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Pre–IPO capital raisings continue to be popular with early stage, pre–profit tech businesses looking for a longer runway ahead of their ASX listing.

In recent years, ASX has been a popular destination for technology businesses to float. This has been partly as a result of encouragement from the ASX as well as the success of companies such as Afterpay, WiseTech and Appen. However, many tech businesses will seek to access funding prior to listing on the ASX, to allow them additional runway to develop their business, demonstrate results, give IPO investors enhanced confidence in their financial position or bring in key investors which may help with IPO marketing. Deferring a listing also provides the issuer with additional time to remain relatively private and not be subject to the enhanced disclosure obligations of a listed company, which may be unwanted at the early stage of a business. Whilst there are a range of sources for funding, an increasingly popular approach is to raise funds from financial investors 12–24 months prior to the IPO, usually through the issue of pre–IPO convertible notes.

Examples in 2021, amongst many others, include payments platform business Till Payments reportedly raising $125 million, men’s health player Mosh $25 million, Radiopharm Theranostics $20 million, Triad Life Sciences AUD$25 million and BirdDog $14 million1. Such fundraising rounds are traditionally managed by firms such as Bell Potter, Wilsons, Canaccord or Morgans, however we are increasingly seeing large investment banks involved where the valuation of the issuer and raise size justifies it.

Pre–IPO convertible notes form a debt owed by the issuer to the investors which converts into equity on the occurrence of certain trigger events, most importantly the IPO. Typically, the debt will convert into shares at the time of the IPO at a pre–determined discount to the IPO price which is generally between 20–30%, with the discount often ratcheting upwards as the time between the pre–IPO raise and IPO increases. This is to both encourage the company to list and to compensate investors for a longer holding period. Often interest is payable on the debt until the time of conversion. Any interest and the IPO price discount is what provides investors with their financial return.

Convertible notes are often used as they (generally) defer the need to value the company and its equity until a later date (given the debt converts at a discount to a share price determined in the future) and provide investors with enhanced downside protection (compared to equity) should things not proceed as planned.

In addition to the interest and discount rate, key commercial considerations for the issuer and investors alike include:

  • Maturity Date: generally, the maturity date of the notes will be within 12 to 24 months of their issue, as they are ordinarily marketed as being the final funding round pre–listing and investors will want to see a clear (and short) path to a liquidity event. The maturity date may be influenced by the investors being targeted as some fund managers have investment mandates preventing them from investing in notes with longer maturity dates.

    The consequence of reaching maturity is also important – in particular, is the amount owed repaid in cash at maturity or converted into equity in the company? Whilst the company may want conversion at maturity (as it avoids the need for funds to pay the debt in cash), investors typically like to see repayment in cash, as it incentivises the company to undertake the IPO and means the investors do not receive a potentially illiquid investment at maturity. It also avoids the difficulties of needing to price the conversion at maturity, documenting or reviewing shareholder arrangements (i.e. a shareholders’ agreement) and potential applicability of the takeovers regime if the number of shareholders exceeds 50 on conversion. Alternatively, investors may be happy with conversion at maturity where it occurs at their option.
  • Ranking and security: generally pre–IPO convertible notes are unsecured obligations which rank equally with the other unsecured debts of the issuer in the event of a liquidation.
  • Negative pledges / other undertakings: generally the issuer will agree to a range of undertakings designed to protect the investment of the investors. For example, restrictions on further indebtedness, distributions or dividends, granting security over assets, changes to the business, sale of assets and the issue of further securities. Positive obligations may also be imposed, for example to provide certain information to investors on a regular basis.
  • Valuation cap: in certain transactions the issuer may agree to a “valuation cap”, which deems the issuer’s valuation at IPO (or some component of it) to be the lower of an agreed value or the amount actually determined by the IPO. This provides investors with equity–like upside in the IPO should the valuation increase above the cap but with downside protection as well.

Other important provisions for investors include the representations and warranties in the note or associated subscription agreements.

In undertaking a pre–IPO raise, issuers need to look ahead to their IPO to ensure they can comply with ASX requirements and also give themselves the best possible chance of success for their IPO. For example:

  • issuers should ensure that convertible noteholders agree upfront to any ASX imposed escrow on the shares issued to them on conversion at the IPO, and also consider asking investors to agree upfront to any voluntary escrow recommended by the lead manager(s) for the IPO. Whilst agreeing to voluntary escrow upfront might make the notes less attractive, where the IPO does not involve a sell down, the possibility of noteholders selling large amounts of shares on day one of trading may dampen investor demand in the IPO; and
  • the convertible notes should also allow the issuer sufficient flexibility to facilitate any pre–IPO restructuring required – for example if a share split or consolidation, or a ‘tophat’, is desirable.

With technology and the companies which develop and bring it to market showing no signs of slowing down, we anticipate that the ASX will continue to see large numbers of technology companies listing in the coming years. However, issuers should consider whether they are sufficiently mature to list on the ASX, or whether additional time bought through a pre–IPO raise may be the best path for the company and its existing securityholders.


  1. See ‘Afterpay–backed Touch piles in as Till’s round hits $125m’, Australian Financial Review, 22 November 2021; ‘Men’s health player Mosh joins pre–IPO raisers’, Australian Financial Review, 6 December 2021; ‘Radiopharm Theranostics tanks on ASX debut’, Australian Financial Review, 25 November 2021; ‘Triad Life Sciences completes A$25m funding round, anticipates ASX listing in coming months’:, ‘Camera company BirdDog briefing investors ahead of IPO’, Australian Financial Review, 17 October 2021.

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