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In our client alert of 15 May 2017, we drew attention to concerns regarding “backdoor licensing” expressed by Julia Leung, Executive Director at the Securities and Futures Commission (SFC) in a recent speech to the Hong Kong Securities and Investment Institute.
On 2 June 2017 the SFC issued a circular referring to the large premiums paid by new substantial shareholders acquiring licensed corporations that have little or no business, and the hiring of responsible officers who do not participate in the firm’s management or operations. The circular reminds the industry that licences are granted to corporations and individuals to enable them to carry on a business in a regulated activity, and that the SFC may revoke the licences of corporations and individuals that do not genuinely carry on a business in a regulated activity.
If responsible officers in reality do not participate in the supervision of the licensed corporation’s business, or they lack sufficient authority to do so, the SFC may consider that the licensed corporation and the responsible officers are not fit and proper. They could therefore be subject to disciplinary action, including public reprimand and licence revocation.
It is apparent from the circular that the SFC is likely to follow up on cases which they consider may involve ‘backdoor licences’ to satisfy themselves that information which was provided at the time of the change of control of the licensed corporation was true and not misleading, and that any changes since then have been properly notified. The circular reminds the industry that the provision of false or misleading information to the SFC in support of a licensing application is a serious offence.
Areas of focus are likely to be representations made regarding the role of any continuing responsible officers and representations made concerning the licensed corporation’s business plan.
It is worth noting that the circular states that the assessment and vetting process for a new substantial shareholder application is no less stringent than the process involved with a new licensed corporation application. The timeframe for processing a substantial shareholder application may be comparable to that for a corporate licence application, as the factors that affect the processing time are largely the same.
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