HK Regulatory Newsletter - Court convicts and fines RO for Unlicensed Activity (Type 1 - Dealing in Securities)

Dear Reader,

In this Hong Kong Regulatory Newsletter issue, we delve into a recent enforcement action by the Securities and Futures Commission (SFC) that underscores the importance of adherence to licensing regulations.

In this enforcement action, the Eastern Magistrates' Court has found Mr. Cheung Wing Hung ("Defendant") guilty of holding himself out as performing the regulated function of dealing in securities as an agent of entities not licensed by the SFC.?

The Case?

Between April 2016 and June 2017, the Defendant, portraying himself as an agent of First Asia Holdings Limited ("FAH") or First Asia Capital Limited ("FAC"), lured three retail investors to finance FAH or FAC's supposed preparations for a secondary listing of FAH shares in Hong Kong, by investing in what were claimed to be "US-listed" shares issued by FAH.

The Defendant represented to the investors that if the secondary listing in Hong Kong were successful, the value of their investment in FAH shares would increase by 100%. The Defendant also stated that the investors would have to swap their FAH shares for shares in a Hong Kong-listed corporation ("ListCo Shares") to realise their investment return. However, the price of the ListCo Shares had fallen substantially when the investors received their ListCo Shares.

The Regulations?

According to Schedule 5 of the Securities and Futures Ordinance ("SFO"), "dealing in securities" falls under the category of regulated activity (Type 1) under the SFO. "Dealing in securities" occurs when an individual initiates or proposes an agreement or tries to influence someone else to agree: (a) to acquire, dispose of, subscribe to or underwrite securities, or (b) to make profits from securities.?

Within the framework of the SFC's licensing regime, "dealing in securities" includes transactions involving securities traded on the Stock Exchange of Hong Kong and other securities, as long as these activities are conducted in the jurisdiction of Hong Kong.

The Defendant's actions contravened section 114(3)(b) of the SFO, which states that it is an offence for any person to hold himself out as performing a regulated function, in relation to any regulated activity, without a license from the SFC.

According to section 114(9) of the SFO, any person who contravenes section 114(3) without a reasonable excuse is committing an offence. If convicted on indictment, the defendant can face a fine of up to $1,000,000 and two years of imprisonment, with an additional fine of $20,000 for each day the offence persists. On summary conviction, the defendant shall be liable to a fine at level 6 (currently HK$100,000), up to six months in jail, and a further daily fine of $2,000 if the offence continues.

In Securities and Futures Commission v Yu Ka Tak (余家德) HCMA 62/2007, the Court of First Instance clarified that a contravention of section 114(3) of the SFO does not automatically constitute an offence. It only becomes an offence when the person contravenes section 114(3) without a reasonable excuse. It entails that 'without reasonable excuse' is an offence element.

Regarding the burden of proof, as elaborated by the court in Yu Ka Tak: "The prosecution alleged that the Respondent did not have a licence. If the Respondent claimed the contrary, he had to prove it on a balance of probabilities. If he exercised his right not to give evidence, the defence would not have any evidence to show that he had a reasonable excuse. Under such circumstances, the court could, on the evidence adduced by the prosecution, determine whether the only reasonable inference to be drawn was that the Respondent was "without reasonable excuse" and had contravened section 114(3) accordingly" (cited by the Court of Appeal in 証劵及期貨事務監察委員會 訴 楊麗萍 [2010] CHKEC 574; HCMA87/2010).?

Therefore, the prosecution shall establish beyond reasonable doubt that the accused, without a reasonable excuse, has held himself out as performing a regulated function in relation to any regulated activity without an SFC licence.

The Ruling

The Defendant pleaded guilty to the charge against him and was imposed a monetary penalty of $6,000 by the court, in addition to being ordered to cover the costs incurred during the SFC's investigation.

Conclusion

Individuals and entities who act as agents to induce others to invest in securities must ensure they are appropriately licensed to perform regulated activities.

It is also crucial to understand that investing in securities involves risks, and investors should carefully consider whether such investments are suitable based on their financial situation, investment experience, investment objectives, and other relevant circumstances. Before investing, potential investors may check the SFC's Public Register of Licensed Persons and Registered Institutions on the SFC's website.?

Through my newsletter, I will continue to keep you informed about regulatory developments and enforcement actions in Hong Kong's financial industry.

Stay informed and stay vigilant!

Best regards,

Martin Chan