In February, 2021, the Hong Kong Government proposed a subsidy (“OFC subsidy”) for the formation of open-ended fund companies (“OFCs”). On May 9, 2021, the SFC announced details of the OFC grant scheme including eligibility criteria and application process. Under the scheme, hedge fund managers who have successfully incorporated a Hong Kong OFC or who have successfully re-domiciled an overseas fund into Hong Kong as an OFC will be eligible for a grant of 70% of eligible expenses up to a cap of HK$1 million per OFC. In this article, we provide an overview of the OFC grant scheme, including timelines, procedures and conditions for applying for an OFC subsidy. If you would like more information about how to set up a hedge fund as an OFC or how to apply for the OFC grant scheme, please contact one of our hedge funds lawyers.
OFCs are Hong Kong corporate structures which offer a number of advantages over Cayman and other non-Hong Kong structures for hedge funds. Now, with the introduction of the OFC grant scheme, OFCs will enjoy an even greater advantage.
What is the OFC Grant Scheme?
The OFC Grant Scheme provides a subsidy from the Hong Kong Government to investment managers who have successfully incorporated an OFC or re-domiciled a non-Hong Kong fund corporation in Hong Kong as an OFC.
What is the Amount of the OFC Subsidy in the OFC Grant Scheme?
Under the OFC Grant Scheme, an investment manager will receive 70% of the eligible expenses in connection with each incorporation of an OFC or each re-domicile of an OFC to Hong Kong. Each OFC subsidy is capped at HK$1 million. Note that if the OFC commences winding-up proceedings or applies for termination of registration within two years from the date of its incorporation or re-domiciliation, the Hong Kong Government may claw back the subsidy.
Is there a Maximum Number of OFC Grants a Hedge Fund Manager Can Receive?
Yes. Under the OFC Grant Scheme, each investment manager is eligible to receive an OFC subsidy for a maximum of three OFCs.
What are Eligible Expenses under the OFC Grant Scheme?
OFC grants will cover expenses paid to Hong Kong based service providers in relation to the incorporation of an OFC or the re-domiciliation of the non-Hong Kong fund corporation in Hong Kong as an OFC. Though the terms “incorporation” and “re-domiciliation” are not defined, based on guidance from the Securities and Futures Commission (“SFC”), which administers the OFC Grant Scheme, the following expenses should be eligible:
Fees charged by law firms in respect of the preparation of the articles of association of the OFC, a subscription agreement for investors to subscribe for shares of the OFC, an investment management agreement between the OFC and the investment manager and a private placement memorandum (PPM) or other offering document in respect of the offering of the shares of the OFC
Fees charged by law firms in respect of the provision of OFC formation related tax advice.
What is the Period of Eligibility for the OFC Grants? When Can I Apply for an OFC Grant?
Under the OFC Grant Scheme, applications for an OFC subsidy must be made after an OFC has been successfully incorporated or re-domiciled and, in the case of a private OFC (as would normally be the case for a hedge fund), no later than three months after the date of the certificate of incorporation or re-domiciliation issued by the Companies Registry.
The OFC Grant Scheme opened to applications on May 10, 2021 and will continue for three years until May 9, 2024. It is unclear whether the scheme requires the OFC to have been incorporated during that period of time or whether the scheme requires the application to be made during that period of time.
It is important to make an application as early as possible. This is because funding is limited to HK$270 million and once the funding has been fully committed to OFC subsidies, the application period may be curtailed. As a result, hedge fund managers considering the setup of a fund may wish to incorporate an OFC as early as possible to maximize the opportunity to receive an OFC subsidy.
How Do I Apply for an OFC Subsidy under the OFC Grant Scheme?
The OFC Grant Scheme is administered by the Investment Products Division of the Hong Kong Securities and Futures Commission (“ SFC”). The Investment Products Division has historically regulated public funds, meaning SFC authorized unit trusts and mutual funds.
Applications for OFC subsidy should be made on the prescribed application form and should include all supporting documentation including the following:
Certificate of incorporation or re-domiciliation issued by the Companies Registry in Hong Kong for the OFC
Copies of invoices and receipts for the expenses claimed
The SFC has given no timeline for how quickly it will process applications for an OFC subsidy.