Marketing Offshore Investment Funds in Singapore

Lim Wee Teck considers the ways in which offshore investment funds may be marketed in Singapore.

Types of Investment Fund Structures

Investment funds that are marketed in Singapore may be broadly categorised as follows:

shares in the capital of investment companies (usually in the form of redeemable preference shares); and
interests in non-corporate entities such as unit trusts or mutual funds (referred to in this article as 'interests in investment funds' and cognates of the same).

The method by which funds are marketed will depend on whether they are designated as shares or interests. Investment funds may also be further categorised into whether they are local or offshore funds. Local investment funds are beyond the scope of this article, which will focus on offshore investment funds and, in particular, the methods by which offshore investment funds may be marketed in Singapore.

Methods of Offer

Under Singapore law, there are three methods of offering shares or interests in Singapore, namely:

by way of a public offering;
by way of a private placement; or
by invoking an exemption under Division 5A of Part IV of the Companies Act (Cap 50) (a 'Division 5A Exemption' and 'Division 5A' respectively).

Shares in the capital of offshore investment companies can be marketed using all three methods, while interests in offshore investment funds can only be marketed in Singapore via the private placement method (subject to one exception discussed in further detail below).

Public Offer

Shares in offshore investment companies

Generally speaking, shares in investment companies may be offered to the public, subject to compliance with statutory requirements. Broadly speaking, this would involve the preparation of a prospectus (in compliance with the requirements of the Companies Act) and the registration of the same and other relevant documents with the Registrar of Companies and Businesses ('the Registrar').

While it is theoretically possible for an offshore fund to register a prospectus (which complies with all the requirements of the Companies Act) with the Registrar for the purpose of offering shares in Singapore, the Registrar retains the discretion to refuse to register the prospectus if it appears to the Registrar that it is not in the public interests to do so (section 50(2)(e), Companies Act). For this reason, no prospectus has, to this writer's knowledge, been registered by the Registrar for the purpose of permitting a public offering of shares of an offshore investment company in Singapore.

Offshore interests

The position in relation to the marketing of interests in offshore investment funds in Singapore was recently changed on 10 February 2001 by the issue of the Companies (Exemption) Notification 2001 (the 'Exemption Notification') by the Minister for Finance.

Generally speaking, interests in investment funds may be offered to the public in Singapore, subject to compliance with certain regulatory requirements contained in Division 6 of Part IV of the Companies Act ('Division 6'). This includes, among other things, registration of a statement similar in nature to a prospectus with the Registrar (section 113, Companies Act) and ensuring that the deed constituting the interests contains the prescribed covenants required by the Companies Act (section 111, Companies Act).

In the case of an interest in an offshore investment fund, prior to the Exemption Notification, even if a statement had been issued and registered in compliance with the requirements of the Companies Act and the deed constituting the interests contained the prescribed covenants required by the Companies Act, no such interest could be offered to the public in Singapore. This is because the Companies Act requires the trustee and the management company of the interests in the investment fund which are to be offered to the public in Singapore, to be public companies incorporated in Singapore, or incorporated under the laws of a proclaimed country and registered as a foreign company in Singapore. However, to date, no country has been declared by the Minister of Finance to be such a proclaimed country. The effect of this was that no interest in an offshore investment fund could be marketed to the public in Singapore.

While the Minister for Finance has still not declared any country to be a proclaimed country, the Exemption Notification has mitigated this state of affairs to a certain limited degree. The Exemption Notification exempts foreign ETF interests from the provisions of Division 6. An ETF interest is defined in the Exemption Notification as:

any interest in a scheme or arrangement which is made for the purpose, or having the effect, of providing facilities for the participation by persons as beneficiaries under a trust, in profits or income arising from the acquisition, holding, management or disposal of a portfolio of predetermined constituent assets in predetermined proportions, which constituent assets principally comprise securities listed for quotation on any stock exchange.

Two elements of this definition should be noted:

The scheme or interest must relate only to securities listed for quotation on any stock exchange. Accordingly, where the scheme or arrangement relates to, for example, unlisted securities (say, securities of companies commonly referred to as emerging markets) or commodity futures, it would not fall within the ambit of the definition, and, accordingly, would not be entitled to rely on the exemption in this notification.
The scheme or interest must relate to a portfolio of predetermined constituent assets in predetermined proportions. Accordingly, schemes or arrangements which provide for either the constituent assets or the proportions of the same to be adjusted at the discretion of the fund manager would not fall within the ambit of the definition.

A 'foreign ETF interest' is defined as 'any ETF interest in a scheme or arrangement that is established outside Singapore and is listed for quotation, or has received approval in-principal for listing and quotation, on a stock exchange outside Singapore'.

A foreign ETF interest may be offered to the public in Singapore for subscription or purchase, provided that it has been previously issued and is listed for quotation on an approved stock exchange (that is, a stock exchange in Singapore approved under the Securities Industry Act - effectively, the Singapore Exchange). This would also include the situation where it has received approval in-principal for listing and quotation on and the offer is made in connection with such a listing and quotation.

In addition, a statement in respect of the foreign ETF must be issued and registered with the Registrar. Such a statement is similar in nature to a prospectus and is treated as a prospectus for the purposes of the Companies Act. The information contained in a statement is generally not as extensive as that contained in a prospectus. No public offer or invitation in respect of foreign ETF interests may be made after the expiry of 12 months from the issue of the statement.

It must be stressed, however, that an interest in an offshore investment fund that is not a foreign ETF interest still cannot be marketed to the public in Singapore.

Private Placement

Both offshore shares and interests may be offered by way of private placement. However, whether or not an offer is one that is made to the public has always posed an intractable problem to practitioners. While it is clear that a general invitation or offer to all and sundry would amount to a public offer, the problem arises where an invitation or offer is made to a restricted class. At what point does the invitation cease to be private and become a public offer?

Case law does not yield any hard and fast rule, and each case will have to be determined in accordance with a variety of factors gleaned from existing case law. Cases have held that an offer to one may constitute an offer to the public if that person is selected or identified by reference to his being a member of the public (Khania Nominees Pty Ltd v Hamilton (1986) 10 ACLR 737). While there are cases that have held that an offer or invitation targeted at specific individuals who share a common characteristic is not an offer to the public (see, for example, Nicholas v Gan Realty Sdn Bhd [1970] 2 MLJ 89 and Hamilton v Austcan Property Investment Pty Ltd (1981) 5 ACLR 469), there are also cases which have held that because the number of specific persons approached was very large, the offer was indeed an offer to the public (see, for example, PP v Huang Sheng Chang [1983] 2 MLJ xcvi and AG v Derrick Chong Soon Choy [1985] 1 MLJ 97).

The general and most important factors that have to be considered are:

the number of persons comprising the group;
the subsisting relationship between the offeror and the members of the group;
the nature and content of the offer; and
the significance of any particular characteristic which identifies the members of the group and any connection between that characteristic and the offer.

Whether the members of the class approached require the statutory protection contained in the prospectus provisions may also constitute a relevant factor (SEC v Ralston Purina Co (1953) 346 US 119 and Corporate Affairs Commission (SA) v Australian Central Credit Union (1985) 10 ACLR 59). This factor is particularly relevant in the light of the fact that prior to the introduction of the Division 5A Exemptions (discussed in greater detail below) in 1990, section 4(6) of the Companies Act prior to the amendment in 1990 provided that offers of both shares and interests to 'persons whose ordinary business it is to buy or sell shares or debentures' (which would include banks, merchant banks and securities dealers ('professional investors')) were deemed not to be offers to the public. This general exemption was then removed with the amendments to the Companies Act in 1990 which introduced the Division 5A Exemptions (the Division 5A Exemptions are based on the premise that the exemptions are granted to offers that are, at law, offers to the public).

Some writers have taken the view that the amendments to the Companies Act which introduced the Division 5A Exemptions in 1990 were not intended to change the law in Singapore relating to offers or interests, and accordingly, offers of interests to professional investors would still not constitute offers to the public in Singapore. This would be the case if the old provision was a codification of the common law on what constitutes a public offer. In other words, if it is accepted that the common law position is that:

whether a particular class of persons approached require statutory protection is a factor in determining whether an offer to them is a public offer; and
professional investors are not such a class. This is presumably because they are both well able to ensure that they are adequately protected, and may be assumed to understand the intricacies of the financial market.

The position is further complicated by the recent Companies (Amendment) Act 2001, which amended section 4(6) to reinstate a number of the categories that were considered not to be offers to the public, but did not reinstate the prior reference to 'persons whose ordinary business it is to buy or sell shares or debentures'. If the reference to 'persons whose ordinary business it is to buy or sell shares or debentures' was merely a codification of the common law position, there is arguably no reason why it should not have been reintroduced by the amendment to section 4(6).

While an offer to professional investors would arguably not fall within the mischief that the prospectus provisions of the Companies Act is designed to protect against, it is, on the other hand, nonetheless difficult (in view of existing case law on what amounts to an offer to the public) to unequivocally state that an offer to, say, a hundred professional investors indiscriminately chosen, would not on its face amount to an offer to the public.

Perhaps at the end, all one can say is that each factor cannot be taken in isolation and a balancing of each of these factors should be conducted. On this basis, it is generally accepted that where an offer is made to a small number of pre-identified investors and in circumstances in which if such initial pre-identified investors decline, no further offer will be made, it is more likely to be regarded as a private placement. While it is not possible to state with precision how many persons may be approached under the private placement route and the greater the number of investors approached the stronger would be the case that the offers are in the nature of a private placement, most legal practitioners have generally accepted (as a rule of thumb) that where the number of pre-identified investors approached does not exceed 15, an offer to these persons would not be likely to amount to an offer to the public.

Division 5A Exemptions

Where, by reason of the number of potential offerees involved or the manner in which the offer is sought to be structured, it is not possible to proceed with the offer by way of private placement, offers of shares may be made in compliance with any one or more of the Division 5A Exemptions.

Pursuant to the Division 5A Exemptions, shares may be offered to institutional and certain other investors in Singapore. The Division 5A Exemptions are available to offers of shares to certain designated categories of investors on the basis that, although the offers are regarded as offers to the public, such offers are exempted from the requirement to issue a prospectus under the Companies Act. It therefore follows that, in the case of a private placement of shares, there is no need for the issuer to consider invoking any of the Division 5A Exemptions, as these need only be considered if the offer of the shares is being made to the public.

The Division 5A Exemptions do not extend to an offer of interests. It would therefore appear that, except for foreign ETF interests, interests in offshore investment funds may only be offered by way of private placement in Singapore.

Institutional investors

Under the exemption provided for in section 106C of the Companies Act, offers of shares may be made to:

banks and merchant banks;
insurance companies and trust companies;
licensed securities dealers and exempt dealers;
the Singapore government (this does not, however, include Singapore government owned companies) and statutory boards;
licensed investment advisers and exempt investment advisers;
pension funds and unit trusts;
investment companies; and
such other persons as the Minister of Finance declares to be exempt purchasers;

who or which acquire the shares as principal or as trustee for accounts fully managed by it who, for such purpose, shall be deemed to be dealing as principal.

Sophisticated investors

Offers of shares may also be made pursuant to section 106D of the Companies Act to sophisticated investors in Singapore, but the following conditions must be complied with:

the offer of the shares may not be accompanied by any advertisement offering or calling attention to the offer; and
no selling or promotional expenses paid or incurred in connection with the offer of the shares other than those incurred for administrative or professional services or incurred by way of commission or fee for services rendered by a securities dealer or investment adviser.

Sophisticated investors are defined in section 106D of the Singapore Companies Act to mean the following persons:

a person who acquires the shares as principal if the aggregate consideration for the acquisition is not less than S$200,000 (or its equivalent in foreign currencies);
an individual who acquires the shares as principal and whose total net personal assets exceed S$2m (or its equivalent in foreign currencies) or whose income in the preceding 12 months is not less than S$300,000 (or its equivalent in foreign currencies); and
a corporation which acquires the shares as principal and whose total net assets exceed S$10m (or its equivalent in foreign currencies) as determined by the last audited balance sheet.

Lim Wee Teck
Rajah & Tann