Private Placement and Distribution of Investments
As an international financial centre, Hong Kong has a robust array of choices for raising capital.
Private placements and Exempt or Registered distribution methods are used in Hong Kong to substantial effect, particularly when accessing family investment groups or ultra- high net worth investors. For clients looking to expand distribution of an existing investment fund a number of different distribution routes are available. Retail distribution requires registration in one form or another. Distribution channels include banks, private banks, securities dealers and insurance products packaged with investment platforms.
Structured products issuers, distributors, private bankers and industry associations in Hong Kong are used to relying on the channel of private or exempt placement to distribute their unlisted structured products.
Particularly for smaller or medium size enterprises, when planning to raise capital in the Hong Kong market, it is essential that careful consideration be paid to the type, size and distribution methods which will make up the offering.
The Private Company Exemption
The first of these exemptions is the distribution of debt or equity of Private Issuers. Section 29 of the Hong Kong Companies Ordinance (Cap 29) defines private companies as companies with up to 50 shareholders, not including employees or former employees, and whose articles restrict the transfer of shares.
The shares and debt issued by such companies are exempt from the definition of “securities” under the Securities and Futures Ordinance (Cap 571) (the SFO) Schedule 1. As a result, an offering of these investments is not an offering of securities and such a distribution cannot be considered a public offering.
Distribution of Investments through Investment funds, Investment-Linked Assurance Schemes (ILAS) and Collective Investment Schemes (CIS)
Under the SFO a Collective Investment Scheme is defined as any investment where the assets of the investors are pooled and the investment decisions are made by a manager or insurance company. This category covers insurance products, funds regulated under the Mandatory Provident Fund Ordinance, and other investments. Certain investments in this category are not necessarily considered Securities.
Insurance products are not defined as Securities under the SFO. An investment sold through the insurance regime would be classed as an ILAS. As an insurance product it must be distributed through licensed Insurance Agents or Brokers regulated under the Insurance
Companies Ordinance (ICO).
Despite being an insurance product the SFO requires registration of the product with the Securities and Futures Commission (SFC). The registration regime includes approval of the offering documentation and marketing materials of the ILAS and arranging a local sponsor.
Distributing Funds in Hong Kong
ILAS products are offered by insurance companies; some types of ILAS Structures, such as Private Portfolio Bonds (PPBs), carry underlying investment funds. Many international funds are sold in Hong Kong under the PPB trading platforms by insurance Brokers or Agents. Indeed the Financial Planning industry in Hong Kong is dominated by insurance providers offering PPB products in addition to traditional insurance products. If the proposed fund or investment is a fit with the requirements of any of the insurance company PPB platform providers, registering as an ILAS Product with the SFC and gaining access to these platforms for distribution may be worth considering.
Real Estate Products
With Real Estate Syndications, Limited Partnerships (LPs) or REIT’s, their direct investments may or may not be Securities under the SFO. Regardless of whether the investment is a Security or not, if the investment decisions are made by a Manager, Trustee or General Partner, such an investment would be defined as a CIS under the SFO/SFC regime. It would be regulated in a similar fashion to ILAs as it affects registration and regulation of documents and marketing materials.
Structured Products Derivatives and Funds offered other than through insurance
Regardless of whether the underlying investments of a CIS are Securities, and regardless of which regulator regulates the marketing or distribution of the product, the structure of the product defines whether it is a Collective Investment Scheme or ILAS. If you are planning to bring a new fund concept or family of funds to Hong Kong, a primary consideration is which of the distribution channels will best fit the target market of the product you wish to introduce. From there the registration requirements can be determined and appropriate representation and distribution can be selected.
What is private placement?
“A private placement is the placement of Securities under an exemption to the prospectus rules for the distribution of Securities”.
There presently is no statutory provision offering a precise definition of private placement in Hong Kong. As a result, the definition of private placement can only be inferred in the context of what will not be considered as an “offer to the public”.
Section 48A of the Hong Kong Companies Ordinance (“CO”) provides that an offer or an invitation is not required to be treated as being made to the public if “it can properly be regarded, in all the circumstances, as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation, or otherwise as being a domestic concern of the persons making and receiving it”.
This is the only current statutory guide as to what will not constitute an offer to the public. The term “public” is defined in the Securities and Futures Ordinance (“SFO”) as meaning “the public of Hong Kong, and includes any class of that public”. Due to the lack of case law and legislation on private placements, a body of market practice has developed to govern private placements which include:
- The offer in Hong Kong should be made to a limited number of offerees and, as a rule of thumb, 50 is taken as the maximum number of persons to whom the offer may be made.
- Each offer document to be issued should be serially numbered and state clearly that it is not an offer to the public.
- Each offer document should be individually addressed to a specific offeree and only that offeree should be capable of accepting the offer and taking up the securities.
- The offer document should contain appropriate wording indicating the restricted nature of the offering and should expressly note that the offer document should not be passed to any other person.
- The minimum number of securities to be acquired should be sufficiently high to make it clear that the offer is intended only for investors of substantial means.
- There must be no advertising, press release or press conference relating to the proposed offering or the offer document in Hong Kong.
Private placement vs. Public offering
Any prospectus, notice, circular, brochure, advertisement, or other document which invites offers to subscribe for Securities in Hong Kong including a company incorporated outside Hong Kong, whether or not they have established a place of business in Hong Kong, it is required to comply with the content and registration requirements of the CO.
In parallel with the prospectus requirements under the CO, the SFO stipulates that issuing – whether in Hong Kong or elsewhere – an advertisement, invitation or document which contains invitations or offers to distribute.
Securities to the public are prohibited unless it has been authorized by the Securities and Futures Commission of Hong Kong (“SFC”).
The costs of compliance with these statutory requirements, as laid down in the prospectus regime of the CO and the authorization regime of the SFO, inevitably constitute an onerous burden on companies planning to raise capital from the public.
This is especially true for small and medium enterprises, which may lack the financial resources or reputation to attract a broad base of investors. A private placement of Securities can be considered an attractive capital investment tool to raise capital not from the public, but directly from professional investors or a small group of people with a lower cost on compliance issues.
There are presently twelve types of offers of shares and debentures (commonly known as “safe harbours”) which are exempt from the prospectus requirements of the CO and the authorization requirements of the SFO.
Among these, four types of safe harbours have been commonly relied on to facilitate private placement in Hong Kong:
(i) An offer to Professional Investors
The Professional Investor exemption closely tracks the Accredited Investor Rules in the United States and Canada.
“Professional Investor” is defined in the SFO and the Securities and Futures (Professional Investors) Rules and includes:
- a trust corporation having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40,000,000;
- any individual, either alone or with any of his associates on joint account, having an investment portfolio of not less than HK$8,000,000;
- any corporation or partnership having a portfolio or not less than HK$8,000,000 or total assets of not less than HK$40,000,000; and
- any corporation whose sole business is to hold investments and which is wholly owned by an individual who, either alone or with any of his associates on a joint account, has an investment portfolio of not less than HK$8,000,000.
(ii) An offer to not more than 50 persons
The SFC has taken, as a rule of thumb, 50 as the maximum number of persons who may be approached without the offer being treated as made to the public.
(iii) An offer in respect of which the total consideration payable for the shares or debentures concerned shall not exceed the amount of HK$5,000,000.
(iv) An offer in respect of which the minimum denomination of, or the minimum consideration payable by any person for the shares or, in the case of debentures, the minimum principal amount to be subscribed or purchased, is not less than HK$500,000. *All offer documents must contain an appropriate warning in the form stipulated by the CO.
Private placement provides an alternative avenue to raise capital from a limited number of investors in a quicker and less expensive way.
Distribution of Securities or other Investments.
Once the type of offering to raise capital in Hong Kong has been determined based on the structure of your organization, the stage of development of your business and the amount and type of capital you need, decisions can be taken as to which route is the most appropriate.
Your program may be executable by direct sales to selected parties – through a private placement or by distribution via licensed securities Dealers and Brokers, Private Banks and Investment Bankers or Insurance Carriers and Brokers.
Asia Pacific Investment Advisors Limited (APIA) offers clients a cost-effective means for companies, especially small and medium enterprises, to determine the most cost-effective route to raise capital without running afoul of local regulation. Advising on Securities and Corporate Finance, Asia Pacific Investment Advisors Limited is well placed to advise you as to the structure, size and type of investments to offer in this market and to help you tailor and execute your distribution program. APIA is ideally suited to provide cost-effective advice, planning and execution of a program in Hong Kong.
6/F, Wings Building, 110 Queen’s Road Central, Central, Hong Kong
Phone: (852) 2526 1767 Fax: (852) 2868 3568 Website: apiahk.com
*Hong Kong Securities & Futures Commission Registered
*Member of Professional Insurance Brokers Association