Section 114 of the Securities and Futures Ordinance (SFO) provides that no person shall carry on a business in a regulated activity or hold himself out as carrying on a business in a regulated activity unless he is licensed or registered for the regulated activity or where an exemption under the SFO applies. “Dealing in securities” is a broadly defined regulated activity under the SFO, the conduct of which will require a Type 1 licence.
On 31 May 2014, the Securities and Futures Commission (SFC) commenced criminal proceedings at the Eastern Magistrates’ Court against IPFUND Asset Management Limited (IPFUND) and its sole director and shareholder Mr. Ronald Sin Chung Yin for unlicensed dealings involving collective investment schemes (CIS) in breach of the SFO. The case was subsequently transferred to the District Court.
The SFC alleged that between February 2011 and December 2011, IPFUND and Ronald Sin offered and disposed of interests in 16 CIS to investors in Hong Kong without being licensed to do so. The CIS related to the acquisition of commercial properties by IPFUND and Ronald Sin, pooling funds from investors. Investors had no day-to-day control over the management of the properties, which were managed solely by IPFUND and Ronald Sin. A shell company incorporated in Hong Kong was established for the purpose of acquiring each property. Upon the sale of properties, IPFUND received consultancy fees based on profits earned from the sale and the remaining profits would be distributed among the investors based on their shareholdings in the shell company after deducting relevant costs and expenses incurred. The relevant shell company would be dissolved after disposal of the property held by it.
The District Court acquitted IPFUND and Ronald Sin of charges of unlicensed dealings. The District Court found that:
- The arrangement involving pooling of funds from investors for the acquisition of properties where investors have no day-to-day control over the management of the properties and the purpose of which is for investors to receive profits or returns from the acquisition or management of the properties constitutes a CIS for the purpose of the SFO.
- IPFUND and Ronald Sin were carrying on a business of operating the CIS at the relevant time.
- Each shell company established for the purpose of holding a property was a private company as defined under section 11 of the Companies Ordinance (CO).
- As the definition of “securities” in Schedule 1 to the SFO expressly excludes shares of a company that is a private company under section 11 of the CO, the arrangement in question relating to the acquisition and disposal of shares in private shell companies did not constitute “dealing in securities” under the SFO.
- It could not be the purpose and intention of the SFO and the regulatory regime that dealing in shares of any private company holding properties should be considered as operating a CIS, and so breach section 114 of the SFO if done by an unlicensed person.
The decision turns on the definition of “securities” in the SFO. The definition includes shares of a body corporate and, separately, interests in a CIS, but excludes shares of a Hong Kong private company. The decision is significant because it would appear to permit the offering of CIS without the need for a licence, so long as the CIS is structured as a Hong Kong private company. In contrast, offering a CIS structured as a trust or limited partnership would still require a licence, even if the operation and investment of the CIS was otherwise the same.
The SFC stated in its enforcement news that it is reviewing the decision and it remains a possibility that the SFC will appeal the decision.