Equity Securities, Debt Securities and Collective Investment Schemes
This domain tests product knowledge across the three asset classes the paper treats as core, and the boundary between what may be offered to the Hong Kong public and what may not.
Equity securities
Hong Kong-listed equity includes ordinary shares of Hong Kong-incorporated issuers, H shares (PRC-incorporated issuers), red chips (outside-PRC incorporated, PRC-controlled), and weighted voting rights shares under Chapter 8A for innovative issuers with market cap of at least HK$40 billion, or HK$10 billion with revenue of at least HK$1 billion. Chapters 18A (pre-revenue biotech) and 18C (specialist technology: HK$6 billion for commercial, HK$10 billion for pre-commercial companies) create separate routes. Dividends are declared, not guaranteed, and there is no statutory pre-emption right in Hong Kong, so minority protection comes from the Listing Rules.
Debt securities
Issuers range from the HKMA (Exchange Fund Notes) to corporates, supranationals and retail programmes such as iBond. Key features are coupon type, seniority, security, embedded options (convertible, exchangeable, callable, perpetual) and credit rating. Ratings are not mandatory for listing; disclosure governs. Price and yield move inversely, and duration measures sensitivity. A three-year 4% bond priced at 98 has a current yield of 4/98 = 4.08%, while yield to maturity is higher because the investor also gains the pull to par.
Collective investment schemes
Under Schedule 1 of the SFO a CIS has four elements: property is pooled; investors lack day-to-day control; the property is managed as a whole; and income or profits are shared. CIS interests are "securities", so a public offer requires SFC authorisation under section 104 and compliance with the Code on Unit Trusts and Mutual Funds. Offering unauthorised funds to the public is an offence under section 103, subject to safe harbours such as offers to professional investors, to no more than 50 persons, or at a minimum subscription of HK$500,000. Structures include unit trusts, ETFs, REITs (at least 90% of assets in property, at least 90% of net income distributed), Open-ended Fund Companies under Part IVA of the SFO, and Limited Partnership Funds under Cap. 637.
Worked example
Twenty investors contribute HK$50 million to buy an office block; a manager selects and manages the property; profits are distributed pro rata. All four CIS elements are present, so an interest is a security and a public offer needs SFC authorisation. Restricting the offer to professional investors may fall within a safe harbour, but marketing must still comply with the Code of Conduct and advertising guidelines.
Traps
- Treating SFC authorisation as a guarantee of performance.
- Forgetting the REIT property and distribution thresholds.
- Assuming every fund may be sold to retail clients.
- Ignoring that a convertible is debt plus an embedded equity option.