The Hong Kong Court of Final Appeal (Court of Final Appeal) made a landmark decision on 20 March 2015 in relation to advertisements for collective investment schemes (CISs), upholding an appeal by Pacific Sun Advisors Limited (Pacific Sun) and its director Mr. Andrew Pieter Mantel (Mr Mantel). It overturned a decision by the Hong Kong Court of First Instance (Court of First Instance) on the interpretation of s.103(3)(k) of the Securities and Futures Ordinance (Cap 571) (SFO).

According to the decision, the exemption under s. 103(3)(k) of the SFO in relation to advertisements, invitations or documents for CISs that are or are intended to be provided only to professional investors is available even if it cannot be seen from the advertisement itself that the advertisement was, by its terms, confined to professional investors at the exclusion of other members of the investing public.

Background
The facts described in the decision are as follows. Pacific Sun issued an email (the email) in relation to the launch of the Pacific Sun Greater China Equities Fund (the Fund) to all potential investors in Pacific Sun’s database, including brokers, auditors, accountants and officers of the Securities and Futures Commission of Hong Kong (SFC).

The email announced the launch of the Fund and contained a press release to the same effect. It specified that the recipient could contact Mr. Mantel directly and investor relations personnel for additional information about the Fund. It contained disclaimer language, but crucially, it did not contain any language specifying that subscription in the Fund was only limited to professional investors.

The website of Pacific Sun contained a fact sheet and a PowerPoint presentation (advertisement) containing a large amount of information about the Fund. The presentation contained disclaimer language, but not any language specifying that subscription in the Fund was only limited to professional investors.

An SFC officer called Pacific Sun to enquire about the Fund after reviewing the information in the advertisement. He was not informed that the Fund was intended only for professional investors but was told about the minimum amount of investment of US$100,000.

In his interview by the SFC, Mr. Mantel stated that the Fund only targeted professional investors and that he would conduct background checks on the persons and entities in Pacific Sun’s database to ensure that they were professional investors.

The Relevant Law
Section 103(1)(b) of the SFO provides that a person commits an offence if he issues, or has in his possession for the purposes of issue, an advertisement, invitation or document which to his knowledge contains an invitation to the public to “acquire any interest in or participating in, or offering to acquire an interest in or participate in, a CIS", unless the issue is authorised by the SFC.

Section 103(3)(k) of the SFO provides an exemption to section 103(1)(b) in respect of advertisements, invitations or documents of CISs that are or intended to be disposed of (ie, provided) only to professional investors (PI Exemption).

Charges against Pacific Sun and Mr. Mantel
As a result of the email and advertisement, criminal charges were laid against both Pacific Sun and Mr. Mantel.
Pacific Sun was charged with:

• issuing the email, which to its knowledge, contained “an invitation to the public to acquire an interest in or participate in or offer to acquire an interest in or participate in, a collective investment scheme, namely, the Fund… when the issue was not authorised by the SFC”
• issuing the advertisement on Pacific Sun’s website which, to its knowledge, contained “an invitation to the public to acquire an interest in or participate in or offer to acquire an interest in or participate in, a collective investment scheme, namely, the Fund… when the issue was not authorised by the SFC”.

Mr. Mantel was charged with an “aiding and abetting” offence in relation to the offences committed by Pacific Sun above.

Decisions of the Magistrate Court and the Court of First Instance
In the trial at the Magistrates’ Court, Pacific Sun and Mr. Mantel were acquitted of all four Charges in relation to the advertisement. The Magistrate accepted the argument of Pacific Sun and Mr. Mantel that since the Fund would only be offered to professional investors, and Pacific Sun had implemented a relevant screening process, they have satisfied the PI Exemption and therefore, the advertisement did not require authorisation by the SFC. The SFC appealed to the Court of First Instance.

The Court of First Instance overturned the acquittals of Pacific Sun and Mr. Mantel, stating that the PI Exemption would only be satisfied where an advertisement for a CIS contains explicit language that states that the offer would only be limited to professional investors, as this would be necessary for the SFC to exercise its duty to protect the investing public. It considered the screening process implemented by Pacific Sun to ensure that only professional investors may invest to be irrelevant. It remitted the case back to the Magistrates’ Court.

As a result, the original acquittal was set aside, and Pacific Sun and Mr. Mantel were convicted by the Magistrate of all four charges.

Pacific Sun and Mr. Mantel appealed against their conviction. They also appealed to the Court of Final Appeal in relation to the interpretation of the PI Exemption:

1. whether for the PI Exemption to be available, it must be seen from the advertisement, invitation or document itself that it is, by its terms, confined to professional investors to the exclusion of other members of the investing public
2. whether the carrying out of a screening process to ensure all investors investing in the collective investment scheme are professional investors is irrelevant.

Court of Final Appeal Decision

In its reasoning, the Court of Final Appeal considered the natural and ordinary meaning, as well as the purposive construction of the relevant provisions relating to the PI Exemption under section 103(3)(k) of the SFO.

The Court of Final Appeal decided that according to the natural and ordinary meaning of section 103(3)(k) of the SFO, the PI Exemption applies to the issue of advertisements made in respect of “products intended to be disposed of only to professional investors”. The qualification in relation to disposal only to professional investors applies to the CIS itself, and not to the advertisement.

In construing the legislative intent of the PI Exemption in the SFO, the Court of Final Appeal noted that in cases under the SFO where particular wording must be used for certain documents, the SFO specifies the precise wording required and expressly states the fact that the particular wording must be used.

Furthermore, the Court of Final Appeal noted that even if the advertisement was to generate the interest of retail investors, Pacific Sun’s screening process would have ensured that the Fund would only accept investments from professional investors. There would in fact be no real harm that the SFO would need to protect retail investors from such advertisements.

Additionally, the Court of Final Appeal noted that the PI Exemption would be fully satisfied if the CIS, which is subject matter of the advertisement, is only intended for professional investors. Therefore, the purpose of investor protection would be achieved without the need for express wording in the advertisement itself.
Accordingly, the Court of Final Appeal decided that the Court of First Instance erred in its ruling and ruled that the PI Exemption still applies even if the issuer’s actual intention to offer the interests in a CIS only to professional investors is not expressed in the advertisement, invitation or document.

Significance
The Court of Final Appeal decision clarifies the PI Exemption in relation to advertisements for CISs. It means that advertisements, invitations or documents of an unauthorised CIS could be issued to the general public, so long as the issuer intends only to sell the unauthorised CIS to professional investors. The key issue turns upon whether the CIS that is the subject matter of the advertisement is intended to be made only professional investors.

It also means that the PI Exemption would have been satisfied if only subscriptions by professional investors of the unauthorised CIS are accepted.

The SFC has indicated that it would review the judgment to determine whether any amendments to section 103 of the SFO would need to be made. We will keep you informed of any further updates on this issue.