Charltons has considerable experience in advising on investment fund matters including fund formation, structuring (both domestic and offshore), development of fund terms, negotiations with investors and marketing. Our downstream practice includes transactional work as funds commence investment activities, advice on redemptions, fund restructuring, exits (including sales and IPOs of portfolio companies) and regulatory matters. Our clients include Hong Kong and international fund managers, investment advisers, private investment funds (including venture capital, private equity and hedge funds), securities dealers and investors investing into funds.
We have experience in a range of fund entities, including protected cell or segregated portfolio companies, limited liability partnerships, unit trusts and limited liability companies.
We advise on all forms of fund structure, including open-ended and closed-end funds, master / feeder structures, fund of funds, offshore funds and hedge funds. Our team has advised on the launch of funds across the full spectrum of asset classes, including listed stocks, fixed income and derivative securities, property, natural resources, private equity, venture capital, and distressed debt. We have also advised on a range of fund strategies including long / short, arbitrage and socially responsible investing.
In addition to our fund establishment and transactional work, Charltons advises fund managers on the regulatory aspects of their financial services operations. We help fund managers set up their businesses in Hong Kong, advise on the types of regulated activities which require licensing by the Securities and Futures Commission (SFC) under the Hong Kong Securities and Futures Ordinance (SFO) and related exemptions. We also assist fund managers in applying for SFC licences and complying with on-going obligations as SFC-licensed corporations. We also advise on the sale of fund management and investment advisory businesses, including the SFO issues arising from such disposals.
In cooperation with Boase Cohen Collins, Charltons can assist fund management clients in relation to SFC investigations, enforcement and disciplinary matters. Our experience includes advising SFC licensed corporations on misconduct by employees and advising financial intermediaries on potential unauthorized selling of investment products and carrying on “regulated activities” without proper licensing.
Charltons also regularly drafts submissions on proposed changes to securities laws in Hong Kong on behalf of interested parties, including fund managers.
The form of fund vehicle may be dictated by a number of different factors including, inter alia:
class of target assets
type of investors
financial promotion
regulatory restrictions
proposed exit (including sales and IPOs)
tax considerations (in particular, the aim is to achieve tax neutrality i.e. absence of tax at the fund level through the use of tax transparent fund vehicles
investor familiarity (in particular, U.S. investors may be more accustomed to LLP structures)
market practice
In Hong Kong, funds can be established either in corporate form as open-ended fund companies (OFCs), in the form of a unit trust by way of a trust deed or a partnership under the Limited Partnership Fund Ordinance (Cap. 637) (the “LPO”). OFCs are incorporated under the Securities and Futures Ordinance (Cap. 571) (the “SFO”). An OFC is an open-ended fund in corporate form domiciled in Hong Kong. An OFC is a separate legal entity with a board of directors; each director owes fiduciary and statutory duties of care, skill and diligence to the OFC.
Key features of an OFC are that:
its assets must be segregated and entrusted to a custodian for safekeeping;
it must appoint an investment manager which is licensed or registered with the Securities and Futures Commission (SFC) to conduct regulated activity Type 9 (asset management);
it can be structured to have sub-funds, each of which will operate as a “protected cell” – i.e. the assets and liabilities of each sub-fund belong only to that specific sub-fund and are not available to the creditors of another sub-fund in the event of its insolvency. However, although the principle of segregation of sub-funds’ liabilities is recognised under the SFO, there is no guarantee that courts in overseas jurisdictions will give effect to it.
Private equity (“PE”) and other typically closed-ended funds could be established in Hong Kong in the form of limited liability companies, but most PE funds managed from Hong Kong are established in offshore jurisdictions such as the Cayman Islands or the British Virgin Islands in the form of limited partnerships with a general partner responsible for the day-to-day management of the limited partnership.
In Hong Kong, it is now possible under the LPO to set up funds as limited partnerships in Hong Kong. A limited partnership fund will be a fund that is structured as a limited partnership and used for managing investments for the benefit of its investors. Key advantages of establishing a fund as a partnership under the LPO include:
contractual freedom;
tax benefits under the unified fund exemption regime pursuant to section 20AN of the Inland Revenue Ordinance (Cap. 112);
familiar investment vehicle across many jurisdictions;
straightforward and cost efficient dissolution / liquidation; and
safe harbour activities.
Charltons has considerable experience in providing Hong Kong funds legal advice on investment fund matters regardless of fund vehicle. Our clients include international and Hong Kong fund managers, investment advisers, private investment funds, securities dealers and investors investing into funds.
