Hong Kong has recently seen the establishment of the Elephant Club Consumer Debt Fund, the city’s first hybrid fund linked to a peer-to-peer (P2P) lending platform, a structure that might be popular in Hong Kong until it develops specific rules on P2P lending, says one legal expert involved.
“At present, there are no laws and regulations in Hong Kong which specifically regulate peer-to-peer lending,” Michael Wong, a Hong Kong-based partner at K&L Gates, told Asia Business Law Journal’s sister publication, China Business Law Journal. “However, peer-to-peer lending, depending on the structure, could potentially fall foul of Hong Kong laws and regulations generally applicable to deposit taking, money lending and advertisements relating to investments and deposits.”
For compliance purposes, Wong and his team designed a structure under which, instead of having the investors directly lending to the borrowers, the investors will invest in an investment fund – namely, the Elephant Club Consumer Debt Fund – with terms similar to those typically applicable to loans.
The investment fund, which aims to raise up to HK$2 billion (US$258 million) in the medium term, is managed by Capital Focus Asset Management. Raised capital will be largely invested in notes issued by Elephant Club, a licensed money lender in Hong Kong that provides an online platform for P2P lending.
Investors in the fund indirectly invest in the consumer lending business of Elephant Club, the notes of which are to be acquired by the fund. The fund is private and only accessible to a confined scope of investors, including professional investors.
Wong said the main reason for formu-lating this structure was that “the laws and regulations in Hong Kong relating to offering of investments funds under the professional investors exemption are very clear”, particularly given a Court of Final Appeal decision in 2015 in the case of Pacific Sun Advisors Limited & Anor v Securities and Futures Commission, which held that advertisements, invitations or documents – including information on websites – of an investment fund can be issued to the general public if the fund is intended to be sold only to professional investors.
Another challenge, according to Wong, is how to replicate the commercial terms of the loans in the investment fund. “Commercially this is very important, and we experienced a lot of practical difficulties in aligning the terms and operations of the investment fund with the underlying loans,” he said.
“In the end we created a structure which, although not the same as a traditional peer-to-peer lending arrangement, is something that we consider very similar, and that could work effectively as well.”
Legal counsel: K&L Gates advised on the formation of the Elephant Club Consumer Debt Fund, the financing structure between the fund and Elephant Club, and on the regulatory issues in relation to the online platform. Michael Wong led the deal, supported by Hong Kong partner Neil Campbell, who advised on the financing aspects.