The ruling confirms that courts will consider substance over form when assessing collective investment scheme arrangements and exemptions under securities law.

By Simon Hawkins and Adrian Fong

On 2 August 2023, the Hong Kong Court of Appeal handed down judgment in the case of 律政司司長 (Secretary of Justice) v. IPFUND Asset Management Limited [2023] HKCA 925 (Judgment), a case which has been the subject of litigation since 2014. The court considered the issue of whether certain commercial property investment arrangements marketed and operated by the defendants constituted “collective investment schemes” (CIS) and “securities” under the Securities and Futures Ordinance (SFO).

The Judgment provides additional guidance on the factors to be considered when assessing whether arrangements constitute CIS under the SFO, and how an exemption from the definition of “securities” should be interpreted.


The case presented the following facts, which were not in material dispute at the time of the Judgment:

  • From February to December 2011, the sole director (Director) of IPFUND Asset Management Limited (IPFUND) arranged for multiple investors to participate in 16 commercial property investments. The Director would first search for suitable commercial properties, negotiate with the sellers, and then arrange for a Hong Kong shell company to enter into a provisional sale and purchase agreement in respect of the property.
  • After arranging the purchase of the property, IPFUND staff would provide information about the property to investors and invite them to participate in the investment. The Director would determine the allocation, payment amounts, and security deposits payable by each investor.
  • IPFUND would then seek to resell the property as quickly as possible — without consulting the investors on how, or at what price, the property would be sold. Ideally, the sale would occur before completion in order to avoid the necessity of securing a bank mortgage. If the property could not be sold before the completion date, then IPFUND would usually secure a mortgage loan for the purchase amount. As part of the process, the registered shareholder of the shell company would make a declaration of trust to hold its shares on behalf of the investors in proportion to their investment stake.
  • After the sale of the property, IPFUND would notify the investors of the details and the sale price. IPFUND would receive “consultancy fees” from the total profit and distribute the rest of the proceeds to the investors.

In May 2014, the Securities and Futures Commission (SFC), Hong Kong’s securities regulator, commenced criminal proceedings against IPFUND and the Director for unlicensed dealings involving CIS in breach of the SFO in the Hong Kong District Court.

Definitions within the SFO

By way of background, the definition of “securities” in the SFO includes “shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority” and “interests in any collective investment scheme”.

“Collective investment schemes” are arrangements in respect of any property:

  1. under which the participating persons do not have day-to-day control over the management of the property;
  2. under which the property is managed by the operators and/or the contributions of the participating persons and the profits or income from which payments are made to them are pooled; and
  3. the purpose or effect of which is to enable the participating persons to participate in or receive profits, income, payments, or other returns from the property.

Excluded from the definition of “securities” are any shares or debentures of a company that is a private company under the Hong Kong Companies Ordinance (Cap. 622) (CO), i.e., a company incorporated in Hong Kong that is limited to 50 shareholders and has restrictions on transfers of shares and subscription to shares by the public (Private Company Exemption).

District Court Judgment

At the trial at the District Court level, the judge acquitted IPFUND and the Director on the basis that, although the property investment arrangements were properly characterised as CIS, they were packaged into Hong Kong shell companies which were “private companies” under the CO. As such, the interests purchased by the investors were shares of private companies and therefore not “securities” due to the Private Company Exemption (even if they were CIS). Therefore, both IPFUND and the Director were acquitted of the charges of conducting unlicensed securities activity.

The SFC appealed the judgment of the District Court to the Hong Kong Court of Appeal in an aim to clarify the law, although it did not challenge the acquittal verdicts of the defendants.

Court of Appeal Judgment

In the Judgment, the Court of Appeal reversed the decision of the District Court. It agreed with the District Court that the overall arrangements constitute CIS since, amongst others:

  1. the investment arrangements were related to property;
  2. the investors had no day-to-day control over the schemes;
  3. IPFUND managed the property as a whole through its staff; and
  4. the contributions and profits were pooled together.

The investors acquired an interest in the arrangement (i.e., a chose in action) rather than a legal or equitable interest in the underlying property.

However, the Court of Appeal disagreed with the District Court’s finding that the Private Company Exemption could be applied. Based on the facts, the Court of Appeal noted that the investment arrangement clearly involved marketing of the commercial property arrangement to the investors, rather than the shares of the shell company. In particular, IPFUND would identify and market each property to investors as the basis for the investment. The shares of the Hong Kong shell company would be allocated to investors under the trust arrangement only if the property could not be resold and a bank mortgage needed to be obtained.

On that basis, investors were not purchasing shares in the shell company, but the rights and interests of the CIS to share in the profits from the sale of the investment properties. Therefore, the Private Company Exemption did not apply since the overall arrangements were not aimed at acquiring or disposing of shares in a private company.


Historically, few Hong Kong cases have opined on the scope of CIS, the definition of “securities”, and the application of the Private Company Exemption. In 2020, the SFC separately stated in a circular to private equity firms that special purpose vehicles (SPVs) incorporated in Hong Kong are treated as “securities” if the underlying investments made by the SPVs are securities. This rule applies even though, strictly speaking, one could argue that the firms are not managing any “securities” given the Private Company Exemption.

However, some market participants have taken a more liberal approach to characterising CIS and exemptions under the securities law. The Judgment is helpful in confirming that regulators and the courts take a substance-over-form approach when determining whether certain arrangements constitute CIS and securities under law, as well as applying exemptions. When structuring investment arrangements and seeking to rely on exemptions, parties should take care as to how they market the interests and arrangements to investors, particularly if they wish to avail themselves of certain exemptions under the SFO.