On 10 June 2014, the Tsuen Wan Magistrates Court convicted Pacific Sun Advisors Limited (Pacific Sun) and its CEO and responsible officer Andrew Mantel (Mantel) on four counts of the advertisement of a collective investment scheme without authorisation by the Securities and Futures Commission (SFC). Both Pacific Sun and Mantel are licensed by the SFC to conduct Type 4 (advising on securities) and Type 9 (asset management) regulated activities. The conviction makes it clear that the exemption applying to sales limited to professional investors only applies where the advertisement states on its face that the terms of the offer are so limited to professional investors.
The conviction was made after a successful appeal by the SFC in the Court of First Instance (CFI) against an acquittal of the two respondents in the Magistrates Court. The SFC charged Pacific Sun under s. 103(1)(b) and 4(b) of the Securities and Futures Ordinance (SFO) on the issuance of an advertisement regarding the launch of a "Pacific Sun Greater China Equities Fund," both by way of email and through materials placed on Pacific Sun's website. The SFC asserted that the advertisements contained an invitation to the public to acquire an interest or participate in a collective investment scheme without the SFC's authorisation. Mantel was charged under s. 390 of the SFO with aiding and abetting the commission of Pacific Sun's offence through his consent or connivance, or attributable to his recklessness.
In defence, counsel for the respondents contended that the interests in the collective investment scheme were never intended to be offered to the general public, but rather fell within the exemption in s. 103(3)(k) of the SFO which excludes advertisements or documents only intended for professional investors. It was argued that the email on its own did not contain enough information to constitute an invitation, while the materials on the website included a disclaimer excluding such an offer. The defence further submitted that Pacific Sun intended for investment in the fund to be available only to professional investors, with Mantel conducting background checks on interested potential investors to ascertain their status as professional investors before their investment.
The CFI in setting aside the acquittal found that an advertisement which contains information likely to lead, even if indirectly, to members of the public acquiring an interest or participating in a collective investment scheme, would fall under s. 103(1)(b). The inclusion of the screening process by Mantel merely affirms that the advertisements would result in offers to acquire interests from non-professional investors. The CFI concluded that the initial ruling had placed undue weight on the disclaimers contained in the advertisements. The CFI further considered that the SFC, in order to be able to exercise its duty to protect the investing public, has to be able to see from the advertisement, invitation or document itself whether it is, by its terms, confined to professional investors to the exclusion of other members of the investing public. S. 103(3)(k) is concerned with the advertisement, invitation or document itself and not with what may or may not be the arrangement or intended arrangement behind it. Pacific Sun was fined $20,000 and Mantel was sentenced to four weeks’ imprisonment suspended for 12 months after the case was returned to the Magistrates Court for reconsideration.
In this particular case, the advertisements did not on their surface make clear that interests in the collective scheme were offered to professional investors only. Further, the distribution of the advertisements were extensive (with emails sent to an apparently general list of parties whose email addresses were maintained in Pacific Sun's database), and certain subscribers to the collective investment scheme had failed to sign a warranty on their professional investor status. While such factors appear to exacerbate the situation, it is yet to be clarified whether an advertisement which clearly precludes non-professional investors may still be found to fall foul of s. 103. Specific professional advice is advised before the issuance of advertisements or invitations relating to securities or collective investment schemes.
A copy of the judgment can be accessed here.