Both in Russian and foreign legal practice, pre-IPO bonds are issued through an SPV — this choice is driven by the required contractual framework.

Either already issued or future shares of the target company may be used for the issuance of pre-IPO bonds.

For the target company:

• deferral of the valuation issue to a later stage;

• avoidance of the conversion difficulties inherent in balance-sheet convertible bonds;

• avoidance of dilution of corporate control after the placement (no minority shareholders appear in the target company until it is ready to go public);

• transparent consequences for the target company in the event of IPO abandonment: the instrument remains debt-like and is repaid on an accelerated basis;

• the ability to provide for a lock-up: the “conversion” may take place six months after the IPO, which does not put pressure on the share price.

For investors:

• 100% capital protection and up to 100% allocation in the future “liquid” IPO.

• Pool of potential purchasers
  
  The placement of pre-IPO bonds, unlike the placement of shares at the pre-IPO stage, makes it possible to attract demand from an audience focused on the debt market.

• Consequences of the transaction for the target company

After the completion of the pre-IPO round on platforms, corporate control is redistributed, and a large number of minority shareholders appear in the company. After the completion of the pre-IPO bonds placement, no redistribution of control takes place. Investors acquire shares only at the IPO stage, which simplifies the implementation of corporate procedures by the target company while preparing for the transaction.

Comparison with pre-IPO through a closed-end investment fund

The creation of a closed-end investment fund, unlike the implementation of the pre-IPO bond mechanism, is complicated by regulated administrative procedures and substantial infrastructure costs. This makes pre-IPO through a closed-end investment fund burdensome for companies planning to establish a fund whose assets will consist solely of shares in that company.

Palantir Technologies is a U.S. IT company specializing in data mining.

Due to the fact that its business is associated with various types of confidential information, the company developed outside public markets from the early 2000s until 2020 and financed its operations through private rounds, including through the issuance of pre-IPO bonds.

Thus, in 2019, Palantir Technologies bonds were offered on the Russian market with the following terms:

• underlying asset: a loan in favor of a foreign holding company;

• the transaction terms assumed an assessment of the company's current value and a preliminary valuation based on which the company would decide whether to go public within a three-year horizon;

• under the loan terms, the borrower was entitled to repay the loan with shares upon an IPO on the agreed platform, and in the event of a refusal to go public, the company was obliged to compensate investors for the market income they did not receive.

A more detailed description and parameters of pre-IPO bonds are available upon request at our address – lecap@lecap.ru.