On 20 and 22 April 2016, the UK Supreme Court and the Hong Kong District Court handed down their respective decisions on criminal charges against defendants for carrying on unlicensed activities in the form of collective investment schemes (CIS). The Supreme Court affirmed the convictions of the defendants in the UK while the District Court acquitted the defendants in Hong Kong.

This highlighted the need to carefully analyse the ambit of an important exception to the definition of “securities” under the Securities and Futures Ordinance (SFO) in Hong Kong, namely, in relation to dealing in shares in a private company, and how the Court will interpret whether an investment constitutes a CIS. These two are important issues as businesses and investments are commonly arranged in complex structures nowadays. Whether a structure can take advantage of the “dealing in private company shares” exception would mean whether it is legal or not.

This bulletin highlights the relevant facts in the Hong Kong and the UK cases and discusses their practical implications.

The Case before the District Court in Hong Kong

In the case of HKSAR v IPFUND Asset Management Limited and Sin Chung Yin DCCC 23/2015 (a copy of the Reasons for Verdict, which is in Chinese only, can be accessed here), Ronald Sin Chung Yin (D2), sole director/shareholder of IPFUND Asset Management Limited (D1), procured the purchase of real properties in Hong Kong in 2011. After the signing of a sale and purchase agreement (SPA) but before completion took place, D2 approached an existing pool of potential investors (mainly D2's relatives and business associates), provided them with details of the properties and invited them to participate in the investment. The primary objective of the investment was for the properties to be on-sold to a third party buyer before completion (which is commonly referred to as confirmor sale in Hong Kong) and the profit would be distributed to the investors. In case a confirmor sale did not take place, the investors would be required to make further contributions in order to complete the sale and purchase. The properties were then either sold later on for a profit or let for rental income.

The following are some key features of the relevant arrangements:

  1. D2 was solely responsible for deciding the properties to purchase, negotiating with the owners on the terms of the sale and purchase and signing (most of the) SPAs;
  2. D2 caused shell companies to be incorporated to purchase (and if necessary) hold the relevant properties;
  3. The amount of the investors' contributions was determined by D2 and the investors then paid their share of contributions;
  4. After the sale of the properties, profits were distributed in accordance with each investor’s contributions and D1 would charge 5 percent of the sale proceeds (after deduction of expenses) as “consultancy fees”;
  5. All the shell companies were deregistered after each property sale.

On the issue of whether D1 and D2 were operating a CIS, the judge agreed with the prosecution’s submissions and held that:

  1. The investment projects involved arrangements relating to property interests;
  2. The investors had no day-to-day control over the investment properties (as they could not control the negotiation and the sale price of the properties);
  3. The investors’ interests in the properties were managed as a whole by D1 (via D2 and others);
  4. The investors’ contributions and profits distributed to them were pooled;
  5. The purpose of the arrangements was to enable the investors to share or receive profits, income or other returns from the acquisition, holding, leasing, management and/or disposal of the properties;
  6. The arrangements were operated by way of business (because of the consultancy fee charged by D1, the number and continuity of the investment schemes, D1's description of its business in its business registration application and website and the leasing of an office).

However, the judge accepted the defendants' submissions that the term “securities” in the SFO clearly excludes shares in private companies. In terms of the finding of facts, the judge held that the investors' interests in the whole scheme were their respective interests in the shares of the relevant shell company. This was so even though some of the investors were not registered shareholders of the shell company and that their interests in the shell company were actually held by D2 on their behalves. As such, the judge held that the defendants' conduct did not constitute the regulated activity of “dealing in securities”.

The case before the UK Supreme Court

In the case of Asset Land v Financial Conduct Authority [2016] UKSC 17 (a copy of the judgment can be accessed here), the relevant activity involved the defendants' purchase of a piece of land which was later sub-divided into smaller plots. Interests in these small plots of land were sold to investors with an understanding that the defendants would arrange the land as a whole to be re-zoned and then sold to developers at a profit.

The relevant UK legislation does not have the “dealing in shares in private company” exception to the definition of “securities” as in Hong Kong. Nevertheless, the definition of CIS is essentially the same as that in the SFO (the difference in the two definitions is not material for the purpose of this discussion).

The Supreme Court dismissed the defendants' appeal and held that:

  • The trial judge was entitled to find that the understanding of the investors had conformed to what was intended by the operator. He was not required to give special weight to contractual or other documents, without regard to their context. The trial judge had concluded that arrangements within the relevant statutory provision had been made when:
    • plots were marketed and investors paid their deposits;
    • the object of the arrangements was that the operator should achieve a sale of the site after seeking to enhance its value (and the price it would attract) by improving the prospects for housing development; and
    • the price paid for it was shared between the owners.

Such conclusion was amply supported by the evidence and disclosed no error of law.

  • It is necessary to consider the substance of the arrangements put in place by the operator when assessing if it is operating a CIS.


The decision of the Hong Kong District Court in the IPFUND case is the first that considers the ambit of the “dealing in shares in private company” exception to the definition of “securities” under the SFO. It seems to suggest that whenever investors' interests are structured as shares of a private company, the relevant investment would fall outside the definition of “securities” in the SFO. This appears to be so even when the investors are mere beneficial owners of interests in shares in a private company (and even when the shares were registered under the name of the operator of the investment). To that extent, the ambit of the relevant statutory exception appears to be very wide.

However, one must appreciate that the decision of the Hong Kong District Court does not have the status of a binding precedent which means that a different trial judge may reach a different conclusion even on the same set of facts. Furthermore, it does not appear that the judge in the present case had the benefit of considering the Supreme Court judgment in the Asset Land case which may have an impact on how he would have decided the case. In any event, the prosecution may appeal to the Court of Appeal against the acquittal by way of a case stated pursuant to section 84 of the District Court Ordinance in order to clarify an important point of law.

In the meantime, it is important to remember that contravention of section 114 of the SFO is a criminal offence punishable by a lengthy prison term and a heavy fine. It is believed that unlicensed activity will continue to be one of the priority areas of the SFC's enforcement programme, particularly when the latest statistics published by the SFC shows that there was a 76.8% increase in complaints concerning unlicensed activities. Before carrying on any business or structuring investments in a way that relies on the “dealing in shares in private company” exception, legal advice on the specific structure should be obtained.