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16 Aug 2016

Dangers of selling managed real estate projects, Structuring unregulated multi-investor private investment vehicles



During this year, certain court decisions and SFC enforcement activity have shed some light on the regulatory issues arising when structuring and selling real estate investments to investors in Hong Kong.

This light has also illuminated a way in which the much-maligned investment vehicle, the Hong Kong private company, can be an extremely useful way of structuring a multi-investor project, in relation to any asset class, so that it does not need any regulatory approval. 

Managed real estate

Many real estate agents sell to Hong Kong buyers investments in real estate, both inside and outside Hong Kong.  However, it has become apparent from enforcement action taken by the SFC over the last few years, and in particularly more recently, that there are serious regulatory pitfalls that have to be avoided wherever the real estate project is managed centrally.

This has been highlighted by:

  • two recent court decisions, one in Hong Kong and one in the United Kingdom, both concerning the sale of managed real estate projects and in particular whether such projects are collective investment schemes (CISs) which cannot be sold unless the CIS is authorised and/or the seller is licensed by the relevant regulator;
  • the recent issue by the SFC of certain answers to frequently asked questions (FAQs) on “collective investment schemes involving interests in real property”; and
  • our own experience in certain advisory projects for our clients. 

Multi-investor private investment vehicles

These developments have also clarified how a multi-investor private investment vehicle might be structured without the need for regulatory approvals in Hong Kong, whether that vehicle is investing directly in real estate or in the shares of companies investing in real estate or indeed in any other asset class.

Hong Kong

In May 2014, the Securities and Futures Commission (SFC) commenced proceedings against IPFUND Asset Management Limited (IPFUND) and Ronald Sin (Sin), its sole director and shareholder, alleging contravention of section 114 of the Securities and Futures Ordinance (SFO). The defendants were charged with unlicensed dealing in securities.

During the material time, IPFUND ran a property investment business. A private shell company would be set up for each property investment project and each property would be purchased by the shell company. IPFUND would invite investors to invest in a project by acquiring shares in the relevant shell company. Part of the profits earned from selling the properties would be distributed to the investors in proportion to their shareholdings in the relevant companies. Part of the profits earned would be distributed to IPFUND as consultancy fees.

As with the sale in Hong Kong of any securities-related investment, this set of facts gives rise to two main regulatory issues:

  • Does the investment product being sold need to be authorised by the SFC for public sale – the product authorisation issue?
  • Does the person selling the product need to be licensed by the SFC – the business licensing issue? 

Product authorisation issue

It was argued by the SFC that shares in the shell companies represented interests in collective investment schemes (CISs). Unless an exemption applies, both the SFO (by section 103) and the old Companies Ordinance (Old CO) prohibit the offering of a CIS in corporate form to the Hong Kong public unless that CIS is authorised by the SFC. But none of the shell companies was authorised by the SFC as a CIS.

The District Court decided that each shell company was a CIS.  Surprisingly, however, the SFC did not seem to be prosecuting IPFUND or Sin for offering an unauthorised CIS to the public. Maybe this was because one of the exemptions is the offering of a CIS to 50 or fewer persons.  As each shell company was a Hong Kong private company, and such companies are by their constitutions not allowed to have more than 50 shareholders or to offer their shares to the public, maybe it was assumed that none of the shell companies was offered to more than 50 persons.  However, the case report indicates that, although each shell company had no more than 50 registered shareholders, there might have been more than 50 investors in some of the shell companies.  This might have been achieved by one or more of the registered shareholders (including Sin) holding shares on behalf of other investors.  In order for there to be more than 50 investors in a CIS, there might have been offers to more than 50 persons.

We are therefore left with an unanswered question as to why the SFC was not prosecuting on the ground that unauthorised CISs were being offered to the public.

Business licensing issue

The ground on which the SFC was prosecuting was that IPFUND and Sin were in breach of section 114 of the SFO by (a) carrying on a business of offering and disposing of interests in securities structured as CISs (whether or not SFC-authorised) without holding a type 1 (dealing in securities) licence from the SFC and (b) holding themselves out as carrying on such business.

To prove this, the SFC had to show that investments in the shell companies were “securities”, as defined in the SFO in the context of the type 1 regulated activity.

As indicated above, the District Court held that IPFUND was indeed carrying on a business of operating 16 CISs at the relevant time. However, doing this did not constitute an SFO-regulated business because the definition of “securities” under the SFO, for the purpose of the type 1 activity of “dealing in securities”, explicitly excludes investments in CISs which are structured as shares in a private company incorporated in Hong Kong. There was therefore no business of “dealing in securities” and so IPFUND was acquitted.  So, although the first part of the definition of “securities” includes investments in CISs, that is reversed by the second part of the definition as regards CISs which are private companies incorporated in Hong Kong.

The SFC has sought to appeal by way of case stated. It is nonetheless our view that, based on the facts of the case stated in the judgment, the court has reached the right conclusion.


Proceedings were brought by the Financial Conduct Authority (FCA) against Asset Land Investment plc (Asset Land) and its principal owner and director Mr Banner-Eve (BE) alleging that they had been carrying on an unauthorised regulated activity, namely the operation of CISs, contrary to section 19 of the Financial Services and Market Act 2000 (FSMA). The activities related to sales by Asset Land of individual plots at six possible development sites in the UK. Asset Land divided the sites into plots, sold them to investors and claimed that it would be responsible for obtaining planning permission and securing a sale to a developer. These arrangements are often referred to as “land banking” schemes. We are aware that land banking schemes are offered and sold in Hong Kong.

Section 235 of the FSMA concerns CISs constituted by arrangements with respect to property which enable participants to receive profits or income arising from the acquisition, holding, management or disposal of the property. To fall within section 235, the participants in the scheme must not have day-to-day control over the management of the property, and the property must be managed as a whole by or on behalf of the operator of the scheme. It does not matter whether the participants have the right to be consulted or to give directions. The definition of a CIS in Hong Kong under the SFO is similar.

Asset Land argued that each investor was the legal owner of the individual plot in which that investor invested and therefore that each investor had control of the management of his/her own plot. So there was no CIS.

However, the English court held that the “property” in question was the whole site. The term “have control” refers to “the reality” of how the arrangements are operated, not legal control. The essence of such a scheme is a lack of legal or practical control by the investor of the profit-generating investment which is the subject of the scheme. The court found that the dominion of the investors over their plots was in reality an illusion. The relevant management of the property as a whole was found by the court to comprise the steps necessary to obtain planning permission and secure a sale to the developer, and it was no part of the arrangement that the investors should have any part in or control over those management activities. It was a case where investors surrender control over their property to the operator of a scheme so that it can be either pooled or managed in common, in return for a share of the profits generated by the collective fund.

This was a decision under English law and does not therefore determine whether a land banking scheme is a CIS under Hong Kong law.  However, as England and Hong Kong are both common law jurisdictions, and the definitions of a CIS in Hong Kong and England are similar, the English court’s decision would be persuasive in Hong Kong.

SFC’S recent FAQs

Soon after the Asset Land case was decided in the UK, the SFC issued certain FAQs on CISs involving interests in real estate. The SFC expresses the following views:

  • If investors own individual units in a real estate project where the units are rented out and a manager makes decisions about how to rent out units, to whom, on what terms and whether any unit should be left unlet for a period, even if there is no pooling of contributions and profits or income, the arrangements may still amount to a CIS.
  • The meaning of “day-to-day control over the management of the property” focuses on whether investors can really make management decisions about the property.
  • Every investor must have day-to-day control over the management of its own piece of real estate for a scheme not to be a CIS. Even if only one investor does not have day-to-day control, the scheme can still be a CIS.

What does all this mean?

Three key points emerge from the above court decisions and the SFC’s FAQs:

  • If an investment in real estate is packaged so that it is managed centrally but sold to several investors, the structure could be a CIS and, unless an exemption applies, that CIS may need to be authorised by the SFC.
  • But a structure which is based on the use of a private company incorporated in Hong Kong, where the investment is offered to no more than 50 persons or only to professional investors or with a minimum investment per person of HKD 500,000, does not need any regulatory approval either for the investment vehicle itself (under the product authorisation regime) or for the person(s) selling the investment (under the business licensing regime).
  • Even if the underlying asset class is not real estate, the HK private company structure can be used as an investment vehicle for multiple investors in a way that does not require regulatory approvals.

As acknowledged by the SFC, the law in this area is complex. Legal advice should be sought if in doubt.  However, we have for many years been giving such advice and structuring multiple-owner investments for our clients not requiring regulatory approvals, so please get in touch.



Katherine Liu

Katherine Liu

T:  +852 2533 2717 M:  +852 6193 5227 Email Katherine | Vcard Office:  Hong Kong

Mark Reed

Mark Reed

T:  +852 2533 2888 M:  +852 9353 1359 Email Mark | Vcard Office:  Hong Kong