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Regulatory implications of offering securities to employees in Hong Kong

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Regulatory implications of offering securities to employees in Hong Kong

  1. SFO Regime
     
    Prohibition on Unauthorised Invitations to the Public
    In the absence of an applicable exemption, the issue of any advertisement, invitation or document (investment advertisement) containing an invitation to the public to acquire securities must be authorised by the Securities and Futures Commission (SFC) before it is issued. An invitation to employees of HKCo potentially constitutes an invitation to the public. Under the SFO, advertisements and invitations include an invitation or advertisement made in a document, verbally or produced electronically.

    Exemptions

    An exemption is available in respect of any investment advertisement which relates to an offer which is exempt under the CWUMPO Prospectus Regime.

    Thus provided the conditions are met for reliance on either the private placement exemption or the qualifying persons exemption, any documents issued in relation to the Shares will be exempt from the requirement for SFC authorisation under the SFO Regime.

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  3. The Licensing Requirement under Part V of the Securities and Futures Ordinance
     
    Although logically an offer of shares should not require the issuer to be licensed under the regime for participants in the Hong Kong securities industry (contained in Part V of the SFO), Hong Kong’s licensing regime has no specific exemptions to make clear that securities issuers do not need to be licensed, as is the case in other jurisdictions.

    The SFO prohibits the carrying on of a business in a regulated activity unless the entity is licensed by the SFC. “Carrying on a business” is construed widely.

    “Dealing in securities” is a regulated activity and is widely defined. A person “deals in securities” if he makes or offers to make an agreement with another person, or induces or attempts to induce another person to enter into or to offer to enter into an agreement (i) to acquire, dispose of, subscribe for or underwrite securities; or (ii) the purpose or pretended purpose of which is to secure a profit to any of the parties from the yield of securities or by reference to fluctuations in the value of securities.

    An offer of shares by a non-Hong Kong company to its Hong Kong employees potentially constitutes dealing in securities by the company.

    An exemption is available where a person as principal (as opposed to as agent) disposes of securities. If the issue of shares to a Hong Kong employee amounts to “dealing in securities” under the SFO, it would be within this exemption.

    More problematic is any solicitation or marketing activity conducted in relation to the shares which will amount to “dealing in securities”, but will not be within the above exemption which is restricted to “disposals”. There is no exemption from the licensing requirement for offers which are exempt under the CO Prospectus and SFO Regimes and thus there is no private placement exemption in the case of the licensing requirement.

    However, if the solicitation activities do amount to “dealing in securities”, this should not normally require a securities issuer to be licensed under the SFO on the basis that it should not be regarded as “carrying on a business” in dealing in securities. In the case of a one-off offer to a single employee, this will be easier to argue than where a series of offers are made to multiple employees. However, this may not necessarily be the case, for example if the issuer is in the business of securities dealing.

    Assuming that a non-Hong Kong company is not in the business of dealing in securities, its solicitation activities in respect of shares to be offered to a single Hong Kong employee should not require it to be licensed under Part V of the SFO.

OCTOBER 2014

This note is provided for information purposes only and does not constitute legal advice. Specific advice should be sought in relation to any particular situation. This note has been prepared based on the laws and regulations in force at the date of this note which may be subsequently amended, modified, re-enacted, restated or replaced.

Regulatory implications of offering securities to employees in Hong Kong

Regulatory implications of offering securities to employees in Hong Kong

Part IV of the Securities and Futures Ordinance

Private placement exemption in Hong Kong

Qualifying persons exemption in Hong Kong

Licensing Requirement under Part V of the Securities and Futures Ordinance

 

Skills

Posted on

2014-10-16