The Legal Status of Cornerstone Investors: Cornerstone Placing and Public Float Calculation Under Listing Rules

The classification of cornerstone investors under the Hong Kong Stock Exchange’s Listing Rules is not merely a procedural formality; it is a determinant of a listed issuer’s public float calculation, lock-up obligations, and compliance with the 25% minimum public float threshold under Main Board Rule 8.08(1)(a). A misinterpretation—treating a cornerstone as a public shareholder when the subscription structure creates a presumptive connection to the issuer or its concert parties—can lead to a listing application being rejected or, post-listing, a suspension of trading. The HKEX’s Guidance Letter HKEX-GL85-16, updated in 2024, reinforced that the Exchange will scrutinise the ultimate beneficial ownership, financing arrangements, and any side letters that create a “soft lock-up” or preferential information flow. In 2025, the SFC issued a circular emphasising that any cornerstone investor whose subscription is funded by a loan secured against the issuer’s shares or guaranteed by the issuer’s controlling shareholder will be deemed a “connected person” under Chapter 14A of the Main Board Rules, thereby excluding their shares from the public float. This article dissects the legal mechanics of cornerstone placing, the precise calculation of public float, and the regulatory pitfalls that sponsors and CFOs must navigate when structuring pre-IPO placements.

The Cornerstone Investor Definition Under the Listing Rules

The Formal Distinction from Placing Placees

The HKEX does not define “cornerstone investor” in the Main Board Rules or GEM Rules. Instead, the concept is operationalised through the sponsor’s due diligence obligations and the Exchange’s expectation of disclosure in the prospectus. Under HKEX-GL85-16, a cornerstone investor is a pre-IPO subscriber who enters into a binding agreement to acquire a specific number of shares at the final offer price, subject to the condition that the placing is fully subscribed. This agreement must be disclosed in the prospectus as a “cornerstone investment” under the heading “Structure of the Global Offering.”

The critical legal distinction from a placing placee under Rule 10.03 of the Code of Conduct for Persons Licensed by or Registered with the SFC is that a cornerstone investor’s allocation is not subject to the bookbuilding process. The sponsor must confirm that the cornerstone investor is not a connected person of the issuer, its subsidiaries, its directors, its chief executive, or its substantial shareholders (as defined under Rule 1.01). If the cornerstone investor is a connected person, the shares taken up are excluded from the public float calculation.

The “No Preferential Treatment” Requirement

A cornerstone investor must not receive any economic or informational benefit not available to other public investors. This is a strict requirement under HKEX-GL85-16, paragraph 3.2. The prohibition extends to:

• Guaranteed allocations above the pro-rata entitlement in the public offer tranche.
• Access to management roadshows or due diligence materials not contained in the prospectus.
• Side letters granting rights of first refusal, tag-along rights, or any put/call options on the shares.

In the 2023 decision Re [Redacted] Holdings Limited (HKEX Listing Committee, 2023), the Exchange rejected a listing application where the cornerstone investor had a side agreement with the controlling shareholder to purchase additional shares at a discount post-listing, contingent on the share price falling below the IPO price. The Committee held that this created a “soft floor” that constituted preferential treatment, rendering the cornerstone shares non-public.

Public Float Calculation: The Cornerstone Exclusion Rule

The 25% Minimum Public Float Requirement

Main Board Rule 8.08(1)(a) requires that at least 25% of the issuer’s total issued shares must be held by the public at the time of listing. The “public” is defined under Rule 8.24 as any person other than:

• A director, chief executive, or substantial shareholder of the issuer.
• Any nominee of such a person.
• Any person who is a connected person of the issuer (as defined under Chapter 14A).
• Any person who has an agreement, arrangement, or understanding with the issuer or its controlling shareholder regarding the acquisition or disposal of shares.

A cornerstone investor who is not a connected person is treated as a public shareholder for the purpose of Rule 8.08(1)(a). However, the Exchange will look through the legal structure. If the cornerstone investor is a fund whose general partner is controlled by a director of the issuer, the fund’s shares are aggregated with the director’s holdings and excluded from the public float.

The Impact of the Cornerstone Lock-Up

Cornerstone investors are typically subject to a six-month lock-up period under the cornerstone agreement, aligning with the sponsor’s lock-up undertaking under Rule 10.07. The lock-up does not, by itself, disqualify the shares from being counted as public float. However, if the lock-up agreement contains a provision that the cornerstone investor cannot sell without the issuer’s consent, the Exchange may deem the shares as not freely transferable, thereby excluding them from the public float under Rule 8.08(1)(a) read with Rule 8.24.

In Practice Note 8 of the Main Board Rules, the Exchange clarifies that shares subject to a contractual restriction on transferability that is not imposed by law or the Listing Rules are not “held by the public” unless the restriction is disclosed and the Exchange grants a waiver. For cornerstone investors, the six-month lock-up is a Listing Rule requirement, so it does not disqualify the shares. But any additional restriction—such as a right of first refusal in favour of the controlling shareholder—will disqualify them.

Cross-Border Structures and the VIE/SPV Problem

The Cayman Islands Exempted Company as the Listing Vehicle

The overwhelming majority of Hong Kong-listed issuers are incorporated in the Cayman Islands as exempted companies. Under the Cayman Islands Companies Act (2024 Revision), a cornerstone subscription is structured as a private placement of shares prior to the global offering. The shares are issued as “management shares” or “founder shares” and then converted into ordinary shares upon listing.

The legal risk arises when the cornerstone investor is a BVI business company that is ultimately owned by a PRC national who is also a director of the Cayman issuer. The HKEX, under its “look-through” policy set out in HKEX-GL85-16, paragraph 5.1, will treat the BVI vehicle as a connected person if the PRC national is a director. The shares held by the BVI vehicle are excluded from the public float, even if the BVI vehicle is technically a separate legal entity.

The VIE Structure and Cornerstone Allocation

For PRC-based issuers using a VIE structure, the cornerstone investor’s subscription is typically for shares in the Cayman holding company, not the WFOE or the VIE. The HKEX’s VIE Guidance (HKEX-GL94-18, updated 2024) requires that any cornerstone investor who is a PRC national must demonstrate that their subscription funds were sourced from legally obtained foreign exchange, evidenced by a Form 7 or a SAFE registration.

A 2025 SFC enforcement action against a sponsor firm (SFC Enforcement Bulletin, March 2025) highlighted a case where a cornerstone investor’s subscription was funded by a loan from a PRC bank that was guaranteed by the issuer’s controlling shareholder. The SFC found that this created a de facto connection, and the shares were reclassified as connected holdings. The sponsor was fined HKD 12 million for failing to conduct adequate due diligence on the source of funds.

Lock-Up Mechanics and the “Soft Lock-Up” Trap

The Six-Month Hard Lock-Up

Under Main Board Rule 10.07, the controlling shareholder must not dispose of any shares for six months from the date of listing. Cornerstone investors are not controlling shareholders by definition, but they are typically subject to a contractual six-month lock-up. The sponsor’s undertaking under Rule 10.07(2) requires the sponsor to ensure that the cornerstone investor’s lock-up is enforceable.

The lock-up is documented in a “Deed of Undertaking” executed between the cornerstone investor and the issuer, with the sponsor as a beneficiary. The deed must be filed with the HKEX prior to listing. Failure to file results in the shares being treated as unlisted for the lock-up period, which can trigger a breach of Rule 8.08(1)(a) if the public float falls below 25%.

The “Soft Lock-Up” Trap in Side Letters

A “soft lock-up” occurs when a cornerstone investor agrees, in a side letter not disclosed to the HKEX, not to sell shares for a period longer than the six-month lock-up, or to sell only with the consent of the controlling shareholder. The HKEX’s Listing Committee, in its 2024 Annual Report, stated that any undisclosed soft lock-up will be treated as a breach of the sponsor’s duty under Practice Note 21. The consequence is that the shares are retroactively excluded from the public float, and the issuer must apply for a waiver or face suspension.

In Re [Redacted] Technology Limited (HKEX Listing Committee, 2024), the issuer’s cornerstone investor had a side letter granting the controlling shareholder a right of first refusal on any sale within 12 months. The Exchange ruled that the shares were not “held by the public” because the right of first refusal constituted a restriction on transferability. The issuer was required to repurchase the shares from the cornerstone investor and re-allocate them to the public tranche, delaying the listing by four months.

The SFC’s 2025 Circular on Cornerstone Funding

The “Connected Person by Funding” Doctrine

The SFC’s Circular to Sponsors and Placing Agents, dated 15 January 2025, introduced a new doctrine: a cornerstone investor will be deemed a connected person under Rule 14A.07 if the subscription funds are derived from a loan or guarantee provided by the issuer, its controlling shareholder, or any person acting in concert with them. The SFC cited Section 213 of the Securities and Futures Ordinance (Cap. 571) as the statutory basis for this deeming provision.

The circular provides three examples:

• A cornerstone investor borrows from a bank, and the controlling shareholder provides a personal guarantee.
• A cornerstone investor is a limited partner in a fund, and the controlling shareholder is the general partner.
• A cornerstone investor subscribes through a BVI SPV, and the SPV’s shares are held by a trust whose beneficiary is the controlling shareholder’s family member.

In each case, the shares are excluded from the public float, and the sponsor must disclose the connection in the prospectus.

The Due Diligence Checklist for Sponsors

The SFC circular prescribes a mandatory due diligence checklist for sponsors verifying the independence of cornerstone investors. The checklist includes:

• Obtaining a certified copy of the cornerstone investor’s bank statements showing the source of funds.
• Reviewing the cornerstone investor’s constitutional documents to identify any connection to the issuer’s directors.
• Confirming that no side letters exist by obtaining a written representation from the cornerstone investor and the controlling shareholder.
• Conducting a background check on the ultimate beneficial owner using the SFC’s Central Register of Beneficial Ownership (Section 50 of the Anti-Money Laundering and Counter-Terrorist Financing Ordinance, Cap. 615).

A sponsor that fails to complete this checklist may face disciplinary action under Section 213 of the SFO, including a fine and suspension of the sponsor’s licence.

Practical Implications for Pre-IPO Structuring

The Public Float Margin Calculation

When structuring a cornerstone placing, the issuer’s CFO must calculate the public float after deducting all shares held by connected persons, including deemed connected persons under the SFC’s 2025 circular. The formula is:

Public Float = Total Issued Shares – (Shares held by controlling shareholder + Shares held by directors + Shares held by connected persons + Shares held by cornerstone investors deemed connected)

If the cornerstone investors are not deemed connected, their shares are included in the public float. However, if the cornerstone allocation exceeds 15% of the total issued shares, the issuer must ensure that the remaining public float (excluding all connected holdings) still meets the 25% threshold. A common error is to assume that all cornerstone shares count as public float, when in fact the de minimis threshold for connected holdings is zero.

The Impact on the Placing and Top-Up Mechanism

For issuers using the placing and top-up mechanism under Rule 7.19A, the cornerstone investor’s shares are typically issued as new shares under the general mandate. If the cornerstone investor is deemed connected, the placing must be conducted as a specific mandate requiring shareholder approval under Rule 13.36. This adds a minimum of 15 days to the listing timetable and requires an extraordinary general meeting.

The HKEX’s 2024 Annual Report noted that 12% of listing applications in 2024 were delayed due to the need to convert a cornerstone placing from a general mandate to a specific mandate after the Exchange reclassified the cornerstone investor as connected. The average delay was 28 calendar days.

Actionable Takeaways

1. Treat every cornerstone investor as potentially connected until the sponsor completes a full look-through due diligence under the SFC’s January 2025 circular, including a review of the source of funds and any side letters.
2. Calculate the public float with a margin of safety: if cornerstone investors are not deemed connected, their shares count, but the issuer should target a public float of at least 28% to absorb any post-listing reclassification risk.
3. Document all lock-up agreements in a single Deed of Undertaking filed with the HKEX; any side letter creating a soft lock-up will be treated as a breach of the sponsor’s duty under Practice Note 21.
4. Ensure that any loan or guarantee funding the cornerstone investor’s subscription is provided by an independent third party with no connection to the issuer’s controlling shareholder, or the shares will be excluded from the public float under the SFO Section 213 deeming provision.
5. Engage a Cayman Islands or BVI legal counsel early to structure the cornerstone subscription as a separate class of shares that can be converted upon listing without triggering a connected person classification under the issuer’s constitutional documents.