In June 2022, SFC published a consultation paper on proposed amendments to the SFO. The proposal contains 2 enforcement-related amendments and the other one relating to the professional investor (PI) exemption (PI amendment) under section 103 of the SFO. I discuss the PI amendment in this article.
The PI amendment is triggered by the Pacific Sun case happened many years ago, summarized as follows:
- SFC announced on 21 Mar 2013 that Pacific Sun Advisors Limited and its director Andrew Mantel were charged for issuing an advertisement on the corporate website promoting "Pacific Sun Greater China Equities Fund" (the Fund) without SFC's authorization. The defendants submitted that they intended to sell the Fund only to PIs and so the advertisements did not require SFC's authorization under the PI exemption. Surprisingly, the Magistrate accepted the defendants' argument and acquitted them.
- SFC announced on 10 Jun 2014 that following its appeal, the Court of First Instance (CFI) issued a ruling in Jan 2014 clarifying that the advertisements in question did not fall within the PI exemption and ordered the case to be returned to the Magistrate for reconsideration. The CFI made it clear that the exemption only applies where the advertisement states on its face that the terms of the offer are limited to PIs. As a result, the defendants were convicted at the Magistrate.
- SFC announced on 20 Mar 2015 that following the defendants' appeal, the Court of Final Appeal (CFA) overturned the ruling of the CFI in that the PI exemption applies even if the intention to sell the Fund only to PIs is not expressed in the advertisement, unless the Fund is subsequently sold to a retail investor. It follows that contravention of section 103 of the SFO can only be established well after the offer to the public has been issued.
SFC has definitely thought the CFA's ruling is not in line with the intention of the PI exemption. SFC expressed on 20 Mar 2015 that it will study the CFA's decision to determine whether there should be any proposal to amend section 103 of the SFO. However, SFC has not taken any action until Jun 2022.
In the consultation paper, SFC proposes an amendment to section 103(3)(k) to restore the PI exemption
to the original point in time when the advertising materials are issued.
Therefore, following the proposed amendments, unauthorized advertisements of
investment products which are intended to be sold only to PIs may only be issued
to PIs who have been identified as such in advance by an intermediary through its
know-your-client and related procedures, regardless of whether or not such an intention
has been stated on the advertisements.
My views:
- The CFA's ruling was weird. Even the CFA made it clear that the burden of establishing the PI exemption applies rests on the defendants, it didn't say expressing the intention to sell the Fund only to PIs was a must.
- SFC's proposed amendments overshoot. It sounds impractical to require an intermediary to identify the PIs (esp. corporate and individual clients) in advance before issuing unauthorized advertisements of investment products.
- My stance is close to the Magistrate's decision in 2014. Section 103 should be amended to require an intermediary to express prominently in the advertisements that the unauthorized product is intended to be sold only to PIs, otherwise the PI exemption won't apply. SFC can subsequently sample check if the intermediary has sold the product to retail investors.
