Hong Kong OFCs – a rough guide

The basics

OFCs are investment funds established in corporate form with limited liability and variable share capital in Hong Kong. The primary regulator of OFCs is the SFC, irrespective of whether they are publicly or privately offered, and the Companies Registry (CR) is responsible for their incorporation and corporate filings. SFC registration takes effect when the CR issues a Certificate of Incorporation. In addition, a Business Registration Certificate issued by the CR on behalf of the Inland Revenue Department is also required.

A "one-stop approach" is adopted for the establishment of OFCs. The applicant would have to submit its registration of the OFC to the SFC, together with the Certificate of Incorporation and Business Registration Certificate. No separate submission of documents and fees in respect of the Certificate of Incorporation and Business Registration Certificate to the CR is required. 

In terms of application documentation, the SFC has application forms for both private and public OFCs and information checklists. Processing applications usually takes less than one month for private OFCs and one to three months for public OFCs. There are, of course, fees payable to the SFC when making the application and these are further specified on the SFC's website.

Importantly, the registered office of an OFC must be situated in Hong Kong. It must also have at least two directors and these must be natural persons (a body corporate cannot be appointed as a director). The board must have at least one independent director, who must not be a director or employee of the custodian.

An OFC must have an investment manager who has an SFC licence, or who is registered with the SFC, for regulated activity Type 9 (asset management). An OFC must have a custodian, and all the scheme property of an OFC must be entrusted to a custodian of the OFC for safe keeping. 

Key pieces of legislation and codes

There are a number of different pieces of legislation and codes that govern OFCs.

The key ones include:

• Securities and Futures Ordinance (Cap. 571).
• Securities and Futures (Open-ended Fund Companies) Rules (Cap. 571AQ) (OFC Rules).
• Securities and Futures (Open-ended Fund Companies) (Fees) Regulation (Cap. 571AR).
• Code on Open-ended Fund Companies (OFC Code).
• For publicly offered OFCs, SFC Products Handbook.

FAQs

The SFC has issued Frequently Asked Questions (FAQs) on OFCs providing useful insights particularly on the application process and post registration changes. 

Points of interest in the FAQs include:

• A private OFC may become a public OFC and vice versa.
• Public OFCs can be exchange-traded funds (ETFs) where the OFC meets the relevant ETF requirements under the SFC Products Handbook.
• OFCs may be tokenised. Investment managers seeking to tokenise OFCs should consult the SFC Circular on intermediaries engaging in tokenised securities-related activities. Investment managers of public OFCs should also refer to the SFC Circular on tokenisation of SFC-authorised investment products. 
• Multiple custodians may be appointed to an OFC. Among other things where multiple custodians are appointed, the OFC's instrument of incorporation and / or custodian agreement should include provisions achieving the following:
  • ensure that all scheme property must be duly entrusted to the custodian(s) of the OFC; 
  • demarcate the rights and liabilities of each custodian clearly as to the respective scheme property that each custodian is entrusted with and responsible for; and 
  • provide for a default mechanism to place into custody any scheme property potentially arising at the umbrella-level OFC (such as any assets which may be attributed to the umbrella due to accounting treatment, or otherwise arising) to a specified custodian of the OFC.

Annual reports

An OFC may apply to the SFC to exempt its directors from the requirement to publish an annual report and provide copies to shareholders. However, the FAQs provide that when making such an application the OFC would meet the following conditions: (i) the relevant OFC has not been launched; and (ii) the relevant OFC has no investor. When making the application the OFC's directors will need to provide a certification that the conditions have been complied with and the SFC may require other supporting documents. It's important to note that notwithstanding the exemption, the OFC and its directors will still need to comply with the applicable provisions of the OFC Rules and OFC Code including the obligation to maintain proper books and records.

The SFC maintains a publicly available list of exemptions or waivers granted to OFCs or their sub-funds in relation to the annual report.

OFC Code

At the time of writing the current version of the OFC Code was dated September 2020.

Apart from providing general guidance it also covers requirements applicable to private OFCs only covering investment scope, scheme changes and fund operations and disclosure. In terms of guidance on investment scope for private OFCs, the OFC Code provides that:

• A private OFC must not be a business undertaking for general commercial or industrial purpose. A private OFC will generally be regarded as "a business undertaking for general commercial or industrial purpose" if it engages predominantly in:
  • a commercial activity, involving the purchase, sale and/or exchange of goods or commodities, and/or supply of services; and/ or
  • an industrial activity, involving the production of goods or construction of properties.
• The investment scope and investment strategies adopted by the investment manager must be clearly disclosed in the offering documents of the OFC.

Re-domiciliation of offshore corporate funds to Hong Kong

The Securities and Futures (Amendment) Ordinance, which came into effect on 1 November 2021, established a new fund re-domiciliation regime whereby existing funds set up in corporate form outside Hong Kong can re-locate their registration to Hong Kong as OFCs. To take advantage of this the fund needs to meet the same set of eligibility requirements for a new fund to be registered as an OFC. To register as an OFC the SFC applies a "one-stop" approach whereby it will notify the CR of the registration, and the SFC's registration will take effect upon the issuance of a certificate of re-domiciliation by the CR. Critically, the registered office of the re-domiciled OFC must be situated in Hong Kong.

Latest developments

In May 2021, the Hong Kong Government launched a grant scheme to subsidise OFCs (that are (i) successfully incorporated in Hong Kong; and (ii) non-Hong Kong fund corporations successfully re-domiciled to Hong Kong as OFCs) and certain real estate investment trusts successfully listed on the Stock Exchange of Hong Kong Limited (REITs)).The grant scheme covers eligible expenses incurred in relation to the incorporation or re-domiciliation of an OFC or the listing of a REIT and paid to Hong Kong-based service providers.

For OFCs incorporated in or re-domiciled to Hong Kong and REITs, the scheme covers 70% of eligible expenses paid to Hong Kong-based service providers, subject to a cap of HK$500,000 for private OFCs and HK$1 million per OFC for public OFCs and HK$8 million per REIT. 

On 26 April 2024, the SFC announced a three-year extension of the Government's grant scheme. The extended scheme was open for applications starting from 10 May 2024 to 9 May 2027 on a first-come-first-served basis.