Offers of investment products
Charltons provides high impact advice to issuers, distributors, financial institutions, fund managers, financial advisors and investors on the regulatory implications of offering investment products in Hong Kong.
We help clients to structure and launch investment products, advising on the applicable regulatory framework and suggesting structures, selling restrictions and other solutions that will enable issuers to avoid SFO authorisation and prospectus registration in respect of the securities to be offered.
In the case of retail and other non-exempt investment products, we will assist with the application for authorisation of the offering by the SFC and registration of the relevant prospectus. We have particular experience in advising on SFC fund authorisation requirements, as well as post-authorisation compliance.
Clients receive smart and practical advice from multidisciplinary lawyers with broad regulatory, securities and transactional experience. Our team has wide experience across capital markets, corporate finance, M&A, investment funds and commercial transactions, as well as in dealing with the SFC and other regulatory and governmental bodies in Hong Kong. We provide an insightful and highly personalised service to clients, and aim to deliver legal advice on complex issues in plain language.
Charltons also understands the complexities and challenges of cross border investment product offerings. Charltons works with a network of law firms worldwide and frequently instructs local counsel and coordinates multi-jurisdictional legal advice on international fund offerings, offering a single point of contact and integrated legal advice to the client. This network allow us to coordinate with experienced lawyers worldwide to deliver timely and cost-effective solutions, particularly regarding investment product selling restrictions and tax issues in overseas jurisdictions.
Issuance of debt instruments
When a company considers issuing debt or debt instruments such as notes and bonds, it may need to consider restrictions contained in the Banking Ordinance (Cap. 155 of the Laws of Hong Kong) (“BO”). Below are some key considerations:
Carrying on a business of taking deposits
Section 12 of the BO prohibits the carrying on in Hong Kong of a “business of taking deposits” other than by an authorised institution” (i.e. a bank, restricted licence bank or a registered deposit-taking company) where the definition of “deposit” includes a loan of money at interest. Breach of the provision is an offence.
The definition of deposit excludes the issue of debentures or other securities in respect of which a prospectus has been registered under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32). By implication therefore, the issue of debentures for which a prospectus is not registered, constitutes a deposit. There is little available guidance on what amounts to a business of taking deposits: according to the HKMA brochure on authorisation, whether or not a corporation is carrying on a business of taking deposits is generally a matter to be decided on the basis of the facts of each individual case, and “the term “business” will generally refer to activity of a systematic and repetitive nature. Section 12(8) of the BO specifies that if a person took deposits on at least 5 separate occasions within any period of 30 days, that person, shall in the absence of evidence to the contrary, be deemed to have been carrying on a business of taking deposits.
To avoid any question that an issuer is carrying on a business of taking deposits by reason of issues of notes or bonds, it may be possible to structure the issuance of notes through an offshore subsidiary and ensure that the subscription monies are paid offshore.
Prohibition on issue of advertisements relating to the taking of deposits
Section 92 BO prohibits the issue of advertisements/invitations or documents (“advertisements”) containing an invitation to the public to make a deposit or to enter into (or offer to enter into) an agreement to make a deposit.
Section 92(2)(b) BO exempts advertisements in respect of certain instruments where:
- the amount or denomination of the instrument is at least HK$1 million;
- the issuer is an “exempted body” – which includes any listed corporation and any wholly owned subsidiary of such a corporation, whether incorporated in Hong Kong or elsewhere; and
- the instruments are issued either by the listed corporation or its wholly owned subsidiary and the issuer of the notes has aggregate assets which exceed its aggregate liabilities by at least HK$100 million; or
- the instruments are issued by a wholly owned subsidiary of a listed corporation and guaranteed by the listed corporation whose aggregate assets exceed its aggregate liabilities by at least HK$100 million.
Note: the aggregate of a corporation’s assets and liabilities is calculated in accordance with generally accepted accounting principles.
An alternative to relying on the above exemption would be to structure offers of notes or notes as private placements. The HKMA however has not provided clear guidance as to the maximum number of invitations which could be made in respect of notes or bonds without there being considered to be an invitation “to the public”.
Charltons provides high impact advice on the regulatory implications of offering investment products in Hong Kong, including Hong Kong SFC fund authorisation, cross border investment and debt instruments.