Preface

In Hong Kong’s financial market, licensed corporations (commonly known as Type 1, Type 4, and Type 9 licenses) are often viewed as assets with “built-in credibility” due to strict regulation by the Securities and Futures Commission (SFC). However, the SFC also maintains rigorous scrutiny over shareholding structures and major shareholders’ qualifications. As a result, some buyers and sellers have devised various methods hoping to formally “bypass” these approval requirements. Among the most widespread approaches is the so-called “334” strategy. This article will explore its operational methods, its appeal, and why it ultimately still often falls under the SFC’s radar.

1. What is the “334” Strategy?

SFC Regulations on Major Shareholders

• Direct Major Shareholders: Individuals or entities directly holding 10% (or more) shares in a licensed corporation must apply for and obtain SFC approval.
• Indirect Major Shareholders: Those who hold 35% (or more) shares in a licensed corporation through a holding company or multi-layered structure also require SFC approval.

Core Concept of “334”

• The “334” strategy refers to three (or more) investors distributing the shares of an upper-level holding company at around 33%, 34%, 33%, ensuring each person’s indirect shareholding falls below 35%.
• Through this method, they attempt to formally avoid being classified as an “indirect major shareholder,” thereby (they believe) not requiring SFC application.

2. How to Apply the “334” Strategy in Licensed Corporation Transactions?

Scenario A: With an Existing Holding Company

1. The seller owns 100% of a holding company that owns a licensed corporation.
2. Sells in batches or all at once: The seller distributes the holding company’s shares in a “334” ratio to three people—A holds 33%, B holds 34%, and C holds 33%.
3. Apparent Result: The holding company as the direct shareholder remains unchanged; at the holding company level, no one reaches 35%, seemingly eliminating the need for SFC approval.

Scenario B: Establishing a New Holding Company Before Transfer

1. Create a new holding company: Transfer the original licensed corporation (e.g., Type 1 license) to a brand new company, still 100% owned by the seller.
2. Cooling period: Wait several months or longer to make it appear as merely an internal structural adjustment.
3. Sell the holding company: Finally split the holding company using the “334” approach, allowing three investors to buy in.

3. Why Do Some People Prefer “334”?

1. Avoiding the Approval Process:
   • The SFC’s approval process is rigorous and time-consuming. Some investors believe that as long as the structure doesn’t “hit” 35%, they can save considerable approval procedures and time.
2. Privacy and Sensitive Issues:
   • Some people don’t want to publicly reveal themselves as the true ultimate beneficiaries, such as those with mistresses, illegitimate children, former lovers, or same-sex partners, fearing public and media scrutiny of their assets.
   • They might also be politically exposed persons (PEPs) or well-known figures in government or business circles who want to reduce the risk of heightened scrutiny.
3. Financial and Compliance Considerations:
   • Some people indeed have money laundering or other illegal motives and need a more “covert” way to control licensed corporations, mistakenly believing that “334” can build a firewall.

4. Risks of “334”: SFC’s Scrutiny and Analysis

1. Identification of Persons Acting in Concert
   • If the SFC discovers that these three investors actually share the same funding source, have a unanimous decision-making agreement, or two of them are merely “nominal shareholders” (e.g., mistresses or illegitimate children who didn’t contribute capital but are just name holders), with actual control falling in the hands of one person, the SFC will view them as a single interest group.
2. Proof of Funds and Loan Documents
   • During investigations, the SFC requires bank records and fund flow information. If the three parties’ investments come from the same bank deposit, or if all funds are paid through a certain boss’s colleague, the illusion of “independent investment” will collapse on its own.
3. Suspicious Transaction Timing and Motives
   • If a holding structure is created and then quickly transferred externally using the “334” approach, or if the obvious purpose is to circumvent approval, the SFC will often conduct in-depth investigations.
4. Ongoing Supervision
   • The SFC doesn’t just focus on the moment of share transfer; any significant changes in the licensed corporation’s operations in the future (financial flows, board decisions, etc.) may attract SFC attention. Once violations are discovered, the license could face revocation.

5. Conclusion

While the “334” strategy may seem to avoid the SFC’s approval requirements for 35% indirect major shareholders on the surface, if substantial control is determined to still belong to the same person (or the same interest group), the SFC will definitely not turn a blind eye. For those who want to operate in Hong Kong compliantly over the long term, transparent and legal applications are the most stable path. After all, if a license is revoked due to concealment of control, not only will money be lost, but also personal and corporate reputation will be damaged.