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Global rules on foreign direct investment (FDI)
Cross-border acquisitions and investments increasingly trigger foreign direct investment (FDI) screening requirements.
The introduction of the open-ended fund companies (OFC) structure in Hong Kong is part of an initiative to enhance market infrastructure to further develop Hong Kong as a full-service international asset management centre and a preferred fund domicile. Following completion of the public consultations and legislative process, the OFC regime came into effect on 30 July 2018. The introduction of this OFC regime means that Hong Kong market participants can choose to set up fund structures in a corporate form.
The OFC regime is a few years old now, but it still attracts significant interest with around 100 new applications in May 2024 according to the Securities and Futures Commissions (SFC) list of registered OFCs. In this article we briefly summarise some of the points arising from the OFCs regime.
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.
There are a number of different pieces of legislation and codes that govern OFCs.
The key ones include:
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:
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.
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:
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.
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.
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