TIMOTHY LOH LLP REPRESENTS PACIFIC SUN IN LANDMARK CASE WHICH DEFINES THE SCOPE OF THE PROFESSIONAL INVESTORS EXEMPTION WHEN ADVERTISING A COLLECTIVE INVESTMENT SCHEME
For Immediate Release. March 20, 2015.
March 20, 2015. HONG KONG – Timothy Loh LLP succeeded in representing Hong Kong independent investment advisory firm, Pacific Sun Advisors Ltd (“Pacific Sun”), and its director and CEO, Mr. Andy Mantel (“Mr. Mantel”), in obtaining acquittals from the Court of Final Appeal (“CFA”) of charges of advertising a collective investment scheme without the authorization of the Securities and Futures Commission (“SFC”).
This is a seminal case defining the scope of the professional investors exemption, which allows professional advisers to advertise securities sold or intended to be sold only to professional investors without having to obtain authorizations from the SFC.
Ruling in favour of Pacific Sun and Mr. Mantel, the CFA clarified that (i) for professional advisers to rely on the professional investors exemption, there is no requirement that the advertisement itself must expressly state that the securities advertised are confined to professional investors only; and (ii) it suffices that those securities will be disposed of only to professional investors.
Commenting on the success, Managing Partner Timothy Loh, stated, “The ruling of the CFA is significant in reshaping the financial services industry’s understanding of how investment products can be marketed. Traditionally, regulators required firms wishing to rely on the professional investor exemption to confirm a prospective client was a professional investor before they could begin product specific discussions with that client. This required clients to undergo a rigorous screening process even before they had expressed any interest in a product - a process that some clients did not wish to undergo outside the context of making an actual investment in a specific product. The ruling of the CFA rejects this regulatory approach, offering the investing public access to a broader range of information on available investment options whilst still protecting the investing public from investing into products suitable only for professional investors."
In November 2011, Pacific Sun sent out an email to various recipients (including prospective investors and the SFC), attaching a press release to announce the launch of a new collective investment scheme (“Fund”). Later in the same month, Pacific Sun made available to the general public the press release and other advertising materials in respect of the Fund by publishing the same on its website. Authorization from the SFC was not sought in respect of these advertising materials as the Fund was intended to be sold to professional investors only. In this regard, Pacific Sun adopted internal screening procedures to screen applicants who wish to invest in the Fund to ensure that all investors of the Fund were professional investors only.
SFC commenced criminal proceedings
In September 2012, the SFC commenced criminal proceedings against Pacific Sun and Mr. Mantel. The SFC alleged that because the advertising materials issued by Pacific Sun (i) failed to express that the Fund was available to professional investors only, and (ii) were circulated to members of the public who were not professional investors, Pacific Sun and Mr. Mantel committed an offence under section 103 of the Securities and Futures Ordinance (“SFO”) for advertising securities to the public without the authorization of the SFC.
In defending against the allegations of the SFC, Pacific Sun and Mr. Mantel relied on the statutory professional investors exemption under section 103(3)(k) of the SFO and argued that authorization from the SFC was not required as the Fund targetted professional investors only and there existed internal screening process to ensure that all investors were professional investors.
Aquittal by Magistrates & conviction by CFI
Initially, Pacific Sun and Mr. Mantel were acquitted before the Magistrates’ Court on the basis that (i) the advertising materials were merely invitations to the public to seek further information on the Fund, and (ii) in any event, the Fund was intended to be available to professional investors only, so the professional investor exemption would apply to exempt Pacific Sun and Mr. Mantel from liability.
The SFC appealed the Magistrate’s verdict to a judge of the Court of First Instance (“CFI”), who took the contrary view that (i) in order for the professional investor exemption to apply, it must be seen from the advertisement itself that the Fund was confined to professional investors to the exclusion of other members of the public; and (ii) the carrying out of a screening process was irrelevant. Accordingly, the judge remitted the matter to the Magistrate.
On the remitter, the Magistrate convicted Pacific Sun and Mr. Mantel for advertising securities to the public without the authorization of the SFC. The Magistrate sentenced Pacific Sun to a fine of HK$20,000, and Mr. Mantel to two concurrent terms of 4 weeks' imprisonment suspended for 12 months.
CFA allowed appeal against SFC
In March 2015, Pacific Sun and Mr. Mantel appealed to the CFA to challenge their convictions and sought clarification of the applicability of the professional investor exemption. The CFA allowed the appeal, set aside the rulings of the CFI judge and upheld the Magistrate’s initial decision of acquittal.