Beware of unauthorised CIS
I recently noticed the SFC website has added a new alert list to give an early warning to the public about suspected unauthorised collective investment schemes (“CIS”).
To understand what the alert list is about, first let’s take a closer look at the terms "CIS" and "unauthorised".
Although you may not be familiar with the term CIS, it covers some common investment products that we have all heard of, including investment funds, MPFs and real estate investment trusts (REITs). Simply put, a CIS usually involves the pooling of funds from various investors to invest in assets which are managed as a whole by an operator of the arrangement, and investors do not have day-to-day control over the assets.
Learn more: Understanding relevant elements of a CIS
I sometimes may make the mistake of judging a book by its cover. Whether an investment scheme is in fact a CIS depends on how the relevant arrangement works whilst its name is not conclusive. Even if its name does not have the word “fund” or does not suggest collective investment, it does not mean that it is not a CIS. Assets covered by CIS are very extensive and are not limited to those located in Hong Kong.
In recent years, there are investment schemes involving overseas properties such as hotels, shopping malls and student dormitory projects, or digital currency and ICO (Initial Coin Offering) in the market. These schemes may not appear to be related to CIS by just looking at their names; yet they may have CIS elements and could be CISs, which in general must be sold by intermediaries licensed by or registered with the SFC.
Under current regulations, unless exempted, all CISs must obtain the SFC’s authorisation before they can be offered to the Hong Kong public. In general, unauthorised CIS can only be sold to professional investors.
Although the authorisation by SFC is not a "Q-mark" certification as it is neither an official recommendation of a product nor a guarantee of a return, it has significant implications in terms of investor protection. Authorised investment products need to meet the requirements of the relevant SFC’s product code, and the offering documents have to clearly disclose essential information including features and risks of the product to enable investors to make informed investment decisions.
On the other hand, unauthorised investment arrangements, including those on the "Suspected Unauthorised CIS Alert List" are of high risk. Since such arrangements and their offering documents are not authorised by the SFC, the products may not be suitable for the Hong Kong public and the product disclosure may not be clear and complete to help investors understand the product features and risks. If investors do not have sufficient knowledge and experience, or if the structure and operation of the product is complicated, it will be more difficult to have thorough understanding of the product. As a result, investors may suffer significant or even total losses in such products.