ComplianceOne Newsletter - August 2024
The topics discussed in this monthly newsletter are as follows:
MARKET NEWS
1. SFC Second Quarterly Report reveals market growth and regulatory progress in Hong Kong
On 22 August, 2024, the SFC posted its second quarterly report (“Report”) showing encouraging performance on asset management, listing and virtual assets landscapes in Hong Kong.
Key takeaways of the achievements mentioned in the Report are as follows:
Hong Kong-domiciled funds continued the momentum with AUM up 7% Quarter-over-Quarter(“QoQ”) as end-June, and recorded with net fund inflows up 80% QoQ for the quarter;
license applications received by the SFC rose 3% QoQ and 8% Year-over Year (“YoY”);
new listing applications up 6% QoQ;
on virtual assets, the six VA spot ETFs were traded with a total market capitalisation of HKD2.4 billion as of mid-August;
17 applications for virtual asset trading platform (VATP) were received in the quarter;
further deepening of connectivity with Mainland and regional capital markets for Hong Kong through the five measures announced by the Mainland to expand market cooperation with Hong Kong;
Besides, the collaboration between the SFC and the HKEX for launch of the severe weather trading arrangement in late September this year further pushes Hong Kong a bit forward towards uninterrupted trading environment to algin with the global markets.
SIGNIFICANCE:
As Ms Julia Leung, the SFC’ s Chief Executive Officer, has said: “the latest quarterly data and continuing trends reaffirm the SFC’ s strategic approach, and we will build upon our accomplishments with steadfast commitment to market connectivity, innovation, sustainability and, above all, integrity”.
2. HKEX’s annual rehearsal for trading system recovery
On 13 August 2024, the SFC announced that the HKEX will conduct an annual rehearsal for emergency trading system recovery in securities market on 7 September 2024. The following process of the Hong Kong investor identification regime (“HKIDR”) will be covered in the rehearsal:
Submission of the BCAN-CID Mapping File and Reporting Forms to the data repository of the Stock Exchange of Hong Kong (SEHK) (applicable to all Relevant Regulated Intermediaries1(RRIs)); and
BCAN tagging for order submission to SEHK’s trading system (applicable to RRIs who are Exchange Participants (EPs) only).
RRIs refers to “Relevant Regulated Intermediaries”, namely, the SFC-licensed corporations which are subject to the HKIDR requirements; and the RRIs are encouraged to participate in the rehearsal to get familiar with the contingency procedures and related operational matters upon the simulated service outage on the SEHK’ trading system.
SIGNIFICANCE:
The HKIDR was launched on 20 March 2023 last year, the submission of the BCAN-Mapping File and tagging of BCAN are indispensable without which the orders will be invalid. Given such paramount importance, RRIs are advised to participate in the rehearsal as failure to act promptly according to the contingency plan might lead to disastrous consequences a RRI can hardly withstand. RRIs can make reference to Attachment 2 (Guidelines for Exchange Participants during the Rehearsal) of the HKEX Circular for details.
3. Joint announcement on modifications to requirements for specialist technology companies and de-SPAC transactions
On 23 August 2024, the SFC and The Stock Exchange of Hong Kong Limited (SEHK) made a joint announcement regarding the temporary modifications to Listing Rules (“Modifications”) and amendments to the SEHK’s guidance materials with effect from 1 September 2024.
The modifications are designed to address the changes in market conditions since introduction of the listing regimes, key takeaways of the Modifications are:
A) For Specialist technology companies
Reduction in initial market capitalisation threshold for listing reduced from (in HKD):
(i) 6 billion to 4 billion for commercial companies;
(ii) 10 billion to 8 billion for pre-commercial companies.
B) For de-SPAC transactions
1. The minimum independent third-party investment required for a de-SPAC transaction will be modified to the lower of:
(i) the currently prescribed percentage of the negotiated value of the de-SPAC target as set out in Main Board Listing Rule 18B.41, or
(ii) $500 million in value.
2. Independence requirements for third party investors:
The independence test for third party investors in a de-SPAC transaction pursuant to Main Board Listing Rule 18B.40 will be aligned with that for sophisticated independent investors (“SIIs”) in specialist technology companies in Chapter 18C Independence Test (please refer to the hyperlinks for details), a brief of the details are as follows:
(i) the independence of a third-party investor will be determined as at the date of the signing of the definitive agreement for investment in the de-SPAC;
(ii) the following persons will not be considered as independent third-party investors, namely, (a) core connected persons of the SPAC or the de-SPAC target, (b) controlling shareholder of the SPAC or the de-SPAC target; (c) the founder of the de-SPAC target and their close associates;
(iii) the SEHK retains the discretion to deem any other person to be not independent based on the facts and circumstances of an individual case.
Other key notes are:
C) Time limit for the Modifications
The above Modifications will apply temporarily for a fixed period of three years from 1 September 2024 to 31 August 2027 (“Implementation Period”), and the SEHK may review the requirements and conduct public consultation if required during the Implementation Period.
D) Clarification on the definition of a “sophisticated investor” for independent third party investment
The SEHK has amended its guidance materials that align the definition of a “sophisticated investor” for independent third-party investment more closely with the SEHK’ s requirement for identifying qualified SIIs in specialist technology companies.
SIGNIFICANCE:
According to Ms Katherine Ng, Head of Listing of HKEX, who said: “These modifications will provide greater flexibility and clarity for both issuers and investors, whilst upholding our robust regulatory standards.”
Reduction of the thresholds in minimum initial market capitalization, together with the subsequent alignments of: (a) independence test between the third-party investors in a de-SPAC transaction and the SII in specialist technology companies; (b) definition of a “sophisticated investor”; all amounted to providing facilitation and flexibilities as the HKEX official has stated.
4. HKMA’s response on Nova Credit Limited’s cessation of operation and exit of Credit Data Smart
On 31 July 2024, the Hong Kong Monetary Authority (“HKMA”) had been informed by notifications from the Hong Kong Association of Banks, the Hong Kong Association of Restricted License Banks and Deposit-taking Companies, and the Hong Kong S.A.R. Licensed Money Lenders Association Limited (collectively as the “Industry Associations”) that Nova Credit Limited (“Nova”), one of the consumer credit reference agencies under the Credit Data Smart, had decided to cease its operations and exit Credit Data Smart for its own reasons.
For sake of protecting the security of consumers’ personal credit data, the Industry Association had required Nova to destroy all personal credit data downloaded from the Credit Data Smart as soon as possible as a matter of compliance to the service agreement; and an independent third party has also been appointed to monitor the implementation progress by Nova.
SIGNIFICANCE:
The HKMA is concerned about the incident of Nova and will maintain close communication with the Industry Association to ensure the exit work of Nova is properly conducted with priority in protection of personal credit data.
5. SFC consults on proposals to abolish mixed media offers
On 16 August 2024, the SFC launched a two-month consultation on proposals to abolish mixed media offers (“MMOs”) to facilitate a fully electronic process for public offerings and enhance the efficiency of the regulatory process in Hong Kong.
With the proposed changes, an issuer of equity or debt securities listed or to be listed on the SEHK will be removed of the option to issue printed application forms accompanied by electronic prospectuses under the Companies (Winding Up and Miscellaneous Provisions) Ordinance, thus expanding the implementation of paperless listing regime. The SFC takes one step forward to cease granting waivers for the use of MMOs in public offerings of SFC-authorised collective investment schemes listed or to be listed on the SEHK.
SIGNIFICANCE:
Under the existing arrangement, MMO allows listing applicants to issue paper application forms in public offers; abolition of this practice helps facilitate and materialise a paperless listing regime and further digitalise the listing process for the benefits of the issuers and the investors.
ENFORCEMENT NEWS
6. Chairman and CEO of China Forestry found culpable of false information and insider trading by Market Misconduct Tribunal
On 7 August 2024, the Market Misconduct Tribunal (“MMT”) has found Mr Li Kwok Cheong (former chairman, “LKC”) and Mr Li Han Chun (former CEO, “LHC”) of China Forestry Holdings Company Limited (“China Forestry”), culpable for disclosing false or misleading information in China Forestry’s IPO prospectus and its annual results announcement and annual report for the year ended 31 December 2009, inducing transactions in the company’s shares.
It was found that as a result of the false information, the reported turnover of China Forestry was overstated by 91.56 % and 99.99% for the years ended 31 December 2008 and 2009. Also, the customers claimed by the company were either non-existent or not genuine, and documentations were falsified as well.
The MMT concluded that LHC and LKC knew of the falsifications amid the IPO and annual results announcement; and LHC with his company were further found of insider dealing by selling 119,000,000 shares of China Forestry in January 2011, thus avoiding a loss of HKD353 million.
SIGNIFICANCE:
The SFC started the proceedings in the MMT against LHC and LKC for market misconduct in 2018, details of which is available in the SFC’s press release dated 28 June 2018.
For more details, please click on the title of the topic above.
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