A landmark court ruling offering guidance on acceptable fund marketing practices has major implications for hedge funds in Hong Kong, says the lawyer who won the case on appeal.
Pacific Sun Advisors and its director, Andrew Mantel, had been charged in 2013 with issuing unauthorised advertisements to the public to subscribe to a collective investment scheme (CIS), in contravention of the Securities and Futures Ordinance.
The ordinance requires any advertisement containing an invitation to the public to acquire securities or interest in a CIS to be authorised by the Securities and Futures Commission, unless it falls within a specified statutory exclusion.
The Court of First Instance initially upheld the charge based on its interpretation of the ordinance. However, Pacific Sun and Mantel were subsequently acquitted by the Court of Final Appeal.
They successfully argued they could rely on an exclusion in the ordinance which applied if the securities were intended to be disposed of only to professional investors.
The appeal court ruled the Court of First Instance had erred, explaining the exclusion could apply even if the intention to dispose of the securities only to professional investors was not specifically expressed in the advert.
“This case actually has a very significant implication for the hedge fund industry as it provides clarity of what is acceptable from a marketing perspective for hedge funds in Hong Kong,” said solicitor Timothy Loh, who acted for Pacific Sun.
“Theoretically if you were to take out a billboard advertisement for your funds in the MTR [subway system], you could do so as long as you were only selling to professional investors.”
The protracted court battle raised eyebrows in the industry. “This was not a case the SFC should have pursued,” argued one legal counsel. “No harm, no foul play. No real investor protection value was served in going after Pacific Sun.”
Another lawyer said the case had shocked the industry. “Here you have a guy who is well-intentioned and selling to professional investors, using a promotional release to send to institutional and high net-worth investors, with the exception that he wanted to let his SFC case officer know, so he sent a copy of the release to the case officer [as a courtesy rather than seeking authorisation]. Lo and behold, as a result of that, enforcement action was started.
“Some people were really surprised. This is a guy who … screens out investors to make sure they are professional and because of some technical language that’s missing, the SFC decided [to pursue] a criminal offence.”
If the decision had not been overturned, the industry could have faced even greater scrutiny, with hedge funds potentially needing to add warnings and disclaimers in every investor communication, noted Loh.
While many fund marketing materials explicitly contain disclaimers, other informal communications may not.
“If you’ve had an email being sent by a hedge fund manager and it says ‘I’ve got a new fund, would you be interested? If you are, I can send you more information,’ that could be an invitation and therefore a criminal offence as there may not be a disclaimer on that email,” noted Loh.
He suggested the emphasis could now be on the screening process to ensure advertisements were targeted at professional investors.
Loh pointed out the Pacific Sun case did not comment on the adequacy of screening measures, but suggested a ‘self-declaration’ check was unlikely to be sufficient in proving an investor was professional.
The Securities and Futures Commission declined to comment on the case to AsianInvestor, while Mantel did not respond to AsianInvestor’s request for comment.