This note considers some of the Hong Kong regulatory issues arising from the marketing of interests in a non-corporate fund (the “Fund”), such as funds taking the form of a unit trust or limited partnership, to potential investors in Hong Kong. There are two principal areas to consider: (i) whether the entity marketing the Fund is required to be licensed or registered under the Securities and Futures Ordinance (the “SFO”); and (ii) the restrictions on the making of invitations to the public in Part IV of the SFO.
Marketing by the Fund
The Fund can be marketed by the Fund 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 Fund can be marketed by an intermediary which is licensed or registered by the Securities and Futures Commission (the “SFC”) to “deal in securities”:
- to unlimited numbers of “professional investors” within Parts A and B of Annex A; or
- to a maximum of 50 investors (who may include non-professionals) where the offer meets the requirements for a private placement.
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 provides that no person shall carry on a business in a regulated activity without being licensed or registered under the SFO. Carrying on a business is construed widely.
“Dealing in securities” constitutes a 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 Fund in Hong Kong by the Fund itself or by an intermediary will prima facie constitute dealing in securities in Hong Kong.
1.2. Marketing by the Fund
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 Fund can rely on this exemption. All marketing activities must therefore be conducted by representatives of the Fund and not representatives of any intermediary (such as an investment manager or placing agent) and all marketing materials must be issued in the name of the Fund itself, in order that the Fund meets the requirement that it is dealing “as principal”.
In addition, the Fund 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 Fund may therefore market interests in itself to Type 1 professionals only without being licensed by the Securities and Futures Commission.
1.3. Marketing by an Intermediary
An intermediary would need to be licensed or registered by the Securities and Futures Commission (“SFC”) to conduct Regulated Activity Type 1 (dealing in securities) in order to market interests in the Fund in Hong Kong, unless an exemption applies.
- Incidental Exemption
An intermediary licensed for Type 9 regulated activity (asset management) is not required to be licensed for Type 1 regulated activity (dealing in securities), provided that this activity is carried out solely for the purposes of the intermediary’s asset management business. However, the SFC interprets this exemption narrowly. The SFC has said that where a fund manager who is already licensed for Type 9 regulated activity engages in marketing activities relating to funds under its management, it may rely on this incidental exemption. Accordingly, to conduct its fund management business plus any incidental marketing activities in relation to the funds it manages, the fund manager is only required to be licensed/registered for Type 9.
However, this exemption will not apply if the fund manager markets other funds which are not under its management. Such marketing activities will not be regarded as incidental to the fund manager’s Type 9 business, and the fund manager will need to be additionally licensed/registered for Type 11.
This exemption is therefore available only where a fund manager holding a Type 9 licence markets interests in a fund under its management.
- 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 Fund to be conducted by a Type 1 licensed/registered intermediary. The exemption will not however apply if the person appointing the licensed intermediary to market the Fund (e.g. the fund manager or the Fund itself) receives any form of commission or other remuneration from the licensed 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 primary requirement for the grant of a corporate temporary licence is that the entity is 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. Where an applicant has obtained a temporary licence in the past, the total approved period of the licences cannot exceed 6 months in any period of 24 months.
In practice, obtaining a temporary licence in Hong Kong is difficult. One of the application requirements is that the applicant has lodged an application under section 130(1) SFO for the keeping of records and documents. It is not possible to obtain a temporary licence to carry out regulated activity Type 9 (asset management). A temporary licensee is also prohibited from holding client assets.
1.4. Marketing from outside Hong Kong
An entity (such as a fund manager or placing agent) which markets interests in the Fund to persons in Hong Kong is prima facie “dealing in securities” and will require a Type 1 licence in the absence of any available exemption.
It should also be noted that section 115 SFO expressly prohibits a person “actively marketing” from outside Hong Kong to the Hong Kong public any services which would constitute a regulated activity if provided in Hong Kong, unless that person is registered or licensed by the SFC. According to the FAQs on the SFC website, “actively markets” may include, for example, those who frequently call on Hong Kong investors and market their services (including offering products); running a mass media programme or internet activities targeting the Hong Kong investing public. 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 Fund 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.
1 Source: SFC FAQs on Licensing Related Matters, Topic 10 – Incidental Exemption, Question 10.6