It is an offence under section 103(1) of the Securities and Futures Ordinance to issue advertisements, invitations or documents relating to investments in certain cases, subject to exemptions under section 103(3). The exemption under section 103(3)(k) provides that sub-section (1) does not apply to any advertisement, invitation or document made in respect of securities or structured products, or interests in any collective investment scheme, that are or are intended to be disposed of only to professional investors.

The Court of Final Appeal (“CFA”) in Securities and Futures Commission v. Pacific Sun Advisors Ltd and Mantel, Andrew Pieter recently decided that for the exemption under section 103(3)(k) to apply, the burden is on the issuer of the advertisement to demonstrate that the investment product is or is intended for disposal only to professional investors.  There is no need for the advertisement, invitation or document itself to contain a reference to the fact that the securities or structured products or interests in any collective investment scheme being advertised or promoted are or are intended to be disposed of only to professional investors.   

Securities and Futures Commission (“SFC”) v. Pacific Sun Advisors Ltd and Mantel, Andrew Pieter

Background

The 2nd Appellant was the Chief Executive Officer of the 1st Appellant.  The 1st Appellant announced the launch of a fund, which was a collective investment scheme, through an email prepared by the 2nd Appellant, and also published on its website three documents relating to the fund, without the SFC’s authorization. 

The Magistrate found that the fund was or was intended to be available solely to professional investors, and this fact was not expressly stated in the advertisements. The Magistrate acquitted the Appellants as he found that the advertisement did not contain an invitation to the public to invest in the fund in view of the disclaimers and subsequent screening procedures adopted by the 1st Appellant to ensure that the fund was available to professional investors only.  Further, he found that the exemption in section 103(3)(k) applied.

On appeal by the SFC, the Judge held that it was necessary for it to be seen from the advertisement itself whether it was, by its terms, confined to professional investors to the exclusion of other members of the investing public. The matter was remitted back to the Magistrate. The appellants were convicted.  The 1st Appellant was fined $20,000 and the 2nd Appellant was sentenced to four weeks’ imprisonment, suspended for 12 months.

The issue before the CFA was whether for the exemption under section 103(3)(k) to apply, 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.

Analysis

The CFA found that the substance of the exemption under section 103(3)(k) is provided by the concept of disposal only to professional investors.  On a proper construction of the section, it is not necessary to state the fact that the securities or structured products, or interests in any collective investment scheme are or are intended to be disposed of only to professional investors.  The purpose of section 103(1) is to regulate the issue of advertisements containing an invitation to the public to acquire certain investments by subjecting it to the SFC’s authority to authorise the issue of such advertisements.  The exemption is available since professional investors, as opposed to the general investing public, do not require statutory protection under section 103(1) so that advertisements of products intended only for them are exempted from the prohibition.  Even if the general investing public wrongly think the fund is intended for them, once enquiries are made and a retail investor is informed that the fund was not intended for disposal to him, there would be no interest of the retail investor for the statutory regime to protect.

In addition, the burden is on the issuer of the advertisement to establish that the investment product is intended only for professional investors.  If the product has already been disposed of to a retail investor, or if the issuer is unable to establish that the product is intended to be disposed of only to professional investors, the offence will have been committed at the time of the issue of the advertisement.

The appeal was allowed.

Implications

In view of the serious criminal consequences, when issuing advertisements in respect of investment products which are or are intended for disposal of only to professional investors without the SFC’s authorization (i.e. relying on the exemption under section 103(3)(k)), it is important for issuers to impose sufficient safeguards to ensure that (1) the products are only disposed of to professional investors; and (2) in case of an SFC enquiry, such an intention can be demonstrated.

The CFA noted that the presence of express wording in the advertisement might go towards satisfying the burden of establishing that the exemption applies.  Hence, it is advisable for issuers to include such wording in the advertisements to make the intention clear so as to reduce any risk of prosecution by the SFC based on section 103 of the SFO.