Private Placement in Hong Kong
Hong Kong as an international financial hub has a robust private placement regime which provides a cost-effective means for companies, especially small and medium enterprises, to raise capital without having to resort to the time-consuming and expensive process of a public offering such as initial public offering (IPO). In addition, structured products issuers, distributors, private bankers and industry associations in Hong Kong are used to relying on the channel of private placement to distribute their unlisted structured products. It has been suggested that a large proportion of structured products’ notional value sold in Hong Kong is through private placement. This article aims to concentrate on the offer of equity by way of private placement in Hong Kong and how a company can benefit from the use of such a private placement.
What is private placement?
At present, there is no statutory provision offering a precise definition of private placement in Hong Kong. As a result, the definition of private placement can be examined only in the context of what will not be considered as an “offer to the public”.
Section 48A of the Hong Kong Companies Ordinance (“CO“) provides that an offer or an invitation is not required to be treated as being made to the public if “it can properly be regarded, in all the circumstances, as not being calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by persons other than those receiving the offer or invitation, or otherwise as being a domestic concern of the persons making and receiving it”. Currently, this is the only statutory guide as to what will not constitute an offer to the public and it offers only minimal assistance in construing the definition of private placement, as there remains no precise definition given to the meaning of “offer to the public” whilst the term “public” is defined in the Securities and Futures Ordinance (“SFO“) as meaning “the public of Hong Kong, and includes any class of that public”.
Due to the lack of case law and legislation on private placements, a body of market practice has developed to govern private placements which includes:
- The offer in Hong Kong should be made to a limited number of offerees and as a rule of thumb, 50 is taken as the maximum number of persons to whom the offer may be made for the offer to be considered not an offer to the public. The fewer offerees involved, the less likelihood there is of the offer being regarded as an offer to the public.
- Each offer document to be issued should be serial numbered and state clearly that it is not an offer to the public.
- Each offer document should be individually addressed to a specific offeree and only that offeree should be capable of accepting the offer and taking up the securities.
- The offer document should contain appropriate wording indicating the restricted nature of the offering and should expressly note that the offer document should not be passed to any other person.
- The minimum number of securities to be acquired should be sufficiently high to make it clear that the offer is intended only for investors of substantial means.
- There must be no advertising, press release or press conference relating to the proposed offering or the offer document in Hong Kong.
In addition, it is recommended that documents which are returned by an offeree should not be reissued in an effort to fill the minimum or maximum subscription levels for a particular offer. This is because the greater the number of people to whom the information memorandum and other information are distributed, the greater the risk will be that the offer will be regarded as being an offer to the public rather than a private placement.
Private placement vs Public offering
In general, any prospectus, notice, circular, brochure, advertisement, or other document which offers or invites offers to subscribe for or purchase any shares in or debentures of a company in Hong Kong (including a company incorporated outside Hong Kong, and whether or not it has established a place of business in Hong Kong) is required to comply with the content and registration requirements of the CO.
In parallel with the prospectus requirements under the CO, the SFO also stipulates that issuing and possessing for the purposes of issue, whether in Hong Kong or elsewhere, an advertisement, invitation or document which contains invitations or offers to acquire shares of a company to the public are prohibited unless it has been authorised by the Securities and Futures Commission of Hong Kong (“SFC“).1
While these statutory requirements are implemented to ensure adequate disclosure and sufficient protection afforded to investors, the costs of compliance with these statutory requirements as laid down in the prospectus regime of the CO and the authorisation regime of the SFO inevitably constitute an onerous burden on companies planning to raise capital from the public.
This is especially the case for small and medium enterprises, which may lack the financial resources or reputation to attract to a broad base of investors to undertake a public offering. Under such circumstances, a private placement of shares or other equity can be considered an attractive capital investment tool to raise capital not from the public, but directly from professional investors or a small group of people with a lower cost on compliance issues.
There are presently 12 types of offers of shares and debentures (commonly known as “safe harbours”) which are exempt from the prospectus requirements of the CO and the authorisation requirements of the SFO.2 Among these, four types of safe harbours which have been commonly relied on to facilitate private placement in Hong Kong are as follows:
(i) An offer to professional investors
“Professional investor” is defined in the SFO and the Securities and Futures (Professional Investors) Rules and includes:
- a trust corporation having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40,000,000;
- any individual, either alone or with any of his associates on joint account, having an investment portfolio of not less than HK$8,000,000;
- any corporation or partnership having a portfolio or not less than HK$8,000,000 or total assets of not less than HK$40,000,000; and
- any corporation whose sole business is to hold investments and which is wholly owned by an individual who, either alone or with any of his associates on a joint account, has an investment portfolio of not less than HK$8,000,000.
The above thresholds must be determined in a certain manner and by reference to specific dates.
(ii) An offer to not more than 50 persons
The SFC has taken, as a rule of thumb, 50 as the maximum number of persons who may be approached without the offer being treated as made to the public.
(iii) An offer in respect of which the total consideration payable for the shares or debentures concerned shall not exceed the amount of HK$5,000,000
(iv) An offer in respect of which the minimum denomination of, or the minimum consideration payable by any person for, the shares or, in the case of debentures, the minimum principal amount to be subscribed or purchased, is not less than HK$500,000.
Whilst the above types of offers do not require the offer document(s) to comply with the prospectus content and registration requirements of the CO, they must nevertheless contain an appropriate warning in the form stipulated by the CO.
Benefits of private placement
Due to Hong Kong’s more relaxed statutory requirements as compared to some other jurisdictions, private placement has become one of the most popular capital raising tools for companies seeking injection of capital in Hong Kong. Compared to offers to the public, private placement provides an alternative avenue to raise capital from a limited number of investors in a quicker and less expensive way.
In addition, private placement enables a company to specifically target investors possessing the relevant knowledge and experience in the business sectors in which the company operates so that the management of the company may benefit from the assistance offered by these investors.
Last but not least, a company raising capital through a private placement, provided the offer is to less than 50 persons, can also preserve its private company status and avoid the onerous disclosure obligations imposed on a company raising capital through public offering.
1.Section 103 of the Securities and Future Ordinance
2.Seventeenth Schedule to the Companies Ordinance
This article is only a brief overview and is not legal advice. If you are contemplating a private placement, or any legal transaction, you should consult our solicitors, who can provide you with the advice that you need, for your specific circumstances:
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Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.