17 Jan 2022

THE HONG KONG MONETARY AUTHORITY PUBLISHED DISCUSSION PAPER ON CRYPTO-ASSETS AND STABLECOINS

Introduction

On 12 January 2022, the Hong Kong Monetary Authority (the “HKMA”) issued a discussion paper on crypto-assets and stablecoins (the “Discussion Paper”), inviting industry and public views on the applicable regulatory approach. Against the backdrop of increasing global adoption of crypto-assets and enhanced use of technology in financial systems, the HKMA has visited the regulatory regimes of Hong Kong as well as other major countries and the recommendations from the global regulators on this nascent field. The two keys of the Discussion Paper are the regulatory frameworks regarding (i) the Authorized Institutions (“AIs”) and (ii) payment-related stablecoins.

Crypto-assets and Stablecoins

In the Discussion Paper, the definition and nature of crypto-asset and stablecoins are broadly set out as follows:

Definition and Nature
Crypto-asset	Stablecoins
a type of private digital asset that depends primarily on cryptography and distributed ledger or similar technology	a sub-set of crypto-asset aims to maintain a stable value relative to a specified asset, or a pool or basket of assets by being “pegged to” or supported by such assets may be used for investment or payment purposes

Current Regulatory Regime in Hong Kong

A. Proposed licensing regime for virtual asset service providers (“VASP regime”)

In November 2019, the Securities and Futures Commission (the “SFC”) issued a position paper to set out a licensing framework for platforms which offer trading of securities-type VAs or tokens (“voluntary opt-in regime”). In particular, the voluntary opt-in regime is applicable to only platforms that offer trading services of at least one virtual asset (“VA”) with securities features involved. Platforms solely trading non-securities VAs are not covered.

In May 2021, Financial Services and the Treasury Bureau (“FSTB”) has completed the public consultation on introducing the VASP licence regime targeting at business operating a virtual asset (“VA”) exchange. At the initial stage, the licence regime will not apply to other types of VASPs such as crypto wallet providers or custodians. For further details, please refer to our news update “FSTB Consultation Conclusions on Legislative Proposals to Enhance Anti-Money Launder and Counter-Terrorist Financing Regulation in Hong Kong on Virtual Asset Services Providers” published on 9 July 2021.

B. Payment Systems and Stored Value Facilities Ordinance (“PSSVFO”)

Under the PSSVFO, the HKMA licenses and supervises Stored Value Facilities (“SVFs”), such as e-wallets and prepaid cards. The arrangements of crypto-assets, especially those used for payment purposes, are in some aspects similar to an SVF. Yet, whether a crypto-asset business amounts to an SVF is determined case by case. If a crypto-asset falls within the definition of SVF, it will be subject to a mandatory licensing regime administered by the HKMA. However, the definition of SVF of the PSSVFO may not cover certain types of stablecoins and/or their activities as may be seen in the market. Therefore, the HKMA is considering expanding the scope of the PSSVFO to cover such payment-related stablecoins.

C. Non-backed crypto-assets such as security crypto-assets

In November 2018, the SFC issued a circular to all intermediaries regarding regulatory requirements and expected standards and practices concerning the distribution of VA funds. For VA funds not authorised by the SFC, intermediaries should only target clients who are professional investors (as defined under the Securities and Futures Ordinance). The AIs intending to provide investment services related to VA must notify the HKMA and the SFC in advance.

Payment-related Stablecoins

Some stablecoins may become a commonly accepted means to make payment which may fall outside existing regulatory frameworks, posing risks to the market and community. One of the key risks is the money laundering/terrorist financing (ML/TF) risk as stablecoins may be held and changed hands anonymously and easily (even across the globe and borders) through the internet or other means.

Key Discussion Questions

A list of eight questions set out by the HKMA for industry and public feedback, together with its corresponding views, are extracted as follows:

No.	Discussion Question	Views of the HKMA
	Types of Stablecoins To Be Regulated
1.	Should we regulate activities relating to all types of stablecoins or give priority to those payment-related stablecoins that pose higher risks to the monetary and financial systems while providing flexibility in the regime to make adjustments to the scope of stablecoins that may be subject to regulation as needed in the future?	Will adopt the risk-based approach to focus on activities related to payment-related stablecoins. More attention will be placed on asset-linked stablecoins as they are more prevalent in the market and predominantly pegged to USD. Flexibility will be built in the regime to adopt future changes.
	Stablecoin-related Activities
2.	What types of stablecoin-related activities should fall under the regulatory ambit, e.g. issuance and redemption, custody and administration, reserves management?	Stablecoin activities such as issuing, creating or destroying stable coins, transmission of funds and executing transactions in stablecoins will need to be licensed by the HKMA.
	Authorisation and Regulatory Requirements
3.	What kind of authorisation and regulatory requirements would be envisaged for those entities subject to the new licensing regime?	High-level regulatory requirements such as HKMA’s prior authorisation, fitness and propriety of the controllers and senior management, and sufficiency of reserve assets would be necessary for stablecoin arrangements.
	Intended Coverage of the Regime
4.	What is the intended coverage as to who needs a license under the intended regulatory regime?	Person carrying out the stablecoin-related activities mentioned in Q2 in Hong Kong or actively market to the public of Hong Kong such activities as a business requires an entity incorporated in Hong Kong and holds a relevant license granted by the HKMA.
	Timing of the New Regime
5.	When will this new, risk-based regime on stablecoins be established, and would there be regulatory overlap with other financial regulatory regimes in Hong Kong, including but not limited to the SFC’s VASP regime, and the SVF licensing regime of the PSSVFO?	Will consider the next steps including assessing the need to issue further documents on specific aspects of the regulatory framework in 2022/23. Aims to establish the new regime no later than 2023/24.
	Stablecoin Issuer
6.	Stablecoins could be subject to run and become potential substitutes of bank deposits. Should the HKMA require stablecoin issuers to be AIs under the Banking Ordinance, similar to therecommendations in the Report on Stablecoins issued by the US President’s Working Group on Financial Markets?	Will draw reference from the relevant international standards and recommendations such as those put forth by the FSB and the BIS for stablecoins. Rules and requirements under the proposed regime would take relevant aspects of Hong Kong’s current approach to SVF and payment regulation at a minimum to avoid regulatory arbitrage.
	Unbacked Crypto-assets
7.	Would the HKMA also have plan to regulate unbacked crypto-assets given their growing linkage with the mainstream financial system and risk to financial stability?	Will provide AIs with more detailed regulatory guidance regarding AIs’ business interface and intermediary services to customers related to crypto-assets.
	Current or Prospective Parties
8.	For current or prospective parties and entities in the stablecoins ecosystem, what should they do before the HKMA’s regulatory regime is introduced?	Encourage current or prospective parties and entities in the stablecoins ecosystem to actively respond to this paper Will continue to supervise AIs’ activities in relation to crypto-assets and implement the SVF licensing regime according to the prevailing supervisory powers and policies.

Analysis and Takeaways

The fast-growing use of crypto-assets may pose risks to the financial system. Developing regulatory perimeters to appropriately govern crypto-assets could address the various risks posed to users and the financial system while embracing the potential benefit of innovations in the market. The Discussion Paper is a timely step taken by the HKMA to update its regulatory tools and shows the initiative and determination of the regulators in Hong Kong to ensure monetary and financial stability amidst technological advancement. We welcome more discussions and sparkles on this topic.

Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.

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11 Jan 2022

Partner Hank Lo Named ALB Dealmakers of Asia 2021

We are pleased to announce that our Partner and Head of Corporate Finance, Mr. Hank Lo, has been named one of the “Dealmakers of Asia 2021, Hong Kong” by Asian Legal Business (ALB). In addition, our firm has also been recognized in the “ALB Asia M&A Rankings 2021”.

About Mr. Hank Lo

Mr. Lo heads the Corporate Finance Practice in the firm. He specializes in capital markets, corporate finance, mergers and acquisitions and representative matters. Hank has significant experience advising issuers, sponsors and underwriters on initial public offerings on both the main and GEM boards of The Stock Exchange of Hong Kong Limited; advising publicly listed companies on a broad range of corporate finance transactions; advising private equity funds, venture capital funds and Hong Kong listed companies on their investments in and exits from companies with an emphasis on China; and providing advice to companies in Greater China on representative matters including property transactions, foreign investment and initial public offerings.

About Our Corporate Finance Group

Our highly experienced corporate finance group has an excellent track record of handling complex transactions of every size. Our clients include public and private corporations, investment banks, financial institutions, direct investment funds and international bodies. Through our network of Interlaw associated offices, we provide clients with access to substantial resources in Europe, the Americas and Asia. Drawing on this network, we can provide a seamless, integrated service that draws together different areas of expertise across countries and continents.

For any enquiries, please contact our Partner Mr. Hank Lo or click here to see the Dealmakers ranking and here to see the M&A rankings.

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7 Jan 2022

(中文) 合伙人徐凯怡律师受邀为山西省法学会港澳台法律研究会担任演讲嘉宾

(中文) 2022年1月7日，本所合伙人﹑诉讼及争议解决部主管徐凯怡律师，受邀为山西省法学会港澳台法律研究会2021年年會担任演讲嘉宾﹐向与会者介绍香港在个人资料（私隐）之相关条例和分享实战经验。本次研究会由山西省法学会港澳台法律研究会和山西省政法管理干部学院主办，并由上海市锦天城（太原）律师事务所和中国国际贸易促进委员会山西商事法律服务中心承办。

徐律师在会上透过案例分享，说明了个人资料保障的六大核心原则﹐如收集之目的及方式﹑准确性和保存期等。徐律师亦阐释了新出台的《2021年个人资料（私隐）修订条例》﹐并从规管对象﹑个人资料/ 信息之定义和行政罚款权等方面﹐对香港和中国内地的个人信息保护法进行了全面的对比和解说。

若阁下想了解更多详情，请联络本所合伙人徐凯怡律师(heidichui.office@sw-hk.com)。

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7 Jan 2022

Partner Heidi Chui Appointed as SHAC Overseas Arbitrators

Our Partner, Head of Litigation and Dispute Resolution Department, Ms. Heidi Chui, has been appointed by Shanghai Arbitration Commission (the “SHAC”) as new Panel (the 7^th Cohort) of Arbitrator, with effect from 1 January 2022.

Established in 1995, SHAC has arbitrated over 40,000 cases involving dispute amount over RMB 200 billion. SHAC received over 3000 registration forms from all over the world. After rounds of reviews, 386 overseas arbitrators were selected, with 68 arbitrators from Hong Kong. The appointed arbitrators are reputable professors, senior accountants, senior lawyers with extensive experience in arbitration, trial, and financial management nationally and globally.

Ms. Chui is one of the few solicitors accredited and listed on the panel of arbitrators for The Law Society of Hong Kong. She is also an arbitrator of Hong Kong International Arbitration Centre, China International Economic and Trade Arbitration Commission, Shanghai International Arbitration Centre, Shenzhen Court of International Arbitration, Hainan International Arbitration Court (Hainan Arbitration Commission), Nanjing Arbitration Commission, Guangzhou Arbitration Commission, Ningbo Arbitration Commission, Hefei Arbitration Commission and Langfang Arbitration Commission.

She is also an accredited mediator of HKAIC, The Law Society of Hong Kong and a Panel Mediator for Buildings Management Cases of the Lands Tribunal, and a fellow of the Chartered Institute of Arbitrators (U.K.). She is also a China Appointed Attesting Officer as appointed by the Ministry of Justice PRC.

For more information, please contact our Partner Ms. Heidi Chui (heidichui.office@sw-hk.com), or click here to visit SHAC’s website.

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3 Jan 2022

THE HONG KONG STOCK EXCHANGE PUBLISHED CONSULTATION CONCLUSIONS ON SPECIAL PURPOSE ACQUISITION COMPANIES (SPACs)

Introduction

On 17 December 2021, The Stock Exchange of Hong Kong Limited (the “Exchange”) published its consultation conclusions (the “Consultation Conclusions”) to create a new listing regime for special purpose acquisition companies (“SPACs”) in Hong Kong. The Exchange also published a guidance letter on SPACs (the “Guidance Letter”). In addition, the Securities and Futures Commission (the “SFC”) published a Practice Note 23 to provide guidance on waivers of the mandatory general offer obligation under Rule 26.1 of the Takeovers Code for De-SPAC Transactions.

Majority of the responses from the public has generally supported the Exchange’s proposals outlined in its consultation paper on SPAC dated 17 September 2021 (the “Consultation Paper”). This article follows up with our news update in September 2021 on the Exchange’s Consultation Paper. The capitalised terms used herein shall have the same meanings as defined in the Consultation Conclusions and Consultation Paper.

The Exchange shall broadly implement its proposals on SPAC set out in the Consultation Paper, with some amendments to reflect the public’s responses. The amended Listing Rules as set out in the Consultation Conclusions and the Guidance Letter came into effect on 1 January 2022.

Key features of SPACs

The table below lays out the key differences between the original proposals and the final SPAC framework to be implemented:

	Original Proposal	Final Model Adopted
Open Market Requirement at Initial Listing
1.	A SPAC’s securities must be distributed to a minimum of 30 Institutional Professional Investors.		Proposal *relaxed*, the minimum number of Institutional Professional Investors is reduced to 20.
SPAC Directors
2.	The majority of SPAC’s board must be composed of representatives of the SPAC Promoters who nominate them.		Proposal *replaced* by a requirement for a SPAC’s board to have at least two Type 6 or Type 9 SFC-licensed individuals (including one director representing the licensed SPAC Promoter).

Alignment of Voting with Redemption

SPAC shareholders can only redeem their shares if they vote against any one of the following matters:

(a) A material change in a SPAC Promoter or the eligibility and/or suitability of SPAC Promoter;

(b) A De-SPAC Transaction; or

Proposal replaced with strengthened Independent PIPE Investment requirements (see item 4 below) to provide a stronger regulatory check on the terms and valuation of the De-SPAC Transaction. SPAC shareholders will be able to redeem their shares regardless of how they cast their vote.

Mandatory Independent PIPE Investment

Size of Independent PIPE Investment

Outside independent PIPE investment constitute at least 25% of the expected market capitalisation of the Successor company, or 15% to 25% in the case of Successor Companies with an expected market capitalisation of over HK$1.5 billion.

Significant Sophisticated Investment

At least one independent PIPE Investor must be an asset management firm or fund with assets under management (the “AUM”) of at least HK$1 billion, and the PIPE investment must result in this investor beneficially owning at least 5% of the issued shares of the listed issuer following the completion of a De-SPAC Transaction.

Size of Independent PIPE Investment

Proposal requirements strengthened, staggering Independent PIPE Investment size thresholds relative to the negotiated value of a De-SPAC Target adopted:

Negotiated De-SPAC Value	Minimum independent PIPE investment as a percentage
< HK$2 billion	25%
HK$2 billion – HK$5 billion	15%
HK$5 billion -HK$7 billion	10%
≥ HK$7 billion	7.5%
> HK$10 billion	Waiver to be considered on a case-by-case basis

Significant Sophisticated Investment

Proposal requirements tightened, at least 50% of Independent PIPE Investment must come from at least three institutional investors with AUM of at least HK$8 billion.

Dilution Cap on Warrants

Overall Warrant Cap is 30%.

Proposal relaxed:

(a) Overall Warrant Cap increased to 50%.

(b) More prominent disclosure on the dilutive effect of all warrants required.

SPAC Promoters Licensing Requirement

At least one of the SPAC Promoters must be a firm holding:

(a) a Type 6 (advising on corporate finance) and/or Type 9 (asset management) licence issued by the SFC; and

(b) at least 10% of the Promoter Shares.

Proposal maintained, the Exchange will also consider granting waiver on a case-by-case basis (for example, to accept a SPAC Promoter if they have overseas accreditation that is equivalent to an SFC Type 6 and/or Type 9 license).

Funds Held in Escrow

100% of the gross proceeds raised from the SPAC’s initial offering are held in a ring-fenced trust account in Hong Kong until a De-SPAC transaction takes place or the SPAC is liquidated.

Proposal adopted, with a minor modification that accrued interests or other income earned on monies held in the escrow account may be released.

Rights to additional Successor Company Shares (earn-out rights)

The Exchange proposed to accept requests from a SPAC to issue additional Promoter Shares, as an earn out portion, subject to the following:

(a) the total number of Promoter Shares (including the earn-out portion) should not be more than 30% of the total number of shares in issue at the time of the SPAC listing;

(b) the earn-out portion is linked to objective performance targets;

(d) such earn-out portion shall be included in the resolution approving the De-SPAC Transaction.

The Exchange will permit a SPAC to issue earn-out rights to SPAC Promoters that are convertible into ordinary shares of the Successor Company, if the Successor Company meets pre-defined performance targets.

The Exchange will allow share price to be used as a performance target for the earn-out rights as long as those share price performance targets are:

(a) at least 20% higher than the issue price of the SPAC Shares at listing of the SPAC;

(b) satisfied by exceeding a pre-defined volume weighted average price of the Successor Company’s shares over a period of not less than 20 trading days within a 30 consecutive trading day period, with such period commencing at least six months after the listing of the Successor Company.

Brokerage Fee
9.	Nil.	The 1% brokerage free requirement for the placing of securities by SPAC at its initial listing will be exempted.
Trading Arrangements
10.	Separate trading of SPAC shares and SPAC warrants from the date of initial listing to a De-SPAC Transaction. The Exchange proposed two options to mitigate the risks of volatility, namely: (a) Option 1: allow only manual trades on SPAC Warrants; and (b) Option 2: allow both automatching of orders with Volatility Control Mechanism and manual trades on SPAC securities.	Proposal with Option 2 is *adopted*.
Warrants
11.	The Promoter Warrants and SPAC Warrants are only exercisable after the completion of a De-SPAC transaction. The Exchange also prohibits SPACs from issuing Promoter Warrants at less than fair value or that contain more favourable terms than that of SPAC Warrants.	Proposal *modified*, the Exchange will prohibit: (a) with the issue of Promoter warrants at less than 10% of SPAC Shares per Promoter Warrant issue price; and (b) Promoter Warrants that entitle the holder, upon exercise, to receive more than one share in the Successor Company. The Exchange will also impose an additional requirement that the minimum exercise price of the SPAC Warrants and Promoter Warrants must be at a price which represents at least 15% premium to the issue price of the SPAC Shares.

Analysis and Takeaways

We can see that the Hong Kong regulators have kept in mind its commitment to investor protection in the Consultation Conclusions. The new Hong Kong SPAC listing regime seeks to strike a balance between upholding Hong Kong as a leading financial centre by allowing SPAC listings while ensuring high quality SPAC listing applicants and De-SPAC targets to enter into the Hong Kong capital markets and maintaining robust regulatory framework.

Please contact our Partner Mr. Rodney Teoh and associate Ms. Angela Lau for any enquiries or further information.

Posted by Editor

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