April 2015
Practice Group:
Investment
Management,
Consumer Financial
Services, Hedge
Funds and Venture
Funds, BrokerDealers
Court of Final Appeal Makes Landmark
Ruling Clarifying Professional Investors
Exemption
Hong Kong Financial Services Alert
The Hong Kong Court of Final Appeal (Court of Final Appeal) made a landmark decision on
20 March 2015 in relation to advertisements for collective investment schemes (CISs),
upholding an appeal by Pacific Sun Advisors Limited (Pacific Sun) and its director Mr. Andrew
Pieter Mantel (Mr Mantel). It overturned a decision by the Hong Kong Court of First Instance
(Court of First Instance) on the interpretation of s.103(3)(k) of the Securities and Futures
Ordinance (Cap 571) (SFO).
According to the decision, the exemption under s. 103(3)(k) of the SFO in relation to
advertisements, invitations or documents for CISs that are or are intended to be provided only
to professional investors is available even if it cannot be seen from the advertisement itself
that the advertisement was, by its terms, confined to professional investors at the exclusion of
other members of the investing public.
Background
The facts described in the decision are as follows. Pacific Sun issued an email (the email) in
relation to the launch of the Pacific Sun Greater China Equities Fund (the Fund) to all
potential investors in Pacific Sun’s database, including brokers, auditors, accountants and
officers of the Securities and Futures Commission of Hong Kong (SFC).
The email announced the launch of the Fund and contained a press release to the same
effect. It specified that the recipient could contact Mr. Mantel directly and investor relations
personnel for additional information about the Fund. It contained disclaimer language, but
crucially, it did not contain any language specifying that subscription in the Fund was only
limited to professional investors.
The website of Pacific Sun contained a fact sheet and a PowerPoint presentation
(advertisement) containing a large amount of information about the Fund. The presentation
contained disclaimer language, but not any language specifying that subscription in the Fund
was only limited to professional investors.
An SFC officer called Pacific Sun to enquire about the Fund after reviewing the information in
the advertisement. He was not informed that the Fund was intended only for professional
investors but was told about the minimum amount of investment of US$100,000.
In his interview by the SFC, Mr. Mantel stated that the Fund only targeted professional
investors and that he would conduct background checks on the persons and entities in Pacific
Sun’s database to ensure that they were professional investors.
The Relevant Law
Section 103(1)(b) of the SFO provides that a person commits an offence if he issues, or has
in his possession for the purposes of issue, an advertisement, invitation or document which to
his knowledge contains an invitation to the public to “acquire any interest in or participating in,
or offering to acquire an interest in or participate in, a CIS", unless the issue is authorised by
the SFC.
Section 103(3)(k) of the SFO provides an exemption to section 103(1)(b) in respect of
advertisements, invitations or documents of CISs that are or intended to be disposed of (ie,
provided) only to professional investors (PI Exemption).
Charges against Pacific Sun and Mr. Mantel
As a result of the email and advertisement, criminal charges were laid against both Pacific
Sun and Mr. Mantel.
Pacific Sun was charged with:
 issuing the email, which to its knowledge, contained “an invitation to the public to acquire
an interest in or participate in or offer to acquire an interest in or participate in, a collective
investment scheme, namely, the Fund… when the issue was not authorised by the SFC”
 issuing the advertisement on Pacific Sun’s website which, to its knowledge, contained “an
invitation to the public to acquire an interest in or participate in or offer to acquire an
interest in or participate in, a collective investment scheme, namely, the Fund… when the
issue was not authorised by the SFC”.
Mr. Mantel was charged with an “aiding and abetting” offence in relation to the offences
committed by Pacific Sun above.
Decisions of the Magistrate Court and the Court of First
Instance
In the trial at the Magistrates’ Court, Pacific Sun and Mr. Mantel were acquitted of all four
Charges in relation to the advertisement. The Magistrate accepted the argument of Pacific
Sun and Mr. Mantel that since the Fund would only be offered to professional investors, and
Pacific Sun had implemented a relevant screening process, they have satisfied the PI
Exemption and therefore, the advertisement did not require authorisation by the SFC. The
SFC appealed to the Court of First Instance.
The Court of First Instance overturned the acquittals of Pacific Sun and Mr. Mantel, stating
that the PI Exemption would only be satisfied where an advertisement for a CIS contains
explicit language that states that the offer would only be limited to professional investors, as
this would be necessary for the SFC to exercise its duty to protect the investing public. It
considered the screening process implemented by Pacific Sun to ensure that only
professional investors may invest to be irrelevant. It remitted the case back to the Magistrates’
Court.
As a result, the original acquittal was set aside, and Pacific Sun and Mr. Mantel were
convicted by the Magistrate of all four charges.
Pacific Sun and Mr. Mantel appealed against their conviction. They also appealed to the
Court of Final Appeal in relation to the interpretation of the PI Exemption:
(1)
whether for the PI Exemption to be available, it must be seen from the advertisement,
invitation or document itself that it is, by its terms, confined to professional investors to
the exclusion of other members of the investing public
(2)
whether the carrying out of a screening process to ensure all investors investing in the
collective investment scheme are professional investors is irrelevant.
Court of Final Appeal Decision
In its reasoning, the Court of Final Appeal considered the natural and ordinary meaning, as
well as the purposive construction of the relevant provisions relating to the PI Exemption
under section 103(3)(k) of the SFO.
The Court of Final Appeal decided that according to the natural and ordinary meaning of
section 103(3)(k) of the SFO, the PI Exemption applies to the issue of advertisements made
in respect of “products intended to be disposed of only to professional investors”. The
qualification in relation to disposal only to professional investors applies to the CIS itself, and
not to the advertisement.
In construing the legislative intent of the PI Exemption in the SFO, the Court of Final Appeal
noted that in cases under the SFO where particular wording must be used for certain
documents, the SFO specifies the precise wording required and expressly states the fact that
the particular wording must be used.
Furthermore, the Court of Final Appeal noted that even if the advertisement was to generate
the interest of retail investors, Pacific Sun’s screening process would have ensured that the
Fund would only accept investments from professional investors. There would in fact be no
real harm that the SFO would need to protect retail investors from such advertisements.
Additionally, the Court of Final Appeal noted that the PI Exemption would be fully satisfied if
the CIS, which is subject matter of the advertisement, is only intended for professional
investors. Therefore, the purpose of investor protection would be achieved without the need
for express wording in the advertisement itself.
Accordingly, the Court of Final Appeal decided that the Court of First Instance erred in its
ruling and ruled that the PI Exemption still applies even if the issuer’s actual intention to offer
the interests in a CIS only to professional investors is not expressed in the advertisement,
invitation or document.
Significance
The Court of Final Appeal decision clarifies the PI Exemption in relation to advertisements for
CISs. It means that advertisements, invitations or documents of an unauthorised CIS could be
issued to the general public, so long as the issuer intends only to sell the unauthorised CIS to
professional investors. The key issue turns upon whether the CIS that is the subject matter of
the advertisement is intended to be made only professional investors.
It also means that the PI Exemption would have been satisfied if only subscriptions by
professional investors of the unauthorised CIS are accepted.
The SFC has indicated that it would review the judgment to determine whether any
amendments to section 103 of the SFO would need to be made. We will keep you informed of
any further updates on this issue.
Author
Michael P. Wong
michael.wong@klgates.com
+852.2230.3529
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