3. Part IV of the Securities and Futures Ordinance
3.1. Investment Advertisements in Hong Kong
It is an offence under Section 103 SFO for a person to issue in Hong Kong an advertisement, invitation or document which is or contains an invitation to the public:
- to enter into or offer to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities: or
- to acquire an interest in or participate in, or offer to acquire an interest in or participate in, a collective investment scheme,
unless the issue is authorised by the SFC under Section 105(1) SFO or an exemption applies.
“Collective investment scheme” is the term used in the SFO to cover mutual funds, unit trusts and other pooled investment arrangements. The Fund will constitute a collective investment scheme for the purpose of the SFO. It is the SFC’s policy intention that the public offering of both open-ended and closed-end funds should be subject to SFC authorization under the SFO unless specifically exempted.
It should be noted that the SFO regime covers advertisements and invitations made verbally as well as written documents5.
3.2. Public Offer
In order for shares in a fund to be marketed to the public in Hong Kong, the fund must be authorised by the SFC under Section 104 SFO. The conditions for authorisation are set out in the Code on Unit Trusts and Mutual Funds. In addition, any invitation to the public to acquire shares in the fund, must be authorised by the SFC under Section 105 SFO.
There are a number of exemptions from the investment advertisements requirements.
Most importantly in terms of the Fund, any invitation to the public which relates to an offer within the safe harbours of the Seventeenth Schedule to the C(WUMP)O, is also exempt from the prohibition on unauthorised investment advertisements in Hong Kong by virtue of Section 103(2)(ga) SFO. Accordingly, SFC authorisation is not required for invitations relating to an offer:
- 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 up to a maximum of 50 other investors.
3.3.1. Advertisements issued to professional investors
This exemption is available in respect of advertisements for securities and for collective investment schemes.
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 interests in the Fund to the categories of high net worth investors referred to in Part B of Annex A in reliance on this exemption. However, the offeror must use appropriate methods to establish that persons specified in paragraphs 10, 11, 12 and 13 of Part B meet the relevant assets or portfolio threshold at the relevant date6 to qualify as a professional investor. Firms should keep proper records of their assessment process so as to demonstrate that they have exercised professional judgement and have reached a reasonable conclusion that their clients meet the relevant thresholds.
5 See the definitions of “advertisement”and “invitation” in Section 102 SFO.
6 “Relevant date” for these purposes means in the case of any advertisement, invitation or document to enter an agreement to acquire or subscribe for securities, the date of issue of the advertisement, invitation or document (Section 2 of the Securities and Futures (Professional Investor) Rules).