In January 2020, the Securities and Futures Commission of Hong Kong (SFC) issued a circular, “Circular to private equity firms seeking to be licensed” (Licensing Guidance for PE Firms), and a separate circular, “Circular on the licensing obligations of family offices” (Licensing Guidance for Family Offices), to illustrate the application of licensing requirements to private equity (PE) firms and family offices.
It is important to note that these are not new requirements, the Guidance circulars provide the SFC’s interpretation of how the existing licence regime applies to private equity funds and family offices.
Licensing Guidance for PE Firms
The key areas of additional guidance under the Licensing Guidance for PE firms are outlined below:
1. Licensing requirements in the context of a limited partnership
General Partners (GPs) of PE funds (in the form of limited partnerships) who manage and control PE funds in Hong Kong are generally required to be licensed for Type 9 (asset management) regulated activity. The Securities and Futures Ordinance (SFO) prohibits an unlicensed GP to represent to any prospective investor that it manages a PE fund in Hong Kong.
GPs who have fully delegated all of their asset management functions to another entity which is licensed or registered to carry on such regulated activity are not required to be licensed for Type 9 regulated activity.
Individuals who perform asset management activities (which fall with the definition of regulated activities) for any GP in Hong Kong are required to be licensed representatives. If such individual is an executive director of such GP, he/she is required to be approved as a responsible officer (RO) to the GP.
2. SFC’s expectation of Type 9 regulated activity licensee
When considering a PE firm’s application for a license for Type 9 regulated activity, the SFC expects such PE firm to be able to exercise full discretionary investment authority in respect of the fund(s) it manages. According to the SFC, factors to be taken into account on a case-by-case basis include:
- the proposed investment decision-making process;
- the roles and involvement of the proposed licensed individuals in the process (including the authority and seniority of the RO in making investment decisions throughout the life cycle of each fund); and
- the proper documentation of investment authority delegation to the PE firm.
It is important to consider which entity/people will make the investment decisions. In many cases, the Hong Kong based employees or board of the Hong Kong entity do not make the final investment decisions, instead such decisions might be made by the general partner of the fund or an investment committee of the general partner. If that is the case then there would be no need for the Hong Kong employee or the Hong Kong entity to hold a type 9 licence. However, if the entity provides investment recommendations or advice, then it may need a type 4 advisory licence.
3. Licensing requirements of investment committee members
Investment committee members who, either individually or jointly, play a dominant role in investment decision-making for such funds are required to be licensed representatives and, where appropriate, be approved as Ros, if such members are in Hong Kong when exercising these functions.
However, those investment committee members in Hong Kong who do not have any voting right or veto power for investment decisions and mainly serve to provide input in respect of legal, compliance or internal control are not required to be licensed.
4. Licensing requirements in the context of holding investments through SPVs
A PE firm which manages a portfolio of investments held through special purpose vehicles (SPVs) is required to be licensed for Type 9 regulated activity if those underlying investments or the SPVs amount to “securities” under the SFO, irrespective of whether such SPVs are carved out from the SFO’s definition of “securities”.
5. Licensing exemptions for PE firms with an existing Type 9 license
A PE firm which offers (i) co-investment opportunities whereby the offerees may enter into securities transactions alongside the PE fund and/or (ii) conducts fund marketing activities is required to be licensed for Type 1 (dealing in securities) regulated activity, unless such PE firm has a Type 9 license and such activities are conducted for the sole purpose of carrying on Type 9 regulated activity.
6. SFC’s assessment of RO’s industry experience
The SFC has now set out its pragmatic approach in assessing an RO applicant’s relevant industry experience, including those with experience gained in an overseas jurisdiction where the related PE activities are unregulated, or in a licensing-exempted Hong Kong PE firm. In particular, it will consider an RO applicant’s 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 (e.g. management buyouts and privatisations).
Licensing Guidance for Family Offices
In light of the activity-based licensing regime under the SFO, if a family office provides services that constitute any regulated activity, it will attract SFC licensing requirements unless it falls within any exemption.
1. Single family offices
According to the SFC, a single family office will be exempted from licensing for Type 9 regulated activity under the SFO, if it is:
- an internal unit to manage assets of a family trust as appointed by such family and it does not provide asset management services to a third party;
- a separate legal entity which is wholly owned by a trustee or a company that holds the assets of a family; or
- operated to provide asset management services solely to its wholly-owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly-owned subsidiaries (related entities).
2. Multi-family offices
A multi-family office with full discretionary investment authority is required to be licensed for Type 9 regulated activities, unless it only provides services to clients who are related entities. Those multi-family offices that are not granted full discretionary investment authority may also attract licensing requirements depending on the type(s) of regulated activities they conduct.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.