SFC has recently commenced a proceeding in the Court of First Instance seeking orders restraining certain unlicensed persons from dealing in grey market securities and seeking a declaration that such dealings are a regulated activity under SFO. SFC's action concerns the activities of two unlicensed individuals, Chow Ngai Keung Alex and Siu Sum Fung Christopher and an unlicensed company, Mega Dragon Group Ltd (now deregistered and not a party to the proceedings).
They had been involved in a scheme offering H shares of Bank of China Ltd (BoC) since Mar 2006 up to 1 Jun 2006 when BoC H shares were listed on SEHK. This kind of alleged trading of securities prior to the time when they are traded publicly on a stock exchange is called "grey market" trading.
SFC contends that any person carrying on a business of offering shares in a "grey market" must be licensed by the SFC and comply with the obligations of a licensee under the SFO and under the Code of Conduct.
The regulatory issues surrounding grey markets were raised recently in a Court of Appeal case, Woo Hing Keung Lawrence v CEF Brokerage Ltd (CACV148/2007) in a judgment published (but not yet found from the online Legal Reference System) on 19 March 2008. This case has provided judicial guidance on the validity as between client and broker of grey market trades.
However, the decision in this case did not deal with the issue of unlicensed persons engaging in grey market activity. Under SFO, IPO shares "soon-to-be-listed" during the grey market period would also fall within the definition of "securities". Accordingly, persons not licensed for Type 1 are prohibited from arranging such grey market trades.
I also wonder if the requirement for providing a "written document" under S.175 of SFO would apply to the offer to acquire or dispose of "unlsted securities" in the grey market.
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