The Securities and Futures Ordinance (SFO) provides that a person shall not sell securities at or through a recognized stock market unless at the time he sells the securities, he or his principal has, or believes and has reasonable grounds to believe that he or his principal has, a presently exercisable and unconditional right to vest the securities in the purchaser of them. Illegal short selling is a criminal offence which carries a maximum penalty of HK$100,000 fine and two years’ imprisonment upon conviction.
In August 2013, the Securities and Futures Commission (SFC) issued a press release reminding the public that the short selling restrictions under the SFO can be triggered where placees sell their placing shares before completion of a placement. The reminder came after the SFC noted some misconceptions in the market that placees could sell their placing shares before completion of a placement even if they did not have the shares when they placed the sell order, provided that they could settle the trade on the settlement day with the placing shares allotted to them.
The SFC takes the view that placing shares will remain conditional until completion of a placement. It follows that a person who sells these conditional placing shares before completion of a placement runs the risk of committing illegal short selling, unless he has already held a sufficient number of shares to settle the trade.
On 1 March 2016, the SFC announced that it has reprimanded and fined a sales director of UBS Securities Asia Limited after finding that she incorrectly represented to the placees of shares of a company listed on the Hong Kong Stock Exchange that the placing shares allotted to them could be sold before the completion of the placement without violating the short selling restrictions. The placement, which was subject to certain conditions, was announced by the listed company on 23 May 2014 and was completed on 30 May 2014. Three placees sold a total of 2,300,000 placing shares before 30 May 2014. The SFC’s press release of this disciplinary action is available here.
This disciplinary action serves as another reminder to the market that selling of placing shares before completion of a placement may violate short selling restrictions under the SFO which may result in serious consequences for the uncovered short sellers. All licenced representatives are expected to act with due skill, care and diligence in conducting business activities. It is imperative that they have a thorough understanding of the short selling restrictions and properly advise their clients in this regard. Failure to do so may constitute misconduct on the part of the licenced representatives giving rise to disciplinary actions by the SFC.