Collective Investment Schemes in Hong Kong
Hong Kong has significant regulations concerning the marketing and distribution of securities2 . These include restrictions on (1) the issuing unauthorized advertisements of securities to the public; (2) the ability to carry on specified securities-related activities without an appropriate licence from the Securities and Future Commission (“SFC”); and (3) the issuance of documents offering securities that do not comply with the Prospectus Regime3 .
This Pacific Sun case related only to the restrictions on advertisements that have not been approved by the SFC under the Securities and Futures Ordinance (SFO)4 .
A general offence is created under Section 103(1) of the SFO for issuing advertisements or invitations to the public to invest in securities or participate in CIS. However, as with other areas of Hong Kong's securities’ regime, there are certain safe harbours for issuing unauthorized advertisements such as for products that “are or are intended to be sold to professional investors” (PI Exemption)5 .
Pacific Sun launched a Greater China Equities Fund in 2011 and, as well as preparing a Press Release, they published documents relating to the Fund on their website.
When the SFC brought charges against Pacific Sun for issuing an unauthorized advertisement in breach of the SFO, the Company argued that they came within the PI Exemption because their disclaimers on the investment documents and also their screening procedures clearly showed that they would only deal with Professional Investors.
The SFC's position - which was upheld in the lower courts - was that if an issuer wanted to rely on the PI Exemption, it had to be clear from the unauthorised advertisement itself that it was only available to Professional Investors.
The Court of Final Appeal disagreed with the SFC’s position and allowed Pacific Sun's appeal. Key points in the Court’s judgment were:
(1) The Prospectus Regime excludes certain offerings where a specified warning is given in the advertisement or invitation6 .
The courts view was that, if it had been intended that the PI Exemption could only be relied upon for unauthorised advertisements where a professional investor qualification was expressly stated, then the SFO would have prescribed appropriate wording to be included in the advertisement. Instead, the SFO is silent on this point.
(2) If Pacific Sun did not intend to sell to the general public, then there was no need for the public to be protected; and
(3) The liability of the issuer did not necessarily arise purely at the time of the advertisement but could arise both before or after its publication based on an actual disposal to a non-professional investor.
The SFC has issued an announcement on this decision7 and have confirmed:
(i) Advertisements of CIS that are unsuitable for retail investors can be issued to the general public, even if the intent is only to actually sell these to Professional Investors.
(ii) It will not be the advertisement alone that determines the intent of the issuer, although the SFC have expressed their concern that this will mean that an offence that affects the general investing public may not be established until a much later date.
(iii) they are going to consider whether the law needs to be changed to protect retail investors on this point.
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Whilst the Pacific Sun case does provide an insight into one specific aspect of Hong Kong’s laws on the advertising and offering of the securities, it does not alter the fact that great caution is still required by those involved in these activities.
Indeed, even though it found that it was not essential to specify in the advertisement that the offering was only available to Professional Investors, the court did also note:
(a) that the burden of proof was on the issuer of the advertisement to show that it did have this intention; and
(b) the presence of wording limiting this offering to Professional Investors on the advertisement – which the SFC argued was required for the PI Exemption – might well go towards satisfying this burden.
For more information on securities and futures related matters in Hong Kong, please contact:-
Chris Lambert | firstname.lastname@example.org | +852 2861 8417
1 Pacific Sun Advisors Limited and Another v. Securities and Futures Commission (FACC 11 of 2014)
2 Securities are very generally defined under Part 1 of Schedule 1 of the SFO and in clude investments in CIS
3 See Companies (Winding Up and Miscellaneous Provisions) Ordinance, Cap 32 of the Laws of Hong Kong(C(WUMP)O). All other regulations referred to in this article are governed by the SFO
4 (Cap 571 of the Laws of Hong Kong)
5 Professional investors are defined under Section 1 of Part 1 of Schedule 1 of the SFO and also include those persons prescribed in Section 3 of the Securities and Futures (Professional Investors) Rules
6 Part 3 Eighteenth Schedule of the C(WUMP)O