Issuing advertisements, invitations or documents relating to investments
Activities concerning the marketing and promotion of financial products and services are regulated under the Securities and Futures Ordinance (Cap 571) (SFO) and relevant legislations. This Practice Note looks into the issue of advertisements.
Section 103 of the SFO – Prohibition to issue documents relating to investment without the SFC’s authorization
As defined under s102(1) of the SFO, an “advertisement” includes every form of advertising, whether made orally or produced mechanically, electronically, magnetically, optically, manually or by any other means.
SFO, s 103(1) prohibits a person from issuing, or has in his possession for the purposes of issuing, an advertisement, invitation or document which to his knowledge is or contains an invitation to the public to:
a) to enter into or offer to enter into:
i) an agreement to acquire, dispose of, subscribe for or underwrite securities; or
ii) a regulated investment agreement or an agreement to acquire, dispose of, subscribe for or underwrite any other structured product; or
b) to acquire an interest in or participate in, or offer to acquire an interest in or participate in, a collective investment scheme,
unless the issue is authorised by the SFC under SFO, s 105(1).
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.
A “collective investment scheme” is a term introduced under and defined in Schedule 1 to the SFO to apply to investment products of a collective nature. It embraces and modernizes the concepts of “unit trust”, “mutual fund corporation” and “investment arrangements”, as defined in the now repealed Securities Ordinance and the Protection of Investors Ordinance. To provide flexibility to address changing market conditions and development of new investment products, the Financial Secretary is empowered under the SFO to prescribe by notice in the Gazette that certain products are, or are not, to be regarded as a collective investment scheme.
SFO, s103(10) also contains deeming provisions:
a) an advertisement, invitation or document which consists of or contains information likely to lead, directly or indirectly, to the doing of any act referred to in s103(1)(a) or (b) shall be regarded as an advertisement, invitation or document (as the case may be) which is or contains an invitation to do such act;
b) an advertisement, invitation or document which is or contains an invitation directed at, or the contents of which are likely to be accessed or read (whether concurrently or otherwise) by, the public shall be regarded as an advertisement, invitation or document (as the case may be) which is or contains an invitation to the public.
A person who fails to comply with the above commits a criminal offence and is liable on conviction on indictment to a fine of HK$500,000 and imprisonment of three years, whereas on summary conviction, a fine at level 6 and imprisonment for 6 months and a further fine of $10,000 for every day during which the offence continues.
Section 103(1) will not apply if an exception under SFO, ss 103(2) and (3) applies. The detailed exceptions cover, amongst other things, an advertisement made by or on behalf of an intermediary licensed or registered for certain activities.
Another example of an exemption is where the issue of the advertisement is made only towards ‘professional investors’ as defined in SFO, Sch 1. To rely on the ‘professional investor exemption’, the Court of Final Appeal has held that the burden is on the issuer to demonstrate that the product is or is intended for disposal only to professional investors. However, it is not necessary that the issue or advertisement itself contain reference to the fact.
Reference: Securities and Futures Commission v Pacific Sun Advisors Ltd, & ANOR  HKCU 1991
A further example of an exemption is the issuing of a prospectus which complies with or is exempted from compliance with Part II of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) (C(WUMP)O) (or Part XII in the case of an overseas company) or a publication falling within the section 38B(2) of C(WUMP)O.
Prospectus regime under C(WUMP)O
On the other hand, the issue of documents to public relating to the offer of shares, depositary receipts, plain vanilla debentures, without any derivative element (i.e., not structured products, which is governed by the SFO instead), is governed by the C(WUMP)O. The prospectus regime under the C(WUMP)O imposes certain requirements, which include, inter alia, that the offer document, namely a prospectus, must be in both English and Chinese, specifying matters contained in C (WUMP)O, sch 3. A person who is knowingly a party to the issue of a prospectus which does not comply with the relevant disclosure and registration requirements shall be liable to a fine pursuant to C (WUMP)O, s 38.
Nonetheless, under C(WUMP)O, certain exemptions, or generally known as ‘safe harbours‘, are available to which the offer of investments does not have to comply with the abovementioned prospectus requirements. These exemptions are set out in C(WUMP)O, sch 17 which include an offer:
- to not more than 50 persons
- with a minimum denomination of HK$500,000
- with a maximum size of HK$5 million, or
- to professional investors (as defined in the SFO)
It is necessary to insert a warning statement into the offer document in the form prescribed in C(WUMP)O, sch 18, should an exemption be used.
ORIGINALLY PUBLISHED ON LEXISNEXIS