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Investors and intermediaries could face criminal prosecution for illegal short selling if they sell placing shares before completion of a placement, the Securities and Futures Commission (SFC) said today (Note 1).
The warning came after recent SFC investigations which revealed some misconceptions in the market on the selling of placing shares prior to completion of a placement.
Some placees, who sold placing shares for which they had subscribed, appear to have taken the mistaken view that the trade would not amount to illegal short selling even if they did not have the shares when they placed the sell order provided that they could settle the trade on the settlement day with the placing shares allotted to them.
In other cases, some placees took the erroneous view that they could sell the placing shares before completion of a placement by relying on oral or written confirmations from their placing agents about the quantity of shares they would be allotted as guarantees for receiving the same number of placing shares on the completion date to settle the trades.
In general, a placement before its completion is subject to various conditions which may or may not be fulfilled. In particular, a placement is usually subject to (i) the Listing Committee of The Stock Exchange of Hong Kong Limited (SEHK) granting the listing of, and permission to deal in, the placing shares; and (ii) the SEHK does not revoke such listing and permission.
As such, the SFC takes the view that placing shares will remain conditional until completion of a placement.
Under the Securities and Futures Ordinance (SFO), a person shall not sell securities at or through a recognized stock market unless at the time he sells them:
- he has or, where he is selling as an agent, his principal has; or
- he believes and has reasonable grounds to believe that he has or, where he is selling as an agent, that this principal has,
a presently exercisable and unconditional right to vest the securities in the purchaser of them.
It follows that anyone who sells these conditional placing shares before completion of a placement runs the risk of committing illegal short selling, contrary to the SFO, unless the person (or where the person is selling as an agent, his principal has) already held a sufficient number of shares to settle the trade.
SFC licensees or registered persons who illegally short sell may also be subject to the SFC’s disciplinary action.
The SFC’s Executive Director of Enforcement, Mr Mark Steward, said: “Investors and other market participants need to be aware of the consequences if they sell shares they do not yet hold or own. In some cases, this may constitute naked short selling which is against Hong Kong law.”
Under the SFO, illegal short selling is a criminal offence which carries a maximum penalty of $100,000 fine and two years of imprisonment upon conviction.
End
Note:
- Section 170 of the SFO sets out, among other things, various restrictions on short selling and the penalty for the offence of illegal short selling upon conviction.
