Licensing under the SFC (SFC Licensing)
Private Equity and Family Office
21. Do I need a license if I engage in venture capital or private equity (PE)?
The term “securities” is given a wide definition in Schedule 1 to the SFO. However, shares or debentures of a company that is a private company (Q) within the meaning of section 11 of the Companies Ordinance (Cap. 622) are excluded from the definition. As such, a firm that deals in, advises on, or manages a portfolio of “private equity” or “venture capital” which does not involve securities may not by itself attract a licensing requirement. In many other cases, however, where a firm deals in, advise 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.
Depending on a firm’s business model, it may be required to be licensed to carry on one, or more than one, type of regulated activity. As general guidance:
- if a firm is delegated with discretionary power to make investment decisions on securities for a fund in Hong Kong, it is required to obtain a licence for Type 9 regulated activity (asset management);
(b) if a firm has not been granted any discretionary investment authority by the fund it serves, it may still need to be licensed for the following types of regulated activities:-
- Type 1 regulated activity (dealing in securities) for marketing or distributing a fund or conducting any other securities dealing activities (e.g. deal negotiation and trade execution) for the fund;
- Type 4 regulated activity (advising on securities) for providing advice in respect of the investments or prospective investments of the fund
Many PE funds set up special purpose vehicles (SPVs), incorporated locally or overseas, for investment holding purposes. In determining whether an investment portfolio of a PE fund comprises securities or futures contracts for the purposes of RA9, the SFC will consider the composition of the entire investment portfolio. If underlying investments held through SPVs fall within the definition of “securities” (even if the SPVs are carved out) or the SPVs themselves fall within the definition of “securities”, the SFC will regard the management of the portfolio as “asset management” and the PE firm would be required to be licensed for RA9.
34. What is a private company within the meaning of section 11 of the Companies Ordinance (Cap. 622)?
(1) For the purposes of this Ordinance, a company is a private company if—
(a) its articles—
(i) restrict a member’s right to transfer shares;
(ii) limit the number of members to 50; and
(iii) prohibit any invitation to the public to subscribe for any shares or debentures of the company; and
(b) it is not a company limited by guarantee.
(2) In subsection (1)(a)(ii)—
member(??) excludes—
(a) a member who is an employee of the company; and
(b) a person who was a member while being an employee of the company and who continues to be a member after ceasing to be such an employee.
(3) For the purposes of this section, 2 or more persons who hold shares in a company jointly are to be regarded as one member.
43. How do the SFC evaluate the relevant industry experience of responsible officer for private equity (PE) firm?
The SFC adopts a pragmatic approach and recognises a broad range of experience as long as the applicant can demonstrate that it is relevant to his or her proposed duties. For example, the SFC will consider experience in:
- conducting research, valuation, and due diligence of companies in related industries;
- providing management consulting and business strategy advice to companies in related industries;
- managing and monitoring a PE fund’s underlying investments for the best interests of fund investors; and
- structuring corporate transactions, such as management buyouts and privatisations.
The SFC also accepts PE experience gained in a non-regulated situation. It will take into account experience in an overseas jurisdiction where the related PE activities are not regulated, as well as relevant experience in a PE firm that operates in Hong Kong and is exempted from the licensing requirement. For example, such experience may involve conducting research in Hong Kong solely for use by the PE firm’s holding company.
45. What are the general checklist items to start up a hedge fund?
Please refer attached checklist for reference.
46. What is the licensing requirement for the general partners (GP) of a private equity (PE) fund?
In general, a GP assumes ultimate responsibility for the management and control of the fund. In return, the GP would receive management fees, carried interest or other remuneration. In light of the GP’s crucial role in managing the PE fund, it is generally required to be licensed for Type 9 regulated activity (RA9) if it conducts fund management business in Hong Kong, provided that the related fund management activities fall under the definition of “asset management” in the SFO. Individuals who perform asset management activities for the GP in Hong Kong are also required to be licensed as representatives and, where appropriate, be approved as ROs accredited to the GP. Please also see Q49 for the licensing requirement of investment committee members.
However, GPs themselves would not need to be licensed for RA9 if they have fully delegated all of the asset management functions to another entity that is licensed or registered to carry on such regulated activity.
47. What is the licensing requirement for family offices?
The licensing regime under the Securities and Futures Ordinance (SFO) is activity-based. The licensing implications of providing asset management services in Hong Kong do not hinge on whether clients are families. Therefore, the relationships amongst the beneficiaries of a family trust or between family members are not relevant in determining whether a licence is required. For example, a family office can manage assets for persons who are not strictly “family members” (e.g. ex-spouses and in-laws). If a family office intends to provide other services such as acquiring financial assets following instructions made by the family, it should review whether they fall within the definition of any of the other types of regulated activities such as Type 1 (dealing in securities) and whether it is required to be licensed for them.
If the services provided by a family office do not constitute any regulated activity or they fall within any of the available carve-outs (see Q5 for incidental exemption and Q9 for group company exemption), the family office is not required to be licensed under the SFO.
Please also see Q48 for the single-family office and multi-family office.
48. What are the differences between single family office and multi-family office and respective licensing requirements?
A single-family office, for example, in cases where a family appoints a trustee to hold its assets of a family trust, and the trustee operates a family office as an internal unit to manage the trust assets, the family office will not need a licence because it will not be providing asset management services to a third party.
Similarly, if the family office is established as a separate legal entity that is wholly owned by a trustee or a company that holds the assets of the family, it will not need a licence as it will qualify for the intra-group carve-out as full discretionary investment manager of the securities or futures contracts portfolio. The family office is not required to be licensed for Type 9 regulated activity if it provides asset management services solely to related entities, which are defined as its wholly-owned subsidiaries, its holding company which holds all its issued shares, or that holding company’s other wholly-owned subsidiaries
A multi-family office by definition serves more than one high net worth family. The type of SFC licence required depends on the services to be provided in Hong Kong. If a multi-family office provides services to clients who are not related entities as defined in single-family office above, it will not be able to make use of the intra-group carve-out.
Where a multi-family office is granted full discretionary investment authority, its asset management activity would generally be similar to that of a licensed asset management company and therefore it would likely need to be licensed for Type 9 regulated activity. If it has not been delegated full discretionary investment authority and only provides securities investment advice and executes securities transactions, it may need to be licensed for other types of regulated activities, ie, Type 1 regulated activity and Type 4 regulated activity (advising on securities). Where the assets include futures contracts, it may also need to be licensed for Type 2 regulated activity (dealing in futures contracts) and Type 5 regulated activity (advising on futures contracts).
49. What is the licensing requirement for the investment committee members of an asset management firm or private equity fund?
Generally speaking, members of an investment committee who, either individually or jointly, play a dominant role in making investment decisions for the funds or investment portfolio are required to be licensed as representatives and, where appropriate, be approved as ROs.
Certain investment committee members do not have any voting right or veto power for investment decisions and their primary role is to provide input from a legal, compliance or internal control perspective. These members would generally not need to be licensed.