Implementation of the Guidelines

The SFC will implement the Guidelines for Virtual Asset Trading Platform Operators (the “VATP Guidelines”), the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers) and Prevention of Money Laundering and Terrorist Financing Guideline for Associated Entities of Licensed Corporations and SFC-licensed Virtual Asset Service Providers (the “AML Guidelines”, together with the VATP Guidelines, the “Guidelines”)) with some modifications and clarifications as set out and discussed in the Consultation Paper. The Guidelines will be published in the Gazette and become effective on 1 June 2023. The Guidelines set out, among others, safe custody of assets, segregation of client assets, avoidance of conflicts of interest and cybersecurity standards and requirements expected of licensed trading platforms. The SFC will provide additional guidance on the new regulatory requirements, other implementation details including licence application procedures, as well as more information about the transitional arrangements.

Part I: Amendments to the proposed regulatory requirements for licensed VA trading platform operators

A: Allow retail access to licensed VA Trading Platforms

Retail access

Most of the respondents showed their strong support for allowing licensed VA Trading Platforms to provide their services to retail investors. Apart from permitting retail access, the SFC agreed that the licensed VA Trading Platforms should comply with a range of robust investor protection measures covering onboarding, governance, disclosure and token due diligence and admission, before providing trading services to retail investors. The SFC expressed that it will continue its efforts with the Investor and Financial Education Council to educate investors about all aspects of virtual assets and their trading, including risks of trading on unregulated platforms to ensure investor protection.

Onboarding requirements

Many of the respondents agreed to the imposition of onboarding requirements for retail clients, but they also indicated their concerns on whether retail clients have sufficient knowledge of virtual assets before trading. A few of the respondents also requested that individual professional investors be exempt from the onboarding requirements entirely.

In response, the SFC considered that the terms, features and risks of virtual assets are generally not likely to be understood by a retail investor, and the implementation of the full scope of proposed onboarding requirements is necessary. The SFC is also of the view individual professional investors should be subject to similar protections as retail investors.

The SFC indicated that platform operators should conduct a holistic assessment of an investor’s understanding of the nature and risks of virtual assets, which could include an assessment of virtual asset training or courses that the investor has previously attended, the investor’s current or previous work experience related to virtual assets and the investor’s prior trading experience in virtual assets.

Governance

The respondents showed strong support for requiring a licensed VA Trading Platform to establish a token admission and review committee to enhance its governance. The SFC is of the view that the members “principally responsible for” different areas of the platform will at least include the corresponding managers-in-charge of the platform operator and it would not be necessary to require platform operators to appoint independent external members to the committee.

Disclosure obligation

The majority of the respondents agreed that the imposition of disclosure obligations for each admitted virtual asset is important for the protection of investors. To address the concern of some respondents on the difficulty to obtain and verify information from an issuer of an admitted virtual asset, the SFC proposed requiring licensed VA Trading Platforms to act with due skill, care and diligence when disclosing information. The disclosure obligations in the VATP Guidelines are also further refined to require platform operators to take all reasonable steps to ensure the product specific information they disclose is not false, biased, misleading or deceptive.

General token admission criteria

The majority of respondents agreed that licensed VA Trading Platforms should have regard to general token admission criteria prior to admitting any virtual asset for trading, while some asked for exemptions for virtual assets with large market capitalisations, for virtual assets which have already been admitted for trading on a licensed VA Trading Platform or for unsolicited execution-only transactions. In response, the SFC believed that it is not appropriate to provide any exemption from conducting due diligence. Also, regarding the issue on token’s regulatory status in each jurisdiction, the SFC expressed that it will only require the platform operator to consider the regulatory status of the virtual asset in Hong Kong. Nevertheless, platform operations are reminded to ensure their operations are in compliance with local laws and regulations in all jurisdictions where they operate.

Specific token admission criteria for “eligible large-cap virtual assets”

The SFC clarified that the tokens must be eligible large-cap virtual assets included in at least two acceptable indices issued by two independent index providers. It further requires that the index provider with experience in publishing indices for the conventional securities market to comply with the IOSCO Principles for Financial Benchmarks such that it has proper internal arrangements in place to protect the integrity and ensure the quality of its indices. In addition to being independent of each other, the SFC will also require that the two index providers should be independent of the issuer of the virtual asset and also of the VA Trading Platform operator.

The SFC also expressed that as the admissibility and continued eligibility of a token for trading depends on the due diligence conducted by a platform operator, it would not be appropriate for the SFC to publish lists of virtual assets eligible for retail trading, acceptable indices or index providers.

Stablecoins will be of no avail prior to implementation of stablecoin regulatory regime

The possible inability to maintain its peg, and susceptibility to run, are reasons the SFC considered that stablecoins should not be admitted for retail trading at this stage prior to being subject to regulation in Hong Kong. It is noted that the Hong Kong Monetary Authority published the conclusion on its discussion paper on crypto-assets and stablecoins in January 2023 (see our news update here) and the regulatory arrangements for stablecoins are expected to be implemented in 2023/24.

B. Maintain an insurance or compensation arrangement

Lowered coverage ratio from 95% to 50% for cold storage of client virtual assets

With regard to the comments provided by the respondents, the SFC is of the view that as risks to client virtual asset held in hot and other storages are not typically associated with the custody of client assets in the traditional financial markets, these client virtual assets should be fully covered by the compensation arrangement of a licensed VA Trading Platform. On the other hand, for client virtual assets held in cold storage, the SFC is prepared to lower the coverage threshold to 50%, on the basis that 98% of client virtual assets will be required to be held in cold storage.

Regarding the types of assets that could form part of a compensation arrangement, the SFC accepts (a) bank guarantees; (b) funds held in the form of demand deposits or fixed deposits with a maturity of six months or less; and (c) virtual assets which are of the same type of the client virtual assets being covered.

Other than an escrow arrangement put in place for the compensation arrangement, VA Trading Platforms are allowed to hold the funds set aside, provided that such funds are segregated from the assets of the VA Trading Platform operator and its group companies, and are set aside on trust and designated for such purpose. Funds held by the platform operator or its associated entity should be held in a segregated account with an authorised financial institution.

C. Trading in virtual asset derivatives

The respondents generally support the idea of allowing licensed VA Trading Platforms to provide trading services in virtual asset derivatives. The SFC will take the comments into consideration and conduct a separate review in due course.

D. Other adaptations to existing requirements

After considering the comments of the respondents, the SFC remains its view that the cold to hot storage ratio should not be lowered and the bulk of client virtual assets should be held in cold storage, so as to ensure the safe custody of client assets. Regarding proprietary trading, the SFC has revised the requirements in the VATP Guidelines to allow trading by affiliates other than trading through the licensed VA Trading Platform. However, licensed VA Trading Platforms are not allowed to provide services commonly seen in the virtual asset market such as earning, deposit-taking, lending and borrowing.

E. AML/CFT matters

Virtual asset transfers

Travel Rule

The SFC considers that any delay in the implementation of the Travel Rule in Hong Kong would affect the competitiveness of the Hong Kong-licensed VA Trading Platforms. Where the required information cannot be submitted to the beneficiary institution immediately, the SFC considers the submission of the required information as soon as practicable after the virtual asset transfer to be acceptable as an interim measure until 1 January 2024.

Virtual asset transfer counterparty due diligence

To address the concern of the respondents, the SFC believed the relevant guidance, including the factors that should be considered and the measures to be taken, are in line with the Financial Action Task Force (FATF)’s standards and guidance and should be applied using a risk-based approach. The due diligence measures should be applied to the entity which a licensed VA Trading Platform conducts virtual asset transfers with.

Risk-based policies and procedures for handling incoming virtual asset transfers lacking the required information

The SFC clarified that a licensed VA Trading Platform should only return virtual assets where appropriate and when there is no suspicion of money laundering or terrorist financing (“ML/TF”), and the returns should be made to the account of the ordering institution rather than the originator’s account.

Virtual asset transfers to or from unhosted wallets

Many respondents supported the requirements imposed for virtual asset transfers to or from unhosted wallets. The SFC indicated that it is mandatory for licensed VA Trading Platforms to take reasonable measures on a risk-sensitive basis to mitigate and manage the ML/TF risks associated with virtual asset transfers to or from an unhosted wallet.

Other virtual asset-specific AML/CFT requirements

Occasional transactions

The SFC clarified that the licensed VA Trading Platforms should not carry out occasional transactions as they are required to establish a business relationship with all customers pursuant to the VATP Guidelines.

Cross-border correspondent relationships

Some respondents had asked the SFC to clarify the scope of application of cross-border correspondent relationships in the context of virtual assets. The SFC stated that the requirements for cross-border correspondent relationships apply to a licensed VA Trading Platform when it provides services in the course of providing a virtual asset service to a virtual asset service provider or financial institution located in a place outside Hong Kong.

Screening of virtual asset transactions and the associated wallet addresses

The SFC has clarified that screening of virtual asset transactions and their associated wallet addresses should be performed before conducting a virtual asset transfer, or before making the transferred virtual assets available to the customer; and after conducting a virtual asset transfer on a risk-sensitive basis.

F. Disciplinary Fining Guidelines

Responding to the concerns regarding the fining criteria, the SFC agreed that the same set of fining criteria should be applied to both Securities and Futures Ordinance (“SFO”)-licensed and Anti-Money Laundering Ordinance and Counter-Terrorist Financing Ordinance (“AMLO”)-licensed VA Trading Platforms, where both of them will be subject to the same fining criteria irrespective of the ordinance under which they are licensed.

The SFC believed the proposed Disciplinary Fining Guidelines already provide sufficient information regarding the factors being considered in determining whether to impose a fine as well as the appropriate fine. The SFC stipulated that it will not follow a rigid framework in applying a specific amount or numerical value to any of the factors.

In deciding whether disciplinary action should be taken against individuals, corporations or both, the SFC will take a holistic approach, in which it will consider all the circumstances including the conduct of the corporation and individual in question. And for those involved in the management of a corporation, the SFC will consider whether there is any consent, connivance or negligence on their part, any failure in supervision, or the management of business.

Part II: Key measures of the transitional arrangements and implementation details of the new regulatory regime

License application related matters

The SFC clarified the scope of “providing a virtual asset service”, where the AMLO regime will cover VA Trading Platforms which are centralised and operate in a manner similar to traditional automated trading venues licensed under the SFO. The provision of virtual asset services without an automated trading engine and ancillary custody services would not fall under the scope of the AMLO regime.

Regarding the dual-licensing issue, the SFC suggested that it would be prudent for VA Trading Platforms to apply for approvals under both the existing SFO and AMLO regime to avoid contravention of the licensing regimes, given the ever-changing nature and classification of tokens. It also acknowledged that withdrawing a token previously admitted for trading when the token evolved into a security token may not be in the best interests of clients and should be a measure of last resort. The dual-licenses application process will be streamlined to allow applicants to submit only one single consolidated application.

The SFC also emphasised that the Phase 1 external assessment report shall be submitted together with the license application, given that an external assessor is expected to be involved in the early preparation stages of applying for a license.

Transitional arrangement-related matters

The SFC explained that the VATP Guidelines will supersede the Terms and Conditions for VA Trading Platform Operators previously issued by the SFC and be imposed as a licensing condition. For existing SFO-licensed VA Trading Platforms, the SFC will not remove the corresponding licensing conditions on compliance with the Terms and Conditions for VA Trading Platforms from their licenses until the VA Trading Platform can fully comply with the VATP Guidelines or by the deadline of the 12-month transitional period, whichever is earlier.

Analysis and Takeaways

Following the introduction of the new requirements and retail access to virtual asset trading, the SFC will implement a number of robust measures to protect retail investors including ensuring suitability in the onboarding process, good governance, enhanced token due diligence, admission criteria and disclosures.

While tokens to be available for retail trading will be limited to large-cap virtual assets, and no retail trading of stablecoins (such as Tether (USDT) or Binance USD (BUSD) are allowed at this stage, it is certainly an important milestone in the opening up of retail access to virtual assets in Hong Kong.

It has been the main focus of the SFC to provide clear regulatory expectations in order to foster responsible development while capturing market opportunities. We believe the continuous efforts of the SFC in modifying the rules will enable sustainable development and encourage innovation in the industry.

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.

The proposed amendments include codification of existing practices of the Executive Director of the Corporate Finance Division of the SFC (the “Executive”), clarifications on the Codes and housekeeping matters. The Executive also proposes amendments to various provisions of the Codes together with reasons for such changes. The public consultation period will end on 23 June 2023.

Part 1: Voting, Acceptances and Concert Party Issues

Definitions

Definition of “close relatives”

The SFC proposes to amend the definition of “close relatives” under the Codes. The current definition refers only to a person’s spouse, de facto spouse, children, parents and siblings, which does not cover the existing practice of the SFC. In order to codify the existing practice and expand the definition of “close relatives”, it is proposed to delete Note 8 to the definition of acting in concert and introduce a new definition of “close relatives” as follows:

“Close relatives: A person’s close relatives means:
(1) the person’s spouse or de facto spouse, parents, children, grandparents and grandchildren;
(2) the person’s siblings, their spouse or de facto spouse and their children; and
(3) the parents and siblings of the person’s spouse or de facto spouse.”

This new definition will result in a larger group of individuals presumed to be acting in concert with a person.

Definition of “voting rights”

Voting rights is currently defined as “… voting rights currently exercisable at a general meeting of a company whether or not attributable to the share capital of the company”. This definition leads to confusions on whether shares that are subject to voting restrictions and, hence their voting rights are not currently exercisable, would be treated as voting rights for the purpose of the Codes. This may also create undesirable situations where voting rights would disappear or re-appear due to the imposition or lifting of voting restrictions.

Therefore, the SFC proposes to amend the definition of “voting rights” by deleting the word “currently”. A Note to the definition of voting rights is also added to the Codes for clarification:

“For the purposes of the Codes, voting rights that are subject to any restrictions to their exercise by agreement, by operation of law and regulations or pursuant to a court order will still be regarded as voting rights exercisable at a general meeting except for the voting rights attached to treasury shares (if any) which will not be treated as voting rights for the purpose of this definition.”

Shareholders’ approval and acceptance

Note to Rule 2.2(c) of the Takeovers Code

In current practice, condition (iii) to the Note to Rule 2.2 is silent as to whether purchases will also be included when determining the equivalent threshold of acquiring 90% of the disinterested shares as compared to Rule 2.11, which has expressly included the purchases. As a matter of practice, the SFC has allowed purchases to be included in determining whether the threshold under condition (iii) to the Note to Rule 2.2 has been met.

Hence, to clarify the rules, it is proposed to amend condition (iii) in the following:

“(iii) the resolution to approve the delisting is subject to the offeror having received valid acceptances of the offer together with purchases (in each case of the disinterested shares) made by the offeror and persons acting in concert with it from the date of the announcement of a firm intention to make an offer amounting to 90% of the disinterested shares.”

Rule 2.11 of the Takeovers Code

The current Rule 2.11 indicates that only purchases made by an offeror and its concert parties during the period of 4 months after the posting of the initial offer document, together with acceptances, would count towards the 90% threshold. As the SFC considers it unnecessary to distinguish between an offer which does not involve a delisting and an offer which involves a delisting in deciding whether an acceptance condition has been met, it is proposed that the treatment of an acquisition pursuant to an acceptance of an offer or via an on-market acquisition should be the same.

The Rule 2.11 is proposed to be amended as follows:

“Except with the consent of the Executive, where any person seeks to acquire or privatise an company by means of an offer and the use of compulsory acquisition rights, such rights may only be exercised if, in addition to satisfying any requirements imposed by law, acceptances of the offer and purchases (in each case of the disinterested shares) made by the offeror and persons acting in concert with it during the period from the date of the announcement of a firm intention to make an offer to the expiry of the 4-month period after posting the initial offer document total 90% of the disinterested shares.”

Rule 2.2 and 2.10 of the Takeovers Code

Given the different interpretations of Rule 2.10 among the Hong Kong courts, the SFC proposes to amend Rule 2.10 to remove any ambiguity in the interpretation of the rule. This applies to Rule 2.2 as well as the same issue exists in Rule 2.2 equally. The amendments proposed by the SFC are as follows:

Rule 2.10:
“(a) the scheme or the capital reorganization is approved by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares shareholders ; and…”

Rule 2.2:
“(a) approval by at least 75% of the votes attaching to the disinterested shares that are cast either in person or by proxy at a duly convened meeting of the holders of the disinterested shares shareholders ;…”

A Note 8 to Rule 2 is added as well:

“8. Shareholders’ meetings held for the purpose of Rules 2.2 and 2.10
Reference to “duly convened meeting of shareholders” under Rules 2.2 and 2.10 refers to shareholders’ meetings which are duly convened in accordance with an offeree company’s constitutional documents and the company law of its place of incorporation. Offeree companies and their advisers are encouraged to seek legal advice and, where applicable, guidance and directions from the relevant courts in respect of the meetings held for the purpose of considering a scheme of arrangement or a capital reorganisation.”

Irrevocable commitments

The SFC proposes to amend Note 4 to Rules 3.1, 3.2 and 3.3 in order to revise the existing framework on the gathering of irrevocable commitments and adopt the following:

(a) Consultation with the Executive is not required where an offeror approaches a shareholder with a material interest in an offeree company. A shareholder has a material interest when he and his concert parties control(s) directly or indirectly 5% or more of the voting rights of an offeree company.

(b) The Executive must be consulted where an offeror intends to approach shareholders other than those with a material interest in an offeree company.

(c) The maximum number of shareholders an offeror can approach in an offer is six. This number includes approaches made to both: (a) shareholders who have a material interest; and (b) shareholders who do not have a material interest.

Part 2: The Chain Principle

In order to address the difficulties faced by practitioners in the application of the Substantiality Test (as set out in Note 8(a) to Rule 26.1) in assessing whether a “chain principle offer” is required, Note 8 to Rule 26.1 is amended to provide more guidance according to the follows:

(a) to add market capitalisation as one of the parameters for comparison when determining the Substantiality Test and amend Note 8(a) to Rule 26.1.

(b) to add further language to codify the Executive’s practice to “look-back” at least the three most recent financial periods when calculations of the Substantiality Test produce an anomalous result; and

(c) to update Practice Note 19 to provide further guidance on the Executive’s approach to the Substantiality Test as set out in this section.

Part 3: Offer Period and Timetable

Certain enhancements were introduced to streamline and improve efficiency during an offer.

Definition of “offer period”

Under the current rules, once an offer period has commenced, it will not end until one of the situations under the current definition of “offer period” is met. The Executive is not given the express power to end an offer period by the Codes either. This may be problematic as the offeree company may be subject to an unnecessarily prolonged offer period when the offeror is not proactive in relation to an offer or ending an offer.

Hence, the SFC proposes to give the Executive an express power to end an offer period. It is suggested that when the Executive exercise this power, an Executive statement will be published on the SFC’s website under the section headed “Executive decisions and statements”, while the offer period table will be updated to set out the reasons for the close of the relevant offer period.

Last possible day for Day 60 in privatisations and take-private transactions

The current Rule 15.5(ii) allows the extension of the last day on which an offer must be declared unconditional as to acceptances beyond the 60th day after the posting of the composite document (Day 60) if the offeree board consents.

In order to balance an offeror’s desire to extend an offer period to meet the acceptance condition and the interest of shareholders of an offeree company, as well as to ensure an offeree company will not be subject to an unnecessarily prolonged offer period, the SFC proposes to codify the practice where the Executive would give its consent to extend Day 60 given that any extension of Day 60 would not exceed four months after the despatch of the offer document.

Put up or shut up (PUSU) orders

A PUSU order requires a potential offeror to announce its firm intention to make an offer within a set period of time (put up), or to announce that it will no longer proceed with an offer (shut up). Under the current rules, there is no express provision under the Codes for the Executive to issue a PUSU order. Hence, the SFC proposes to add Rule 3.9 to codify the existing practice with respect to PUSU orders and to expressly empower the Executive to impose such orders in exceptional circumstances.

The proposed factors for the Executive to consider when deciding whether or not to impose a PUSU order:
(1) The current duration of the offer period;
(2) The reason(s) for the delay in issuing a firm intention announcement by the offeror;
(3) The proposed offer timetable (if any);
(4) Any adverse effects that the offer period has had on the offeree company; and
(5) The conduct of the parties to the offer.
Settlement of consideration and return of share certificates

Under the current Rule 20.1, 20.2 and Rule 17, there are no rules that set out the timing expected for new share certificates that are required to be issued to accepting shareholders following a successful offer. Hence, the SFC proposes to amend Rule 20.2 and Rule 17 in order to clarify that, in successful offers, share certificates for untaken or untendered shares in an offer (including partial offers) or share buy-back by way of general offer must be posted to or be made ready for collection by the accepting shareholder at the same time as the payment of consideration, and in any event no later than 7 business days after the later of: (i) the date of offer becomes, or is declared, unconditional; and (ii) the date of receipt of a duly completed acceptance.

Other amendments

Timing Requirements

Currently, different variations of the timing requirements have been used throughout the Codes. This causes confusion.

Thus, the SFC proposes to make a number of housekeeping amendments to provisions where time periods are relevant. The changes are extracted in Appendix 2 of the Consultation Paper.

Apart from that, in relation to Rule 7, there had been some confusion in the market as to the exact permitted time as to when directors’ resignations may take effect.

Hence, the SFC proposes to clarify Rule 7 as follows:

“Once a bona fide offer has been communicated to the board of the offeree company or the board of the offeree company has reason to believe that a bona fide offer is imminent, except with the consent of the Executive, the directors resignation of any directors of an offeree company should not resign take effect until after the publication of the closing announcement on the first closing date of the offer, or the date when publication of the announcement that the offer becomes has become or is been declared unconditional, or shareholders have voted on whichever is later. In the case of a transaction involving a whitewash waiver, the resignation of any director of an offeree company should not take effect until after the publication of the results announcement relating to the shareholders’ meeting to approve the waiver of a general offer obligation under Note 1 on dispensations from Rule 26, whichever is the later. ”

Rule 15.7 of the Takeovers Code

Rule 15.7 provides that all conditions must be fulfilled or the offer must lapse within 21 days of the later of the first closing date or the date when the offer becomes or is declared unconditional as to acceptances, unless the Executive consents otherwise.

The SFC proposes to add a note to Rule 15.7 to the effect that no consent from the Executive will be required in cases where the time delay between the court meeting and the effective date of a scheme is due to the court’s timetable. In other words, applications for consent will no longer be required. The amendment will also streamline the vetting and approval process for a privatisation by way of a scheme of arrangement.

Part 4: Offer Requirements

Disclosure of offer price in talk announcement

Under the current regime in Issue 37 (June 2016) of the Takeovers Bulletin, the Executive advised parties to maintain confidentiality and take all necessary steps to ensure there is no leakage of information prior to the announcement of a firm intention to make an offer.

That said, the SFC indeed acknowledges that parties should be given the flexibility to disclose a price in a Rule 3.7 announcement and there could be situations where this would be desirable. Notwithstanding the Executive’s strict approach to the disclosure of an offer price in a Rule 3.7 announcement, in practice, the SFC has been flexible in its supervision having regard to the specific circumstances of the case.

As such, the SFC now proposes to codify this practice by introducing a new note to give effect that the disclosure of an indicative offer price is not normally permitted before an announcement of a firm intention to make an offer unless there are exceptional circumstances.

Deduction of dividends from offer price

In the 2019 decision relating to Dalian Port (PDA) Company Limited (“Dalian Port”), the Panel ruled that the offeror will not be allowed to deduct the final dividend approved by the shareholders of Dalian Port from its offer price in a possible mandatory general offer.

Following the decision, the SFC proposes to codify the effect of dividends and withholding tax on an offer price. The proposed Note 11 to Rule 23.1 is as follows:
“An offeror will not be permitted to reduce from the offer consideration any amount equivalent to a dividend (or other distribution) which is subsequently paid or becomes payable by the offeree company to offeree company shareholders, unless it has specifically reserved in an announcement the right to do so. Where a dividend (or other distribution) is subject to withholding or other deductions, the offer consideration should be reduced by the gross amount received or receivable by the offeree company shareholders.”
Part 5: Partial Offers

Proposed amendments to the Codes aim to clarify certain procedural matters in partial offers and requirements for comparable offers.

Offer periods relating to partial offers

The current Rule 28.4 provides that for partial offers, once acceptances exceed the number of shares stated and the offeror declares the partial offer unconditional, the final closing date must be the 14th day thereafter and cannot be further extended. The rationale for that is any extension of the offer period will (i) dilute the number of shares accepted from an accepting shareholder; and (ii) delay the receipt of consideration which would only be settled after the close of offer.

Yet, in response to the misconception that an offer must be unconditional on both acceptances and approval before the restriction on extension of offer periods under Rule 28.4 kicks in, the SFC proposes to make amendments to clarify that the acceptance and approval conditions are in fact two separate conditions. The SFC does not consider it appropriate to allow an offer period in a partial offer to remain open for a prolonged period of time when an acceptance condition has already been met in order to facilitate the satisfaction of the approval condition under Rule 28.5.

Comparable offer for convertible securities, warrants, etc.

Currently, there is no explicit requirement to make appropriate Rule 13 offers for convertible, options, warrants etc. during a partial offer.

However, upon review, the SFC notes that all partial offers made since 2011 have included comparable offers for options or convertible securities, typically offering the same percentage as that under the partial offer for shares. Given that the market has accepted that appropriate Rule 13 offers apply to partial offers for more than a decade, the SFC proposes to add a new Rule 28.10 to make the requirement explicit.

Tick-box approval

The current Rule 28.5 imposes a “tick-box” approval condition requiring a partial offer to be conditional on, in addition to acceptances, majority approval from independent shareholders if an offer may result in an offeror holding 30% or more of a company. Under the rule, the tick-box requirement may be waived if one independent shareholder holding over 50% of the independent voting rights has indicated approval of the partial offer.

In response to enquiries on whether the tick-box approval applies to partial offers falling under Rule 28.1 (a) or (b), the SFC proposes to make amendments to clarify that the tick-box approval does not apply to an offer “(a) which could not result in the offeror and persons acting in concert with it holding 30% or more of the voting rights of a company; or (b) where the offeror and persons acting in concert with it hold more than 50% of the voting rights of a company.”

Acceptance and approval of partial offer by exempt principal traders

The current Rule 35.4 provides that shares held by exempt principal traders connected with an offeror or an offeree company must not be voted in the context of an offer.

In response to enquiries on whether Rule 35.4 applies to partial offers (as the rule does not specify whether an exempt principal trader can approve a partial offer under Rule 28.5), the SFC believes there is no reason that the discipline under Rule 35.4 that applies to general offers should not apply equally to partial offers, which are subject to more stringent rules than general offers. Hence, the SFC proposes to add a new Note 3 to Rule 28 to clarify that Rule 35.4 indeed applies to partial offers.

Part 6: Going Green

The SFC proposes several green initiatives to reduce the environmental impact associated with the documents published under the Codes, including introduction of electronic dissemination under the Codes and the related Code amendments.

Analysis and Takeaways

Some provisions of the current Codes are ambiguous and may cause confusion to companies and relevant stakeholders in complying with the Codes. It is believed the proposed amendments by the SFC would clarify current issues of the Codes and provide better guidance to companies on interpretation of the rules, as well as to reduce the number of disputes arising from such ambiguity. Codification of certain market practice undertaken by the SFC would also provide certainty to companies when conducting their business or any corporate actions which involves interpretation of the Codes, as well as greater convenience by reducing the need to conduct separate consultation with the SFC. The proposal to include green initiatives is also a commendable action as the dispatch of physical copies of documents required under the Codes can be cumbersome and, in particular, bulk-printing of documents for meeting the despatching requirements under the Codes may in practice hinder actions of some companies where time is of essence and compelling.

In the future, it is expected that the SFC would continue to review the rules to provide better guidance and efficiency to the market participants while balancing the core value to maintain market order and defend the market integrity of Hong Kong.

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.

Subject to responses during the Consultation Period, the revised ESG Reporting Guide (the “ESG Reporting Guide”) set out in Appendix 27 (“Appendix 27”) to the Rules Governing the Listing of Securities on The Stock Exchange of Hong Kong Limited (“Listing Rules”) will come into effect on 1 January 2024 (the “Effective Date”), and apply to ESG reports in respect of financial years commencing on or after the Effective Date.

Key Proposals

As an update from the current “comply or explain” mechanism for climate-related disclosures in ESG reports, the new climate-related disclosures based on the ISSB Climate Standard ¹ will be introduced as a new Part D of Appendix 27. These disclosures will be categorised under four core pillars, namely Governance, Strategy, Risk management and Metrics and Targets. The key proposed disclosures are set out in the table below, including interim provisions for an issuer’s first and second reporting periods following the Effective Date (the “Interim Period”).

Analysis and Takeaways

Recently, thematic investment has become a popular trend and ESG investment is undeniably one of the major investing themes among investors, shareholders and other stakeholders. The Hong Kong Stock Exchange also notes the importance of promoting high standards of ESG practice and disclosure, and has incorporated certain elements of the Recommendations of the Task Force on Climate-related Financial Disclosures (“TFCD“) in the ESG reporting requirements that became effective in July 2020. In November 2021, the Hong Kong Stock Exchange further published a Guidance on Climate Disclosure to promote TCFD-aligned climate change disclosures.

While the Hong Kong Stock Exchange aims to keep up with international developments, it should also take into account the particular circumstances of the Hong Kong market when formulating the ESG reporting framework. The diversified business profile, specialised industry sectors and operating locations of Hong Kong-listed issuers, as well as their applicable laws and regulations, are all key concerns that the Hong Kong Stock Exchange should take into consideration.

In the future, it is expected that ESG and corporate governance matters would continue to be the key focus of the Hong Kong Stock Exchange. The Hong Kong Stock Exchange should also provide more guidance or training to cater for different levels of sophistication for ESG matters of the issuers. The Hong Kong Stock Exchange also encouraged issuers to visit its ESG educational platform, ESG Academy, for guidance materials. Issuers are advised to seek professional support for ESG advisory and reporting to meet the increasingly stringent and granular ESG requirements.

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.

¹ The IFRS S2 Climate-related Disclosures Exposure Draft, as supplemented or modified by deliberations of the ISSB available on https://www.ifrs.org/news-and-events/updates/issb.

² A set of industry-based standards that guide the disclosure of financially material sustainability information by companies to their investors. Effective from 1 August 2022, the SASB Standards are under the oversight of the ISSB.

³ A set of interrelated sustainability reporting standards that enable organisations to report publicly on their economic, environmental and social impacts and contribution towards sustainable development developed by the Global Sustainability Standards Board of the GRI.

Definition of “Specialist Technology Companies”

The Exchange will adopt the proposed definitions of STCs without amendment,¹ which is defined as “a company primarily engaged (whether directly or through its subsidiaries) in the research and development of, and the commercialisation and/or sales of, Specialist Technology Products (“STPs”) within an acceptable sector of a Specialist Technology Industry”.

STP is defined as “a product and/or service (alone or together with other products or services) that applies Specialist Technology”, and “Specialist Technology” is defined as “science and/or technology applied to products and/or services within an acceptable sector of a Specialist Technology Industry”.²

List of Specialist Technology Industries and acceptable sectors

In respect of the Specialist Technology Industries and acceptable sectors, the Exchange will adopt the proposed list set out in the Consultation Paper with amendments, and the list will be published in the Guidance Letter to be updated from time to time by the Exchange after consultation with the Securities and Futures Commission and with its approval.³ Summary of the list of Specialist Technology Industries and the non-exhaustive acceptable sectors are as follows:⁴

The Exchange has specifically excluded blockchain and digital asset related business in the list as such companies’ success is considered generally attributable to the expansion of mining capacity, rather than the application of new technology, with minimal contribution of research and development (R&D) to the companies’ expected value⁵ .

Applicants falling outside the existing list of Specialist Technology Industries and acceptable sectors

An applicant falling outside the list of Specialist Technology Industries or acceptable sectors above may still be considered as “within an acceptable sector of a Specialist Technology Industry” for the purpose of the definitions of STC and “Specialist Technology” if it can demonstrate that:⁶

(a) it has high growth potential;

(b) its success can be demonstrated to be attributable to the application, to its core business, of new technologies and/or the application of the relevant science and/or technology within that sector to a new business model, which differentiates it from traditional market participants serving similar consumers or end users; and

(c) research and development significantly contributes to its expected value and constitutes a major activity and expense.
Such applicant must submit a pre-IPO enquiry to the Exchange before submitting a listing application under Chapter 18C of the Listing Rules⁷ , and the Exchange will assess by taking into account all relevant facts and circumstances and consult with the SFC and seek its approval.⁸

Companies with multiple business segments

In respect of applicants with multiple business segments, the Exchange will adopt a holistic assessment of the non-exhaustive factors set out in the Guidance Letter and take into account the following additional factors when assessing whether an applicant is eligible for listing under Chapter 18C:⁹

(a) the proportion of the revenue (if any) generated by the Specialist Technology business segment(s) relative to the total revenue of the company (instead of prescribing a “bright line” percentage threshold); and

(b) the reason for retaining the non-Specialist Technology business segment(s) and the history of the company’s operations.

Categorisation of Commercial / Pre-Commercial Companies

The Exchange has adopted its proposal to accommodate the listings of Commercial Companies and Pre-Commercial Companies, with more stringent requirements imposed on Pre-Commercial Companies than Commercial Companies¹¹ , and that all investors (including retail investors) be allowed to subscribe for, and trade in, the securities of Pre-Commercial Companies.¹²

Requirements

The below table sets out a comparison of the key requirements for Commercial Companies and Pre-Commercial Companies to be eligible for listing as set out in the Conclusions:

Additional qualification requirements for Pre-Commercial Companies²⁴

• Primary reason for listing must be for raising funds for the R&D of, and the manufacturing and/or sales and marketing of, its STPs to bring them to commercialisation and achieving the Commercialisation Revenue Threshold (i.e. HK$250 million for an audited financial year);
• Demonstrate, and disclose in its Listing Document, a credible path to achieving the Commercialisation Revenue Threshold; and
• Have available working capital (after taking into account the IPO proceeds of the applicant) to cover at least 125% of its group’s costs (which must substantially consist of general, administrative and operating costs and R&D costs) for at least the next 12 months

Post-IPO lock-up²⁵

Scope of the target persons subject to post-IPO lock-up of STCs is wider than the main board issuers with a longer lock-up period. In particular, the applicable post-IPO lock-up for STCs is as follows:

Analysis and Takeaways

While the value of STCs may be difficult to estimate, due diligence and in-depth research on the capabilities of performance of STCs, as well as the participation of investors with professional experience and industry expertise are crucial to the price setting of shares of STCs. The IPSI mechanism, with a 50% share allocation percentage requirement, introduced by the Exchange in view of overcoming the difficulty in price-setting, has in fact created certain challenges for STC listing applicants as they lose some flexibilities in seeking general investors’ support.

Nevertheless, the introduction of the IPSI mechanism, together with other adjustments made after considering the market feedback, such as lowering the market capitalisation requirement for listing and modifying the requirements for the minimum R&D expenditure ratio, demonstrated the Exchange’s efforts in promoting the feasibility of the new listing regime without compromising the protection offered to investors.

This new route to the market is expected to support some of the most innovative and progressive companies of the future. Since the listing reforms implemented by the Exchange in 2018, Hong Kong has made a great leap forward in catching up with the international capital market’s development progress of regulatory framework to accommodate the ever-changing market needs. The introduction of such series of rules and regulatory frameworks, including this new Specialist Technology chapter, will greatly enhance Hong Kong’s competitiveness as a fundraising market in Asia, and Hong Kong would be able to make an even greater use of its connectivity with Mainland China.

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.

¹ Conclusions, p. 6
² Conclusions, pp. 6 and 7
³ Conclusions, p. 12
⁴ Conclusions, pp. V-2 to V-6, paragraph 7 of the Guidance Letter
⁵ Conclusions, pp. 10 to 11
⁶ Conclusions, pp. 11 and V-7, paragraph 10 of the Guidance Letter
⁷ Conclusions, p. V-7, paragraph 11 of the Guidance Letter
⁸ Conclusions, p. V-7, paragraphs 12 and 13 of the Guidance Letter
⁹ Conclusions, pp. 14 and V-8, paragraphs 16 and 17 of the Guidance Letter
¹⁰ Companies that have achieved meaningful commercialisation of their Specialist Technology Products and achieved a minimum revenue of HK$250 million in the most recent audited financial year, and are also expected to demonstrate year-on-year growth of revenue from the Specialist Technology business.
¹¹ Conclusions, pp. 17-18
¹² Conclusions, pp. 18-19
¹³ Conclusions, pp. 1, 22 to 29
¹⁴ Conclusions, pp. 29 to 31
¹⁵ Conclusions, pp. 2 and 39 to 42
¹⁶ Conclusions, pp. 42 to 43
¹⁷ Conclusions, pp. 45 to 62
¹⁸ Conclusions, pp. 58-59
¹⁹ Conclusions, p. 60
²⁰ Conclusions, pp. 75-84
²¹ Conclusions, pp. 82 to 84
²² Conclusions, pp. 84 to 88
²³ Conclusions, p. 90
²⁴ Conclusions, pp. 63 to 70
²⁵ Conclusions, pp. 93 to 100
²⁶ Key personnel responsible for the STC’s technical operations and/or the R&D of its STP(s) (including the head and the key personnel of its R&D department) whose expertise is primarily relied upon by the company for the development of its STP(s), and the lead developer(s) of the core technologies in relation to the STP(s). In determining whether a person should be designated as a Key Technical and R&D Personnel, an applicant should consider factors including the shareholding of such personnel, his/her remuneration relative to other R&D staff, and his/her seniority.

Key Regulatory requirements

A. Key proposed regulatory requirements for licensed VA Trading Platforms

Upon the commencement of the AMLO VASP regime, it is proposed that VA Trading Platforms licensed by the SFC shall comply with the Guidelines for Virtual Asset Trading Platform Operators (“VATP Guidelines”). Such VATP Guidelines will be based on the existing regulatory requirements applicable to SFO-licensed platform operators (“LPOs”), and particularly, the Terms and Conditions for VA Trading Platform Operators (VATP Terms and Conditions).

The proposed regulatory requirements under VATP Guidelines cover various aspects and areas, such as fit and proper requirement, compliance with the general principles, financial soundness, operations, prevention of market manipulative and abusive activities, dealing with clients, custody of client assets, management, supervision and internal control, cybersecurity, conflict of interests, record keeping, auditors, ongoing report obligations.¹ The SFC also emphasise the “same business, same risks, same rules” approach, which requires VA providers of the same risk level to be subjected to the same obligations but adapted to address the specific risks of virtual assets (“VA(s)”), aiming to provide investors with more protection under the backdrop of the collapse of the Luna token and Terra stablecoin.² After the AMLO VASP regime comes into effect, the VATP Terms and Conditions will be superseded. All platform operators, whether licensed under the SFO and/or the Anti-money Laundering Ordinance (“AMLO”), will be subject to the VATP Guidelines.

B. Dual Licences

Upon the commencement of the AMLO VASP regime, the SFC will regulate the trading of security tokens by VA Trading Platforms under the existing SFO regime and regulate the trading of non-security tokens by VA Trading Platforms under the AMLO VASP regime.

Given that a VA may evolve from a non-security token to a security token (or vice versa), VA Trading Platforms (together with their proposed responsible officers and licensed representatives) should apply for approvals under both the existing SFO regime and the AMLO VASP regime and become dually licensed and approved.

C. Proposal to allow retail access to licensed VA Trading Platforms³

When the existing SFO regime was introduced in 2018, it was more prudent to restrict SFO-licensed VA Trading Platforms to serve professional investors only. In this regard, the SFC notes the public’s diverse views on whether retail investors should be allowed access to the services of licensed VA Trading Platforms.

In January 2022, the SFC allowed for the first-time retail investors to access a limited suite of regulated virtual asset-related derivative products traded on conventional exchanges. Later in October 2022, the SFC put in place a regime for authorising virtual asset futures exchange-traded funds. Retail investors, thus, since then have indirect access to Vas through regulated products in Hong Kong (see our news update for details).

Since more global financial institutions and service providers have entered the market, the SFC proposes to allow all types of investors, including retail investors, to access trading services of “Eligible large-cap VAs” offered by LPOs, provided that the VAs are included in at least two “acceptable indices” issued by at least two independent index providers. LPOs should also take into account other general token admission criteria including the market capitalization, trading volume, security of protocols, and internal compliance of the VAs before admitting them for trading.⁴

D. Consultations Questions⁵

Some of the key questions set out by the SFC for industry and public feedback, together with their corresponding views, are extracted as follows:

Key measures of the transitional arrangements and implementation details for the AMLO VASP regime

E. Eligibility for the transitional arrangements

To be eligible for the transitional arrangements, a VA Trading Platform must be pre-existing, i.e., in operation in Hong Kong prior to 1 June 2023 and with meaningful and substantial presence. To determine the same, the SFC will take to account the following non-exhaustive factors including (a) whether it is incorporated in Hong Kong; (b) whether it has a physical office in Hong Kong; and (c) whether its Hong Kong staffs have central management and control over the VA Trading Platform.¹⁰

F. Key dates and implementation details of the transitional arrangements

For pre-existing VA Trading Platform which intends to apply for a licence, it must submit a fully completed licence applicable online under the AMLO VASP regime between 1 June 2023 and 29 February 2024. It will be asked to confirm and demonstrate that it has been operating a VA Trading Platform in Hong Kong immediately before 1 June 2023 and it will comply with the applicable regulatory requirements.

For pre-existing VA Trading Platform that does not intend to apply for a licence, it should start preparing to close down its business in Hong Kong in an orderly manner. While the strict deadline for these platforms to close down is 31 May 2024, the SFC expects them to cease any active marketing of their services in Hong Kong.

By 1 June 2024, all VA Trading Platforms in Hong Kong must have been either deemed to be licensed or granted a licence by the SFC. The SFC will take immediate action against any unlicensed VA Trading Platforms.

Analysis and takeaways

Subsequent to the Government’s Policy Statement on its plan and approach for the VASP regime (see our news update), this Consultation Paper is a timely attempt to translate visions into practices and denotes a significant milestone in the global regulatory regime over VAs. SFC is committed to taking the forefront role in expanding the retail market for VAs in Hong Kong by implementing legal safeguards for different stakeholders. It helps retail investors acclimate to the volatile market and enables retail investors’ access to regulated trading platform under a protective and effective system. This Consultation Paper, together with the previously unveiled regulations, foster a new wave of market opportunities and capital investments while modernising Hong Kong’s financial market, which aligns with the global trajectory of further utilising VAs.

As such, we welcome the SFC’s proposals and would be happy our perspectives on the Consultation Paper for facilitating local VA services. We would also like to take the opportunity to encourage you to have discussion with us and share your views 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.

¹ Please see p.10-11 of the Consultation Paper for the full list and corresponding explanation of the existing regulatory requirements.
² P.7 of the Consultation Paper.
³ P.12 of the Consultation Paper.
⁴ P.16 of the Consultation Paper.
⁵ P.12-23 of the Consultation Paper.
⁶ Please see p.15 of the Consultation Paper for the full list of general non-exhaustive token admission criteria suggested by the SFC.
⁷ Please see p.16 of the Consultation Paper for the specific token admission criteria, particularly on requirements for an “acceptable index”.
⁸ Please see p.17 of the Consultation Paper for the specific areas of due diligence required.
⁹ Please see p.17-18 of the Consultation Paper for the non-exhaustive list of disclosure obligations.
¹⁰ Please see p.24 of the Consultation Paper for full list of non-exhaustive factors in determining whether the firm has a meaningful and substantial presence.