Introduction

In the March issue of Financial Services Briefing, we discussed the marketing of funds to the public in Hong Kong.  We now turn our attention to marketing funds in Hong Kong on a private placement basis.

In February 2008, the Milken Institute, a publicity supported independent economic think tank, published its Capital Access Index 2007.  There are 122 countries ranked in the index, which looks at such factors as macroeconomic environments, financial and banking institutions, the development of the equity and bond markets, and alternative capital sources.  Hong Kong maintained its position in first place: "Its general financial environment is among the world's best, with a sound banking system, a relatively large equity market and diversified sources of business funding including venture capital."

Whilst Hong Kong enjoys recognition as a world leader in facilitating access to capital, Hong Kong's securities legislation is aimed at preventing the unauthorised offer of securities and investment arrangements to the public.  However, there are certain situations in which an information memorandum or other document which contains an invitation to subscribe for interests in a fund which will be made available to potential investors in Hong Kong is not required to be authorised by the Hong Kong Securities and Futures Commission ("SFC") before issue, or (in the case of corporate funds) comply with the prospectus requirements of the Companies Ordinance ("CO").

The "professional investor" exception

The first situation is known as the "professional investor" exception and arises as a result of specific exemptions contained in the CO and the Securities and Futures Ordinance ("SFO"). 

Under the SFO, it is possible to make a private offer to an unlimited number of "professional investors" as defined in the SFO.  The definition is considerably wider than under previous law and includes:

§       any intermediary or any other person carrying on the business of the provision of investment services regulated outside Hong Kong;

§       any authorised financial institution or any bank regulated outside Hong Kong;

§       any authorised insurer or any other person carrying on insurance business and regulated outside Hong Kong; and

§       any authorised collective investment scheme or any other scheme which is similarly constituted and regulated outside Hong Kong.

In reliance on its powers to make rules under the SFO, the SFC has provided for additional categories of "professional investor" in the Securities and Futures (Professional Investor) Rules.

Accordingly, offers of securities and/or collective investment schemes will not need to be authorised if the investors fall within one or other of the following definitions:

(a) Trust corporations with at least HK$40 million in assets (approximately US$5.1 million).

     The SFC will require the offeror to obtain the following proof of assets:

§       audited financial statements not more than 16 months old; or

§       current custodian and bank statements;

(b) High net worth individuals with portfolios of at least HK$8 million (approximately US$1 million).

     Documentary proof required:

§       statement of account not more than 12 months old issued by the individual's custodian stating the current total relationship balance; or

§       financial statements verified by accountants;

More than one custodian statement may be used for the purpose of determining the individual's portfolio value;

(c) Corporations or partnerships with a portfolio of at least HK$8 million (approximately US$1 million) or total assets of at least HK$40 million (approximately US$5.1 million).

     Documentary proof required:

§       audited financial statements not more than 16 months old; or

§       current statement of accounts from custodians;

Corporations which act solely as investment holding companies and are wholly owned by individuals who are themselves professional investors will also qualify.

For corporate issuers, the Companies (Amendment) Ordinance 2004 repeals the existing definition of "prospectus" in the CO and introduces a new definition.  In doing so it excludes certain offers from the prospectus regime.  Part I of the 17th Schedule of the CO lists circumstances in which a document will not constitute a prospectus for the purposes of the CO, including an offer to "professional investors" within the meaning of the SFO. 

The "private placement" exception

The second situation arises where information is distributed in such a manner that it does not constitute an offer to the public and therefore does not fall within the prohibition contained in the SFO or the definition of "prospectus" in the CO.  This is the "private placement" exception.  The Companies (Amendment) Ordinance 2004 clarifies some situations where a document used in a private offer by a corporate issuer will not constitute a "prospectus":

(1)   An offer to not more than 50 persons, which includes a prescribed warning statement to the effect that the document has not been reviewed by any regulatory authority in Hong Kong.

(2)        An offer of shares or debentures in respect of which the total consideration does not exceed HK$5million (or its equivalent in another currency), which includes a prescribed warning statement.

(3)   An offer of shares or debentures in respect of which the minimum subscription per investor is not less than HK$500,000 (or its equivalent in another currency), which includes a prescribed warning statement.

Some offers which are excluded under Part I of the 17th Schedule to the CO, may be combined and the entire offer will remain excluded from the prospectus regime.  For example an offer to not more than 50 persons (who do not qualify as "professional investors") combined with an offer to an unlimited number of "professional investors" will not constitute a prospectus and hence remain exempted under the CO.  However, exemptions (2) and (3) above cannot be combined with other exemptions.  Further, it should be noted that exemptions (2) and (3) above apply only to corporate offerors.

An offer to persons who are outside Hong Kong does not constitute an "offer" under Part I of the 17th Schedule to the CO and can be disregarded in determining whether a relevant exclusion applies.

Steps must be taken to ensure that an offer intended as a private offer is not treated as an offer to the public in Hong Kong.

Conclusion

Hong Kong's securities legislation prohibits unauthorised invitations to the public to acquire securities or interests in collective investment schemes.  Specialist legal advice should be sought if an offer is to be made.  It is important to determine whether authorisation of the fund and/or offering material is necessary or if in the particular circumstances and taking into account the manner of the offer, the offer can be considered as not being one to the public. 

Susan Gordon

Financial Services Practice Group

Deacons

Hong Kong