PE Firms and Family Offices on the SFC Radar: An Update on SFC Licensing in Hong Kong

10Jan2020

The Securities and Futures Commission in Hong Kong (SFC) actively engaged with the private equity sector in 2019. The purpose was to highlight securities licensing requirements that affect private equity (PE) fund managers and family offices in Hong Kong. On 7 January 2020, the SFC announced two circulars that address key points arising from that industry engagement.

Here are three key high level points to remember:

  1. If a PE firm in Hong Kong manages an investment portfolio that includes offshore private companies, then this is likely to trigger a licensing requirement with the SFC for one or more regulated activities.
  2. If a PE firm establishes an Investment Committee in Hong Kong that takes a dominant role in making investment decisions for the PE fund, then members of that Investment Committee may need to be licensed as representatives or (as appropriate) responsible officers.
  3. Multi-family offices in Hong Kong with discretionary investment authority have a high likelihood of needing to be licensed by the SFC for one or more regulated activities.

Our detailed analysis is below.

Private equity firms

The SFC circular on licensing obligations of PE firms highlights these points of interest:

General partners: Private equity funds are generally formed as limited partnerships. The limited partnership structure requires there to be a general partner (GP) that performs all management activity. If the GP conducts fund management business in Hong Kong that includes managing a portfolio of securities or future contracts for another person, then the GP will need to be licensed for the regulated activity of asset management, and individuals who perform those activities in Hong Kong will need to be licensed as representatives or (as appropriate) responsible officers. This would not apply if the GP has fully delegated all asset management functions to an appropriately licensed firm.

Investment Committee members: If a PE firm establishes an Investment Committee in Hong Kong that takes a dominant role in making investment decisions for the PE fund, then members of that Investment Committee may need to be licensed as representatives or (as appropriate) responsible officers. This would not apply if the Investment Committee member does not have voting or veto power, and his primary role is to provide legal, compliance or internal control perspectives.

Private company exemption: The SFC clarified in February 2019 that where a firm deals in, advises on or manages shares or debentures of private offshore companies that fall outside the definition of “private company” under the Companies Ordinance, it is likely that the firm in question will be required to be licensed. Now, the SFC has further clarified that it will look at the composition of the entire investment portfolio to determine whether the investment portfolio constitutes securities. The private company exemption may not apply in the case of an SPV that is a private company incorporated in Hong Kong that is used for investment holding purposes for underlying investments that fall within the definition of securities. A PE firm in Hong Kong that structures its PE investments via a layer of Hong Kong incorporated private companies in respect of underlying investments in private companies outside Hong Kong is likely to need to be licensed with the SFC for at least asset management activities.

Co-investment: The offer of a co-investment opportunity by a PE firm in Hong Kong may trigger a licensing requirement for the PE firm to be licensed for the regulated activity of dealing in securities. Dealing in securities includes the activity of inducing others to enter into securities transactions. This would not be a requirement if the PE firm is licensed for asset management activities and offers co-investment opportunities as an integral part of its fundraising strategy for its own underlying investments.

Relevant experience: The SFC has clarified that it will take into account a broad range of experience of industry participants who need to be licensed. This can include PE experience gained in a non-regulated situation.

Family offices

The SFC circular on licensing obligations of family offices highlights these points of interest:

No special treatment for family offices: The SFC has clarified that there is no specific licensing regime for family offices. A company or family office set up as a business to manage assets that include securities or futures contracts may require to be licensed for asset management activities. The relationship of family members is not relevant to this issue.

Single family offices: A single family office could avoid a licensing requirement, depending on the way in which it operates. This could be the case where the structure and operations make it clear that no asset management assets are provided to a third party, or the asset management services are solely in relation to wholly owned corporations within the same group.

Multi-family offices: A multi-family office managing PE investments in Hong Kong is likely to require to be licensed by the SFC for asset management activities. Its regulatory position is quite similar to a PE firm conducting the same activities.

Other points

Other relevant regulatory activities: If a PE firm or family office fully delegates all asset management activity, it would still need to consider whether its activities in Hong Kong require to be licensed for the regulated activities of:

  • dealing in securities, if it executes securities transactions
  • advising on securities, if it provides securities investment advice
  • dealing in or advising on futures contracts if those activities include futures contracts

Group company exemption: A group company exemption from the requirement to be licensed can apply for the regulated activities of advising on securities or futures contracts, advising on corporate finance or asset management. This applies if the relevant advice or services are provided solely to wholly owned subsidiaries, a holding company which holds all the corporation’s issued shares, or other wholly owned subsidiaries of that holding company.

In February 2019, the SFC clarified that for securities advice, the exemption does not apply to advice given to clients of the group companies, and only applies in respect of either proprietary assets of the group itself, or advice that is independently assessed by the group company receiving the advice and then issued in its own name.  

The group company exemption for asset management activities only applies in respect of that group company’s assets. It should not be read as applying to the management of assets belonging to the group company’s clients. Managing assets belonging to third parties would constitute “asset management” and attract a licensing requirement.

Enforcement action: In October 2019, the SFC announced it had reprimanded and fined SEAVI Advent Ocean Private Equity Limited (SAOPEL) HK$1 million for breach of the Fund Manager Code of Conduct. The disciplinary action followed an SFC investigation which found that SAOPEL had allowed its director and an investment manager, both of whom were not licensed by the SFC, to perform regulated functions for its business in regulated activities between March 2013 and April 2014. They introduced clients to invest in the fund managed by SAOPEL, answered clients’ queries and arranged for the execution of the subscription agreements for the fund. This is just one instance that highlights the SFC’s interest in the PE and family office sector.

Areas of doubt: The circulars are helpful, but some areas of doubt still remain. There may be doubt about what constitutes full delegation of all asset management activities. It is unclear what the SFC will consider as a “dominant role” for the participation of members of an Investment Committee in investment decisions. It remains to be seen whether the SFC is fully content to exclude from licensing investment structures that involve managing offshore SPV’s for underlying property or non-securities investments. We do not know the likely attitude of the SFC to taking account in new licensing applications of experience of PE professionals in PE firms that should have been, but were not, licensed.

This is a helpful addition to the guidance offered by the SFC to the PE and family office sector.  The message is clear. The PE sector in Hong Kong is a regulated sector. Get to know your obligations, and comply.

Pádraig Walsh

The above is not intended to be relied on as legal advice and specific legal advice should be sought at all times in relation to the above.

If you would like to discuss any of the matters raised in this article, please contact:

Pádraig Walsh
Partner | E-mail
Russell Bennett
Partner | E-mail
Edmond Leung
Partner | E-mail
River Stone
Partner | E-mail

Disclaimer: This publication is general in nature and is not intended to constitute legal advice. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.