Australia: navigating post-IPO escrow for key employees
These are exciting times for investors in Australian Initial Public Offerings (IPO) – especially key employees who hold Founder Shares. These employees often look to sell these shares as soon as the post-IPO escrow period ends. However, there is an alternative that enables them to raise funds while retaining exposure to their vested shares– says Mitchell Hopwood at EquitiesFirst.
The last 12 months have been very difficult for humanity, but great for markets. After collapsing in the first quarter of 2020, global stocks have come roaring back faster and further than almost anyone expected. In April this year, the Dow Jones Industrial average crossed the 34,000 point mark for the first time.1 Here in Australia, the ASX200 breached 7,000 points for the first time since the pandemic began, coming within range of its all-time high.2
This extraordinary recovery in equities has been fuelled by unprecedented fiscal stimulus and monetary easing intended to cushion the impact of the worst economic crisis since the Second World War. In recent months, demand for stocks has been supercharged by growing optimism that the rollout of vaccines heralds a gradual return to pre-pandemic life around the world.
Bumper Crop of IPOs
Not surprisingly, companies have been rushing to list in such buoyant markets, with analysts expecting another bumper year for Australia IPOs in 2021. It is also no surprise, given the shifts the pandemic has caused to how we work and live, that technology firms have been leading the charge. According to Bloomberg, they accounted for A$1.3 billion of the total A$5.4 billion raised through floats last year, achieving the sector’s biggest share of IPO volumes in at least 10 years.3
There were 66 IPOs in Australia’s 2020 vintage. Investors in these newly-listed companies have generally done well: they were up an average of 42% at the end of the year and markets have continued to rise since then.4 This performance has helped create wealth for employees who received share options ahead of those companies’ IPOs, among other shareholders. For employee shareholders of information technology stocks, the wealth effect has been even more pronounced: shares in this sector have returned more than 86% in the last 12 months.5
But these key investors – often senior management of the firm – are also typically subject to a “lock-up” provision that requires them to place their shares in an escrow account after the IPO.
For companies qualifying for an IPO through the ‘asset test’ – which requires them to have A$4 million of net tangible assets or a market capitalisation of A$15 million as well as A$1.5 million of working capital – the ASX will usually oblige certain shareholders to place their shares in escrow for a period of 12 to 24 months, depending on the type of shareholder and other circumstances.6
The provision applies to shareholders like seed investors, promoters and major shareholders, related parties like directors and professionals or consultants who have been paid for their services in shares. It aims to prevent these early investors from selling – and potentially causing volatility – before the market has had time to properly value the company through trading.7
Pre-IPO employee investors are often counting down the months, weeks and days until they are allowed to sell stock.
For many of these early investors, though, the escrow period is a frustrating but necessary delay between wealth being created for them through the IPO and them having access to that wealth. Pre-IPO employee investors are often counting down the months, weeks and days until they are allowed to sell stock.
That does not mean they lack confidence in their company: usually it just means they have immediate opportunities, expenses or other capital needs. They may also need to fund a tax payment: the Australian Taxation Office treats employee stock options as income once they vest, which makes them subject to a tax rate of as much as 45%.
Options for Equities Post Escrow
Investors in this situation sometimes assume that they have no alternative to selling their shares in order to meet their capital needs. Yet the private credit market does offer an attractive alternative: equity financing.
Through a non-recourse loan with EquitiesFirst, a shareholder can pledge a portion of their holding as collateral for their borrowing. The same number of shares will be returned to the borrower when the loan is repaid. During the life of the transaction, the original shareholder retains exposure to the performance of the shares and the right to receive dividend payments.
By accessing this alternative source of liquidity, a pre-IPO investor can retain their full shareholding when escrow ends, enjoy all the upside of owning the stock and make the investments, purchases or payments they had in mind.