Convertible Note Agreement (Hong Kong)

A Convertible Note Agreement in Hong Kong sets out the terms on which the lender advances funds and the borrower agrees to repay them.

Convertible notes occupy a strategically important position in Hong Kong's startup and venture capital ecosystem, enabling pre-Series A companies registered with the Companies Registry under Cap. 622 to raise growth capital from angel investors, family offices, and early-stage venture funds without agreeing on a company valuation at the time of investment. The valuation question is deferred to the next priced financing round, at which point the note converts at a discount to — or at a valuation cap below — the round price, rewarding early investors for the risk they took before the company's value was established by a lead investor conducting full due diligence.

As a debt instrument before conversion, the convertible note evidences the company's obligation to repay principal and accrued interest if no conversion trigger occurs before maturity. Interest typically accrues at 5-8% per annum on the outstanding principal. The Inland Revenue Department (IRD) treats accrued interest on a note held by a Hong Kong business investor as assessable income under Profits Tax at 16.5% (or 8.25% under the two-tier rate for the first HK$2 million of assessable profits). Hong Kong imposes no withholding tax on interest payments to non-resident investors, making Hong Kong convertible notes attractive to cross-border investment structures.

The Securities and Futures Commission (SFC) regulates the offering of convertible notes that constitute 'debentures' and therefore 'securities' under Cap. 571. Public offers of such securities require a prospectus under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32) unless an exemption applies — most commonly the professional investor exemption under Schedule 1 to Cap. 571 or the private placement exemption limiting offers to no more than 50 persons in any 12-month period under Section 38B of Cap. 32.

Upon conversion, Section 142 of Cap. 622 requires the company to file a return of allotment with the Companies Registry within one month, recording the number of shares allotted, the names of allottees, and the consideration received. Stamp duty under the Stamp Duty Ordinance (Cap. 117) at 0.2% applies only where existing shares are transferred rather than new shares issued upon conversion. Hong Kong imposes no capital gains tax on investment gains from the subsequent sale of shares acquired through conversion, making Hong Kong an attractive jurisdiction for convertible note exit scenarios.

The forms-legal.com Convertible Note Agreement template addresses all key structural elements: principal amount, interest rate, maturity date, conversion triggers, valuation cap, conversion discount, share allotment mechanics, representations and warranties, events of default, and HKIAC arbitration under the Arbitration Ordinance (Cap. 609).

Convertible Note Agreement in Hong Kong is needed whenever a company seeks early-stage capital from investors and both parties prefer to defer the valuation question rather than negotiate a priced equity round, or whenever an investor wishes to provide bridge financing to an existing portfolio company ahead of a larger funding event.

Pre-seed and seed-stage startups incorporated under Cap. 622 — including technology companies, fintech ventures regulated by the HKMA or SFC, biotech firms, and consumer businesses — use convertible notes as the primary instrument for raising initial capital from angel investors and seed funds without the cost of a formal valuation and shareholders' agreement. Hong Kong's active startup ecosystem, supported by Cyberport and Hong Kong Science and Technology Parks Corporation (HKSTP), makes convertible note financing a standard early-stage mechanism.

Bridge financing situations arise when an existing investor needs to provide additional capital to a portfolio company between priced rounds — for example, when a Series A fundraise is delayed and the company needs runway extension of three to six months. A convertible note bridge allows the existing investor to provide capital quickly under a simple two-page instrument rather than waiting for the full due diligence and legal documentation of a new equity round.

Family office and angel investor groups in Hong Kong frequently use convertible notes to participate in early-stage investments where the transaction size (typically HK$500,000 to HK$5 million) does not justify the legal cost of a full priced equity round with shareholders' agreements, preference share terms, and anti-dilution protections.

Cross-border investments — where Mainland Chinese investors through the Hong Kong-Mainland financial corridor, Singaporean family offices, US venture funds, or European investors provide capital to Hong Kong-incorporated companies — use convertible notes as a cross-border instrument that is recognised and enforceable under both Hong Kong law and, if structured correctly, the investor's home jurisdiction. Hong Kong's common law system and HKIAC arbitration infrastructure provide international investors with a reliable enforcement framework.

Distressed company restructuring situations where a creditor converts outstanding debt into equity — for example, where a supplier or strategic partner converts unpaid trade payables into a convertible note as part of a deferred payment arrangement — use convertible note documentation to formalise the conversion mechanism and protect the creditor's priority position relative to other unsecured creditors.

Hong Kong Innovation and Technology Commission (ITC) grant recipients who receive government funding under programmes such as the Innovation and Technology Fund (ITF) may use convertible notes to raise matching private investment from qualifying investors. The ITC's eligibility requirements and co-investment conditions must be reviewed before structuring a convertible note transaction for a grant-funded company.

Hong Kong-listed companies considering convertible note issuances must comply with the Listing Rules of the Stock Exchange of Hong Kong Limited (SEHK) administered by the Securities and Futures Commission (SFC), including Rule 28 on general mandates for the issue of new securities, Rule 17 on announcement and shareholders' approval requirements, and the inside information disclosure provisions of Section 307B of Cap. 571.

Convertible Note Agreement in Hong Kong must contain the following essential commercial and legal terms to create an enforceable debt obligation and an effective conversion mechanism under Cap. 19, Cap. 622, and Cap. 571.

Party Identification records the investor's full legal name and address — whether a natural person with HKID number, a Hong Kong company with Companies Registry number, or a foreign entity — and the company's full registered name, Companies Registry number, registered office address, and the names of the directors authorising the note issuance under a board resolution.

Principal Amount states the investment amount in HKD. Hong Kong imposes no minimum investment threshold for convertible notes offered to professional investors under Cap. 571. The SFC's private placement exemption under Section 38B of Cap. 32 applies to offers to no more than 50 persons in any 12-month period.

Interest Rate specifies the annual interest rate — typically simple interest at 5-8% per annum — the basis of calculation (365-day year), whether interest is payable periodically or accrues and is added to principal on conversion or repayment, and any default interest rate applicable to overdue amounts. Interest income received by a Hong Kong corporate investor is assessable under Profits Tax at 16.5% (or 8.25% under the two-tier rate).

Maturity Date states the date on which the note matures if no conversion trigger has occurred, typically 18 to 36 months from issuance. The maturity date provisions must specify the outcome at maturity: automatic conversion at the valuation cap price, investor-elected conversion, or repayment of principal plus accrued interest.

Conversion Triggers defines each event that causes automatic or elective conversion: qualifying financing round (with minimum aggregate size threshold, typically HK$5-20 million); maturity date; liquidity event (acquisition, merger, or IPO on SEHK or another exchange); and a discretionary investor conversion right.

Conversion Price Mechanics specifies the valuation cap (the maximum pre-money valuation at which the note converts, protecting the investor from excessive dilution if the company raises at a high valuation), the conversion discount (typically 10-30% below the qualifying round price per share), and the formula for calculating the conversion price as the lower of the cap price and the discounted round price.

Share Allotment Mechanics requires the company to allot and issue ordinary or preferred shares to the investor upon conversion consistent with Section 140 of Cap. 622, file a return of allotment with the Companies Registry within one month under Section 142, and deliver a share certificate to the investor within two months of allotment.

Representations and Warranties by the company cover: due incorporation under Cap. 622 and good standing with the Companies Registry; authority of the board to issue the note (confirmed by board resolution); absence of pre-existing security interests that would rank ahead of the noteholder; accuracy of financial statements provided to the investor; and compliance with all applicable SFC regulations.

Events of Default and Acceleration covers: insolvency or winding-up petition under Cap. 32; material breach of any covenant; failure to pay interest on the due date; and change of control without investor consent. Upon an event of default, the investor may accelerate the outstanding principal and accrued interest and elect conversion at the valuation cap price.

Governing Law and Dispute Resolution specifies Hong Kong law and HKIAC arbitration under the Arbitration Ordinance (Cap. 609) as the dispute resolution mechanism, with Hong Kong as the seat of arbitration. HKIAC awards are enforceable in over 170 jurisdictions under the New York Convention. The forms-legal.com Convertible Note Agreement template includes a compliant HKIAC arbitration clause and a Companies Registry return of allotment checklist.

Anti-Dilution Protections: where the convertible note investor requires protection against the company issuing additional shares at a lower price before conversion (a 'down round'), the agreement should include an anti-dilution adjustment mechanism — either weighted average anti-dilution (adjusting the conversion price to reflect the weighted average of old and new shares) or full ratchet anti-dilution (reducing the conversion price to the new lower issuance price). Full ratchet provisions are strongly investor-protective and rarely accepted by company founders in Hong Kong market practice.