On 31 May 2014, the Securities and Futures Commission (the “SFC”) commenced its first indictable offence under section 114 of the Securities and Futures Ordinance (“SFO”) against IPFUND Asset Management Limited (“IPFUND”) and its sole director and shareholder, Mr. Ronald Sin Chung Yin (“Mr. Sin”). They were prosecuted for carrying on a business, or holding out as carrying on a business, in a regulated activity in dealing in securities (Type 1 regulated activity as defined in the SFO) without a licence. The securities in questions are collective investment schemes (the “CIS”).
Background of the case
SFC alleged that between February 2011 and December 2011, IPFUND and Mr. Sin, both of whom have never been licenced by the SFC, offered and disposed of interests in 16 CIS to investors. IPFUND and Sin managed and controlled the CIS which were not authorized by the SFC.
The CIS in the present case related to the purchases of commercial properties by collection of funds from investors. A shell company was established for the purpose of purchasing each targeted property. The shares of the shell company will be distributed to the investors, as members or beneficial owners of the company, in accordance with their contributions to the purchase.
Upon the sale of those properties, part of the profits earned would be distributed among the investors in proportion to their contributions towards the purchase price, and IPFUND received consultancy fees based on profits earned from the trading of those commercial properties. The shell companies will be dissolved after the disposal of the properties.
Pursuant to Schedule 1 of the SFO, a CIS has four relevant elements: (a) it must involve an arrangement in respect of property; (b) the participants do not have day-to-day control over the management of the property; (c) the property is managed as a whole by or on behalf of the person operating the arrangement and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and (d) the purpose of the arrangement is for the participants to participate in or receive profits, income or other returns from the acquisition or management of the property. But it does not include arrangements operated by a person otherwise than by way of business.
Judge considered the facts of the present case and concluded that the 16 CIS in the properties purchases fulfilled the requirements of CIS as defined under the SFO and found that IPFUND was carrying on a business in operating 16 CIS at the relevant time.
Dealing in securities
However, pursuant to Schedule 1 of the SFO, “securities” means any interest in any collective investment scheme but excludes shares or debentures of a company that is a private company within the meaning of section 11 of the Companies Ordinance (Chapter 622 of the Laws of Hong Kong)(“CO”), the Judge considered the articles of associations of each shell company established for the purpose of holding each property and concluded that they were private companies under the CO. Thus, when the investors were investing in the CIS, they were in fact acquiring shares in private companies which held the commercial properties in questions.
As the definition of “securities” excluded shares of private companies, the agreements for “acquiring, disposing of, subscribing for or underwriting” the shares of the shell companies shall not be categorised as “dealing in securities” under Part 2 of Schedule 5 of the SFO. In other words, there was no “dealing in securities” in the present case. Otherwise, any private company holding properties would equally be considered as carrying out a scheme and this cannot be the purpose and target of the SFO and the regulatory mechanism. The court held that IPFUND and Mr. Sin were not guilty to the offences.
The Apex Horizon and Asia Television Limited (“ATV”)
Market participants or investors, other than observing the obligations under section 114, should also consider the consequence of section 103 of the SFO, inter alia, to issue an invitation to the public to acquire, or offer to acquire, an interest in or participate in a CIS, unless the issue is authorised by the SFC. Back to 2013, an accused unauthorised CIS was the sale of hotel room units of The Apex Horizon by Pearl Wisdom Limited, a wholly-owned subsidiary of Cheung Kong (Holdings) Limited (later known as Cheung Kong Property Holdings Limited) to the public and such sale was investigated by the SFO and unwound at a later stage. Also, the suggestion of “one share per person to save ATV” as proposed during a press conference by the management of ATV last year may also fall within the requirements of a CIS and triggered the possible intervention by the SFC if the management enforced such scheme.
Although IPFUND and Mr. Sin were acquitted in the present case, the SFC is reviewing the court’s decision. Persons who intend to enter into any kind of arrangements and/or schemes are advised to obtain legal advices from legal practitioners in advance.