Financial Regulation

Offering investments to the public

Two regimes govern public offerings in Hong Kong: the offer of investments regime under SFO and the prospectus regime under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (the CWUMPO).

Under the offer of investments regime, it is an offence under section 103 of the SFO to issue an advertisement, invitation or document which is or contains an invitation to the Hong Kong public to acquire securities, structured products or collective investment schemes unless the issue is authorised by the SFC, or an exemption applies.

Under the prospectus regime, any document which offers or invites to the public to subscribe for or purchase any shares in or debentures of a company (including companies incorporated outside Hong Kong, and whether or not it has established a place of business in Hong Kong) is required to comply with the content and registration requirements of the CWUMPO.

For corporate financings such as initial public offerings, the prospectus regime applies, but for investments in collective investment schemes like mutual funds, the offer of investments regime applies.

Licensing and registration

SFO, s 114 stipulates that any person who carries on or holds himself out as carrying on a business of a regulated activity commits an offence unless that person is licensed by or registered with the SFC, or that person or activity falls within an exemption.

Types of regulated activity provided under SFO, Sch 5:

• Type 1: dealing in securities
• Type 2: dealing in futures contracts
• Type 3: leveraged foreign exchange trading
• Type 4: advising on securities
• Type 5: advising on futures contracts
• Type 6: advising on corporate finance
• Type 7: providing automated trading services
• Type 8: securities margin financing
• Type 9: asset management
• Type 10: providing credit rating services
• Type 11: dealing in OTC derivative products or advising on OTC derivative products.
• Type 12: providing client clearing services for OTC derivative transactions.

Type 11 activity was added in June 2014 by section 53 of the Securities and Futures (Amendment) Ordinance 2014, and is not yet in operation.

The new Type 12, Part 1, Schedule 5 added by the Securities and Futures (Amendment) Ordinance 2014 came into operation on 1 September 2016, in so far as it relates to paragraph (c) of the new definition of “excluded services” in Part 2 of Schedule 5. Paragraph (c) of the new definition of “excluded services” includes services for clearing over-the-counter (“OTC”) derivative products that (i) would constitute Type 12 regulated activity except for an act of an acceptable participant of a central counterparty located in Hong Kong; and (ii) are provided by an authorized financial institution or an approved money broker.

The individual or corporate applicants for licensing or registration have to demonstrate that they are fit and proper in the following respects:

• financial status or solvency
• educational or other qualifications or experience (having regard to the nature of the functions to be performed)
• ability to carry on the regulated activity competently, honestly and fairly, and
• reputation, character, reliability and financial integrity

Failure to remain fit and proper may lead to disciplinary action including the revocation or suspension of a licence or registration by the SFC.

Market misconduct, offences and improper practices

The SFC monitors the markets to detect market misconduct. The six forms of market misconduct as defined under SFO, Part XIII are:

• insider dealing;
• false trading;
• price rigging;
• disclosure of information about prohibited transactions;
• disclosure of false or misleading information inducing transactions; and
• stock market manipulation.

The above forms of market misconduct are largely replicated in SFO, Part XIV as well.

SFO, Part XIII establishes the market misconduct tribunal and provides the civil route, while SFO, Part XIV establishes the criminal route for remedies. The SFC can choose to pursue the civil or criminal route for remedies based on the merits of each case. However, note that proceedings before the market misconduct tribunal (a civil proceeding) and criminal prosecution cannot be instituted against the same person for the same act of market misconduct.

In addition to the above forms of market misconduct, SFO, Part XIV specifies other offences relating to dealing in securities and futures contracts which do not fall under SFO, Part XIII.

There are also other offences provided in other parts of SFO. For example, SFO, s 174 makes it an offence to engage in certain acts during an unsolicited call, often referred to as a cold call.

In addition to the above offences, there are some practices which the SFC regards as improper or unethical and involve a breach of the SFC’s codes and guidelines. Some examples are boiler room activities, front running, rat trading and churning. These do not constitute offences but may affect the fitness and properness of a licensed or registered person.