Whether a business owner should use his personal bank account or open a corporate bank account is one of the vital concerns when starting one’s own business. There is no legal obligation for a company to create a corporate bank account, although doing so could be beneficial both financially and administratively. This article will explain to you why you should consider using a separate corporate bank account for your business. Is it obligatory to use a corporate bank account for my business? The short answer is no. As a company, you are not legally obligated to create a corporate bank account. That means you may use your personal bank account for your business. However, in some cases, a personal bank account may only be used for personal funds and transactions. What are the benefits of using a corporate bank account? Although using a separate corporate bank account is not mandatory, it can be beneficial for effective finance management and business development in many ways. Accurate bookkeeping & clear assessment of business performance When the number of business transactions exceeds that of personal transactions, it may become confusing to understand your monthly business costs and revenues. Having a corporate business account that is separate from your personal account would make it easier to assess how well your business is performing, hence providing greater potential for growth. Simplified tax preparation If business and personal transactions are mixed together in a single bank account, preparing for taxation would be troublesome, time-consuming and complex. There are many differences between personal and corporate taxation, for instance, the tax rate. Insufficient accuracy and clarity may expose you to risks of penalties by the Inland Revenue Department. In case of audit, there will be a clear distinction between personal and business expenses if the bank accounts are separate; courts might hold you personally liable and not see

Requests from clients for third-party payment arrangements should normally be refused. Requiring a third-party to receive a client’s funds should be rare. Such arrangements are acceptable in exceptional and legitimate circumstances due to the financial crime and compliance risks associated with such transactions. For instance, third-party payments may be used to disguise the true beneficial owner or source of funds. Therefore, extra care must be taken to address the associated risks such as money laundering and misappropriation of funds. The SFC has laid down key control measures that should be adopted by parties accepting third-party payment arrangements. This article will help you understand (i) the SFC regulations with respect to accepting third-party payments; and (ii) how licensed corporations should protect themselves from risks; and (iii) the exceptional circumstances for accepting third-party payments;. Additionally, the issues surrounding money laundering would be examined. What should licensed corporations be aware of when accepting third-party payment arrangements? SFC has explained effective practices that corporations should take with respect to third-party payment arrangements. Corporations should adopt a policy that discourages third-party deposits and payments. Should such arrangements be accepted, detailed policies, procedures and controls should be in place to mitigate the risks. The acceptance should be subject to stringent management control. Corporations accepting third-party payment arrangements should clearly explain, in approved policies and procedures, the exceptional circumstances and the control measures to be carried out by designated managers and staff. Before accepting third-party payment arrangements, due diligence should be conducted on a risk-sensitive basis to determine (i) the identity of the third-party payor; (ii) the relationship between the client and the third-party payor; and (iii) the reason for

Cryptocurrencies and blockchain technology have established a new economy and thereby brought new investment opportunities. Without direct legislation regulating the use of cryptocurrencies in Hong Kong, there lies a certain degree of uncertainty regarding how they can be used legitimately. This article will explain (i) the relevant regulated activities; (ii) the Securities and Futures Commission (the “SFC”) regulatory approach; (iii) the licensing requirements; (iv) the licensing application process; and (v) the qualified corporations’ ongoing obligations. What is cryptocurrency? A cryptocurrency is a form of digital asset based on a network that is distributed, using blockchain technology, across a large number of computers that manage and record transactions. It is not issued by any central authority. When do I need a license to engage in cryptocurrency-related investment activities? As per the Securities and Futures Ordinance (“SFO”), any company or individual engaged in a regulated activity must apply for the relevant license, unless an exemption applies. Depending on the nature of your business, you may need to apply for more than one license to engage in the regulated activities. Currently, there are 12 types of regulated activities and the relevant ones are described below: Dealing in securities (Type 1) Making or offering to make an agreement with another person, or inducing or attempting to induce another person to enter into or to offer to enter into an agreement for or with a view to acquiring, disposing of, subscribing for or underwriting securities; or the purpose or pretended purpose of which is to secure a profit to any parties from the yield of securities or by reference to fluctuations in the value of securities. Dealing in futures contracts (Type 2) Making or offering to make an agreement with another person, or inducing or attempting to induce another person to enter into, or to acquire or dispose of, a

The shareholders of a Hong Kong company may choose to transfer their shares either by sale or gift to an existing or a new shareholder at any time. A share transfer may be triggered to, for instance, facilitate the restructuring of a company or the rearrangement of profit sharing or ownership etc. However, such transfer of shares must be carried out in accordance with the company’s Articles of Association and the procedure set out in the Companies Ordinance. This article will help you understand (i) the shares transfer process; (ii) required documents; and (iii) the stamp duty assessment. Share Transfer Process Shares may be transferred by means of an instrument of transfer in any usual form or any other form approved by the directors, which is executed by or on behalf of both the transferor and the transferee. Share transfer must accord with the provisions relating to share transfer in the Articles of Association. Generally, it requires approval of the board of directors; and offering of the shares to the existing shareholders before transferring them to new shareholders.   Before the shares are transferred, the transferee should Check the company’s Articles of Association for any limitations or restrictions on share transfersEnsure that any pre-emptive rights stated in the company’s articles of association have been satisfied or waivedReview the company’s shareholders agreement for limitations or restrictionsObtain approval to conduct the share transfer from the company’s shareholders What documents should be submitted for stamp duty assessment? Some of the documents required are: Bought and Sold Notes / Contract NotesSale and Purchase agreement (if any)Articles of Association of the companyCertificate of IncorporationLatest audited financial statements of the company (if consolidated accounts are not prepared)Latest certified management accounts of the company (if consolidated accounts are not prepared or they are not up to

More and more investors look for investment advice to advance their short- and long-term financial goals. Abundant “tips” and “advice” regarding investment have become increasingly accessible through social media platforms. However, any company or individual carrying out regulated activities such as in the securities and futures market needs to apply for a relevant type of regulated activity license with the Securities and Futures Commission (the “SFC”) to carry out these regulated activities in Hong Kong. This article will help you understand the SFC licensing regime and will provide an overview of (i) the relevant regulated activities; (ii) the licensing requirements; (iii) the exemptions from the licensing requirements; and (iv) the license application process. Regulated activities As per the Securities and Futures Ordinance (“SFO”), any company or individual engaged in a regulated activity must apply for the relevant license, unless an exemption applies. Depending on the nature of your business, you may need to apply for more than one license to engage in the regulated activities. Currently, there are 12 types of regulated activities and some of the relevant ones are described below: Advising on securities (Type 4) Giving advice and issuing analyses or reports on whether, which, when and terms of securities should be acquired or disposed of. Advising on futures contracts (Type 5) Giving advice and issuing analyses or reports on whether, which, when and terms of future contracts should be entered into. Advising on corporate finance (Type 6) Giving advice concerning The compliance with or in respect of the rules governing the listing of securities and the code published under section 399(2)(a) or (b) of the Securities and Finance Ordinance. Any offer or acceptance to dispose or acquire securities from the publicCorporate restructuring in respect of securities, to a listed corporation or public company or a

Licensed money lenders offer an alternative route of financing for individuals and businesses. Generally, a person carrying on business as a money lender in Hong Kong must obtain a money lenders licence. This article will help you understand (i) the situations where you would need to obtain a money lender license to lend money and some exemptions; and (ii) the license application process. When do you need a money lenders license to lend money? Money lenders refer to people whose business is that of making loans or who advertises or announces himself or holds himself out in any way as carrying on that business. The following persons are exempted from obtaining a money lender’s license: Any subsidiary of a bank, a restricted licence bank, or a deposit-taking company.A co-operative society registered under the Co-operative Societies Ordinance.A registered credit union.A registered trade union.An insurer.The University Grants Committee.A bank which is incorporated or established outside Hong Kong;recognised as a bank by the relevant declared banking supervisory authority; andcarrying on banking business in the place where that banking supervisory authority is located.An organisationwhich is a member of the International Union of Credit and Investment Insurers (The Berne Union); orwhich has been declared in writing by the Registrar that he is satisfied that it was established by one or more national governments with the object of financing, or guaranteeing the financing of, the export of a country’s goods or services.A corporation licensed to carry on business in securities margin financing.A corporation licensed to carry on business or an authorised financial institution registered to carry on business in engaging in securities margin financing to facilitate acquisitions or holdings of securities by the corporation or institution for its client. The following loans are generally exempted from the licensing requirement: made bona fide by an

When purchasing a business, depending on what you are specifically buying and taking over, you will either purchase assets or shares in a business. What is a share purchase? A share purchase involves purchasing the shares of the company from the shareholders. On purchasing the shares, as a buyer, you take all of the company’s assets, liabilities, obligations. In private companies limited by shares, there are transfer restrictions for shares generally outlined in the company’s articles of association or the shareholders’ agreement. For instance, consent may be needed from other shareholders to waive pre-emptive rights. But other than that, in Hong Kong, there are no general legal restrictions on the transfer of shares in an incorporated company. To understand more about the transfer of shares, read Can I transfer the shares of my company?  However, if you are purchasing a company that is into the following sectors then the different rules will apply: InsuranceBankingSecurities and FuturesProvident FundTelecommunications Broadcasting What is an asset purchase? An asset purchase is the transfer of specific assets or employees relating to a specific business function. You are choosing what to purchase in the business, instead of purchasing the whole business. Thus, you can pick the assets you want from the business, or any liabilities you are willing to take on. This means the process of purchasing has fewer formalities than entering into a share purchase, where all assets are bought. You should also look to the articles of association (AOA) and shareholders agreement to look for any restrictions on the transfer of assets. The restrictions will usually be requiring approval from shareholders. Furthermore, the AOA should also detail the procedure for transferring the rights, permits and licenses, to continue operation in Hong Kong. Third-party consent may also be required if there are previous agreements that have to be

Due diligence is when potential buyers evaluate factors relating to a transaction, such as finances, assets, legal issues and external issues to gain a better understanding of the business. Essentially, it is a deeper dive investigation or audit into a specific situation/area relating to a business, that takes place before a formal contract is drafted and agreed on. It can be compared to when a house gets investigated before it is purchased. As for businesses, it may be financially disastrous if they fail to perform due diligence. How does this relate to purchasing a business? Due diligence is a process that the potential buyer of another business will conduct before entering into a contract to purchase a business. They then review and find information about the business they are planning on purchasing. This is especially important as you take over the liabilities and debts the business currently has and helps you to make an informed decision. Whether that information is found by the buyer or given by the target business, the buyer will review and verify the information. If after comprehensive due diligence, they are still interested in purchasing the business, then the negotiations will proceed. Moreover, the due diligence stage will include evaluating the target company. This determines how much your purchase price will be after taking into account all areas of the business. Why is it important to conduct due diligence? Due diligence must be performed before purchasing a business. A thorough investigation of the target business will ensure you do not get surprised after you enter into the agreement. It will help you to evaluate the legal, financial and commercial position of the business. If this is not done, you may encounter unplanned costs, which leads to a more costly purchase than expected. Thus, due diligence ensures you are making an appropriate and informed business decision. This ensures the purchase will be successful

Heads of terms are different from a formal contract. This document sets out the preliminary terms of a commercial transaction agreed upon by the parties in the course of negotiations. It ensures both parties are on the same page as regards the major aspects of the transaction and prevents misunderstandings. While you do not need to have a heads of terms document, it is advisable to have one when purchasing another business. This is because it may be more complex when dealing with an existing business operation, financials, culture and more. It will also help to detail all the main issues of the deal in the beginning, which lessens the chances of miscommunication and disagreements when drafting the formal contract for the purchase. Lastly, it will indicate your intention of buying another business. This will show that you are a serious buyer, which would be more attractive to potential sellers. Is it legally binding? No, heads of terms are not legally binding. While they show a strong intent to follow through with the agreement, it does not have any legally binding force. When would I use a Heads of Terms Document when purchasing another business? Heads of terms will be used during the negotiations to purchase another party’s business. It is usually used in the earlier stages before the two parties decide to be legally bound by a formal contract, and when they are serious about continuing the transaction. Thus, it will mainly be used to outline the proposed acquisition (purchase) terms agreed between the parties. Here are some things to consider clarifying when drafting a Heads of Terms: The proposed acquisition and what you are planning to purchase The price of the purchaseConditions involved (e.g. the purchase price to be conditional upon employees retaining their positions) Timing of negotiations and timeline for the future Due diligence Costs Governing law and jurisdiction of the transaction For more information on Heads of

Purchasing a business or a company indeed may be an easier option than starting your business from ground zero, but it is not an entirely automatic, straightforward process. Certain steps are typically involved in a business purchase transaction accompanied by their respective required legal documents. A business/company purchase transaction can broadly be divided into three main stages: Pre-purchase negotiationsPurchase of business/companyPost-purchase formalities Stage 1: Pre-purchase negotiations Generally, the first stage encompasses all the necessary what steps that need to be taken before purchasing the desired business/company. This stage mostly involves negotiations regarding, and in preparation for, the purchase and calls for various legal documents: Non-Disclosure Agreement A Non-Disclosure Agreement is essentially a contract whereby you and the seller agree not to disclose confidential information that has been shared between the two of you in the process of conducting business together. The information communicated between you, the purchaser, and the seller in the process of business/company transfer are no doubt extremely sensitive as they detail the finances, assets, debts, etc. of both parties. The process itself may also be confidential as the seller may want to circumvent any worrying of staff or clients from any leakage information about a potential sale of the business too early on in the process. Please see our Non-Disclosure Agreement template and easily customise it according to your needs. Due diligence checklist You will first need to conduct Due diligence on the business/company you are planning to purchase. This means investigating the business/company to make sure that you want that specific business/company, and to be aware of any potential drawbacks involved in purchasing it. For instance, drawbacks may include existing liabilities and debts that will be transferred to you after the purchase. Basically,

While starting a new business can be intriguing and exciting, the big downside is that you have to start from scratch. This is why some people opt to purchase an existing and established business instead. This means that instead of setting up a completely new business from the ground up, you are skipping all the preliminary steps such as registering your business and coming up with your own business plan/idea. You will be paying to acquire or take over an already operating business. In the case of an incorporated company, this will either be in the form of purchasing all the shares in that company. You will take on the company’s obligations, liabilities and existing agreements. Or, if you only want to buy certain businesses under a company or a business under the sole proprietorship/partnership modes, you can pick and choose which liabilities and assets to purchase instead of buying the shares. This will be a transfer of business, without any transfers of shares relating to a holding company. It is a complex process involving due diligence to verify financial information, identifying risks involved, signing a confidentiality agreement, memorandum of understanding, sale and purchase agreement etc... Therefore, you should seek legal advice if you plan to purchase an existing business especially if the business is owned by a company. What are the advantages and disadvantages of purchasing an existing business? Advantages Disadvantages The product/service has already entered the market, resulting in a higher chance of successThe product/service may need significant improvements, which will increase costs There is already a brand that is established and followed, so the customer base is secured It may be more difficult to move the business in a different direction given the established branding Reduced startup time, giving you more time to focus on growing the business instead of establishing it (such as not having to incorporate your own

In Hong Kong, a loan can be given by an authorized money lender or a bank. Borrowing money from a financial institution which is not a bank is governed by the Money Lending Ordinance (MLO), whereas a bank loan is governed by the Code of Banking Practice (Code). Both regulations set out how money lenders should conduct their business. And they have different restrictions on how much interest a lender can charge. Maximum interest rate (Short answer) Non-bank money lenders60% per annumBanksNil The relevant regulations will be further explained below. How to calculate the true rate of interest? As it is important to find out whether a lender has charged an unfair or illegal interest rate, both borrower and lender should understand how the true annual percentage rate of interest is calculated, and should not take whatever interest rate is on the leaflet, brochure, or even the contract itself. Generally, the formula to calculate an interest rate is as follow: Annual interest rate= Total interest payments over a year/Loan principal amount x 100% Example A borrowed HK$100,000 from B and intended to repay B Co. over a 12 months period with the terms below: Loan Amount: HK$100,000Repayment Period: 12 monthsRepayment Instalment: 12 %/ HK$12,000 per monthFees and expenses: 5,000 The interest payment usually also includes the fees and expenses in the calculation. So the calculation should be as follows: Annual interest rate= Total interest payments over a year/Loan principal amount x 100% =$12,000 x 12+$5000$100,000 x 100% = 49% per annum Authorized money lender (not a bank) An authorized money lender means a money lender who has obtained a license from the Registrar of Money Lenders. It is a criminal offence to operate as a money lender without a license. Therefore, a borrower should be advised to confirm whether the lender has obtained the appropriate license. Maximum Interest Rate: The MLO sets out the maximum

One of the main reasons people set up a private limited company is to limit their liability for business debt. The principle of separate legal entity of a company means that the right and liability of a company are separate from those of its directors. However, that does not mean that directors are free to do whatever they want. This Q&A aims to identify the certain events where a director can be held personally liable for the business’s debt. Directors’ duties under Hong Kong laws Directors are in charge of the management of the company. They make operational decisions of the business and are responsible for making sure that the company will meet all its obligations. There are 3 major sources of law in Hong Kong which set out the duties and liabilities of directors: Common Law: This is where most of the director’s duties originated. It includes the duties to act in good faith, to avoid conflict of interest, to use power for proper purpose etc. The Company Ordinance (Cap.622): It specifies the duty of care, skill and diligence. In deciding whether a director has breached the duty, both the general knowledge expected of a director (the objective condition) and the specific skill and knowledge of that particular director (the subjective condition) must be considered. Other Hong Kong Legislation: There are also other legislations including the other Company Ordinance (Cap.32) which regulate the director’s conducts immediately before company’s liquidation. There is also the MPF scheme in Hong Kong which holds directors who fail to enroll employees in an MPF scheme liable. To briefly summarize, here are some of the major directors’ duties in Hong Kong: Duty to act in good faith Duty conflict of interest Duty to exercise care, skill and due diligenceDuty to use power for proper purpose Duty to obey the company’s law Duty not to delegate power except with proper authorization and exercise independent judgement So, In what

Although a shareholder is not generally held personally liable for the company’s debt, you should make sure you are aware of them so that you do not fall into a situation where this could happen. Limited liability of shareholders In Hong Kong, limited liability means when the shareholder’s liability is limited to a fixed amount, most commonly the value of a shareholder’s investment in the business. A limited liability company can be incorporated in Hong Kong by registering with the Companies Registry under the Companies Ordinance (Cap.622). A Company will then become a separate legal entity which means that the right and liability of the company are separate from those of its directors and shareholders. Although companies can be either limited or unlimited, the preferred choice for most small business founders in Hong Kong is to set up a limited company as the liabilities of the owners of the business will be limited to whatever they invested in the company. The owner’s personal assets will also be protected from business liabilities. Shareholder’s liability in a company limited by shares A limited company limited by shares is one in which the shareholdings do not attach to any shareholders of the company. It is also the most sought after form of company in Hong Kong. The liability of shareholders is limited to the nominal value of the shares they hold in the business. For example, A shareholder holds 10 shares with a nominal value of HK$1, his financial liability is capped at HK$10 if the company fails to pay its own debts. Exceptions Despite the idea of limited liability, there are still circumstances where shareholders can be responsible for company debt: 1. Personal guarantee by the shareholder If the shareholder has given a personal guarantee for the company loan, and if the company fails to make repayment plus interest when due, the shareholder will assume personal liability to pay the outstanding amount. Please

In a transaction, a party (often the seller) may require some form of guarantee in case the other party fails to make payment or is a limited company and its creditworthiness is unknown. The party who provides the guarantee is the “guarantor”, also known as “surety” of the transactions. Hong Kong does not have a specific set of rules or ordinance governing the operation of a guarantee. Parties are generally free to agree using a guarantee agreement and the general rules of contract interpretation apply when deciding the meaning of the guarantee contract. Terminology Creditor - party taking benefit of guarantee Debtor - party whose obligations are being guaranteed Guarantor (or surety) - the party guaranteeing the obligations of the debtor Personal guarantee A personal guarantee means that a guarantor promises to repay the loan taken out by another individual or a company (the debtor). To simply put, when the debtor for any reason fails to repay the loan, the guarantor will assume responsibility to pay whatever is due. ProsConsEasier for the start-up company to get the loan Better lending terms might be given by the money lenderIn the worst case, a guarantor will be liable to pay the huge debt The personal liability might potentially bankrupt the guarantor Example Co. A (Debtor) has taken out a 1 million loan from Bank B (Creditor). Because Co. A is a limited company, even when Co. A fails to repay the loan, the directors and the shareholders will not be personally liable for the debt of the company. Because of that, Bank B requires Mr. C, (being the director of Co. A) (Guarantor) to sign a personal guarantee of payment. So if Co. A fails to pay the 1 million plus interest in full at maturity, Mr. C will assume personal liability to pay the outstanding amount. Please be reminded that, as a personal guarantor, it will be difficult for you to avoid liability from the guarantee unless you have solid evidence proving

Start-ups in Hong Kong can use debt financing to raise funds for their companies. Debt financing means when a company borrows money to be paid back at a later date. This is a good way for young businesses who want to raise funds and also maintain control over their company in Hong Kong. Debt financing is usually adequate for SME that need a significant amount of capital quickly for business growth. This Q&A aims to identify the most common types of debt financing in Hong Kong so you can pick the right ones for your business. 1. Loans from family and friends Friends and family are usually the first source of financing for many young businesses. The upside of such loans is that they are usually interest-free and much easier to secure. However, companies must carefully assess the risk of borrowing from family and friends as this might pose an adverse effect on one’s personal relationships if things go south. 2. Loans A start-up can obtain a loan from a bank or any qualified money lender. Lenders will often assess the corporate financial situation and lend money accordingly. There are a number of ways that a bank can go about lending money to businesses: Installment loans: This is the most common type of bank loan in Hong Kong. If a company takes out an installment loan from a bank, it will receive a lump-sum payment from the bank upfront. Then the company has to make regular payments (monthly or annually) to the bank until the loan has been fully repaid. Term loans and small business loans are examples of instalment loans. Check out our guide on What do I need to know about Small Business Loans? Revolving loans: Instead of the bank giving you a lump sum right at the start, a revolving loan gives you access to a facility of credit that the company can draw down from. Unlike an installment loan, the amount repaid will become available for withdrawal again. Cash flow loans: A cash flow is a type of unsecured loan that is used for daily

A Small Business Loan, also known as a SBA Loan, is a fixed amount of funding given to a small business in exchange for repayment of the loan principal amount plus interest. A Small Business Loan can be offered by a bank or a qualified money lender and can be used by small businesses for various business purposes such as equipment or vehicle purchases, operating expenses or raising cash flow. Like regular loans, the amount of funding available and the interest rate are dependent upon the credibility of the company. Strengths and weaknesses of Small Business Loan ProsConsLow interest ratesFlexible repayment termsLower down paymentsNo collateral is generally neededSmaller amounts compared to regular bank loan Longer approval processDecent credit score often required Small business loan vs Conventional bank loan Similarities: Credit Score: For both small business loans and conventional loans, the amount of funding available and the interest rate are dependent upon the credibility of the company. With more solid financials, a company can expect to obtain a bigger loan with a lower interest rate. Obligations: Both SBA loan and traditional bank loan offer flexible repayment terms. Differences: Target borrowers: Apparently, only small businesses are eligible to SBA Loans, whereas conventional bank loans are available to all companies. Government Assistance: The Hong Kong government has also set up a number of different funding schemes to help small businesses in obtaining loans from banks or money lenders. (See below) Terms of the loan: A small business loan and a traditional bank loan differ in terms of loan amount, interest rate, repayment term, turnaround time and security requirement. Please see the table below for some general information: Small business loan Traditional bank loans Loan amount HKD 400,000 to 40 MillionsOver 2 MillionsRepayment terms 5 - 25 years1 - 20 years Interest rate6% - 13% per annum5% - 10% per

A Convertible Bond is a short-term debt that converts into equity in conjunction with a future financing round. Convertible Bonds are bonds that can be converted into shares of the issuer at the discretion of the lenders. The lenders would receive equity in the company instead of principal plus interest like normal loans. Purposes and benefits A Convertible Bond allows the investor to participate in the upside of an issuer upon IPO or increase in the value of the issuer's shares. It is less risky than buying the stocks outright as investors can hold onto the bonds as a debt instrument should there be no listing or the share price went down. Bondholders also have priority over shareholders in the event of insolvency or liquidation. The value of the Convertible Bonds would be equivalent to that of a typical bond plus an option to purchase the stocks. As it is a hybrid between stocks and bonds, Convertible Bonds typically offer higher yields than stock but lower yields than typical bonds. Legal documentation required Term sheet: This should serve as a summary of the key terms of the agreement between the company and the investors. This is signed at the start of the transaction and before commencing detailed due diligence conducted by the investors. Subscription agreement: This document is a contract between the company and the investors which entitled an investor to subscribe for a convertible bond. This agreement should include how the debt is converted into equity, the discount rate and the valuation cap. Convertible bond certificate: This is a deed which confirms the purchase of the convertible bond and is a written promise to repay the debt at a specified time by issuing shares. What is the difference between a convertible bond and a SAFE? Check out our guide on What is a Simple Agreement for Future Equity (SAFE)? Both convertible bonds and SAFEs are converted into equity in a future priced equity stage, and both

A Simple Agreement for Future Equity (SAFE) is an agreement between a company and an investor that grants an investor the right to obtain equity at a future date if the company sells shares in a future financing. SAFE is a financing contract that start-ups can use to incentivise employees or to raise funds in seed financing. The basic idea is that the holder of SAFE is an early employee/ investor whose stake in the company will be based on the valuation in the future pricing round of the company. For more information, check out our guide on Employee Share Scheme / Options / SAFE / Incentives. Mechanism of SAFE A SAFE is used where the investor agrees to pay for a certain amount for shares that may be issued to him/her at a later point in time. The shares are usually issued on the occurrence of a trigger event such as Future equity financing or Sale of the company. The previously invested money will then be converted into the corresponding number of shares based on either a Discount or a Valuation Cap (to be explained later) A SAFE is a contract between the investor and the company and should contain the following points: The definition of a triggering eventHow the number of shares an investor is entitled to is calculatedInvestors right to vote and receive dividends (if any) Governing law and jurisdiction This instrument will expire and terminate upon the triggering events. A binding and enforceable SAFE should also be drafted accurately to reflect the parties’ intention and prevent unnecessary dispute. Check out our Simple Agreement for Future Equity template. Example Investor A invests HKD10,000 through a SAFE, the company will utilize that money to start the business. It is unquestionable that HKD10,000 will not get the company very far. After some progress has been made, the company may want to raise more funds to take the company up a notch, that is when the mechanism of SAFE comes into play. Let’s say investor B

Company financing is one of the major concerns for operating any business. Debt financing and Equity Financing have been the two types of financing options that are most commonly sought after by companies in Hong Kong and around the world. Equity Financing Equity financing means someone is putting money into the business in return for ownership in the company. Apart from the ownership rights, equity investors also get parts of the future profit of the business. How? An advertisement and invitation to acquire shares of a company to the public are prohibited unless: It complies with the prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance; and It has been authorised by the Securities and Futures Commission of Hong Kong (SFC) under the Securities and Futures Ordinance (SFO). Instead of an offer to the public, a small and medium enterprise can raise funds by way of Private Placement which is subject to less regulations than an offer to the public. A Private Placement means an offer which: made to no more than 50 persons the total consideration does not exceed HK$5,000,000the minimum principal amount to be subscribed for is not less than HK$500,000 A Private Placement must contain an appropriate warning in the form stipulated by the Company Ordinance. Besides, there should be no advertisement and press release regarding the offer and each offer document should be individually addressed to specific offeree and state clearly that it is not an offer to the public. Advantages No obligation to pay dividends on equity Experienced investors can provide the company with valuable insights No negative repercussions even if the company loses all the investor’s money Reducing reliance on debt and improving financial health of the business Disadvantages Giving up a portion of ownership and control of the company Attracting investors can be harder than getting a loan since equity

Apart from getting funds from banks or investors, start-ups and small businesses can check out the funding schemes or grants set up by the Hong Kong government. Both funding schemes and grants are sums of money given to a business in order to help them further their business, promote innovation and/or support different industries. Companies are usually not obliged to at a later stage pay back the money so long as they meet the requirements and conditions set out under the grant. Different types of Funding Scheme The Hong Kong government has initiated a number of funding schemes for enterprises and organisations across different industries. Here are some of the most sought after schemes: SME Financing Guarantee Scheme is a fund which helps SME and non-listed enterprises obtain financing from participating lenders for meeting business needs.The SME Export Marketing Fund (EMF) is a fund which focuses primarily on marketing or promotion activities. It strives to provide financial assistance to SMEs for participation in export promotion activities, hoping to encourage them to expand their markets outside Hong Kong.The Innovation and Technology Support Programme (ITSP) supports research and development (R&D) projects undertaken by designated local public research institutes and R&D Centres.The Patent Application Grant assists local companies and individuals to apply for patents of their own inventions to capitalise their intellectual work. The Hong Kong government has also set up the SME Loan Guarantee Scheme (SGS). Instead of providing fund/loan directly to a SME, the Government will act as a guarantor to provide loan guarantee to SMEs to help them secure loans from participating lending institutions for acquiring business installations and equipment or meeting working capital needs of general business uses. For more information on other funding schemes set up by the Hong Kong government, Please click here. Timely and truthful declaration An

Funding is so important when it comes to running a business. Raising funds for a start-up or a SME may feel like a daunting task, this article aims to provide you with different ways you can go about seeking funds and what legal documentations are needed respectively. After reading this, you will also find out the advantages and disadvantages of different forms of funding so you can choose the most suitable one for your business! 1. Friends and Family Friends and family are usually the first source of financing for many young businesses. This type of funding can come as a gift, a loan or in exchange for shares of the company. ProsConsUsually interest-freeThe process is not as complicated as other forms for fundraisingThis may pose an adverse effect on one’s personal relationships 2. Small Business Loans A Small Business Loan, also known as a SBA Loan, is a fixed amount of funding given to a small business in exchange for repayment of the loan principal amount plus interest. A small business or a start-up can get a small business loan from an investor, a bank or any qualified money lender. Like regular loans, the amount of funding available and the interest rate are dependent upon the credibility of the company. With more solid financials, a company can expect to obtain a bigger loan with a lower interest rate. In Hong Kong, a loan can be given by an authorized money lender or a bank. A company if wishes to borrow money should enter into a Loan Agreement with a lender. A loan agreement operates as a contract between the borrower and the lender and will stipulate the followings: Whether this is a secured or unsecured loanPrincipal amountInterest rateAny conditions to be fulfilled before the loan becomes available to the companyDates for repaymentObligation of borrowers and lendersGoverning law of the contract For more information, check out our Commercial Loan Agreement template, please be reminded that in case of a secured loan,