Open-ended fund company Hong Kong structure, regulation and requirements

Open-Ended Fund Company Hong Kong: Structure and Requirements

An open-ended fund company Hong Kong (OEFC) is a corporate fund structure established under the Securities and Futures Ordinance (Cap. 571, the SFO) for collective investment schemes. Unlike a standard private company limited by shares, an OEFC has variable capital. It can issue and redeem shares on an ongoing basis without the restrictions that apply to a conventional company under the Companies Ordinance (Cap. 622). The Securities and Futures Commission (SFC) regulates the OEFC, which must comply with the SFO and the Code on Open-Ended Fund Companies.

Hong Kong OEFC Requirements

Establishing an OEFC requires satisfying several statutory requirements under the SFO and the SFC's regulatory framework.

• Incorporation with the Companies Registry: The OEFC must be incorporated under the SFO. The application is made to the Companies Registry, which issues a Certificate of Incorporation. The OEFC must also register with the Business Registration Office of the Inland Revenue Department and obtain a Business Registration Certificate.

• SFC Authorization: An OEFC that offers its shares to the public must be authorized by the SFC under section 104 of the SFO. A private OEFC, which offers shares only to professional investors, does not require SFC authorization but must still comply with the SFO and the OEFC Code.

• Minimum Capital: The OEFC must have initial capital of at least HK$1,000,000 (or its equivalent in foreign currency) at the time of incorporation. A private company limited by shares has no minimum capital requirement.

• Directors: The OEFC must have at least two directors. Each director must be a natural person. At least one director must be an individual who is ordinarily resident in Hong Kong. A private company limited by shares requires only one director (who may be a natural person) and imposes no residency requirement.

• Company Secretary: The OEFC must appoint a company secretary. The secretary must be a natural person ordinarily resident in Hong Kong or a body corporate with a registered office or place of business in Hong Kong. A company with only one director cannot have that same person as its sole company secretary.

• Registered Office: The OEFC must maintain a registered office in Hong Kong. A post office box is not acceptable.

• Custodian: The OEFC must appoint a custodian to hold the fund's assets. The custodian must be independent of the investment manager and must be approved by the SFC. This requirement is unique to OEFCs and does not apply to private companies limited by shares.

• Investment Manager: The OEFC must appoint an investment manager to manage the fund's portfolio. The investment manager must be licensed or registered with the SFC for Type 9 (asset management) regulated activity.

• Articles of Association: The OEFC must have articles of association that comply with the SFO and the OEFC Code. The articles must address the variable capital structure, share issuance and redemption, and the rights of shareholders.

OEFC vs Hong Kong Private Company

The OEFC and a Hong Kong private company limited by shares are distinct entity types with different legal frameworks and purposes. The table below summarises the key differences.

The OEFC is designed for collective investment schemes. The private company limited by shares is the standard trading vehicle for businesses. An OEFC cannot be used for general commercial activities; its business must be the investment of its assets in a portfolio of securities, property, or other assets.

Open-Ended Fund Company Structure Hong Kong

The structure of an OEFC in Hong Kong is defined by the SFO and the OEFC Code.

• The OEFC as a Corporate Entity: The OEFC is a company with separate legal personality. It can sue and be sued in its own name. Its shareholders have limited liability, meaning they are not personally liable for the fund's debts beyond the amount unpaid on their shares.

• Variable Capital: The OEFC has variable capital. The fund can issue new shares and redeem existing shares at any time, subject to the terms of its articles of association. The share capital of the OEFC is not fixed, and there is no concept of authorised share capital. Shares have no par value, consistent with the abolition of par value under Cap. 622.

• Share Classes: The OEFC may issue different classes of shares. Each class can carry distinct rights and features, such as Class A shares for retail investors and Class B shares for institutional investors. The articles of association must specify the rights attaching to each class.

• Board of Directors: The board of directors is responsible for the overall management of the OEFC. The directors must act in the best interests of the shareholders and comply with the SFO and the OEFC Code.

• Custodian: The custodian holds the fund's assets in safe custody. The custodian must be independent of the investment manager and must be approved by the SFC. The custodian's duties include safekeeping of assets, settlement of transactions, and monitoring the investment manager's compliance with the fund's investment restrictions.

• Investment Manager: The investment manager makes investment decisions on behalf of the OEFC. The manager must be licensed or registered with the SFC for Type 9 regulated activity. The manager is subject to the SFC's Code of Conduct and must act in the best interests of the fund's shareholders.

• Administrator: The OEFC may appoint an administrator to handle the fund's accounting, valuation, and shareholder services. The administrator is not a statutory requirement but is common in practice.

• Auditor: The OEFC must appoint an auditor who is qualified under the Professional Accountants Ordinance. The auditor must audit the fund's financial statements annually.

Private OEFC vs Public OEFC

The OEFC regime distinguishes between private OEFCs and public OEFCs.

• Private OEFC: A private OEFC offers its shares only to professional investors as defined in the SFO. It does not require SFC authorization for its share offerings. It must still comply with the SFO and the OEFC Code. The private OEFC is subject to lighter regulatory requirements than a public OEFC.

• Public OEFC: A public OEFC offers its shares to the general public. It must be authorized by the SFC under section 104 of the SFO. The SFC imposes additional requirements on public OEFCs, including disclosure obligations, investment restrictions, and ongoing reporting.

Ongoing Compliance

An OEFC must comply with ongoing obligations under the SFO and the OEFC Code. These include:

• Filing annual returns with the Companies Registry on Form NAR1.
• Maintaining a registered office in Hong Kong.
• Keeping statutory records, including a register of members, register of directors, and register of charges.
• Preparing and filing audited financial statements with the Companies Registry and the SFC.
• Notifying the SFC of any changes to the fund's directors, custodian, or investment manager.
• Complying with anti-money laundering and counter-terrorist financing requirements.

Tax Treatment

An OEFC is subject to Hong Kong profits tax on its assessable profits at the standard rate of 16.5%. A qualifying OEFC may be exempt from profits tax on its investment income under the Unified Tax Exemption Regime for Funds. The exemption applies to funds that are authorized by the SFC or that meet the definition of a "qualifying fund" under the Inland Revenue Ordinance (Cap. 112). The OEFC should seek professional tax advice to determine its eligibility for the exemption.

Summary of Key Steps

To set up an OEFC in Hong Kong:

1. Prepare the articles of association and other constitutional documents.
2. Appoint the directors, company secretary, custodian, and investment manager.
3. File the application for incorporation with the Companies Registry, together with the required forms and fees.
4. Obtain the Certificate of Incorporation and Business Registration Certificate.
5. If the OEFC is to be a public OEFC, apply for SFC authorization.
6. Open a bank account and arrange for the custodian to hold the fund's assets.
7. Commence operations in accordance with the fund's investment mandate and the SFO.

The OEFC regime provides a flexible and regulated structure for collective investment schemes in Hong Kong. It differs significantly from a private company limited by shares, particularly in its variable capital structure, the requirement for a custodian and investment manager, and the SFC authorization pathway. Business owners and fund managers should obtain legal and regulatory advice on the requirements specific to their structure.