29 Jan 2024

Stevenson, Wong & Co. acted as international counsel for the placing agents in the successful issuance of CNY107.5 million 8.0% bonds due 2025 by Liaocheng Guotai Dongchang Urban Construction & Development Group Co., Ltd.

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24 Jan 2024

(中文) 史蒂文生黄律师事务所与CSpro成功合办 “STO Friday”

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18 Jan 2024

Stevenson, Wong & Co. Partners Recognised as 2023 A-List “Growth Drivers” by China Business Law Journal

China Business Law Journal (CBLJ), a globally renowned legal media, has recently announced the “The A-List: The Growth Drivers for China Practice 2023”. This year, we are delighted to announce that three of our partners have been recognized for their extensive experience and recognition by clients.

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15 Jan 2024

FSTB AND HKMA JOINTLY PUBLISHED A CONSULTATION PAPER ON REGULATORY REGIME FOR STABLECOIN ISSUERS

Introduction

On 27 December 2023, the Financial Services and the Treasury Bureau (the “FSTB”) and the Hong Kong Monetary Authority (the “HKMA”) jointly published a consultation paper (the “Consultation Paper”) on proposals to implement a regulatory regime for stablecoin issuers in Hong Kong. The FSTB and the HKMA are seeking market feedback on their proposal by 29 February 2024.

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Background

Virtual asset (“VA”) presents both opportunities for financial innovation and challenges to the financial system. Among the various types of VA, fiat-referenced stablecoin (“FRS”) aims to maintain a stable value in relation to fiat currencies. With the potential for extensive and frequent interaction with the traditional financial system, FRS may affect various commercial, financial, and economic activities and possibly pose more immediate and direct threats on the stability of the financial system.

Prior to this consultation, the HKMA released a Discussion Paper on Crypto-assets and Stablecoins in January 2022 (the “Discussion Paper”) and the consultation conclusion to the Discussion Paper in January 2023. Please also see our news update in relation to The Hong Kong Monetary Authority Published Discussion Paper on Crypto-Assets and Stablecoins, as well as our news update regarding The HKMA Published Conclusion on Crypto-assets and Stablecoins Discussion Paper. The industry and various organisations generally expressed their support to include stablecoins within the regulatory framework. Against this backdrop, the FSTB and the HKMA propose to implement a regime and a new piece of legislation for regulating issuance of FRS.

Current Regulatory Framework and Developments in Hong Kong

A. Licensing Regime for VA Service Providers (“VASPs”)

In December 2022, the Legislative Council passed a bill confirming the implementation of a new licensing regime for VASPs under the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Cap. 615) (the “AMLO”) which came into effect on 1 June 2023. Under this regime, centralised virtual asset exchanges in Hong Kong must obtain licenses and comply with regulations set by the Securities and Futures Commission (the “SFC”). The FSTB, the HKMA and the SFC are working together to improve the regulatory landscape in relation to VA, which include exploring the possibility of extending the regulatory framework to cover other VA-related activities.

B. Proposal for Regulatory Regime for FRS Issuers

The FSTB and the HKMA collaborate with the SFC and other stakeholders to develop the specific regulations for FRS issuers, aiming to prevent regulatory arbitrage, address any regulatory overlaps or gaps, and mitigate risks associated with different activities in the VA sector. Recognising the evolving and intricate nature of the VA market, a new piece of legislation is proposed to implement a licensing regime for FRS issuers. This legislation may also encompass the regulatory framework for other segments of the VA market in the future.

It is proposed that FRS issuers be brought within the regulatory remit of the HKMA. Moreover, the issuance of FRS by an FRS licensee would be excluded from certain regulatory regimes, such as those applicable to securities (including collective investment schemes) and stored value facilities (“SVFs”). This approach aims to prevent overlapping regulatory requirements from being imposed on FRS issuers.

Key Features of the Proposed Licensing Regime for FRS Issuers

Scope and coverage

Definition of Stablecoin

A “stablecoin” is defined as a cryptographically secured digital representation of value that, among other things:
- is expressed as a unit of account or a store of economic value;
- is used, or is intended to be used, as a medium of exchange accepted by the public, for the payment for goods or services, discharge of a debt, and/or investment;
- can be transferred, stored or traded electronically;
- uses a distributed ledger or similar technology that is not controlled solely by the issuer; and
- purports to maintain a stable value with reference to a specified asset, or a pool or basket of assets.
- The following are excluded from the definition of “stablecoin”:
  - deposits, including its tokenised or digitally represented form;
  - certain securities or futures contracts (e.g., authorised collective investment schemes, authorised structured products);
  - float stored in SVFs or SVF deposit;
  - digital representations of fiat currencies issued by or on behalf of central banks; and
  - certain digital representation of value that has a limited purpose.

Definition of FRS

FRS is defined as a stablecoin where the specified asset is one or more fiat currencies
Issuance of an FRS would be a regulated stablecoin activity under the proposed new legislation

Scope of Regulation

Unless it is a company that holds an FRS issuer licence granted by the HKMA, no person shall:

(i) issue an FRS in Hong Kong;

(ii) issue a stablecoin that purports to maintain a stable value with reference to the value of the Hong Kong dollar (“Hong Kong dollar-referenced stablecoin”); or

(iii) actively market their issuance of FRS to the public of Hong Kong, should be licensed by the HKMA

All FRS issuers will be subject to the same regulatory treatment, regardless of the stabilisation mechanism of the FRS concerned and the underlying backing assets

Licensing criteria and conditions

Management of Reserves and Stabilisation Mechanism

Full backing: FRS issuer must maintain a reserve of assets that is equal to or greater than the par value of the FRS in circulation at all times
Investment limitations: Reserve assets must be of high quality and liquidity with minimal market, credit, and concentration risk
Segregation and safekeeping of reserve assets: FRS issuer must establish effective trust arrangements to segregate the reserve assets from other assets and ensure their availability for redemption, reserves should be held in segregated accounts with licensed banks or with asset custodians under arrangements satisfactory to the HKMA
Risk management and controls: FRS issuer must have adequate policies, guidelines, and controls for managing investment activities and liquidity risks associated with the reserve assets, periodic stress testing should be conducted to monitor the adequacy and liquidity of the reserve assets
Disclosure and reporting: Regular disclosure of the total amount of FRS in circulation, mark-to-market value, and composition of reserve assets should be made to the public
Prohibition on paying interest: Any income or loss from the reserve assets should be attributed to the FRS issuer, interest payments to FRS users are prohibited in line with international regulatory practices
Effective stabilisation: FRS issuer holds ultimate responsibility for ensuring the proper functioning of the stabilisation mechanism, even if third parties are involved in carrying out stabilisation activities

Redemption Requirements

FRS users have the right to redeem their FRS at par value with the issuer and have a claim on the reserve assets
Redemption requests should be processed promptly and without undue costs, FRS issuer must not impose unreasonable conditions on redemption, such as high minimum threshold amounts
Any fees for redemption must be clearly communicated to users, proportionate, and not set at levels that discourage redemption
FRS issuer must maintain a contingency plan for orderly redemption in case they are unable to meet requests, including in situations like license suspension or revocation
If channels for exchanging FRS into fiat currency become unavailable, the FRS issuer must ensure direct redemption for all users in a reasonably timely manner

Restrictions on Business Activities

FRS issuer must obtain the HKMA’s approval before engaging in any new lines of business
- A risk assessment should be conducted, and sufficient resources be dedicated to FRS issuance and maintenance
- New business activities should not introduce significant risks or impair the issuer’s ability to function as an FRS issuer
- FRS issuer is allowed to conduct ancillary or incidental activities related to FRS issuance, such as providing wallet services for the FRS it issues to facilitate the issuance and redemption processes
- Lending, financial intermediation, and other regulated activities under the Securities and Futures Ordinance (Cap. 571), Mandatory Provident Fund Schemes Ordinance (Cap. 485), or Insurance Ordinance (Cap. 41) are prohibited

Physical Presence in Hong Kong

FRS issuer must be a locally incorporated company with a registered office in Hong Kong
Its chief executive, senior management team, and key personnel must be based in Hong Kong, ensuring effective management and control of FRS issuance and related activities

Financial Resources Requirements

FRS issuer must have adequate financial resources, including a minimum paid-up share capital, to support its FRS issuance business and absorb potential losses
The minimum paid-up share capital is proposed to be either HKD25,000,000 or 2% of the par value of FRS in circulation, whichever is higher
The HKMA has the discretion to impose a higher paid-up share capital requirement as a licensing condition if deemed appropriate

Disclosure Requirements

FRS issuer must publish a white paper disclosing general information about itself, user rights and obligations, the stabilisation mechanism, reserves management, underlying technology, and risks, prior notification to the HKMA is required
FRS issuer must disclose redemption policies that outline the redemption process, timeframe, applicable fees, and the right of FRS users to redemption

Governance, Knowledge and Experience

Controllers, chief executives, and directors of an FRS issuer must be fit and proper individuals; prior consent from the HKMA for their appointment is required

Risk Management Requirements

FRS issuer must implement appropriate risk management processes and measures, among other things:
- adequate security and internal controls to ensure the safety and integrity of data and systems;
- effective fraud monitoring and detection measures;
- technology risk management measures;
- robust contingency arrangements to address operational disruptions; and
- other operational and security safeguards which are commensurate with the scale and complexity of the business.
- Risk assessments should be conducted at least annually to evaluate and ensure the adequacy and effectiveness of internal controls, risk management, and governance processes

Audit Requirements

Audited financial statements must be provided to the HKMA annually
Upon request by the HKMA, the FRS issuer must submit reports from external auditors and assessors to validate the management and operational soundness of FRS issuance

Anti-Money Laundering and Counter-Financing of Terrorism

FRS issuer must establish and implement adequate systems of control to prevent and combat money laundering and terrorist financing
FRS issuer must comply with the relevant provisions of the AMLO and any measures issued by the HKMA

Specified licensed entities

Only licensed FRS issuers, authorised institutions, licensed corporations and licensed Virtual Asset Trading Platforms (“VATPs”) can offer FRS in Hong Kong or actively market such offering to the public of Hong Kong
Authorised institutions, licensed corporations and licensed VATPs can offer FRS issued by entities not licensed by the HKMA only to professional investors, and must indicate clearly such FRS is not issued by a licensed FRS issuer

Power of the authorities

Power to Modify the Regime

The regulatory regime will be designed with flexibility, allowing authorities to adjust the parameters of stablecoins and activities that fall within its scope, having regard to:

(i) the risks posed to the monetary and financial stability of Hong Kong;

(ii) the risk posed to the functioning of Hong Kong as an international financial centre; and

(iii) matters of significant public interest.

Powers of the HKMA

Powers will be provided to the HKMA for supervising and administering the licensing regime, and conducting investigations to enforce the regime

Offences, sanctions and appeal

Criminal Offences and Sanctions

Criminal sanctions would deter industry participants from committing offenses
Proposed offenses include:
- issuing an FRS in Hong Kong without a license
- issuing a Hong Kong dollar-referenced stablecoin without a license
- actively marketing unlicensed FRS issuance to the public
- advertising unlicensed FRS issuance
- failure to produce required documents
- providing false information or making false entries
- contravening the HKMA’s conditions for the licensing regime
- Only specified licensed entities will be allowed to offer FRS in Hong Kong, it will be illegal to offer FRS or advertise FRS offerings without a license

Civil and Supervisory Sanctions

The HKMA will be empowered to impose a range of civil and supervisory sanctions, including:
- issuing a caution, warning, reprimand, order to take specified action(s); and supervisory sanctions including temporary suspension, suspension or revocation of licence, or a combination of the above;
- a pecuniary penalty not exceeding HKD10,000,000 or 3 times the amount of profit gained or loss avoided as a result of the contravention, whichever is higher; or
- any combination of the above.

Appeals

A proposed appeal tribunal mechanism will be established to allow for appeals against the HKMA’s decisions regarding the licensing and supervisory requirements of the regulatory regime
Decisions that can be appealed against include:
- refusal to grant FRS issuance licenses
- imposition of license conditions
- conditions on exemptions granted to issuers
- license revocation or suspension
- objections to controllers, directors, and key personnel
- imposition of civil and supervisory sanctions
- If dissatisfied with the Tribunal’s decision, a person may further appeal to the Court of Appeal on a point of law

Transitional Arrangement

Pre-existing FRS issuers with significant presence in Hong Kong before the commencement date of the regulatory regime may continue operations for 6 months, if a license application to the HKMA is submitted within the first 3 months
FRS issues who fail to submit a licence application within the first 3 months must orderly close their business by the end of the fourth month after the commencement of the regime
In evaluating whether the FRS issuer has a meaningful and substantial operations in Hong Kong, the HKMA will take into consideration the following factors:
- whether it is incorporated in Hong Kong;
- whether it has a physical office in Hong Kong with staff exercising central management and control over the FRS issuance; and
- whether the FRS it issues has been circulated to independent FRS users (i.e., not limited to its own associated entities).

Analysis and takeaways

The Consultation Paper represents a collaborative initiative between the FSTB and the HKMA to put forward the regulatory framework for the issuance of FRS that has garnered overall support from previous consultations. It is anticipated that this regime has the potential to unlock sustainable business opportunities in the VA markets while effectively addressing associated risks.

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 2024

Stevenson, Wong & Co. acted as international counsel for the placing agents in the successful issuance of CNY310 million 8.0% bonds due 2024 by Weihai Nanhai Investment and Development Co., Ltd.

Stevenson, Wong & Co. acted as international counsel for the placing agents in the successful issuance of CNY310 million 8.0% bonds due 2024 by Weihai Nanhai Investment and Development Co., Ltd. (the “Issuer”).

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5 Jan 2024

THE HONG KONG STOCK EXCHANGE PUBLISHED CONSULTATION CONCLUSIONS ON GEM LISTING REFORMS

Introduction

On 15 December 2023, The Stock Exchange of Hong Kong Limited (the “Hong Kong Stock Exchange”) published conclusions (the “Consultation Conclusions”) to its consultation paper on GEM Reforms (the “Consultation Paper”).

Gem Listing Reforms …

During the consultation period which ended on 6 November 2023, the Hong Kong Stock Exchange received 58 responses in total. After considering the comments made by the respondents, the Hong Kong Stock Exchange has adopted all the proposals in the Consultation Paper with minor adjustments and clarifications. For more details of the proposed GEM listing reforms, please refer to our news update on the Consultation Paper. The said proposals came into effect on 1 January 2024.

The Hong Kong Stock Exchange has marked several modifications and clarifications to its original proposals in Chapter 2 of the Consultation Conclusions, which the conclusions are summarised below:

Initial Listing Requirements

New Alternative Eligibility Test

The Hong Kong Stock Exchange proposed a new financial eligibility test (the “market capitalisation / revenue / R&D test”) to attract high-growth enterprises heavily involved in R&D. Concerns were raised about its effectiveness in attracting new GEM listings and favouring technology industries over traditional ones. The Hong Kong Stock Exchange clarified that the market capitalisation / revenue / R&D test is open to companies from all industries with substantial R&D investment, therefore, small and/or medium-sized enterprises (“SMEs”) in traditional industries can still list on GEM if they meet cash flow test thresholds. The Hong Kong Stock Exchange will monitor the market capitalisation / revenue / R&D test’s effectiveness and make adjustments if needed.

Reduction of Post-IPO Lock-up Period for Controlling Shareholders

Regarding the post-IPO lock-up period for controlling shareholders of GEM issuers, the proposed duration was reduced from 24 to 12 months. While there are concerns about operational instability and shell activities, the Hong Kong Stock Exchange considers them adequately addressed by emphasising existing rules and guidance on reverse takeovers and the delisting regime. As such, the 12-month lock-up period is considered sufficient to balance the interests of investors and post-IPO fundraising flexibility of the GEM issuers.

Existing Eligibility Requirements

Though not mentioned in the Consultation Paper, some respondents suggested lowering the minimum market capitalisation of HK$150 million and cash flow requirement of HK$30 million for GEM listing. However, the Hong Kong Stock Exchange decided to maintain the existing requirements, commenting that the current minimum market capitalisation is already lower comparing to peer markets and that operating activities which generate a reasonable level of cash flow are more likely to indicate business sustainability.

Continuing Obligations

Compliance Officer and Compliance Adviser

The Hong Kong Stock Exchange removed the requirement for an executive director of a GEM issuer to serve as the compliance officer, with the view that the board of directors collectively holds responsibility for compliance, making the role of compliance officer unnecessary. To ease the financial burden of GEM issuers and further align with the rules applicable to Main Board issuers, the engagement period for compliance advisers is also shortened so that it ends on the date on which the GEM issuer publishes its financial results for the first full financial year commencing after the date of its initial listing.

Periodic Reporting Requirements

As to the removal of mandatory quarterly financial reporting for GEM issuers, while some respondents preferred retaining quarterly reporting to enhance transparency, the Hong Kong Stock Exchange believed that removing the requirement (and only keeping it as a recommended practice) would reduce compliance costs for GEM issuers. Respondents unanimously supported aligning financial reporting timeframes of GEM issuers with those of the Main Board, as both markets adhere to the same accounting standards and report preparation process. A respondent suggested amending the guidance letter HKEX-GL25-11 to reflect the change in publication timeframes, which the Hong Kong Stock Exchange agreed to.

Transfers to the Main Board

New Streamlined Transfer Mechanism

In the Consultation Paper, the Hong Kong Stock Exchange planned to introduce a streamlined mechanism for qualified GEM issuers to transfer their listings to the Main Board. An overwhelming proportion of respondents supported this proposal, believing that the streamlined transfer mechanism will enhance accessibility and efficiency, eliminate the need for a redundant “prospectus-standard” listing document, and save time and costs by removing the requirement for sponsor appointment. Considering the majority support, the Hong Kong Stock Exchange has adopted this proposal.

Track Record Requirements

As part of the streamlined transfer process, applicants are required to demonstrate a minimum track record of ownership continuity and control, as well as of no significant changes in their principal business for three full financial years as a GEM listed issuer before the transfer. Some respondents considered the three-year period to be too long and proposed shortening it to one or two years. However, the Hong Kong Stock Exchange believed the three-year compliance record is necessary to justify the streamlined transfer arrangements, while decided to retain the existing transfer mechanism alongside the new streamlined transfer mechanism. The existing mechanism requires a transferee to demonstrate a one-year pre-transfer track record period after GEM listing. In other words, GEM issuers can choose the existing transfer route over the streamlined mechanism for a quicker transfer if the benefits outweigh the costs associated with sponsor due diligence and the production of a “prospectus-standard” listing document.

Liquidity and Valuation Requirements

Transfer applicants must also meet certain liquidity and valuation criteria, including the Daily Turnover Test and the Volume Weighted Average Market Capitalisation Test as described in the Consultation Paper. Supporting respondents considered that a daily turnover requirement could reflect adequate investor demand in the GEM issuer’s securities, and the minimum daily turnover threshold is set at HK$50,000. Regarding the Volume Weighted Average Market Capitalisation Test, for the purpose of assisting issuers and market practitioners, the Hong Kong Stock Exchange will further provide illustrative examples to explain how to calculate the volume weighted average market capitalisation of an issuer.

Compliance Record Requirement

The Hong Kong Stock Exchange has introduced a compliance record requirement for streamlined transfers. This means that transfer applicants must not have committed a serious breach or be the subject of an investigation or ongoing disciplinary proceedings related to a serious or potentially serious breach of the Listing Rules. Some raised concerns about the presumption of innocence and the potential disruption and costs associated with cancelling a transfer application if an applicant is only made aware of an investigation at the time of application. In response, the Hong Kong Stock Exchange again emphasised the importance of a clean compliance record to mitigate the risk of disciplinary action or serious breaches after the GEM issuer being transferred to the Main Board.

Costs for Transfers of Listing

The proposal of exempting GEM transferees from the Main Board initial listing fee received widespread support, as it reduces the cost of transferring from GEM to the Main Board and incentivise qualified companies to choose the streamlined transfer mechanism.

Analysis and takeaways

The lack of GEM listings in recent years has underscored the need for reforms to enhance its competitiveness. By reintroducing the streamlined transfer mechanism with modifications and clarifications in the Consultation Conclusions, GEM listing reforms may attract SMEs from Hong Kong and the Greater Bay Area that are seeking a listing, and reduce compliance costs for current GEM issuers while maintaining market quality and protection to investors.

Effectiveness of the reforms in restoring vitality to the GEM market is yet to unfold. Hopefully, the GEM reforms will pave the way for a more conducive environment to SMEs, new listings, and a more vibrant GEM market.

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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