2. The C(WUMP)O Prospectus Regime
Any prospectus distributed in Hong Kong which offers for subscription or purchase shares in or debentures (other than structured products)2 of a company incorporated outside Hong Kong must comply with the content and registration requirements set out in the Companies (Winding Up and Miscellaneous Provisions) Ordinance (the “C(WUMP)O”)3.
A prospectus is defined as any prospectus, notice, circular, brochure, advertisement or other document which:
- offers any shares or debentures of a company to the public for subscription or purchase; or
- is calculated to invite offers by the public to subscribe for or purchase any shares or debentures of a company.
Accordingly any documents distributed to the “public” which contain an offer or invitation to acquire shares in the Company will be subject to the C(WUMP)O prospectus requirements unless a specific exemption applies.
The prospectus requirements do not apply to public offers of shares which are made verbally, although verbal advertisements and invitations are subject to the prohibition on unauthorised investment advertisements in Section 103 SFO.
The Seventeenth Schedule to the C(WUMP)O (the “Seventeenth Schedule”) sets out twelve safe harbours which exclude certain categories of offers from the prospectus regime. The most important of these in terms of an offer of Shares are the following:
- Professionals Exemption
The offering documentation for offers to professional investors (as defined in Section 1 of Part 1 of Schedule 1 to the SFO) is excluded from the C(WUMP)O “prospectus” definition and hence from all the C(WUMP)O prospectus requirements.The definition of professionals which applies for the purposes of this exemption includes all the categories of investors listed in Part A of Annex A to this note (i.e. Type 1 professionals) and those listed in Part B of Annex A (“Type 2 professionals”).
It is therefore possible to market the Shares to the categories of high net worth investors referred to in Part B of Annex A in reliance on this exemption. However, under the Securities and Futures (Professional Investor) Rules (the “Professional Investor Rules”) the offeror must obtain the documentary proof specified in paragraphs 10, 11, 12 and 13 (as relevant) of Annex A to establish that the investor qualifies as a “professional investor”. In response to complaints from market participants that these documentary requirements are overly restrictive and, in practice, discourage market practitioners from relying on the exemption for offers to professionals, the SFC has announced that it will introduce new evidentiary requirements. The new regime will establish a more flexible, principles-based approach allowing firms to use the methods they consider most appropriate in assessing whether an investor satisfies the relevant assets or portfolio threshold at the relevant date to qualify as a professional investor. Alternatively firms which prefer the current practices will be able to continue to use the existing methods set out in the Professional Investor Rules.
- Private Placement Exemption
An exemption is available for offers made to a maximum of 50 persons in Hong Kong provided that the offer document contains in a prominent position the warning statement specified in Part 3 of the Eighteenth Schedule to the C(WUMP)O (the “specified warning statement”) which is as follows:
The contents of this document have not been reviewed by any regulatory authority in Hong Kong. You are advised to exercise caution in relation to the offer. If you are in any doubt about any of the contents of this document, you should obtain independent professional advice.”
In counting the 50 offerees, an offer is taken with any other offer of shares by the same person within the preceding 12 months which relied on the same exemption. Accordingly, it is not possible to increase the number of offerees by staggering placements of the shares.
Where the Hong Kong private placement exemption is to be relied on, the following steps should be taken:
- Each information memorandum issued should be numbered in series and individually addressed to each offeree;
- The information memorandum should include the specified warning statement on the front cover;
- The information memorandum should contain a warning that the addressee may not copy or pass the information memorandum to any other person;
- Subscriptions for shares in the Company should only be accepted from the offeree and the offeree should only be able to purchase shares in the Company as principal;
- Placees should be required to agree not to sell their shares in Hong Kong in the 6 months following the allotment of the shares, except in circumstances which do not constitute an “offer to the public” within the meaning of the C(WUMP)O. This is to ensure that the anti-avoidance provisions of Section 343(1) C(WUMP)O are not triggered; and
- There should be no public advertising at all in Hong Kong in relation to the offer of shares in the Company. The issue of promotional material must be strictly limited to offerees.
It is also possible to combine the professionals exemption and the Hong Kong private placement exemption so that documents offering shares in the Company to unlimited numbers of professional investors and to a maximum of not more than 50 other persons (who do not qualify as professional investors) will be exempt from the C(WUMP)O prospectus requirements. If reliance is to be placed on both exemptions, no more than 50 copies of the information memorandum should be issued to persons who do not qualify as professional investors and the steps specified at (a) to (f) above should also be taken in respect of any offers to such persons.
- Small Offer Exemption
Offers for which the total consideration payable for the relevant shares does not exceed HK$ 5 million (or its foreign currency equivalent) are also exempt from the C(WUMP)O prospectus requirements.
In determining whether the HK$ 5 million condition is satisfied, offers are taken together with any other offer of shares by the same person within the preceding 12 months which relied on the same exemption.
The offer documentation must also contain the specified warning statement in a prominent position.
- High Denomination Exemption
There is an exemption for offers where the minimum consideration payable by any person for the shares is not less than HK$ 500,000 (or its foreign currency equivalent). The specified warning statement must be included in the offer documentation in a prominent position.
To rely on this exemption, every investor must pay a minimum of HK$ 500,000. If they do so, investors do not additionally need to be “professionals” within the definition referred to above.
- Offers to Persons outside Hong Kong
References in the safe harbours to an “offer” do not include an offer to the extent that it is made to persons outside Hong Kong4. Offers made to persons outside Hong Kong can therefore be disregarded in determining whether any relevant exemption applies. For example, when determining whether the number of offerees is within the 50 person limit allowed under the Hong Kong private placement exemption, it is only necessary to count the number of offerees in Hong Kong.
2 Broadly speaking, structured products are any products with a derivative element. They are defined in Section 1 of Part 1A of Schedule 1 to the SFO to include: a) instruments where some or all of the return or amount due (or both the return and amount due) or the method of settlement is determined by reference to one or more of: (i) changes in the price, value or level (or a range within the price, value or level) of any type of securities, commodity, index, property, interest rate, currency exchange rate or futures contract; (ii) changes in the price, value or level (or a range within the price, value or level) of a basket of more than one type of securities, commodity, index, property, interest rate, currency exchange rate or futures contract; or (iii) the occurrence or non-occurrence of an event or events specified in the instrument (excluding an event or events relating only to the issuer or guarantor of the instrument or to both of them); or (b) regulated investment agreements.
3 Section 342C C(WUMP)O
4 Paragraph 1(b) of Part 4 of the Seventeenth Schedule.