All Things FinReg


In our first blog on Hong Kong private equity licensing, we looked at Dealing in Securities (Type 1). This second blog deals with Advising on Securities (Type 4).

Advising on Securities (Type 4) includes not only giving advice on acquiring or disposing of securities, but also advising on the terms or conditions on which securities should be acquired or disposed of. There is an important "intra-group" exemption for the requirement for a Type 4 license, and many private equity firms have traditionally relied on this to conduct advisory activities in Hong Kong. This exemption is available if advice on securities is provided by the private equity firms in Hong Kong to (i) any of its wholly-owned subsidiaries; (ii) a holding company which wholly owns the private equity firms; or (iii) wholly-owned subsidiaries of its holding company. The recipient of the advice, recommendation, or research should assess the advice, recommendation or research (as the case may be) and has the discretion to reject it, before issuing the material to its own clients in its own name. In other words, the recipients must assess the advice, and not merely rubber-stamp it.

The regulatory capital for a Type 4 and a Type 9 license (discussed in the third part of this blog) is considerably lower if the onshore manager does not hold any client assets. There is no minimum paid up share capital requirement and the minimum liquid capital requirement is HK$100,000 (approximately US$ 12,776). In light of the need to hold at least 120% of the liquid capital in practice, the minimum liquid capital requirement is HK$120,000 (approximately US$ 15,331).

In determining the types of licenses to apply, it is important to note that the SFC has begun to refine its interpretation of "dealing in securities" and "advising on securities" regulated activities. The key distinction according to the SFC's interpretation of Type 1 is whether the negotiations being undertaken, whether on an acquisition or a disposal, are an integral part of "securing the deal." The SFC has stated in the past that "[The negotiation] process inevitably involves persuasion, offer and counteroffer and attempts to ‘secure a deal’, and we do not believe that this can properly be regarded as ‘advising on securities’. " If a private equity fund manager decides to apply for a Type 4 license, care should therefore be taken to ensure that the onshore entity's role in negotiating any transaction to acquire or dispose of securities does not amount to "securing a deal," which may then amount to "dealing in securities."

Our next and final blog on Hong Kong licensing will discuss Asset Management (Type 9).