PSE proposes changes in lock-up rule

MANILA, Philippines — The Philippine Stock Exchange (PSE) is proposing changes in the coverage of the lock-up rule to provide a better exit-route for alternative investment funds (AIFs) when a company they’re invested in embarks on an initial public offering (IPO).

AIFs are private equity funds, venture capital, hedge funds, sovereign wealth funds or their investment arms which invest in a company.

The PSE conducted a review of the lock-up rule in the main board and SME board listing rules “following receipt of queries from market participants regarding an IPO exit route for AIFs or their investment arms which invest in a company prior to the IPO in the form of convertible securities or any other security that gives them an option to subscribe to the company’s shares.”

AIFs generally exercise their conversion or subscription rights close to the IPO at a price lower than the IPO price, triggering the application of the lock-up rule.

The lock-up rule provides that if there is any issuance or transfer of shares done and fully paid for within 180 days prior to the start of the offer period or prior to the listing date in the case of companies doing their listing by way of introduction – and the transaction price is lower than that of the offer price in the IPO – all shares availed of shall be subject to a lock-up period of at least 365 days from the full payment of the aforesaid shares.

Because of this lock-up rule, the shares of AIFs or their investment arm arising from the exercise of their conversion or subscription rights may be subject to lock-up and restrict them from making an IPO exit.

The PSE has also proposed to exempt shares issued to AIFs from the 365-day lock-up period.

“In view of the foregoing, the PSE proposes to exempt shares issued to AIFs or their investment arm within the 180-day period prior to the IPO at a price lower than the IPO from the application of the lock-up rule,” the PSE said.

One is that the shares are issued pursuant to an exercise of rights granted under convertible securities, warrants, options or similar instruments that have been held and fully paid for by the AIF or its investment arm for at least 365 days prior to the offer or the holding period.

Another is that the AIF or its investment arm is entitled to convert its holdings or subscribe to the underlying shares during the entire holding period.

Another condition is that the AIF or its investment arm sells the exempted shares during the IPO.

“Shares of the AIF or its investment arm which are covered by this exemption, but are not sold during the IPO shall be subject to the 365-day lock-up,” the PSE said.