How to Structure Your Pre-IPO Capital Raise (and Avoid Common Pitfalls)

A pre-IPO capital raise is often the bridge between a private growth-stage company and the listed market. Done well, it brings on supportive investors, validates your valuation, and provides the capital needed to fund the listing process. Done poorly, it creates a messy capital table, regulatory risk, and difficult conversations with brokers and ASX.

Why pre-IPO funding matters

The pre-IPO round typically funds the costs of preparing for listing (legal, accounting, due diligence and prospectus preparation) and provides working capital through to listing. It also serves as a price discovery and validation exercise: a successful pre-IPO round, completed at a sensible valuation, sends a strong signal to the broker syndicate and the broader market.

The challenge is that pre-IPO investors often have very different expectations from public market investors. Negotiating their entry without creating issues for the IPO is where most pitfalls arise.

Common structures

There are three structures we see most often in Australian pre-IPO raises:

Ordinary share placement. The simplest structure. Investors subscribe for ordinary shares at an agreed price, often at a discount to the proposed IPO price. Suitable where the IPO timeline is short and the valuation is settled.

Convertible notes. Investors lend money to the company in exchange for a note that converts into shares at IPO, usually at a discount to the IPO price (commonly 15–25%). Useful where the IPO valuation is not yet settled or where investors want some downside protection.

SAFE-style instruments. Less common in Australia than the United States, but increasingly used. A SAFE (Simple Agreement for Future Equity) gives the investor the right to receive shares on a future capital event, without being structured as a debt instrument.

The right structure depends on the company's stage, the timing of the proposed IPO, and the negotiating position of the parties.

Key legal considerations

Disclosure obligations. Pre-IPO offers are typically made to sophisticated and professional investors under section 708 of the *Corporations Act 2001* (Cth). This avoids the need for a full disclosure document, but the section 708 conditions must be carefully observed.

Anti-dilution and ratchet clauses. Pre-IPO investors often request mechanisms that protect them if the IPO occurs at a lower-than-expected valuation. These clauses must be carefully drafted, both for legal effectiveness and to ensure they do not breach ASX requirements at listing.

ASX 12-month escrow. Securities issued in the 12 months before listing are generally subject to ASX-imposed escrow restrictions. This means pre-IPO investors may not be able to sell their shares for up to two years after listing. Investors need to understand this before they commit.

Cleansing and disclosure on listing. Convertible notes and other instruments need to be clearly disclosed in the prospectus. Conversion mechanics must be clean and unambiguous.

Common pitfalls

The most common mistakes we see are:

• Issuing too many shares at too low a price, leading to dilution issues that complicate the IPO valuation.
• Granting investor rights (such as board seats or veto rights) that do not unwind cleanly on listing.
• Using ad-hoc documentation that does not align with the proposed IPO structure.
• Underestimating the ASX escrow regime and its effect on investor liquidity.
• Failing to comply with section 708 conditions, particularly investor certificates and the limit on personal offers.

How Luma Legal can help

We work with companies, founders and brokers to design pre-IPO structures that strike the right balance: bringing in supportive investors on commercial terms, while keeping the IPO path clean. We coordinate with your corporate adviser and broker to ensure the structure works end-to-end.

If you are planning a pre-IPO raise or thinking about your path to listing, we are here to help.