Marketing restrictions - Hong Kong SAR

In Hong Kong it is necessary to consider whether cross-border marketing/selling activities will trigger authorisation/prospectus requirements at a fund level as well as the licensing/registration requirements that apply at a firm level. General marketing activities may be possible in certain circumstances although caution is required.

Funds

The main approach to the firm level requirement is to restrict activity to: (i) responding to a genuine reverse enquiry; or (ii) limited marketing that is bespoke, tailored and highly controlled and/or directed only to a very restricted group of investors. Caution is required as these routes are not official exemptions but are based on local counsel’s interpretations of what may be permitted without triggering the requirement.

The fund level requirements involve: (i) a fund authorisation requirement; and (ii) a prospectus requirement (for funds with a corporate structure). In both cases there is an exemption for Professional Investors as well as other useful exemptions/routes discussed further below, which include responding to a genuine reverse enquiry.

Investment Management & Advisory Services (IMAS)

The position described above in terms of restricting activities to reverse enquiries or certain limited marketing so as not to trigger the firm level requirement applies equally to the marketing/provision of IMAS, which for these purposes means arranging, execution of orders on behalf of clients, investment advice and portfolio management.

The following general marketing activities may be permitted depending on the content and how the activity is structured:

• brand awareness
• product/service line awareness
• publishing articles
• activities referring to an investment strategy or particular characteristics; and
• speaking at a finance related event.

It is important that there is no suggestion or implication that the firm is carrying on business in a “regulated activity” in or from Hong Kong. Particular care is therefore required where the general marketing includes reference to service-lines which match the descriptions of regulated activities in Hong Kong. For example, references to a term such as “investment services” would be preferable to “securities dealing” (on the basis that the latter is a category of regulated activity in Hong Kong). That said specific terms may be acceptable where described in the context of the group generally as opposed to a service provided by a specific group entity. Ultimately, however, it will be a question of fact and the SFC will take a holistic approach.

Where general marketing activity does trigger the restrictions, it may still be possible for the firm to conduct the activity provided it is structured to fit within one of the routes discussed in Active Marketing/Selling of Funds below.

For activity undertaken in Hong Kong, see also the considerations discussed under Fly-In Meetings below.

Permitted to hand out a business card that confirms name and company provided there is no “holding out” of a Hong Kong business. Activity to be carried out on a restricted basis only.

Funds and IMAS:Workable although it can often be difficult to demonstrate that a reverse enquiry was genuine

It is technically possible to respond to a genuine reverse enquiry without triggering the restrictions discussed in the Active Marketing/Selling of Funds section below. However, it can often be difficult to demonstrate that the reverse enquiry was genuine. A mere representation from an investor that the transaction is being entered into pursuant to a particular reverse enquiry may not be enough, depending on the surrounding circumstances, particularly where the firm has previously been in touch with the investor. If the firm chooses to seek such a representation, whether it does so by means of a standard form template would not affect the analysis.

Local counsel recommend the following Guidelines for Reverse Enquiry:

• The response should be bespoke and tailored to the enquiry and conducted on a highly controlled basis.
• An example of a response that would be problematic is where there is a genuine reverse enquiry which alerts a firm to a gap in the market which it then tries to fill by way of a concerted marketing campaign to a broader target audience.
• The reverse enquiry need not relate to a specific fund or service.
• There is no maximum number of investors a firm may market/sell to in response to an unsolicited approach. However, if there is a significant number of reverse enquiries, especially in relation to a particular fund or service, that could as a practical matter call into question the degree to which the reverse enquiry route can be relied on without it being tested by the regulators.
• In terms of the Licensing/Registration Requirement the analysis requires consideration of the specific facts and circumstances of each case.
• In terms of the SFC Authorisation Requirement and Prospectus Requirement, these will not be triggered unless marketing materials are provided in a manner that amounts to an offer or invitation to the public. It is therefore recommended that materials sent in response to a reverse enquiry contain disclaimers clarifying that they have been prepared/provided in response to a reverse enquiry from a specific client.

Alternatively, the firm could consider structuring its activities to fall within one of the routes discussed in Active Marketing/Selling of Funds below.

Workable depending on how activity structured and on investor type 

There is no route available enabling a firm to avoid the restrictions applicable to active marketing/selling purely because activities amount to introductory pre-marketing. See Active Marketing/Selling of Funds below for details of the restrictions and exemptions/exclusions. These would apply equally to pre-marketing activities.

Workable depending on how activity structured and on investor type

There are three main restrictions that a firm needs to consider when marketing/selling funds in Hong Kong. 

1. Licensing/Registration requirements

It is necessary to consider this firm level requirement both in relation to selling activity as well as cross-border marketing activity that amounts to Actively Markets.

Active Markets: According to the FAQs issued by the SFC, in determining whether or not a person “actively markets” its services to the public, the SFC would consider the nature of the business activities as a whole and have regard to a number of factors including whether:

• there is a detailed marketing plan to promote the services;
• the services are extensively advertised via marketing means such as direct mailing, advertisements in local newspapers, broadcasting, or other “push” technology over the Internet (as opposed to where the services are passively available, e.g. on a “take it or leave it” basis);
• the related marketing is conducted in a concerted manner and executed in accordance with a plan or a schedule which indicates a continuing service rather than a one-off exercise;
• the services are packaged to target the public of Hong Kong, e.g. written in Chinese and denominated in Hong Kong dollars; or
• the services are sought out by the customers on their own initiative.

It may, however, be possible for a firm to cross-border market/sell a fund to an investor in Hong Kong without triggering the restriction on the basis of one of the following approaches:

• Bespoke, Tailored Marketing that is Conducted on a Highly Controlled Basis: The activity should not be part of an organised marketing strategy or concerted approach to Hong Kong investors. Such activity would not trigger the restriction on the basis that it would fall outside the definition of Actively Markets.
• Activity Directed Only to a Very Restricted Number of Offerees: The number of investors that can be approached depends on the firm’s appetite for risk although local counsel advise a conservative approach. As a general rule, the higher the number and the more diverse the nature of investors targeted, the more risk of an invitation being viewed as to “the public”. Extreme caution is required for retail investors since they are afforded the greatest level of protection under Hong Kong law. See Memorandum section 6.2(c) for more information.

In addition to the above approaches, there is a formal exemption available for the regulated activity of “dealing in securities” where the firm deals genuinely as principal only with Institutional Professional Investors. This means that in practice the exemption may be available for the general partner of a fund structured as a limited partnership, but would not be available to the investment manager of a fund. The scope of this exemption is therefore quite narrow.

Rather than try to structure activities within the scope of one of the above approaches, some firms prefer to use a locally licensed/registered securities dealer as an intermediary. See Intermediaries section below.

2. SFC Authorisation Requirement

This is a two-step process involving the authorisation of both the fund and its offering documents. Among the conditions for authorisation are the requirement that the offering document of the fund complies with the SFC’s “Code on Unit Trusts and Mutual Funds” and the requirement that the fund has a custodian/trustee that is acceptable to the SFC. It is also necessary for the fund to have at least one regular dealing day a month and therefore the SFC authorisation process is not suitable for funds structured as unlisted closed-ended funds.

The authorisation process can take several months. The level of complexity, the SFC’s familiarity with the fund’s jurisdiction and scheme type will affect the timing. Please refer to section 6.2(d) of the Memorandum for detail regarding fees, filing requirements and Chinese language requirements in relation to the offering documents.

There are two main exemptions/exclusions from the SFC Authorisation Requirement:

• Professional Investor Exemption: The offer is made to Professional Investors. The SFC has noted that it should be plainly apparent from the face of any advertisement issued in reliance on this exemption that the underlying investment product is intended only for disposal to Professional Investors. The clear display of an appropriate message/warning on all advertising materials would go a long way towards establishing this intention.
• Offer Made to a Very Restricted Number of Offerees: This route is not based on a formal exemption but is based on an interpretation of what would not amount to a “public” offering. The normal market practice is that 50 persons (offerees not investors) would, other than in exceptional circumstances, be the maximum number of persons that would not be considered to be the "public". However, the SFC has privately stated that care should be taken in using 50 as a benchmark. Depending on the circumstances, they could regard a number less than 50 as being the "public".

It is technically possible to combine the above routes such that it may be possible to offer a fund to an unlimited number of Professional Investors as well as to a group of non-Professional Investors without SFC authorisation. However, the exact number and type of non-Professional Investors that a firm feels comfortable approaching is subject to the firm’s interpretation of what constitutes a “very restricted number of offerees”.

3. Prospectus Requirement

For funds structured as corporates, in addition to considering the requirement for SFC authorisation, it will also be necessary to consider the requirement for a registered prospectus. There are four useful exemptions where the requirement is triggered:

• Professional Investors Exemption: The offer is made to Professional Investors.
• Limited Offerees Exemption: Offers made to not more than 50 persons.
• Minimum Subscription Exemption: Applies where the offer has a minimum subscription per investor of not less than HKD 500,000 or its equivalent in another currency.
• Small Offers Exemption: An offer which has a total consideration which does not exceed HKD 5 million or its equivalent in another currency.

Recognised Jurisdiction Schemes - streamlined authorisation procedure

It is possible for a non-HK fund to receive SFC authorisation such that it can be marketed to the public in HK. Certain funds which are Recognised Jurisdiction Schemes are subject to what the SFC describes as “streamlined” procedures in terms of the SFC Authorisation Requirement essentially treating certain aspects of the authorisation requirements as having already been met. However, the SFC review and authorisation process is still lengthy, even where the “streamlined” process is available.

The following are some of the schemes which are categorised as Recognised Jurisdiction Schemes (see section 6.2(d) of the Memorandum for full list):

• Australia: managed investment schemes under the Corporations Act 2001 (as amended)
• France: UCITS under the French Financial and Monetary Code (as amended) and General Regulation of the AMF (as amended)
• Guernsey: Class A schemes under the Protection of Investors Law 1987
• UK: UK UCITS under the Financial Services and Markets Act 2000 and the Open-Ended Investment Companies Regulations 2001 (as amended)

It would also still be necessary to consider the Licensing/Registration Requirement.

 Mutual Recognition of Funds Schemes

Eligible funds from Mainland China, Switzerland, France, the UK, Luxembourg, the Netherlands and Thailand may be distributed in Hong Kong through mutual recognition of funds schemes. See section 6.1(a) of the Memorandum for more information.

Workable depending on how activity is structured

For background on the Licensing/Registration Requirement see Active Marketing/Selling of Funds above. The main routes for a firm are either:

• Bespoke, Tailored Marketing that is Conducted on a Highly Controlled Basis.
• Activity Directed Only to a Very Restricted Number of Offerees.

Intermediaries

Funds: Some firms prefer the route of marketing/selling funds through a locally licensed/registered securities dealer as an intermediary. However, there are restrictions on that approach which would need to be complied with. Please refer to section 6.2(d) of the Memorandum for more details.

IMAS: It should be noted that using a locally licensed intermediary to market a firm’s services can be difficult in practice. This is because the definition of Actively Markets catches a person who "actively markets, whether by himself or another person on his behalf" and hence the intermediary’s activities could trigger the Licensing/Registration Requirement on behalf of the non-Hong Kong firm. There are also further restrictions discussed in section 6.2(d) of the Memorandum.

Fly-in meetings

In relation to the Licensing/Registration Requirement, it should be noted that the interpretation of the concept of “carrying on a business” is wide and can extend to what are on the surface, temporary or one-off arrangements which take place in Hong Kong. Care is required that the incoming salesmen/marketers are not viewed as carrying on, or holding out their employers as carrying on, regulated activities such as dealing in securities or advising on securities in Hong Kong.

In addition it is also worth bearing in mind considerations related to the protection of personal data. See section 6.2(d) of the Memorandum above regarding use of investor data and the direct marketing requirements.

Wealth Management Connect Scheme

The Wealth Management Connect Scheme enables eligible Mainland, Hong Kong and Macao residents in the Guangdong-Hong Kong-Macao Greater Bay Area to invest in wealth management products (including eligible funds) distributed by banks and eligible firms in each other’s market.

Professional Investors - fall into two sub-categories:

• Institutional Professional Investors: includes regulated financial intermediaries, recognised exchange companies or clearing houses, regulated banks, regulated insurers, regulated collective investment schemes and their scheme operators, governments (other than municipal government authorities), central banks and multilateral agencies.
• High Net Worth Persons: include any corporation or partnership having a portfolio (comprising of securities, certificates of deposit and money held with custodians) of not less than HK$8 million (or its equivalent in any foreign currency) or total assets of not less than HK$40 million (or its equivalent in any foreign currency).

Retail Investors - Investors that do not fall within any of the above categories of Professional Investors.