Hong Kong Regulation of Offers of Investment Products

The Hong Kong regulatory regime governing the sale of investment products includes:

• a requirement for SFC authorisation of offering and marketing documentation aimed principally at ensuring that disclosure is accurate and adequate;
• a requirement that those recommending or soliciting investment are licensed or registered to do so by the SFC; and
• an obligation on those selling investment products to ensure that the product is suitable for the proposed investor.

Document Authorisation Requirements

Two regimes govern the authorisation of offering documentation: the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 prospectus regime (the “Prospectus Regime”) and the regime governing offerings of investment products under Part IV of the Securities and Futures Ordinance (SFO)

Prospectus Regime

The Prospectus Regime applies to offers in Hong Kong of the shares and debentures of Hong Kong and overseas companies. It thus governs offers in Hong Kong of the following: ordinary shares, preference shares, depositary receipts in respect of shares, plain vanilla debentures (including fixed rate bonds, zero coupon bonds and promissory notes), and floating rate notes. The Prospectus Regime requires that any document which offers shares or debentures to the public (including any section of the public), or is calculated to invite offers from the public to subscribe for or purchase shares or debentures, must:

• comply with the detailed contents requirements for prospectuses set out in the Third Schedule to the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32; and
• be registered with the Hong Kong registrar of companies.

The Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 Prospectus Regime does not however apply to “structured products”, which are investment products having a derivative element, and include equity-linked notes, credit-linked notes, equity-linked deposits and other equity-linked instruments. These are regulated instead under Part IV of the SFO. The following investment products are however specifically excluded from the definition of “structured products”:

• convertible and exchangeable bonds and subscription warrants entitling the bondholders to convert or exchange, and warrant holders to subscribe, for shares in the issuer or its related corporation. These are therefore governed by the Prospectus Regime;
• collective investment schemes (i.e. funds) which are governed by sections 103 to 105 SFO; and
• insurance contracts relating to any business specified in the First Schedule to the Insurance Companies Ordinance. Note, however, that investment-linked assurance schemes that are offered to the public must be authorised under section 104A SFO.

Exemptions from the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 O Prospectus Regime

The Seventeenth Schedule to the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap. 32 sets out 12 categories of offers for which the offering documentation is exempted from the prospectus regime requirements. These include offers:

1. to no more than 50 persons (the private placement exemption);
2. with a minimum denomination or subscription amount of HK$500,000 (the high denomination exemption);
3. with a maximum size of HK$5 million (the small offer exemption); and
4. to professional investors (as defined in Schedule 1 to the SFO and the Securities and Futures (Professional Investor) Rules.

Where reliance is placed on either the private placement exemption, the high denomination exemption or the small offer exemption, the offer document must contain the following warning statement:

“WARNING

The contents of this documents 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.”

With the exception of the high denomination and small offer exemptions, the Seventeenth Schedule exemptions can be used in combination so that, for example, an offer could be made to no more than 50 persons in Hong Kong who are not professionals, and to unlimited numbers of Hong Kong professional investors. When determining the total number of offerees under the private placement exemption or the total offer size under the small offer exemption, all other offers of the same class of shares or debentures made by the same person which were open at any time in the previous 12 months must also be counted (i.e. as well as the present offer), if they relied on the same exemption from the prospectus regime requirements.

Part IV of the SFO

The regime under Part IV SFO requires that SFC authorisation must be obtained for any advertisement, invitation (which can be an oral invitation) or document which contains an invitation to the public to:

1. enter into or offer to enter into: (a) an agreement to acquire, dispose of, subscribe for or underwrite securities; or (b) a regulated investment agreement or an agreement to acquire, dispose of, subscribe for or underwrite any other structured product; or
2. acquire an interest in or participate in, or offer to acquire an interest in or participate in, a collective investment scheme.

It is an offence to make an invitation to the public in respect of any investment product referred to above without prior SFC authorisation.

A “regulated investment agreement” is defined as “an agreement, the purpose or effect, or pretended purpose or effect of which is to provide, whether conditionally or unconditionally, to any party to the agreement a profit, income or other returns calculated by reference to changes in the value of any property, but does not include an interest in a collective investment scheme”.

Collective Investment Schemes

Collective investment schemes are products such as funds where property is managed on behalf of a group of persons participating in the scheme. In the absence of a particular exemption, the collective investment scheme itself must be authorised by the SFC under section 104 SFO. Authorisation requires that the fund and its documentation comply with the requirements set out in the SFC’s Code on Unit Trusts and Mutual Funds. The offering documents and marketing materials for an authorised fund must also be authorised by the SFC under section 105 SFO.

Structured Products

In the absence of an available exemption, a retail offer of a structured product requires that the product itself is authorised by the SFC under section 104A SFO and that any advertisement or offering document in respect of the structured product must be authorised by the SFC under section 105 SFO.

Any offering document for a product covered under the Prospectus Regime which is exempt under the Seventeenth Schedule of that ordinance, is also exempt from the requirement to be authorised by the SFC.

Other Exemptions from the SFO authorisation requirements

Other exemptions are available for the issue of advertisements, invitations or documents:

• to persons outside Hong;
• in respect of securities, RIAs, or CISs offered to professional investors;
• in respect of securities approved for listing on the Stock Exchange of Hong Kong Limited;
• in relation to currency-linked or money market instruments issued by authorised financial institutions that are referenced to changes in the level of any interest rate and/or currency and/or a basket of interest and/or currency rates; and
• in respect of securities (but not RIAs, CIS or structured products) by an intermediary which is licensed or registered for Regulated Activity Type 1, 4 or 6.

Licensing/Registration Requirement for Persons Offering Securities

Any person involved in offering, marketing or selling investment products in Hong Kong must be licensed or registered by the SFC for Regulated Activity Type 1 (Dealing in Securities). Both the firm and the individual involved in the activity must be licensed or registered. If the entity is an authorised financial institution (i.e. a licensed bank, a restricted licence bank or a deposit-taking company authorised by the Hong Kong Monetary Authority), it must be registered with the SFC as a registered institution to carry on any SFO regulated activities. For entities which are not authorised financial institutions, they must be licensed by the SFC as licensed corporations and their employees undertaking regulated activities must be licensed individuals.

The SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC imposes (among others) know your client obligations and specific obligations to ensure that investment products offered to clients are suitable for them.