China: Key regulations on the disclosure of false or misleading information / misstatements in prospectus in Hong Kong

Last Updated: 21 January 2015
Article by Barbara Chiu

The Securities and Futures Ordinance (Cap. 571) ("SFO") regulates the securities and futures market in Hong Kong, and provides a comprehensive civil and criminal regime to address misconduct in the financial market. In addition, sections 40 (Civil liability for misstatements in prospectus) and 40A (Criminal liability for misstatements in prospectus) of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) ("CWUMPO") also impose civil and criminal sanctions for misstatements made in a prospectus for the protection of public investors.

In this article, we will focus on SFO sections 277 (Disclosure of false or misleading information inducing transactions), 298 (Offence of disclosure of false or misleading information inducing transactions) and 384 (Provision of false or misleading information) concerning the disclosure of false or misleading information and CWUMPO sections 40 and 40A.

1. Legal principles

1.1 Sections 277 and 298 – Disclosure of false or misleading information inducing transactions

Section 298 is the basis for criminal sanction, and its equivalent civil sanction is set out in section 277. Under sections 277 and 298, liability arises where a person discloses, circulates or disseminates, or authorises or is concerned in the disclosure, circulation or dissemination of false or misleading information which is likely to induce subscription, sale or purchase of securities or dealing in futures or increase, reduce, maintain or stabilize price, and the person knows that, or is reckless or negligent (for civil proceedings only) as to whether, it is false or misleading.

Prosecution is required to prove that the information in question was false or misleading as to a material fact, or was false or misleading through the omission of a material fact.

1.2 Section 384 – Provision of false or misleading information

Section 384 provides that it is an offence for any person, in purported compliance with a statutory requirement to provide the Securities and Futures Commission ("SFC") or the Hong Kong Stock Exchange ("HKEx") with information that is false or misleading in a material particular. This offence may be prosecuted by the SFC in the Magistrates Court or by the Department of Justice on indictment. The maximum penalty on indictment is 2 years imprisonment and a fine of HK$1 million.

Under section 384, the prosecution has to prove:

  1. The person is in purported compliance with a requirement to provide information imposed by or under any of the relevant provisions;
  2. Such person provided information to a specific recipient; and
  3. Such information was false or misleading in a material particular and that he knew or was reckless as to whether the information was false or misleading.

In determining whether a statement was materially misleading, the primary question is twofold:

  1. Whether the impugned statement had a tendency to convey a meaning inconsistent with the true state of affairs?
  2. Whether the natural and probable result of the impugned statement would be to induce the reader to act in belief that is inconsistent with the true state of affairs?

It should be noted that the law requires that the misstatement must be false "as to a material fact" or is false "through the omission of a material fact". Accordingly, minor misstatements or errors would not attract liability under the aforementioned sections.

1.3 Civil and criminal liabilities for misstatements in prospectus under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32)

Section 40 imposes a civil liability to pay compensation for losses suffered by those who subscribed to shares or debentures after relying on untrue statements included in a prospectus. The liability to compensate is imposed by section 40(1) on the following classes of persons (subject to a number of defences provided under section 40(2)):

  1. Every person who was a director of the company at the time the prospectus was issued
  2. Every person who has agreed to be named in the prospectus as a director or who has agreed to become a director
  3. Every person who is a 'promoter' of the company (as defined in section 40(5)(a))
  4. Every person who has authorised the issue of the prospectus (but not including the Commission or its delegate: section 40(1A))

In contrast, section 40A imposes a criminal liability for such misstatements in relation to prospectuses issued by a company incorporated in Hong Kong. In general, where a prospectus includes an untrue statement, any person who has authorised the prospectus will be liable to imprisonment and a fine unless it can be shown that the statement was immaterial or that there were reasonable grounds to believe, and that the person did believe, that the statement was true (section 40A(1)). Where a breach of section 40A has been proved on indictment, a fine of up to HK$700,000 and three years' imprisonment may be imposed. Where the matter is tried summarily, a fine of up to HK$150,000 and 12 months' imprisonment may be imposed.

2. Our experience

We have advised listed companies / senior executives belonging to various business sectors during different stages of regulatory investigations. We provide strategic planning and advice in relation to investigations conducted by the relevant regulators and enforcement agencies including SFC, Independent Commission Against Corruption and Commercial Crime Bureau and assistance in defending any charges that may arise from such investigations. We have advised on a wide range of issues and areas of law, including disclosure of false / misleading information inducing transactions, disclosure of inside information, continuous disclosure obligations and legal professional privilege.

Based on our experience, it is most common to see investigations initiated by the SFC to be in relation to, inter alia, SFO sections 277, 298 and 384 regarding disclosure of false / misleading information in the listed companies' documents including prospectus, announcements and circulars. Whenever the SFC receives complaints regarding potential market misconduct and/or breach of relevant SFO provisions on the part of a listed company / relevant persons and the SFC has reasonable grounds to form a prima facie case against the listed company / relevant persons, they will initiate investigations under SFO section 182 and exercise the investigatory power vested upon them under SFO section 183 to request the listed company and/or the senior executives / relevant persons to produce relevant documents and to attend interviews with SFC investigators for the purpose of gathering information. It is the usual practice of the SFC to either make such a request in writing or apply to court for a search warrant to seize the relevant documents located in the office premises of the listed company and/or its legal representatives. It is a criminal offence if any request made under SFO section 183 is not complied with without any reasonable excuse.

At the outset of the SFC investigation, clients should take note of the following:

  1. Obligation of secrecy
    1. SFO section 378 imposes obligations of secrecy upon any persons assisting the SFC in carrying out their investigations.
    2. Such persons must not disclose anything about the investigation to anyone, failing which, will constitute a criminal offence.
  1. No right to silence
    1. SFO section 183 explicitly requires that a person must attend before the investigator at the time and place the investigator requires upon notice from the SFC, and answer any question relating to the matters under investigation that the investigator may raise with him.
    2. Section 184 states that it is an offence to fail to answer, without reasonable excuse, a question raised by the investigator.
    3. In other words, a person under investigation by the SFC is not entitled to refuse to answer any question and exercise his right to silence.
  1. Legal professional privilege ("LPP")
    1. LPP is expressly preserved and protected under SFO section 380(4). We normally advise clients to designate a particular group of persons (e.g. the legal department of the company) to give instructions to and communicate with lawyers/legal advisers. It is of paramount importance that legal advices are disseminated to persons other than the board of directors only if absolutely necessary, so as to avoid any possibility for potential waiver of LPP.
    2. In a 2011 case, the Court of Appeal of the High Court of HKSAR unanimously held that partial waiver of LPP is recognised in Hong Kong. We will advise clients that, when under SFC investigations, it is now open for them to only assert, if necessary, a limited waiver of LPP in favour of the SFC for the purposes of the investigations. We will also advise clients to keep a clear written record at the outset on the conditions of the limited waiver of LPP with the SFC to avoid any confusion as to the extent of the limited waiver.

In recent years, we have observed the SFC take a more rigid and proactive approach in their investigations and prosecutions. They have increasingly taken a hard stance on market misconducts involving disclosure of false or misleading information/misstatements in prospectus. Very often, those investigations lead to criminal prosecution and cases that might involve corruption or fraud may be referred to other law enforcement agencies, including Independent Commission Against Corruption and Commercial Crime Bureau, for further investigation.

Given the potentially dire consequences of SFC's investigations and the fact that a person under SFC investigations cannot exercise his right to silence, a listed company or its directors (executive/non-executive or independent) should immediately engage their own lawyers for advice on the potential civil or criminal liabilities and prepare for SFC's request for documents and interviews.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions