Private share placement to employees and outside investors
NovaCare Biotech Limited is a Hong Kong-incorporated start-up with 40 employees. It wants to raise HK$30 million by issuing new shares at HK$3 each. It plans to offer shares to all 40 employees (minimum HK$30,000 each), 25 external individual investors (HK$200,000 each), and 3 venture capital funds that qualify as professional investors. It advertises on its website and in a WeChat group open to the public, and accepts subscriptions from anyone who downloads the form. No prospectus has been registered. Its lawyers say the employee offer is exempt and the external investors are 'private'. The company also plans to complete the offer in two tranches three months apart to avoid the 50-person cap. The 3 venture capital funds will each invest HK$5 million and will receive the same information as the external investors.
1. Is this an offer to the public, and can any safe harbour apply?
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Yes. Advertising on a public website and an open WeChat group, and accepting subscriptions from anyone who downloads the form, is an offer to the public. The professional-investor safe harbour covers only the 3 venture capital funds. The 50-person safe harbour is not available because 40 employees + 25 external investors + 3 funds = 68 persons; splitting into two tranches three months apart does not cure a public offer and may be aggregated. The HK$500,000 minimum consideration safe harbour is not met: employees invest HK$30,000 and externals HK$200,000. The employee exemption is narrow and does not extend to the 25 external investors. The 'private' label does not control; substance and promotion do.
2. What are the consequences of proceeding without a registered prospectus?
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Proceeding without a registered prospectus would breach the prospectus regime. The offer document would not be authorized or registered, and the company, directors and anyone aiding the contravention may face criminal liability, fines and imprisonment. Investors could rescind and claim compensation; the SFC could issue a warning or take action to stop the offer; the company's future fundraising and listing prospects would be damaged. The two-tranche plan may be treated as an attempt to evade the cap rather than a genuine separate offer.
3. Design a compliant fundraising structure for NovaCare.
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A compliant structure would be one of: (i) restrict the offer to professional investors only, with no public advertising and verified professional-investor status; (ii) register and publish a prospectus that complies with the Companies Ordinance and SFO requirements; or (iii) rely on the 50-person safe harbour with no public promotion, no more than 50 offerees in total, and full records; or ensure each offeree invests at least HK$500,000 and the other conditions are met. Employee shares should be handled under a separate, properly documented employee scheme and not used to advertise to outsiders. A licensed intermediary should be engaged for placing, and all offering materials and investor classifications should be retained.