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Regulatory implications of offering securities to employees in Hong Kong

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Regulatory implications of offering securities to employees in Hong Kong

A. Introduction

This article considers the Hong Kong laws regulating the offering of securities in Hong Kong in relation to an offering of shares of a company incorporated outside Hong Kong to an employee in Hong Kong.

B. Securities Laws

There are two regimes governing offers of shares in Hong Kong, the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O) prospectus regime (C(WUMP)O Prospectus Regime) and the “offers of investments” regime under Part IV of the Securities and Futures Ordinance (SFO Regime).

  1. C(WUMP)O Prospectus Regime

    A document which offers to the public for purchase or subscription the shares or debentures of a company incorporated outside Hong Kong is a prospectus which must be authorized for registration in accordance with the requirements of the CO, unless an exemption applies.

    Offer to the Public

    The CWUMPO Prospectus Regime applies where there is an “offer to the public” which is defined to include an offer to any section of the public. An offer to a company’s employees in Hong Kong is prima facie an offer to the public.


    The following exemptions from the C(WUMP)O requirements are available:

    1. Private Placement Exemption in Hong Kong

      An exemption is available where an offer is made to not more than 50 persons provided that the document(s) making the offer contain a warning statement (Specified Warning Statement), in a prominent position, in the following form:


      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.”

      If the offer is to be limited to single employee, the private placement exemption can be relied on provided that the Specified Warning Statement (above) is included in a prominent position (i.e. on the front page) of any documents offering the shares provided to the Hong Kong employee.

      In determining whether the 50 person limit has been exceeded, an offer is taken together with other offers of the same class of shares made by the same company which were open at any time in the previous 12 months which relied on the same exemption. Thus, if there are any future offers to other Hong Kong employees, those offers will be within the private placement exemption only if the total number of offers under the existing offer and any future offers within the next 12 months does not exceed 50.

      Restricting Distribution of Offering Document

      If the private placement exemption is to be relied on, any documentation relating to the share offer can only be given to the single employee in Hong Kong. In addition:

      1. the offering document should be addressed to the relevant offeree. Ideally, the offering document to be delivered in Hong Kong should be annotated with the name of that employee;
      2. The offering document must contain the Specified Warning Statement;
      3. The offering document should also contain a warning that it cannot be copied or passed to any other person.
      4. Subscription must only be accepted from the relevant employee; and
      5. There should be no public advertising at all in Hong Kong in relation to the shares. The issue of promotional material in Hong Kong must be strictly limited to the single employee. In particular, the offering document must not be posted on a website as this will amount to an offer to the public for which SFC authorisation is required.

      Offer to Qualifying Persons Exemption

      An exemption is also available where a company offers its shares to persons who are qualifying persons of that company or of another company, which is a member of the same group as the company1.

      “Qualifying persons” are defined2 to include (i) current and former directors, employees, officers and consultants and the dependents of such persons; and (ii) trusts established by the company or any group member which can hold shares for any of the persons mentioned in (i) above. A “dependent” means the wife, husband, widow or widower of the person or any child or stepchild under the age of 18.

      A company will be a member of the same group as another company if the latter (i) controls more than half the voting power of the first company; (ii) holds more than half of other company’s issued share capital; or (iii) controls the composition of its board of directors.

      Conditions for Reliance on the Qualifying Persons Exemption in Hong Kong

      There are 2 conditions for reliance on the Qualifying Persons Exemption:

      1. the offer must be made on terms that the only persons who can acquire the shares are the qualifying persons to whom they are offered or, if the terms of the offer so permit, any qualifying person. ; and

        It would not therefore be possible to rely on the exemption if the employee is able to assign his rights to the shares to another person, except if the assignment is to a qualifying person and this is permitted under the terms of the employee share scheme.

      2. Any documents offering the shares must contain, in a prominent position, the Specified Warning Statement in the same form as is required for the private placement exemption (please see above).

1 Section 8 of Part 1 of the Seventeenth Schedule to C(WUMP)O.

2 Section 6 of Part 4 of the Seventeenth Schedule to the Companies Ordinance.


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