Related-Party Transactions: What Will the Sponsor Make You Unwind

The sponsor’s due diligence on related-party transactions is the most common source of pre-IPO restructuring requirements. The sponsor will typically require the unwinding or formalisation of: loans from the company to founders or their family members (these must be repaid with interest before filing); personal expenses run through the company (founder’s personal travel, family office staff salaries, club memberships charged to the company must be reimbursed); shared services agreements where the company shares office space, staff or services with other entities controlled by the founders (these must be formalised at arm’s length terms or terminated); intellectual property that is owned by a founder personally rather than the company (must be assigned to the company at fair value, with documentation of the transfer). The disclosure requirement is that all material related-party transactions in the three years preceding listing must be disclosed in the prospectus, with an explanation of why they were entered into and on what terms. Companies that have historically treated the founder and the company as a single economic unit — a common pattern in Asian family-founded businesses — will face the most extensive cleanup requirements.