Cornerstone Investor Practice: Lock-up, Allocation and Disclosure

Cornerstone investors are institutional investors who commit to subscribing for a fixed allocation of IPO shares at the offer price before the bookbuilding process begins, typically with a 6-month lock-up. This practice, virtually universal in Hong Kong IPOs, serves three functions: price anchoring (the cornerstone commitments demonstrate institutional confidence in the valuation), deal certainty (the sponsor and issuer can guarantee a minimum level of demand before launch), and signaling (the identity of cornerstone investors provides public validation of the issuer’s quality). In exchange for their early commitment and lock-up, cornerstone investors receive guaranteed allocation (the cornerstone tranche is carved out before bookbuilding). HKEX rules require cornerstone agreements to be disclosed in the prospectus, including the investor identity, the number of shares subscribed, the offer price, and lock-up arrangements. The regulatory concern is that undisclosed side arrangements — such as compensation for cornerstone investors if the share price falls below the offer price — could create a misleading market. SFC enforcement actions have targeted such arrangements in the past.