This note considers some of the Hong Kong regulatory issues arising from the marketing of shares (“Shares”) of a company incorporated outside Hong Kong (the “Company”) as part of a placing (the “Placing”) of shares of the Company in various jurisdictions, including Hong Kong. It is assumed that, in connection with the Placing in Hong Kong, the Company will provide potential investors in Hong Kong with certain written materials relating to the Company. There are two principal areas to consider: (i) whether the entity marketing the Shares is required to be licensed or registered under the Securities and Futures Ordinance (the “SFO”); and (ii) the restrictions on the making of offers/invitations to the public under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (the “C(WUMP)O”) and under Part IV of the Securities and Futures Ordinance.
Marketing by the Company
The Shares can be marketed by the Company itself without a licence under the SFO only to the limited categories of “professional investors” set out in Part A of Annex A to this note.
Marketing by an Intermediary
The Shares can be marketed by an intermediary which is licensed or registered by the Securities and Futures Commission (the “SFC”) to “deal in securities”:
- to investors each paying a minimum consideration of HK$ 500,000 for the shares; or
- in circumstances where the total consideration payable for the shares is less than HK$ 5 million; or
- to unlimited numbers of “professional investors” within Parts A and B of Annex A, overseas investors and, subject to meeting the requirements for reliance on the Hong Kong private placement exemption specified in Section 2.1 below, to up to a maximum of 50 other investors.
1. The Hong Kong Licensing Requirements under the Securities and Futures Ordinance (the “SFO”)
1.1. Business of Dealing in Securities in Hong Kong
The SFO requires a person to be licensed or registered under the SFO in order to carry on, or hold oneself out as carrying on, a business in a SFC regulated activity. Carrying on a business in a SFC regulated activity while unlicensed is an offence punishable by a fine of up to HK$ 5 million and up to 7 years’ imprisonment. Carrying on a business is construed widely.
“Dealing in securities” constitutes a SFC regulated activity and is widely defined. A person is “dealing in securities” if he, whether as principal or agent, makes or offers to make an agreement with another person, or induces or attempts to induce another person to enter into or offer to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities.
The marketing of the Shares in Hong Kong by the Company itself or by an intermediary will prima facie constitute dealing in securities in Hong Kong.
1.2. Marketing by the Company
There is a limited exemption from the requirement to be licensed to deal in securities where a person, as principal, deals with a person who is a “professional investor” within the limited category of investors set out in Part A of Annex A attached hereto (“Type 1 professionals”).
Only the Company can rely on this exemption. All marketing activities must therefore be conducted by representatives of the Company and not representatives of any intermediary and all marketing materials must be issued in the name of the Company itself, in order that the Company meets the requirement that it is dealing “as principal”.
In addition, the Company may only market to Type 1 professionals. The definition of Type 1 professionals is however limited. In summary, it includes licensed investment intermediaries, authorised financial institutions, regulated insurance companies, regulated collective investment schemes, government and multilateral agencies. Significantly, Type 1 professionals do not include the categories of “high net worth” investors set out in Part B of Annex A or the subsidiaries or holding companies of licensed intermediaries or authorised financial institutions.
The Company may therefore market shares in itself to Type 1 professionals only without being licensed by the SFC.
1.3. Marketing by an Intermediary
An intermediary would need to be licensed or registered by the Securities and Futures Commission (“SFC”) to conduct SFC Regulated Activity Type 1 (dealing in securities) in order to market the Shares in Hong Kong, unless an exemption applies.
- Dealing through a Licensed/Registered Securities Dealer
An exemption from the requirement to be licensed is available where a person deals through another person who is licensed or registered to deal in securities. Arrangements can therefore be made for the marketing of the Shares to be conducted by a Type 1 licensed/registered intermediary.
- Temporary Licence
If an intermediary is not currently licensed under the SFO, it may be able to apply for a temporary licence for a period of up to three months. The main requirements for the grant of a corporate temporary licence are that the entity is: (i) carrying on a business outside Hong Kong which would be a SFC regulated activity if carried on in Hong Kong; and (ii) authorised in its home jurisdiction by a regulator which performs a similar function to the SFC and has the power to investigate and discipline the entity in respect of its conduct in Hong Kong. The SFC has indicated on an informal basis that it would normally take up to 12 weeks to process a full licence for an entity unknown to the SFC, but that it should take less time for temporary licences where the applicant is already licensed in a recognised jurisdiction. They indicated a possible timetable of around one month if the structure is not complicated and around 2 months for less straightforward cases. Marketing must not commence until the temporary licence has been granted. Any representatives of the intermediary involved in the marketing activities would also need to apply for temporary licences.
1.4. Marketing from outside Hong Kong
The SFO expressly extends the licensing requirement to marketing activities conducted from outside Hong Kong. Essentially, if a person outside Hong Kong actively markets its services to the public in Hong Kong and those services involve one of the nine regulated activities under the SFO, the person will need to be licensed by the SFC1. The SFO expressly provides for companies and individuals based outside Hong Kong to be eligible to be licensed by the SFC to cater for this.
The marketing of the Shares to the public in Hong Kong by an off-shore intermediary would therefore require the intermediary to be SFO licensed. Members of its staff conducting the marketing activities would also need to be licensed as representatives. “Active marketing” for these purposes includes, for example, calling on Hong Kong investors and offering products and internet activities targeting Hong Kong investors (see further at Part 3 below).
1 Section 115 SFO