Preface

Besides the “334” strategy, many other “clever” approaches circulate in the market that attempt to avoid SFC approval for major shareholders, such as splitting shareholdings into numerous small portions below 10%, or diluting actual control through multiple layers of offshore companies. This article will explore several common cases and explain how these methods are ultimately exposed under the SFC’s comprehensive supervision.

1. Brief Overview of SFC Rules

• Direct Major Shareholders: Anyone directly holding 10% or more shares in a licensed corporation needs to apply to the SFC.
• Indirect Major Shareholders: Those who ultimately control 35% or more through intermediate companies or structures must also apply.
• Persons Acting in Concert: If what appears to be several independent investors actually have their funds and decision-making tied together, they will be viewed as a single interest group.

2. Several Popular “Bypass” Methods

1. “334”
   • Key point: Attempting to avoid the 35% threshold through three people holding 33%, 34%, and 33%.
   • Risk: If investigation confirms they have close relationships—even if they are mistresses, illegitimate children, or same-sex partners in name only—and share the same funding source, they will be consolidated and viewed as one person.
2. “11 Portions Each Below 10%”
   • Concept: Dividing shareholding into 11 portions (or more), each below 10%, so theoretically no one is a direct major shareholder with 10%.
   • Common pitfall: The SFC will examine these small shareholders’ funding sources or interpersonal relationships. If they discover all are related to the same boss, or are a group of colleagues pooling funds together, they may still be deemed as acting in concert.
3. Multi-layered Holding Companies
   • Method: Using multiple offshore companies or trusts, with each layer holding only 10%~30%, making the legal shareholding percentage at any layer appear to be below the SFC threshold.
   • Flaw: The SFC can require ultimate beneficiary disclosure, “penetrating” shareholder lists layer by layer. Once they discover the same person controls more than 35% at the top level, application is still required.
4. “Apply First, Transfer Later”
   • Method: First having a “qualified” person pass SFC approval, then quietly transferring shares to an actual holder who prefers not to be exposed (such as a politician’s former lover or a tycoon’s relative).
   • Risk: Licensed corporations must still report to the SFC if shareholding changes occur during operations. Once discovered to be “hanging a sheep’s head but selling dog meat,” the license can be revoked at any time.

3. Why Do People Still Take Risks?

1. Time-consuming Approval, High Fees
   • Many investors are eager to complete transactions or don’t want the SFC to scrutinize their financial background too closely.
2. Privacy and Sensitivity Considerations
   • This includes politically exposed persons (PEPs) or celebrities who mostly don’t want the public to know they control a licensed corporation through illegitimate children, mistresses, or cohabiting partners.
3. Illegal Motives
   • Some want to use licensed corporations for money laundering, illegal fund transfers, etc., so they want to maintain a “low profile” to evade tracking by law enforcement agencies.

4. How Does the SFC Uncover These Schemes?

1. Funding Sources and Transaction Records
   • The SFC frequently requests to review transfers and loan records. If they discover that multiple small shareholders’ money ultimately comes from the same account, the scheme is immediately exposed.
2. Personal and Business Connections
   • If shareholders have family relationships, jointly operate companies, or sign contracts under the same boss’s arrangement, the SFC may classify them as a single interest group.
3. Continuous Supervision
   • Even if initially approved, it doesn’t mean “permanently safe.” The SFC regularly reviews the licensed corporation’s board records and financial statements. If they discover the actual control doesn’t match what was reported, they take immediate action.

5. Conclusion

Although various bypass methods continue to emerge, it is very difficult to truly and completely hide the ultimate beneficiary or actual control under the SFC’s meticulous investigation and penetrative supervision. Whether it’s “334,” splitting shareholding into 11 portions, multi-layered holding companies, or applying first and transferring later—as long as there’s suspicion of deliberate evasion, once discovered, they may face license revocation or even criminal liability. Rather than taking risks, it’s better to follow proper procedures to apply for major shareholder qualification, reducing future compliance risks.