Expansion of section 3(d) of the Rules
The Rules now contain a broader definition of “professional investor” to include any corporation which is wholly owned by one or more trust corporations, individuals (alone or with an associate), corporations or partnerships, which fall within the scope of sections 3(a), (b) or (c) of the old rules as appropriate (section 3(d)). Sections 3(a), (b) and (c) define the following as professional investors (i) any trust corporation with total assets of not less than HK$40 million; (ii) any individual (alone or with associates) having a portfolio of not less than HK$8 million; and (iii) any corporation or partnership having a portfolio of not less than HK$8 million or total assets of not less than HK$40 million. It should be noted that these thresholds are in Hong Kong dollars or its equivalent in any foreign currency.
The Asset Test
Under the Rules, to qualify as a professional investor a person will have to meet the relevant assets or portfolio threshold either at the “relevant date”1 or, for the benefit of market participants who have found the previous regime satisfactory, as evidenced in audited financial statements prepared within 16 months of the relevant date or custodian statements within 12 months of the relevant date i.e. the previous methods of evidencing the asset thresholds which have been preserved by the Rules.
Where relying on meeting the threshold at the relevant date market participants may use, as explained in the Securities and Future Commission (SFC) related consultation conclusions, methods which they deem appropriate in satisfying themselves whether a person meets the portfolio threshold to qualify as a professional investor at the relevant date.
Although not contained in the Rules, in its consultation conclusions the SFC did not rule out the possibility of a person accepting an investors’ self-declaration as one of the ways in which to confirm a person’s professional investor status. The SFC has indicated that this method should be limited to occasions which are appropriate in the circumstances, where an intermediary has sufficient knowledge of the person based on its own appropriate due diligence, not least taking into account requirements, where relevant, of the SFC Code of Conduct.
It is worth remembering that the SFC clearly expects intermediaries to keep proper records of their assessment process so that they can demonstrate that they have exercised professional judgment and have reached a reasonable conclusion that their clients meet the relevant thresholds. The keeping of records is a fundamental practice appearing throughout he SFC’s regulatory requirements.
Prior to the Rules, intermediaries could apply for a waiver under s.134 of the Securities and Futures Ordinance (SFO) from the requirements. Modifications and waivers may still be applied for, however market participants will not necessarily need to apply for a modification or waiver if the sources or types of information relied upon are consistent with the approach under the Rules. In addition, the SFC has noted that modifications which have been granted as of the date of implementation of the Rules may continue to be relied upon.
- Defined in s.2 of the Rules:
(a) in the case of advertisement, invitation or document described in s.103(3)(k) of the SFO, means the date on which the advertisement, invitation or document is issued or processed for the purpose of issue;
(b) in the case of a call described in s.174(2)(a) of the SFO, means the date on which the call is made;
(c) in the case of an offer described in s.175(5)(d) of the SFO, means the date on which the offer is made;
(d) in any other case which, by virtue of the any rules made under the SFO, requires compliance with an obligation, means the date by or on which the obligation is required to be complied with.