SFC Takes Enforcement Action Against Private Equity Firm, a Director and Investment Manager

November 01, 2019

The Hong Kong Securities and Futures Commission (SFC) has announced that it reprimanded and fined a Hong Kong private equity firm, SEAVI Advent Ocean Private Equity Limited (PE Firm), for employing or appointing unlicensed persons to perform regulated functions for its asset management business. This disciplinary action, following the SFC's recent confirmation to exclude private offshore companies from the private securities exemption, may signify the beginning of a trend towards enforcement by the SFC against private equity managers.

Disciplinary Action

As background, according to the Statement of Disciplinary Action issued by the SFC1 in June 2013, the PE Firm was appointed as a fund manager of a private investment fund (Fund), and within a year 23 investors had subscribed for non-voting participating shares in the Fund with a total capital commitment of HK$60 million.

The SFC found that one director of the PE Firm (Director), as well as an individual investment manager of the PE Firm (Individual Manager), had engaged in the following regulated activities without having a license: (a) marketing the Fund to potential investors; (b) answering investors’ queries regarding (among other matters) calculation of the Fund’s subscription and management fees; and (c) arranging for the execution of the Fund’s know-your-client questionnaires and subscription agreements.

In addition, the SFC found that the Director had “introduced” 11 investors to invest US$8.75 million in the Fund. In return, the PE Firm agreed to pay the Director introductory fees in the amount of 2% of the capital commitments of the investors introduced by him. The SFC also found that the Investment Manager was employed by an investor in the Fund, and had been seconded to the PE Firm to provide it with consultancy services.

The SFC found the PE Firm to be in breach of paragraphs 12.12 and 4.13 of the Code of Conduct, for allowing the Director and the Individual Manager who were not licensed by the SFC to carry on regulated activities, and imposed a fine of HK$1 million in connection with the breach. In deciding the appropriate sanction, the SFC took into account the PE Firm’s cooperation in resolving the regulator’s concerns and the fact that it had an otherwise clean disciplinary record.

2019 Revision to SFC’s Licensing Handbook

All private equity managers that carry on a business in a regulated activity in Hong Kong, or which hold themselves out as carrying on a business in a regulated activity in Hong Kong, are required to have an appropriate license unless an exemption applies. Private equity managers commonly engage in Type 1 regulated activity (dealing in securities),4 Type 4 regulated activity (advising on securities)5 and/or Type 9 regulated activity (asset management).6 As shares or debentures of a “private company”7 under Companies Ordinance8 are excluded from the definition of “securities” in the Securities and Futures Ordinance,9 a private equity firm that deals in, advises on or manages a portfolio of private equity not involving such “securities” is exempt from licensing requirements. In the most recent update to its Licensing Handbook in February this year, the SFC clarified that where a private equity firm deals in, advises on or manages shares or debentures of private offshore companies that fall outside the definition of “private company” under Companies Ordinance, the private equity firm likely will need to be licensed.10 This is also consistent with the Hong Kong Court of First Instance decision in Aachen (Asia Pacific) Consultants Ltd v Khoo Ee Liam (HCA 4354/2003).

Considerations for Private Equity Managers

This enforcement action demonstrates the regulator’s increased focus on private equity firms. Private equity managers should take this as a timely reminder to reevaluate whether they have satisfied applicable licensing requirements. A private equity manager may wish to consult with legal professionals as to whether the manager and its staff have obtained appropriate license(s) from the SFC. Further, internal control procedures implemented to assess business activities should be subject to ongoing review to determine whether they remain effective to comply with regulatory requirements. 


1) SFC, Statement of Disciplinary Action (October 3, 2019).
2) Paragraph 12.1 of the Code of Conduct for Persons Licensed by or Registered with the SFC (Code of Conduct) requires a licensed corporation to “comply with, and implement and maintain measures appropriate to ensuring compliance” with applicable regulatory requirements
3) Paragraph 4.3 of the Code of Conduct requires a licensed corporation to have “internal control procedures and financial and operational capabilities which can be reasonably expected to protect its operations, its clients and other licensed or registered persons from financial loss arising from theft, fraud, and other dishonest acts, professional misconduct or omissions.”
4) In relation to a manager of a private equity fund, the definition of “dealing in securities” would include activities such as: deal sourcing and negotiation; deal execution; and marketing and distribution of a fund.
5) A Type 4 (advising on securities) license allows a private equity firm to provide advice in respect of the investments or prospective investments of a fund.
6) “Asset management” includes managing a portfolio of securities or futures contracts. A private equity firm that has been delegated discretionary power to make investment decisions on securities for a fund in Hong Kong must obtain a Type 9 (asset management) license.
7) “Private company”, as defined in section 11 of the Companies Ordinance, is a company not limited by guarantee, whose articles: (i) restrict a member’s right to transfer shares; (ii) limit the number of members to 50; and (iii) prohibit any invitation to the public to subscribe for its shares or debentures.
8) Chapter 622 of the Laws of Hong Kong.
9) Chapter 571 of the Laws of Hong Kong.
10) SFC, Licensing Handbook (February 2019), paragraph 1.4.18.

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