The Hong Kong Securities and Futures Commission (SFC) recently issued a guidance note clarifying its regulatory approach to conducting the following activities on the Internet:
- offering securities and investment arrangements by electronic prospectuses;
- issuing advertisements or other documents relating to securities, investment arrangements and investment advisory services; and
- securities dealing, commodities futures trading, leveraged foreign exchange trading and related advisory businesses.
It is clear from the guidance note that the SFC recognizes the need to encourage market development and innovation. However, while the SFC "encourages the legitimate use of the Internet" and the development of new mechanisms to facilitate offering and trading activities, no dispensation or special treatment is given to activities conducted by electronic media which fall within the SFC's regulatory ambit. The SFC intends to uniformly regulate these activities, irrespective of whether such activities are conducted by a paper-based media or electronic media.
Although accepting that prospectuses may be distributed electronically, the SFC still regards paper-based information as the prime medium for prospectuses and paper-based prospectuses cannot be dispensed with at this time. Therefore electronic prospectuses can only be used in conjunction with identical paper copies of the prospectus (and the electronic prospectus must prominently indicate where hard copies of the prospectus can be obtained).
The SFC is also not prepared to accept electronic applications for shares or debentures. Investors are therefore required to download any electronic application form that accompanies an electronic prospectus and submit a hard copy of the application form to the company.
Also, the Hong Kong Companies Registry and the Stock Exchange of Hong Kong Limited will accept only paper copies of the prospectus for registration and prospectus vetting purposes.
As expected, the SFC has indicated that it generally will not regulate the issue of advertisements or other documents relating to securities, investment arrangements and investment advisory services if they are not targeted at investors residing in Hong Kong. Although the SFC accepts that Hong Kong residents are free to search the Internet and take advantage of financial services and products made available over the Internet, it will not tolerate advertisements directed at Hong Kong residents through 'push' technology (eg, by targeting Hong Kong investors by email or spams).
The SFC recognizes that the use of disclaimers may safeguard against allegations that investors are being targeted in Hong Kong, provided that the following criteria are met:
- the disclaimer must be prominent;
- the disclaimer must be viewed with or before the services or products being advertised; and
- the disclaimer must make it clear that the services or products are not available to Hong Kong residents. A general disclaimer stating that 'the services or products will not be made available in any jurisdiction in which the same may be illegal' would not be acceptable to the SFC.
In conjunction with the disclaimer, precautions should be taken to ensure that services are not in fact provided to Hong Kong residents. This can be done by using firewalls, passwords or other blocking devices to restrict access by Hong Kong residents to application procedures.
In general, parties who provide dealing, trading or advisory services in Hong Kong through the Internet are subject to the same registration and licensing requirements as are applicable to those who provide such services through other means. Parties whose Internet activities require them to be licensed or registered under Hong Kong legislation are unlikely to be licensed or registered by the SFC if they do not have a physical presence in Hong Kong. Therefore, if the only point of contact for investors and the SFC in Hong Kong is an email address, the SFC is unlikely to grant registration.
Financial services providers who use the Internet to conduct their business should also bear in mind the need to adequately disclose to their clients the risks associated with Internet transactions.
The guidance note does not cover the provision of trade matching facilities over the Internet nor does it separately address the issue of electronic payments (eg, electronic application instructions for initial public offerings). However, further guidance on electronic payments may be issued at a later stage.
The guidance note does not have the force of law but it does illustrate that the SFC will treat the above activities conducted by electronic media in the same manner as it treats such activities conducted by paper-based media. Failure to conduct such activities by electronic media in accordance with Hong Kong legislation may lead to the commission of offences under that legislation, and where service providers are already licensed by or registered with the SPC, their continued fitness to be licensed/registered may be questioned.
A full copy of the guidance note is available from the SFC's web site at www.hksfc.org.hk.
For further information on this topic please contact Elizabeth Hickery at Simmons & Simmons by telephone (+852 2868 1131) or by fax (+852 2810 5040) or by e-mail ([email protected]). The Simmons & Simmons web site can be accessed at www.simmons-simmons.com.
The materials contained on this web site are for general information purposes only and are subject to the disclaimer