Private Placement in Hong Kong Background 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.

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Hang Seng Bank

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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.