the release, the company's fundamentals, and market sentiment. In some cases, the share price may already have adjusted in advance, and the expiry may trigger a relief rally if expectations were overblown.

How Retail Investors Can Use Lock-up Information

Retail investors can incorporate lock-up information into their IPO application and trading decisions:

• For IPO subscription: A longer lock-up for cornerstone investors may indicate stronger institutional support, potentially making the deal more attractive.
• For post-listing trading: monitor the lock-up expiry date and the number of shares being released. Selling pressure may be more significant if the share price has risen since listing, attracting profit-taking.
• Always consider the company's fundamentals and overall market conditions, not just the lock-up calendar.

For more on interpreting IPO documents, readers may find the following helpful: How to Read the Industry Overview Section of a Hong Kong IPO Prospectus and A Systematic Breakdown of the Historical Financial Information Section in Hong Kong IPO Prospectuses.