The Court of Final Appeal (CFA) overturned a decision by the Court of First Instance and upheld an appeal by Pacific Sun Advisors Limited (Pacific Sun) and its director Mr Andrew Pieter Mantel (Mr Mantel) in relation to issuing advertisements to promote a collective investment scheme (CIS) without the authorization of the Securities and Futures Commission (SFC).  The CFA’s decision relates to the interpretation of section 103 of the Securities and Futures Ordinance (SFO), which requires any advertisement, invitation or document containing an invitation to the public to acquire securities or interest in a CIS to be authorized by the SFC unless it falls within a specified statutory exemption including section 103(3)(k) of the SFO (Exemption).  The Exemption applies where the securities are or are intended to be disposed of only to professional investors.

The background of the case was that in 2013, Pacific Sun and Mr Mantel were charged with issuing unauthorized advertisements to the public at large to subscribe for interests in a CIS in contravention of section 103 of the SFO.  Pacific Sun and Mr Mantel successfully argued before the magistrate court that they could rely on the Exemption and were acquitted.   The SFC sought clarification from the Court of First Instance about the application of the Exemption. The Court of First Instance ruled that the Exemption applied if it was apparent from the advertisement, invitation or document itself that the offer was confined to professional investors.

On further appeal by Pacific Sun and Mr Mantel, the CFA decided that the Court of First Instance had erred in its ruling.  The CFA adopted a purpose interpretation of the statutory provision and concluded that the Exemption applied to an advertisement of a relevant investment product that, as a matter of fact, was or was intended to be disposed of only to professional investors whether or not this fact was actually stated in the advertisement itself.  The CFA further cited examples to show that where an advertisement, invitation or document must contain a particular express statement in order for an exemption to apply, the Legislature had clearly and expressly stated this and identified the substances of the particular form of words to be used - which was not the case here. 

The CFA also made it clear that the burden of establishing that the Exemption applied rested on the issuer of the advertisement and not on the SFC.

According to the SFC, the potential implications of the CFA’s decision are two-fold:

  1. advertisements of CIS that may be unsuitable for retail investors can be issued to the general public even if the issuer only intends to sell them to professional investors; and
  2. a contravention of section 103 of the SFO, which occurs upon issue of a relevant unauthorized offer advertisement/document to the public, can only be established well after the advertisement/document to the public has been issued.

The SFC said that it would study the CFA’s decision to determine whether there should be any proposal to amend section 103 of the SFO as a result.

A copy of the CFA’s judgement can be downloaded via the following link: