An offering of securities in Hong Kong generally requires registration with the Hong Kong Companies Registry and a prospectus that satisfies the requirements of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (CWUMPO), unless one or more exemptions are available. This Note provides an overview of securities offerings that are exempt from the prospectus registration requirement.
Overview of regulatory structure
In Hong Kong, for public offerings, offering documents must contain prescribed information and be authorized by the Securities and Futures Commission (SFC) unless an exemption applies.
Under the existing legislation, the requirements for authorization of offering documentation governing the public offering of shares and debentures are set out in the CWUMPO (CWUMPO Prospectus Regime). While the authorization requirements governing the offering documentation of structured products and collective investment schemes are set out in the Securities and Futures Ordinance (Cap 571) (SFO) (Offers of Investments Regime).
Under both the CWUMPO Prospectus Regime and the Offers of Investments Regime, an exemption is available to offers made to professional investors (see Professional investors exemption). There are other exemptions under the CWUMPO Prospectus Regime (see Key prospectus registration exemptions).
There is no statutory definition of private placement in Hong Kong. Generally, offerings that are exempted from the CWUMPO Prospectus Regime and do not require authorization by the SFC are referred to as private placements. The extent and quality of information disclosed in marketing documentation in private placement is not subject to regulatory standards which are equivalent to a public offering.
Prospectus registration requirements
Generally, under the CWUMPO, subject to certain exemptions, a prospectus is required where there is either:
- An offering of any shares in or debentures of a company (including a company incorporated outside Hong Kong, and whether or not it has established a place of business in Hong Kong) to the public of Hong Kong for subscription or purchase for cash or other consideration.
- Calculation to invite offers by the public to subscribe for or purchase, for cash or other consideration, any shares in or debentures of a company (including a company incorporated outside Hong Kong, and whether or not it has established a place of business in Hong Kong).
The reference to “offer to the public” is construed as including a reference to offering them to “any section of the public, whether selected as members or debenture holders of the company concerned or as clients of the person issuing the prospectus or in any other manner” (section 48A(1), CWUMPO). References to “invitation to the public” are interpreted in a similar manner.
A prospectus includes any prospectus, notice, circular, brochure, advertisement, or other document.
Under section 38 of the CWUMPO, a company must not issue any form of application for shares in or debentures of the company unless the form is issued with a prospectus. This requirement is imposed for offers made to the public only.
Every prospectus issued by or on behalf of a company must:
- Be in English and contain a Chinese translation or be in Chinese and contain an English translation.
- State the matters set out in Part I of the Third Schedule to the CWUMPO.
- Set out the reports specified in Part II of the Third Schedule to the CWUMPO.
- Contain the following statement specified in Part 1 of the Eighteenth Schedule to the CWUMPO:
"IMPORTANT - If you are in doubt about any of the contents of this prospectus, you should obtain independent professional advice.”
If any prospectus is issued which does not comply with or contravenes the above requirements, the company and every person who is knowingly a party to that issue is liable to a fine (section 38, CWUMPO).
Before a prospectus is issued, the SFC must have authorized its registration and a copy of it must have been registered by the Companies Registry. An application for authorization for registration of a prospectus must be made in writing to the SFC and having endorsed on it or attached to it certain documents specified in the CWUMPO. The SFC may authorize the registration by the Companies Registry or refuse to authorize that registration (section 38D, CWUMPO).
Where an application for shares in a company or for a debenture of the company is issued without a prospectus that complies with the requirements of section 38 of the CWUMPO, any person who acts in contravention of these requirements will be liable to a level 6 fine (currently HKD100,000), punishable summarily.
Key prospectus registration exemptions
The definition of prospectus specifically excludes 12 categories of offers specified in Part 1 of Schedule 17 to the CWUMPO. These 12 categories of offers, which are commonly referred to as safe harbours, are excluded from the CWUMPO Prospectus Regime and they do not need to comply with any of the provisions of the CWUMPO governing prospectuses.
Amongst the 12 types of safe harbours, the most common types of safe harbours are:
- Professional investors exemption.
- Offer to not more than 50 persons exemption.
- Total consideration exemption.
- Minimum consideration exemption.
- Qualifying persons exemption.
For a discussion of the less common safe harbours, see Other exemptions.
The CWUMPO also empowers the SFC to issue a certificate of exemption from certain prospectus requirements under the CWUMPO. Companies proposing to offer shares or debentures may apply to the SFC for an exemption. The basis for this exemption must be that the SFC considers that both:
- The exemption will not prejudice the interest of the investing public.
- Compliance with any or all of these requirements would be irrelevant or unduly burdensome or is otherwise unnecessary or inappropriate.
(Section 38A, CWUMPO.)
This exemption may be issued subject to certain conditions, as the SFC thinks fit, and notice of the exemption must be published in the Hong Kong Special Administrative Region Gazette.
The SFC can also, on its own initiative, on the same grounds, grant exemptions from compliance with the relevant prospectus requirements. Using this power, the SFC has published the Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice (Cap 32L), which contains exemptions relating to:
- Bilingual prospectus requirements.
- Certain contents requirements of prospectuses for GEM companies.
- Valuation reports.
- Certain contents requirements with respect to debentures.
- Requirements for hardcopy prospectuses to accompany application forms.
(Sections 4, 5, 6, 8, 9 and 9A, Companies (Exemption of Companies and Prospectuses from Compliance with Provisions) Notice.)
Professional Investors Exemption
An offering document for an offer to professional investors is excluded from the definition of prospectus under the CWUMPO and therefore this offering is not subject to the CWUMPO Prospectus Regime (section 1, Part 1, Schedule 17, CWUMPO) (Professional Investors Exemption).
The term professional investor is defined in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance (Cap 571) (SFO) and the Securities and Futures (Professional Investor) Rules (Cap 571D) (Professional Investor Rules).
Professional investors can be broadly categorised as:
- Institutional professional investors (such as licensed corporations, banks, and insurance companies).
- Individual professional investors.
- Corporate professional investors.
Institutional professional investors include entities such as:
- Intermediaries (corporations licensed or registered under the SFO to conduct any regulated activity), or any other person carrying on the business of providing investment services which is regulated under the law of any place outside Hong Kong.
- Authorized financial institutions (banks, restricted license banks, or deposit taking companies authorized under the Banking Ordinance (Cap 155)), or a bank which is not an authorized financial institution but is regulated under the law of any place outside Hong Kong.
- Insurers authorized under the Insurance Ordinance (Cap 41), or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong.
- A government (other than a municipal government authority), any institution which performs the functions of a central bank, or a multilateral agency.
Institutional professional investors are considered to be financially sophisticated.
Professional investors also include entities or individuals who may or may not be financially sophisticated, but which meet minimum monetary portfolio or asset thresholds specified under the Professional Investor Rules. These include:
- Any individual who (either alone, with their spouse or child on a joint account, or their share of a portfolio on a joint account with any one or more persons other than their spouse or child) has a portfolio of not less than HKD8 million (individual professional investors).
- Any trust corporation having been entrusted with total assets of not less than HKD40 million;
- Any corporation or partnership having:
- A portfolio of not less than HKD8 million; or
- Total assets of not less than HKD40 million.
- Any corporation which has as its principal business the holding of investments and is wholly owned by any one or more of the entities or individuals in the three bullets above.
The entities above (not including individual investors in the first bullet) are collectively referred to as corporate professional investors.
In 2013, the SFC published a consultation paper on certain proposals concerning the professional investor regime. In September 2014, the SFC published the consultation conclusions and concluded that:
- Individual professional investors and corporate professional investors should continue to be allowed to participate in private placement activities.
- The minimum monetary thresholds for them to qualify as a professional investor under the Professional Investor Rules should also remain unchanged.
The SFC believes that the private placement regime in Hong Kong is well established, and that it is comparable to other overseas jurisdictions.
Offer to not more than 50 persons exemption
An offering document for an offer made to not more than 50 persons in Hong Kong is excluded from the definition of prospectus under the CWUMPO and therefore from the CWUMPO Prospectus Regime, provided that the offer document contains a statement in a prominent position, specified in Part 3 of Schedule 18 to the CWUMPO (Specified Warning Statement), which is in the following form:
"WARNING - The contents of this document 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.”
(Section 2, Part 1, Schedule 17, CWUMPO).
To determine whether the 50-person limit has been exceeded, an offer is taken together with any other offers of the same class of shares or debentures made by the same company which were open at any time within the preceding 12 months, provided that the document issued in respect of those was not a prospectus by virtue of the same exemption (section 3, Part 4, Schedule 17, CWUMPO).
For the purpose of this exemption, the following are treated as making an offer to a single person:
- Making an offer of shares or debentures to trustees or members of a partnership or unincorporated association acting in that capacity.
- Making an offer of shares or debentures to any other two or more persons jointly.
(Section 4, Part 4, Schedule 17, CWUMPO.)
Total consideration exemption
An offering document for an offer in respect of which the total consideration payable for the shares or debentures concerned does not exceed HKD5 million (or its foreign currency equivalent) is exempt from the CWUMPO Prospectus Regime, provided that the offer document contains the Specified Warning Statement in a prominent position (section 3, Part 1, Schedule 17, CWUMPO) (total consideration exemption).
In determining whether the HKD5 million limit has been exceeded, an offer is taken together with any other offers of the same class of shares or debentures made by the same company, which were open at any time within the preceding 12 months, and the document issued in respect of which was not a prospectus by virtue of the same exemption (section 3, Part 4, Schedule 17, CWUMPO).
Minimum consideration exemption
An offering document is also exempt from the CWUMPO Prospectus Regime if both:
- The offer has a 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 HKD500,000 (or its foreign currency equivalent).
- The offer document contains the Specified Warning Statement in a prominent position.
(Section 4, Part 1, Schedule 17, CWUMPO).
Qualifying persons exemption
An offering document for an offer of shares in or debentures of a company to persons who are qualifying persons of that company, or of another company which is a member of the same group of companies, is excluded from the definition of prospectus under the CWUMPO and therefore is not subject to the CWUMPO Prospectus Regime (section 8, Part 1, Schedule 17, CWUMPO).
Qualifying persons, in relation to a company means:
- Current or former directors, employees, officers, and consultants of the company and the dependents of those persons.
- Trustees of a trust established by the company or any group company which can hold shares or debentures on behalf of any person referred to in the previous point.
Dependent means the wife, husband, widow, or widower of the person, or any child or stepchild under the age of 18 years of the person.
To rely on the qualifying persons exemption:
- The offer must only allow qualifying persons to whom the shares or debentures are offered to acquire the shares or debentures, or if the terms of the offer so permit, any qualifying persons.
- The offering document must contain the Specified Warning Statement in a prominent position.
Offer to persons outside Hong Kong
References in the safe harbours to an offer do not include the offer to the extent that it is made to persons who are outside Hong Kong (section 1(b), Part 4, Schedule 17, CWUMPO).
Therefore, for example:
- For the offer to not more than 50 persons exemption, when determining whether the number of offerees is within the 50 persons limit, it is only necessary to count the number of offerees in Hong Kong.
- For the total consideration exemption, when determining whether the total consideration payable is within the HKD5 million limit, it is only necessary to count the total consideration payable for the shares or debentures that are offered to persons in Hong Kong.
Other prospectus registration exemptions
The other seven types of offers which are safe harbours under Part 1 of Schedule 17 to the C(WUMP)OCWUMPO and allow offering documents not subject to the CWUMPO Prospectus Regime are:
- An offer in connection with an invitation made in good faith to enter into an underwriting agreement (section 5, Part 1, Schedule 17, CWUMPO).
- An offer in connection with a takeover or merger or a share buy-back which is in compliance with the Codes on Takeovers and Mergers and Share Buy-backs issued by the SFC (section 6, Part 1, Schedule 17, CWUMPO).
- An offer of shares in a company made:
- For no consideration to holders of shares in the company; or
- As an alternative to a dividend or other distributions, to all holders of shares of a particular class in the company, provided that the offer is of fully paid-up shares of the same class.
- In either case, the offering document must contain the Specified Warning Statement in a prominent position (section 7, Part 1, Schedule 17, CWUMPO).
- An offer by a charitable institution or trust mentioned in the Inland Revenue Ordinance (Cap 112) or an education establishment within the meaning of the Sex Discrimination Ordinance (Cap 480) where the proceeds of the offer will be applied towards the objectives of the charitable institution or trust, or educational establishment. In this case, the offering document must contain the Specified Warning Statement in a prominent position (section 9, Part 1, Schedule 17, CWUMPO).
- An offer to members, or applicants for members, of a club or association. In this case, the offering document must contain the Specified Warning Statement in a prominent position (section 10, Part 1, Schedule 17, CWUMPO).
- An offer in respect of an exchange of shares in the same company which does not result in an increase in the issued share capital of the company; or an exchange of debentures of the same company which does not result in an increase in the aggregate principal amount outstanding under the debentures. In this case, the offering document must contain the Specified Warning Statement in a prominent position (section 11, Part 1, Schedule 17 to CWUMPO).
- An offer in connection with a collective investment scheme authorized under the SFO, and in connection with which the issue of each advertisement, invitation, or document has been authorized under the SFO (section 12, Part 1, Schedule 17, CWUMPO).
A prospectus is also not required for offers in relation to the following:
- Rights issues. Section 38 of the CWUMPO does not apply to issue to existing members or debenture holders of a company of a prospectus or form of application relating to shares in or debentures of the company (section 38(5)(a), CWUMPO).
- Existing listed shares or debentures. Section 38 of the CWUMPO does not apply to a prospectus or an application form relating to shares or debentures which are uniform with shares or debentures previously issued and for the time being listed on the Hong Kong Stock Exchange (section 38(5)(b), CWUMPO).
- Structured products. The prospectus requirements do not apply to offers of any shares or debentures which are structured products (section 38AA, CWUMPO). They are regulated under the Offers of Investments Regime in the SFO.
SFO regime
Apart from the CWUMPO, the SFO also stipulates that issuing or possessing for the purposes of issue, whether in Hong Kong or elsewhere, an advertisement, invitation, or document which contains invitations to the public to acquire securities of a company is prohibited, unless it has been authorized by the SFC (section 103, SFO). Under the SFO, advertisement includes every form of advertising, whether made orally or produced mechanically, electronically, magnetically, optically, manually or by any other means (section 102, SFO). Any invitation to the public that is related to an offer within the safe harbours of Schedule 17 to the CWUMPO is exempt from the prohibition on unauthorized investment advertisements (section 103(2)(ga), SFO).
Exemptions used in equity offerings
Private placements enable companies, in particular small and medium-sized enterprises, to raise capital. Unless a company is intending to apply for a listing of its shares on the Hong Kong Stock Exchange, it will typically prefer to conduct a private placement rather than a public offering as there will be less time, expenses, and professional fees involved. A private placement also enables the company to specifically target investors who have the relevant knowledge and experience in the business sectors in which the company operates.
There are three main types of placings of shares of listed companies in Hong Kong:
- Placing of new shares.
- Placing of existing shares, usually known as a block trade.
- Placing and top-up subscription, usually known as top-up placing, where there is a placing of existing shares by a shareholder to investors followed by a top-up subscription by the shareholder for new shares of the company. The primary advantage of a top-up placing is that it can achieve a T+2 closing for the placing tranche (investors will receive the shares two business days after signing of the placing agreement), whereas a placing of new shares typically requires a T+5 closing (investors will receive the shares five business days after the placing agreement is signed).
For issuance of new shares, a listed company may obtain a general mandate from its shareholders in an annual general meeting to issue up to 20% of the company’s total issued share capital. The company may also seek a specific mandate to issue a specific amount of share capital for a particular placing.
In Hong Kong, the most common exemptions used in placings are the Professional Investors Exemption and the offer to not more than 50 persons exemption. (See Professional investors exemption and Offer to not more than 50 persons exemption.)
To ensure that the offering falls within the exemptions and is regarded as a private placement rather than an offer to the public, in practice, the parties will usually:
- Restrict the offer in Hong Kong to a limited number (usually 50 maximum), as the fewer offerees involved, the less likelihood there is of the offer being regarded as an offer to the public.
- Address each of the offer documents to a specific offeree, allocating to it a serial number, and clearly stating that the document should not be passed to any other person.
- Insert appropriate warnings and wordings in the offer document to indicate the restricted nature of the offering, and that it is not an offer to the public.
Placing agents will typically conduct know-your-client (KYC) procedures and require investors to confirm and represent, through a representation letter or so called “big boy letter”, that they fall within one of the categories of professional investor.
In some cases, placing agents may get the benefit of obtaining a closing legal opinion from the company’s legal counsel or its Hong Kong legal counsel, which confirms, among other things, that no consents, approvals, registrations, and authorizations which are required under Hong Kong law in connection with the placing, has not been obtained. It is more common for placing agents to require closing opinions for placings of new shares than for placings of existing shares. The placing agents may also obtain a US “no registration” legal opinion which confirms that no registration of the shares under the US Securities Act of 1933 is required for the placing.
Exemptions used in debt offerings
In Hong Kong, companies may raise funds by issuing debt securities (for example, bonds or notes) that are listed on the Hong Kong Stock Exchange. They can be offered to retail investors in a public offering, or offered to professional investors only.
Debt securities which are offered to retail investors in a public offering are governed by Chapter 22 to Chapter 36 of the Main Board Listing Rules.
Debt securities which are offered to professional investors only are subject to lighter regulations and are regulated under Chapter 37 of the Main Board Listing Rules. Debt securities offered to professional investors only are exempted from the CWUMPO Prospectus Regime. Although an issuer is not required to prepare a prospectus pursuant to the CWUMPO disclosure requirements, the listing document must contain the information that professional investors would customarily expect to be included (Rule 37.29, Main Board Listing Rules). Chapter 37 of the Main Board Listing Rules also lists certain information that must be disclosed in listing documents, including:
- Standard disclaimer.
- Responsibility statement to be made by the company.
- Statement limiting the listing documents’ distribution to professional investors only.
(Rules 37.27, 37.28 and 37.31, Main Board Listing Rules.)
Since Chapter 37 debt securities listings require a shorter timeframe for the issuer to obtain listing approval and a simplified disclosure requirement, many issuers prefer to offer debt offerings to pre-selected professional investors only instead of conducting a public offering.
