Hong Kong - SFC’s Clarification On Licensing Requirements For Private Equity Firms And Family Offices.

Legal News & Analysis - Asia Pacific - Hong Kong - Private Equity - Regulatory & Compliance

24 January, 2020


On January 7 2020, the Securities and Futures Commission (the “SFC”) issued two circulars to clarify the licensing requirements for private equity (“PE”) firms and family offices in Hong Kong. These circulars were issued in response to inquiries from industry participants and their professional advisors. New and existing PE firms and family offices in Hong Kong should take note of these circulars to ensure compliance with the SFC’s licensing requirements.


Opening remarks


Family offices are essentially private wealth management firms that manage the financial and investment affairs of high or ultra-high net worth individuals. Broadly speaking, family offices can be categorised as “single” or “multi”. They are simply a platform through which expertise in legal, asset management, estate planning, etc. are pooled together to serve single or multiple families. A single family office would serve one affluent family or individual. A multi-family office would, by definition, serve more than one affluent family similar to a licensed asset management firm.


Private equity funds are commonly structured as close-ended investment vehicles by way of limited partnerships, where the PE firm would usually serve as the general partner in return for management fees, carried interest or other remuneration.


A summary of the key aspects of the circulars is set out below. The common themes applicable to both PE firms and family offices will be discussed first, followed by themes that are specific to each type of firm.


Would PE firms or family offices operating in Hong Kong need to be licensed by the SFC?


If the services provided by a PE firm or a family office in Hong Kong do not constitute any regulated activity (an “RA”) or if any of the exemptions under the SFO1 are available to such firm, it would not need to be licensed by the SFC. Whether a licence is required and if so, the type of licence required would depend on the services that the PE firm or the family office would provide in or from Hong Kong.


Under the SFO, type 9 (asset management) RA refers to, among other things, the provision of a service of managing a portfolio of securities or futures contracts for another person. Where a PE firm conducts fund management activities or where a family office manages assets as a business in Hong Kong on a discretionary basis2, it will generally be required to obtain a type 9 licence. This is provided that the related activities fall under the “asset management” definition.


Firms will also need to consider whether their activities might require them to be licensed for other RAs such as type 1 (dealing in securities), type 2 (dealing in futures contracts), type 4 (advising on securities) or type 5 (advising on futures contracts) RA. This is particularly the case if the PE firm or family office has not been delegated full discretionary investment authority and only provides investment advisory and/or execution-only services to its clients.


Individuals who perform RAs for such firms will also need to be licensed as representatives, and where appropriate, be approved as responsible officers (“ROs”). An unlicensed firm must be mindful not to hold itself out as carrying on any business in an RA in Hong Kong. For example, an unlicensed PE firm (if required to be licensed) should not represent to any prospective investor that it manages a PE fund in Hong Kong.


Which licences are required? 


We have set out below the various types of services that a PE firm or family office may provide to its clients and the SFC licences that could be relevant: 

Service Licence type (regulated activity) Some common exemptions /carve-outs

•Managing an investment portfolio/portfolio of companies on a discretionary basis

•Managing funds on a discretionary basis 

Type 9 (asset management)

•Incidental exemption: If a PE firm or family office is already licensed for type 9 RA and wants to carry out type 1 (dealing in securities) (e.g. placing orders to dealers) and type 4 (advising on securities) RAs (e.g. providing investment advice or research reports), it does not need to be licensed for these RAs if they are carried out solely for the purpose of its asset management business.

•Intra-group exemption: No licence is required for a firm providing asset management services to its related entities (“Related Entities”) which are defined as its wholly-owned subsidiaries, its holding company which holds all its issued shares or that holding company’s other wholly-owned subsidiaries. This exemption is available provided that the assets being managed do not belong to third parties (e.g. clients of a group company’s clients). 

•Offering investment/co-investment opportunities

•Fund marketing activities

•The PE firm arranges for a fund managed by it or an investee company to enter into an agreement in which the fund acquires an interest in the investee company

Type 1 (dealing in securities)

•Incidental exemption: A type 1 licence may not be required if a firm is licensed to provide type 9 (asset management) services and conducts type 1 RA solely for the purpose of the firm’s asset management business.

•Advising or recommending an investment or divestment in securities

Type 4 (advising on securities

•Incidental exemption: Firms already licensed for type 1 RA do not need to be licensed for type 4 RA provided that this advisory service is purely incidental to their type 1 RA business.

•Intra-group exemption: No licence is required for "advising on securities" RA if the advice is provided to a Related Entity for the own consumption of that Related Entity.


Discretionary investment authority for type 9 RA


Where a type 9 licence is being applied for, the SFC takes the view that the asset manager, whether a PE firm or a family office, must be able to exercise full discretionary investment authority to make investment decisions for clients. A type 9 licence would not be required, and cannot be obtained, if a firm has not been delegated such investment authority or if the firm has delegated all of the asset management functions to another entity which is licensed or registered to carry on such activity. For instance, if the general partner of a fund has fully delegated all its asset management functions to another type 9 licence holder, the general partner will not need to be licensed for type 9 RA.


When considering whether a firm possesses this authority, the SFC will consider the facts of each case, including the proposed investment decision-making process, the roles of the proposed licensed individuals (including ROs) and their involvement in the process, and whether the delegation of investment authority to the firm is properly documented.


Investments in securities of private companies


The definition of “securities” is wide but excludes shares or debentures of a company that is a “private company” under section 11 of the Companies Ordinance (i.e. a Hong Kong-incorporated private company).


Firms often set up special purpose vehicles (“SPVs”) for investment holding purposes. In determining whether an investment portfolio comprises securities or futures contracts for the purposes of type 9 RA, the SFC will consider the composition of the entire portfolio. If the underlying investments held through the SPV constitute “securities” (even if the shares or debentures of the SPV are excluded from such definition because the SPV is a HK-incorporated private company), or if the shares or debentures of the SPV fall within the definition of “securities”, the SFC will regard the management of the portfolio as “asset management” and the firm will need to be licensed for type 9 RA. 


Industry experience requirement for ROs


The SFC has clarified that it will take a pragmatic approach in assessing whether an RO applicant of a firm possesses the requisite industry experience to satisfy its competence requirements. The SFC will take into account a broad range of (relevant) experience such as research and valuation, the provision of management consulting and business strategy advice to companies in related industries and the structuring of corporate transactions. PE experience gained in a non-regulated situation, both in Hong Kong and overseas, will also be taken into account by the SFC. The SFC will also accept relevant experience in a PE firm which operates in Hong Kong but is exempted from its licensing requirements (e.g. conducting research in Hong Kong solely for use by the PE firm’s holding company). 


PE firms


The following are themes discussed in the SFC’s circular that are specific to PE firms: 


Whether investment committee members need to be licensed by the SFC


Generally, members of an investment committee of a PE firm who, either jointly or individually, play a dominant role in making investment decisions for the funds managed by the PE firm must be licensed as representatives and, where appropriate, be approved as ROs. This would not apply if those members do not have any voting right or veto power in relation to making investment decisions; and their primary role is to provide input from a legal, compliance or internal control perspective. 


Fund marketing activities and offering co-investment opportunities 


Where a PE firm engages in fund marketing activities or offers investment opportunities to other persons, the firm is generally required to be licensed for type 1 RA. This is because such activities will likely be regarded as inducing others to enter into securities transactions. However, a PE firm may not require a licence for type 1 RA if it is licensed for type 9 RA to manage a fund and the activities under this heading are conducted solely for the purpose of carrying on type 9 RA. 


Family offices


The following are themes discussed in the SFC’s circular that are specific to family offices: 




As discussed, a family office set up as a business in Hong Kong to provide asset management services within the type 9 RA definition may need to be licensed. The relationship amongst beneficiaries of a family trust or between family members is not relevant in determining whether a licence is required. 


Single family offices


In the case of a single family office, a type 9 licence could be avoided if it does not provide asset management services to a third party. For instance, where a family appoints a trustee to hold the assets of a family trust, and the trustee operates the family office as an internal unit to manage the trust assets, it may not need to obtain a type 9 licence. Similarly, where the family office is a separate legal entity which provides asset management services solely to any of its Related Entities (i.e. to a trustee or a company that holds the family’s assets and which wholly owns the family office), it should be able to rely on the intra-group exemption and no type 9 licence would be required.


Multi-family offices


A multi-family office managing investments in Hong Kong will not be able to rely on the intra-group exemption if it provides the asset management services to clients who are not its Related Entities.


Furthermore, where this type of family office is granted full discretionary investment authority to manage the assets of more than one family in Hong Kong, it may need to be licensed for type 9 RA. The regulatory position is similar to a PE firm or a licensed asset management firm conducting similar activities.


Concluding remarks


It is a criminal offence under section 114 of the SFO to carry on a business in any regulated activity in Hong Kong without the proper SFC licence. Anyone who is interested in setting up PE firms or family offices, or who is already running PE firms or families offices, should carefully consider the above issues. We have for many years been advising Hong Kong and overseas clients on SFO licensing issues. If in doubt, please get in touch with us for a discussion. We would be pleased to speak with you.

1 Please refer to Schedule 5 of the SFO for details of the exemptions under the definitions of the various types of RAs.


2 Under the SFC’s Licensing Handbook (February 2019), the SFC generally expects that a corporation to be licensed for type 9 RA (asset management) has discretionary investment authority to make investment decisions for its clients. Such discretionary investment authority must be properly delegated to the corporation.




For further information, please contact:


Katherine Liu, Partner, Stephenson Harwood