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How pre-IPO trusts can protect your assets

8 September 2021

Alice Lau

Executive Director, Head of Private Wealth of Asia Pacific

Alice Lau

Executive Director, Head of Private Wealth of Asia Pacific

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With IPO activity defying the pandemic in the first half of 2021, entrepreneurs planning to go public should consider pre-IPO trusts as an important tool for asset protection and business continuity during and after the IPO process.

The global IPO market defied the overall economic trends related to the Covid-19 pandemic in 2021, with continued growth, particularly in the US, Hong Kong and mainland China.

Buoyed by strong liquidity, homecoming listings and large deals, IPO activity in Hong Kong hit a historic high, reaching US$26bn in total funds raised, according to KPMG’s latest analysis.

As a result, the Hong Kong Exchange currently ranks third – after NASDAQ and the New York Stock Exchange – among the top five stock exchanges for IPO deals, followed by the Shanghai Stock Exchange in China, which had $20.6bn in IPO proceeds.

This pace of activity is expected to continue throughout the rest of 2021, defying the resurgence of Covid-19 cases in many markets, with more technology, healthcare and consumer product companies planning to go public.

Given the global uncertainty still pervading most markets, entrepreneurs should consider a pre-IPO trust to protect their assets against unforeseen events during and after the lengthy public listing process.

How does a pre-IPO trust help entrepreneurs?

Pre-IPO trusts are typically set up for key individual shareholders – including the founders, chief executive, chairman and senior executives – of a private company before it goes public. Their shares in the company are held in a trust rather than being owned directly.

Transferring the shares into a trust before listing offers several advantages:

  • Business continuity. Holding shares in a trust helps protect the business against unforeseen factors – including the departure of key shareholders, legal disputes or even divorce, incapacity or death – over the long period required for the listing process.
  • Asset protection. As the trust assets are no longer held by the settlor, they are not exposed to creditors’ claims.
  • Succession planning. Trusts help maintain the founders’ vision for the company, providing security for future generations while protecting the assets from taxes, estate duties, creditors’ claims, family disputes and probate formalities in case of the settlor’s death.
  • Continued ownership control. Putting the shares into a trust can prevent ownership from being diluted over subsequent family generations.

The best timing for a pre-IPO trust

Planning a pre-IPO trust should start as soon as the company decides to go public, as the process is complex and involves several steps. These include:

  • Engaging a trustee
  • Selecting the most suitable trust structure and location
  • Drafting the trust deed and letter of wishes
  • Executing the trust deed
  • Setting up and transferring the shares to the legal entity owned by the trust.

The entire process usually takes two to three months but could be achieved in as little as one month if deadlines are tight.

Choosing the right partner for a pre-IPO trust

Establishing a pre-IPO trust can be a complex process, and choosing the right trustee is one of the most crucial steps for entrepreneurs wishing to protect their personal wealth before their company goes public.

As the trustee will be in charge of the trust affairs, those delegated to look after the assets should have a solid reputation to gain the settlor’s confidence.

The trustee’s location should be readily accessible to the trust settlor as well as the beneficiaries and should offer a global network if changing circumstances require transfer to another location in future.

Other considerations should include the trustee’s flexibility, impartiality and commitment to investing the assets in the best interests of the settlor and beneficiaries. Trust fees should also be transparent and reflect the trustee’s responsibilities, not the client’s wealth.

How Intertrust Group can help with a pre-IPO trust

We were established in 1952, giving us over 65 years’ experience in specialised trustee and administrative services. We are listed on the Euronext Amsterdam and draw upon a network of 4,000 experts in 30 jurisdictions across the world to support international clients wishing to protect their personal assets for succession planning.

How Intertrust Group can help in Hong Kong

  • Trust administration
  • Trustee and fiduciary services
  • Pre-IPO trusts
  • Employee benefit trusts
  • Private Trust Companies (PTC)
  • BVI Vista trusts