On 7 January 2020, the SFC issued guidance on the licensing obligations of private equity (PE) firms and family offices which conduct business in Hong Kong. This guidance took the form of two circulars, the first of which relates to PE firms (the First Circular) and the second relates to family offices (the Second Circular).
The First Circular provides general guidance for PE firms seeking to be licensed to carry on a business of regulated activities in Hong Kong under the Securities and Futures Ordinance (SFO), including that:
- the general partner is generally required to be licensed for the type 9 regulated activity of asset management (RA9) if it conducts fund management business in Hong Kong that amounts to asset management under the SFO;
- a PE firm must have full discretionary investment authority in order to be licensed for RA9. When considering whether a PE firm has this authority, the SFC will look at the proposed investment decision-making process, the roles of the proposed licensed individuals and their involvement in the process, and whether the delegation of investment authority is properly documented;
- PE firms licensed for RA9 that have established an investment committee in Hong Kong must ensure that members of such investment committee who play a dominant role in making investment decisions are licensed as representatives and, where appropriate, approved as responsible officers;
- a PE firm that utilises special purpose vehicles (SPVs) for investment holding purposes will still require a license for RA9 if the underlying investments held through such SPVs, or the shares or debentures of the SPVs themselves, fall within the definition of “securities” under the SFO. This is an important clarification to the “private company” exemption that some PE firms are currently relying on;
- if a PE firm offers investment opportunities to other persons whereby they may enter into securities transactions alongside the PE fund then the firm is generally required to be licensed for the type 1 regulated activity of dealing in securities (RA1), as the act of offering the co-investment opportunities will likely be regarded as inducing other persons to enter into securities transactions. Please note that the incidental exemption may still be available where the co-investment is an integral part of the fund-raising;
- as fund marketing activities generally constitute “dealing in securities” as defined in the SFO, a PE firm carrying on a business in such activities would generally be required to be licensed for RA1. As with the above, the incidental exemption may still be available if the marketing occurs solely for the purposes of RA9 activities; and
- in assessing whether a responsible officer applicant of a PE firm has the required relevant industry experience to satisfy competence requirements, the SFC will adopt a pragmatic approach and recognise a broad range of experience as long as the applicant can demonstrate that it is relevant to his or her proposed duties.
The Second Circular provides general guidance for family offices intending to carry out asset management or other services in Hong Kong, including that:
- There is no specific licensing regime for family offices and licensing requirements arise from the activities-based regime in the SFO and its relevant exemption.
- As regards single family offices, the way in which such office operates can lead to different consequences under the licensing regime and the circular gives some helpful examples of the licensing impact of common structures.
- Equally, for multi-family offices, the type of license required depends on the services to be provided in Hong Kong.
The circulars were issued in response to enquiries from industry participants and their professional advisers and provide helpful clarification for market participants in relation to their licensing requirements and the availability of certain exemptions.
A copy of the First Circular can be found here and a copy of the Second Circular can be found here.
