Fund-raising by public companies

Welcome to Your Guide on Fund-raising!

Hello there! Today, we are diving into one of the most exciting parts of corporate law: Fund-raising by public companies. Think of this as the "fuel" that keeps a big company running. When a company wants to build a new factory or expand globally, it needs money (capital). It can get this by asking the public to invest.

Because the company is asking for money from everyday people, the law is very strict to make sure no one gets cheated. Don't worry if this seems like a lot of legal jargon at first—we will break it down step-by-step into simple, "human" language!

1. The "Sales Brochure": What is a Prospectus?

In the world of HK law, if a company wants to offer shares or debentures to the public, it must issue a Prospectus.

The Simple Concept: Think of a prospectus as a movie trailer. It’s a document that tells potential investors why they should "watch the movie" (buy the shares). However, unlike a movie trailer, a prospectus must be 100% honest and follow strict rules under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO).

Legal Definition: A prospectus is any document that is an "offer to the public" or "invitation to the public" to subscribe for or purchase shares or debentures.

Key Requirements for a Prospectus:

1. It must be in English and Chinese.
2. It must be registered with the Registrar of Companies.
3. It must contain all the information an investor would reasonably need to make an informed decision (the "Material Facts").

Key Takeaway:

If you are asking the general public for money, you must provide a registered prospectus. If you don't, you are breaking the law!

2. The "Safe Harbors": When You DON'T Need a Prospectus

Writing a full prospectus is expensive and time-consuming. Luckily, the law provides "Safe Harbors" (Exemptions) under the Seventeenth Schedule of CWUMPO. If an offer fits into one of these categories, it is not considered an "offer to the public," and no prospectus is needed.

Common Exemptions (The "Easy" Ways):
1. Professional Investors: Offering only to big banks or huge investment firms. (They are "pros" and don't need the law to hold their hand).
2. The "Small Group" Rule: Offering to not more than 50 people.
3. The "Small Money" Rule: The total amount raised is not more than HK\$5 million.
\n4. High Entry Barrier: The minimum investment for one person is at least HK\$500,000.

Memory Aid: The "50-5-5" Rule

To remember the exemptions, think: 50 people, $5 million, or $500k (half a million) minimum buy-in.

3. Misstatements: What Happens if the Prospectus Lies?

If a company puts false information in a prospectus and an investor loses money because of it, there is big trouble. There are two types of liability:

A. Civil Liability (Section 40 CWUMPO)

This is about compensation. The investor sues to get their money back. People who can be sued include:
- Directors of the company.
- Promoters of the company.
- Any person who authorized the issue of the prospectus (e.g., experts like accountants).

B. Criminal Liability (Section 40A CWUMPO)

This is about punishment. If a person authorized a prospectus with an untrue statement, they can face fines or even imprisonment unless they can prove they had reasonable grounds to believe the statement was true.

Common Mistake to Avoid:

Students often think only the company is liable. Wrong! Individual directors can be personally sued and even go to jail for lies in a prospectus.

4. Issuing Shares: The Process

Once the money is coming in, the company issues shares. This is called Allotment.

The Rule on Authority: Under the Companies Ordinance (CO), directors generally need prior approval from the shareholders in a general meeting before they can allot shares (Section 140 & 141).

Quick Review: Why do directors need approval?

Because if directors could just issue shares whenever they wanted, they could give them all to their friends and "dilute" the power of existing shareholders. The law prevents this "power grab."

5. Debentures: Borrowing Instead of Owning

Sometimes a company doesn't want to give away "pieces" of itself (shares). Instead, it wants to borrow money. It does this by issuing Debentures.

Analogy:
- Shares = You are a part-owner. If the company wins, you win. If it fails, you lose.
- Debentures = You are a lender. The company gives you an "IOU." They must pay you back with interest, regardless of whether they made a profit.

Fixed vs. Floating Charges:

When a company issues debentures, it often gives the lender "security" (like a mortgage).
1. Fixed Charge: Tied to a specific asset (e.g., a building). The company cannot sell the building without the lender's permission.
2. Floating Charge: "Floats" over a group of changing assets (e.g., inventory or cash). The company can keep using/selling these items in daily business. If the company defaults, the charge "crystallizes" and becomes fixed.

Key Takeaway:

Shares provide Equity (Ownership). Debentures provide Debt (A loan with security).

Final Summary Checklist for Your Exam:

1. Is it a Prospectus? Is it an offer to the public? If yes, it needs registration and specific content.
2. Is there an Exemption? Check the "50-5-5" rule (17th Schedule).
3. Is there a Lie? If there is a misstatement, identify who is liable (Civil vs. Criminal).
4. Shares or Debentures? Remember that shares need shareholder approval to issue, while debentures are essentially secured loans.

You've got this! Corporate law is just a set of rules to keep the business world fair. Keep reviewing these core concepts, and the details will fall into place.