It has been nearly two decades since commencement of the current Securities and Futures Commission (SFC) licensing regime. The relevant legislation, the Securities and Futures Ordinance, originally specified nine types of regulated activity requiring a licence. Three types of regulated activity, concerning credit rating agencies and OTC derivatives, have been added subsequently.
As none of the 12 regulated activities relate specifically to private equity (PE) fund management, there have been occasional suggestions that a new regulated activity type should be introduced to clearly regulate that business. The SFC has never seriously pursued this option, arguing that the existing regulated activity types already cover PE firms. However, the SFC has not always had a consistent view as to which regulated activity type is most appropriate. Nor has the SFC historically shown much interest in prosecuting PE firms operating without a licence, although last year it disciplined a licensed PE firm, SEAVI Advent Ocean Private Equity Limited, for using unlicensed persons to perform regulated functions for its asset management business. The mixed messaging has lead to confusion among PE firms as to whether an SFC licence is required at all.
Although there has been no change to the legislative requirements, the SFC’s Licensing Department has twice in the past year sought to remind PE firms of possible licensing implications of their operations. First, a February 2019 update to the SFC’s Licensing Handbook included a brief explanation as to which types of regulated activity may be relevant to PE firms. A Circular issued at the beginning of this year included more detailed guidance.
In particular, where a PE fund is set up as a partnership and its general partner (GP) exercises discretionary investment authority in Hong Kong, that GP will need to be licensed for type 9 (asset management) regulated activity. An exclusion applies where the fund invests only in certain Hong Kong private companies, although the SFC takes the view that a licence is nonetheless required if those companies are special purpose vehicles themselves holding shares in companies incorporated elsewhere.
If a PE firm offers co-investment opportunities to other investors or undertakes fund marketing activities, it may need to be licensed for type 1 (dealing in securities) regulated activity, unless those activities are conducted solely for the purposes of carrying on the asset management activity under a type 9 licence.
The disciplinary action last year against a licensed PE manager, and the recent Circular, could indicate that the SFC will in future pay closer attention to the activities of PE firms. Unlicensed PE firms face an obvious dilemma: will the SFC prosecute them for past conduct if they now seek to rectify possible breaches of a licensing requirement? Generally, the SFC has taken a fairly lenient approach in this situation, although care is required when explaining it to the Licensing Department.
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