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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021.
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . . . . . . . . . . . . . .
OR
Commission file number: 001-38820
For the transition period from to
Futu Holdings Limitfved
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
11/F, Bangkok Bank Building
No. 18 Bonham Strand W, Sheung Wan
Hong Kong S.A.R., People’s Republic of China
+852 2523-3588
(Address of principal executive offices)
Arthur Yu Chen, Chief Financial Officer
Telephone: +852 2523-3588
Email: ir@futuholdings.com
11/F, Bangkok Bank Building
No. 18 Bonham Strand W, Sheung Wan
Hong Kong S.A.R., People’s Republic of China
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
American depositary shares (one American
depositary share representing eight Class A
ordinary shares, par value US$0.00001 per share)
Class A ordinary shares, par value
US$0.00001 per share*
Trading Symbol(s)
FUTU
Name of each exchange on which registered
The Nasdaq Stock Market LLC
(The Nasdaq Global Market)
The Nasdaq Stock Market LLC
(The Nasdaq Global Market)
* Not for trading, but only in connection with the listing on The Nasdaq Global Market of American depositary shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
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None
(Title of Class)
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
As of December 31, 2021, 708,482,154 Class A ordinary shares (excluding treasury shares and Class A ordinary shares issued to the depositary bank for bulk
issuance of ADSs reserved for future issuances upon the exercise or vesting of awards granted under our share incentive plans) and 494,552,051 Class B ordinary
shares, par value US$0.00001 per share, were issued and outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ⌧ Yes ☐ No
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. ☐ Yes ⌧ No
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from
their obligations under those Sections.
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the
past 90 days. ⌧ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation
S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See the
definitions of “large accelerated filer,” “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ⌧
Accelerated filer ☐
Non-accelerated filer ☐
Emerging growth company ☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use
the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange
Act. ☐ Yes ☐ No
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards
Codification after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over
financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit
report. ☒ Yes ☐ No
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
U.S. GAAP ⌧
International Financial Reporting Standards as issued by the
International Accounting Standards Board ☐
Other ☐
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. ☐
Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ⌧ No
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of
1934 subsequent to the distribution of securities under a plan confirmed by a court. ☐ Yes ☐ No
Table of Contents
INTRODUCTION
FORWARD-LOOKING INFORMATION
EXPLANATORY NOTE
PART I
TABLE OF CONTENTS
Page
Item 1.
Item 2.
Item 3.
Item 4.
Item 4A.
Item 5.
Item 6.
Item 7.
Item 8.
Item 9.
Item 10.
Item 11.
Item 12.
Identity of Directors, Senior Management and Advisers
Offer Statistics and Expected Timetable
Key Information
Information on the Company
Unresolved Staff Comments
Operating and Financial Review and Prospects
Directors, Senior Management and Employees
Major Shareholders and Related Party Transactions
Financial Information
The Offer and Listing
Additional Information
Quantitative and Qualitative Disclosures about Market Risk
Description of Securities Other than Equity Securities
PART II
Item 13.
Item 14.
Item 15.
Item 16A.
Item 16B.
Item 16C.
Item 16D.
Item 16E.
Item 16F.
Item 16G.
Item 16H.
Item 16I.
Defaults, Dividend Arrearages and Delinquencies
Material Modifications to the Rights of Security Holders and Use of Proceeds
Controls and Procedures
Audit Committee Financial Expert
Code of Ethics
Principal Accountant Fees and Services
Exemptions from the Listing Standards for Audit Committees
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Change in Registrant’s Certifying Accountant
Corporate Governance
Mine Safety Disclosure
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
PART III
Item 17.
Item 18.
Item 19.
Financial Statements
Financial Statements
Exhibits
SIGNATURES
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Unless otherwise indicated or the context otherwise requires, references in this annual report to:
● “ADSs” are to American depositary shares, each of which represents eight Class A ordinary shares;
INTRODUCTION
● “availability rate” are to the ratio of the total time a service system is capable of being used during the market hours of the relevant equity
markets;
● “average DAUs” in a given period are to the average of the DAUs on each trading day during that period;
● “China ,” “Mainland China” and the “PRC” are to the People’s Republic of China, excluding, for the purposes of this annual report only,
Hong Kong, Macau and Taiwan;
● “churn rate” are to the percentage of the decrease in the same paying client cohort between the beginning and ending of a given period
divided by the number of paying clients at the beginning of the same period;
● “client asset balance” are to the asset balance in the trading accounts of our paying clients;
● “Class A ordinary shares” are to our Class A ordinary shares, par value US$0.00001 per share;
● “Class B ordinary shares” are to our Class B ordinary shares, par value US$0.00001 per share;
● “DAUs” are to the number of user accounts and visitors who access our platforms Futubull and/or moomoo, at least once on a given
trading day. Some visitors may access our platforms using more than one device on a given trading day and we calculate the number of
visitors who access our platforms based on the number of the devices used by the visitors to access our platforms;
● “Futu,” “we,” “us,” “our company,” “our” and “Group” are to Futu Holdings and its subsidiaries and, in the context of describing our
operations and consolidated financial information, also include the VIE and its subsidiaries, unless the context otherwise requires;
● “Futu Holdings” are to Futu Holdings Limited, our Cayman Islands holding company;
● “Futu International Hong Kong” are to Futu Securities International (Hong Kong) Limited, our wholly-owned subsidiary incorporated in
Hong Kong;
● “Futu Hong Kong” are to Futu Securities (Hong Kong) Limited, our wholly-owned subsidiary incorporated in Hong Kong;
● “HK$” and “Hong Kong dollars” are to the legal currency of Hong Kong;
● “HK SFC” are to the Securities and Futures Commission of Hong Kong;
● “MAUs” are to the number of user accounts and visitors who access our platforms Futubull and/or moomoo at least once during the
calendar month in question. Some visitors may access Futubull or moomoo using more than one device in a given month and we calculate
the number of visitors who access our platforms based on the number of the devices used by the visitors to access our platforms;
● “NiuNiu/Moo Community” are to our social network services on Futubull or moomoo platform, including the interactive tools and
functions offered on such platform;
● “paying clients” are to the clients with assets in their trading accounts with us;
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● “registered clients” and “clients” are to the users who open one or more trading accounts with us;
● “RMB” and “Renminbi” are to the legal currency of China;
● “shares” and “ordinary shares” are to our Class A ordinary shares and Class B ordinary shares;
● “US$,” “U.S. dollars,” “$,” and “dollars” are to the legal currency of the United States;
● “users” are to the number of user accounts registered with our applications or websites;
● “VIE” and “Shenzhen Futu” are to Shenzhen Futu Network Technology Co., Ltd., a company incorporated in the PRC that has entered
into a series of contractual arrangements with the WFOE; and
● “WFOE” and “Shensi Beijing” are to Shensi Network Technology (Beijing) Co., Ltd., our wholly-owned subsidiary incorporated in the
PRC.
For each relevant period prior to January 1, 2021, “users,” “MAUs” and “average DAUs” figures disclosed in this annual report are only
inclusive of those under Futubull, due to insignificant figures recorded under moomoo. Since January 1, 2021, the numbers disclosed in this annual
report include figures under Futubull and moomoo for each subsequent period.
For each relevant period prior to January 1, 2021, “clients,” “registered clients,” “paying clients,” “client asset balance,” “trading volume” and
other client-based figures disclosed in this annual report are only inclusive of those under Futu International Hong Kong, due to insignificant
figures recorded under Futu Inc. Since January 1, 2021, the figures disclosed in this annual report include those under Futu Securities International
(Hong Kong) Limited, Futu Inc. and Futu Singapore Pte. Ltd. for each subsequent period.
Unless otherwise noted, all translations from Hong Kong dollars to U.S. dollars and from U.S. dollars to Hong Kong dollars in this annual
report were made at a rate of HK$7.7996 to US$1.00, the exchange rate as of December 30, 2021 as set forth in the H.10 statistical release of the
Board of Governors of the Federal Reserve System. We make no representation that any Hong Kong dollars or U.S. dollar amounts could have
been, or could be, converted into U.S. dollars or Hong Kong dollars, as the case may be, at any particular rate, or at all.
FORWARD-LOOKING INFORMATION
This annual report contains forward-looking statements that reflect our current expectations and views of future events. The forward-looking
statements are contained principally in the sections entitled “Item 3. Key Information—D. Risk Factors,” “Item 4. Information on the Company—
B. Business Overview” and “Item 5. Operating and Financial Review and Prospects.” Known and unknown risks, uncertainties and other factors,
including those listed under “Item 3. Key Information—D. Risk Factors,” may cause our actual results, performance or achievements to be
materially different from those expressed or implied by the forward-looking statements.
You can identify some of these forward-looking statements by words or phrases such as “may,” “will,” “expect,” “anticipate,” “aim,”
“estimate,” “intend,” “plan,” “believe,” “is/are likely to,” “potential,” “continue” or other similar expressions. We have based these forward-
looking statements largely on our current expectations and projections about future events and trends that we believe may affect our financial
condition, results of operations, business strategy and financial needs. These forward-looking statements include, but are not limited to, statements
relating to:
● our mission, goals and strategies;
● our future business development, financial conditions and results of operations;
● the trends in, expected growth and the market size of the online and mobile trading and other financial services industry in China, Hong
Kong, the United States, Singapore and globally;
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● expected changes in our revenues, costs or expenditures;
● our expectations regarding demand for and market acceptance of our products and services;
● our expectations regarding our relationships with users, clients and third-party business partners;
● competition in our industry;
● our proposed use of proceeds;
● the impact of the COVID-19 pandemic;
● relevant government policies and regulations relating to our industry; and
● general economic, business and socio-political conditions in China, Hong Kong, the United States, Singapore and other markets we have
businesses or operations.
These forward-looking statements involve various risks and uncertainties. You should read thoroughly this annual report and the documents
that we refer to with the understanding that our actual future results may be materially different from and worse than what we expect. Important
risks and factors that could cause our actual results to be materially different from our expectations are generally set forth in “Item 3. Key
Information—D. Risk Factors,” “Item 4. Information on the Company—B. Business Overview” and “Item 5. Operating and Financial Review and
Prospects” and other sections in this annual report. Moreover, we operate in an evolving environment. New risk factors and uncertainties emerge
from time to time and it is not possible for our management to predict all risk factors and uncertainties, nor can we assess the impact of all factors
on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in
any forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements.
This annual report contains certain data and information that we obtained from various government and private publications. Although we
believe the data and information to be reliable, we have not independently verified the accuracy or completeness of the data and information
contained in these publications. Statistical data in these publications also include projections based on a number of assumptions. The online
brokerage and related industries may not grow at the rate projected by market data, or at all. Failure of these markets to grow at the projected rate
may have a material and adverse effect on our business and the market price of the ADSs. In addition, the rapidly evolving nature of the online
brokerage industry results in significant uncertainties for any projections or estimates relating to the growth prospects or future condition of our
market. Furthermore, if any one or more of the assumptions underlying the market data are later found to be incorrect, actual results may differ
from the projections based on these assumptions. You should not place undue reliance on these forward-looking statements.
You should not rely upon forward-looking statements as predictions of future events. We undertake no obligation to update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise, after the date on which the statements are made or
to reflect the occurrence of unanticipated events. You should read this annual report and the documents that we refer to in this annual report and
have filed as exhibits to this annual report, of which this annual report is a part, completely and with the understanding that our actual future results
may be materially different from what we expect.
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EXPLANATORY NOTE
Investing in our securities involves a high degree of risk. Please carefully consider the risks discussed under the section entitled “Item 3. Key
Information—D. Risk Factors” in this annual report. We provide the following disclosure to help investors better understand our corporate
structure, operations in China and the associated risks.
As used in this annual report, (i) “Futu,” “we,” “us,” “our company,” or “our” refer to Futu Holdings and its subsidiaries and, in the context of
describing our operations and consolidated financial information, also include the VIE and its subsidiaries, unless the context otherwise requires;
(ii) “Futu Holdings” refers to Futu Holdings Limited, our Cayman Islands holding company; (iii) “Futu Hong Kong” refers to Futu Securities
(Hong Kong) Limited, our wholly-owned subsidiary incorporated in Hong Kong; (iv) “VIE” or “Shenzhen Futu” refers to Shenzhen Futu Network
Technology Co., Ltd., a company incorporated in the PRC that has entered into a series of contractual arrangements with the WFOE; and
(v) “WFOE” or “Shensi Beijing” refers to Shensi Network Technology (Beijing) Co., Ltd., our wholly-owned subsidiary incorporated in the PRC.
Our Corporate Structure and Operation in China
Futu Holdings is not an operating company but a Cayman Islands holding company conducting a significant portion of our operations through
our wholly-owned subsidiaries, including in Hong Kong, Singapore and the United States. Because Futu Holdings is an exempted company
incorporated in the Cayman Islands, it is classified as a foreign enterprise, and our wholly-owned PRC subsidiaries are foreign-invested enterprises,
under PRC laws and regulation, and none of them is generally allowed to own more than 50% of the equity interests in PRC companies that are
value-added telecommunication service providers.
In order to provide certain value-added telecommunication services in China while ensuring compliance with PRC laws and regulations, the
WFOE has entered into a series of contractual arrangements with the VIE and its shareholders. The contractual agreements are designed to provide
us economic exposure to the VIE’s value-added telecommunication services in China where PRC law prohibits, restricts or impose conditions on
direct equity investment in the VIE. For a detailed description about these contractual arrangements, see “Item 4. Information on the Company—C.
Organizational Structure—Contractual Arrangements with the VIE and Its Shareholders.”
As a result of the contractual agreements with the VIE, Futu Holdings becomes the primary beneficiary of the VIE for accounting purposes
and treat it as a PRC consolidated entity under U.S. GAAP. Neither we nor our investors own any equity ownership in, direct foreign investment in,
or control of the VIE as a result of the WFOE’s contractual agreements with the VIE and its shareholders. As a result, holders of the ADSs are not
purchasing equity interest in the VIE or its subsidiaries but instead are purchasing equity interest in Futu Holdings, a Cayman Islands holding
company whose consolidated financial results include those of the VIE and its subsidiaries under U.S. GAAP.
Our contractual arrangements with the VIE and its shareholders have not been tested in a court of law in the PRC and foreign investors may
never be allowed to hold equity interests in the VIE and its subsidiaries under PRC laws and regulations. Chinese regulatory authorities could in
the future disallow these agreements, which would likely affect our operations in China. Please see “Item 3. Key Information—D. Risk Factors—
Risks Related to Our Operations in China—If the PRC government deems that the contractual arrangements in relation to the VIE do not comply
with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations
change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.”
We and the VIE face various legal and operational risks and uncertainties related to Our Operations in China, including complex and evolving
PRC laws and regulations. For example, we and/or the VIE face risks associated with regulatory approvals on offshore offerings, the use of
variable interest entities, anti-monopoly regulatory actions, and oversight on cybersecurity and data privacy, as well as the lack of inspection by the
Public Company Accounting Oversight Board, or PCAOB, on our independent registered public accounting firm, which may impact our ability to
conduct certain businesses, accept foreign investments, or list on a U.S. or other foreign exchange. These risks could result in a material adverse
change in our operations and the value of the ADSs, significantly limit or completely hinder our ability to offer or continue to offer securities to
investors and cause such securities to significantly decline in value, as further explained below:
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● The PRC government has significant authority to regulate or intervene in a company’s operations in China at any time, such as ours,
whether such operations are conducted through a subsidiary or a consolidated variable interest entity. Therefore, investors in the ADSs
and our business face potential uncertainty from the PRC government’s policy. The Chinese government may intervene or influence our
operations at any time, or may exert more oversight and control over offerings conducted overseas and/or foreign investment in China-
based issuers, which could result in a material change in our operations and/or the value of our ADSs. Any actions by the Chinese
government to exert more oversight and control over offerings that are conducted overseas and/or foreign investment in China-based
issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of
such securities to significantly decline. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Operations in China—The
PRC government has significant authority to regulate or intervene in a company’s operations in China at any time, such as ours, whether
such operations are conducted through a subsidiary or a consolidated variable interest entity. Therefore, investors in the ADSs and our
business face potential uncertainty from the PRC government’s policy”;
● We believe that our corporate structure and contractual arrangements with the VIE comply with the current applicable PRC laws and
regulations. As of the date of this annual report, we believe that our PRC subsidiaries and the VIE are not required to obtain permission or
approval from the Chinese Securities Regulatory Commission, or the CSRC, or the Cyberspace Administration of China, or the CAC, to
operate their respective business in China or to approve our contractual arrangements with the VIE and its shareholders. However, PRC
laws and regulations governing the conditions and the requirements of such approval are uncertain and the relevant government
authorities have broad discretion in interpreting these laws and regulations. Accordingly, the PRC regulatory authorities may take a
different view. There can be no assurance that the PRC government authorities such as the Ministry of Commerce, or the MOFCOM, the
Ministry of Industry and Information Technology, or the MIIT, or other authorities that regulate our business and other participants in the
telecommunications industry, would agree that our corporate structure or any of the above contractual arrangements comply with PRC
licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the
future. As of the date of this annual report, we have not received any inquiry, notice, warning, or sanctions regarding our corporate
structure and contractual arrangements from the CSRC, CAC or any other PRC governmental agency. If we, our subsidiaries or the VIE
inadvertently conclude that approvals are not required, or if these regulations change or are interpreted differently and we are required to
obtain approval in the future, our ADSs may significantly decline in value or become worthless if we are unable to assert our contractual
control rights over the economic benefits and assets of the VIE and its subsidiaries. See “Item 3. Key Information—D. Risk Factors—
Risks Related to Our Operations in China—If the PRC government deems that the contractual arrangements in relation to the VIE do not
comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of
existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those
operations”;
● Recently, the PRC government initiated a series of regulatory actions and released guidelines to regulate business operations in China with
little advance notice, including those related to data security or anti-monopoly concerns, which may have an impact on our ability to
conduct certain business in China, accept foreign investments, or list on a U.S. or other foreign exchange. If we are unable to address any
data security or information protection concerns, any compromise of security that results unauthorized disclosure or transfer of personal
data, or to comply with the then applicable laws and regulations, we may incur additional costs and liability and result in governmental
enforcement actions, litigation, fines and penalties or adverse publicity and could cause our users and clients to lose trust in us, which
could have a material adverse effect on our business, results of operations, financial condition and prospects. And if certain of our
activities in Mainland China were deemed by relevant regulators as violation of the laws and regulations on anti-monopoly, it may result
in governmental investigations, fines and/or other sanctions against us. As of the date of this annual report, we have not been subject to
any administrative penalties, regulatory actions or inquires in connection with anti-monopoly or data security or data privacy. We may
also be subject to new laws, regulations or standards, or new interpretations of existing laws, regulations or standards, including those in
the areas of data security, data privacy and anti-monopoly, which could require us to incur additional costs and restrict our business
operations. For a detailed description of risks and regulations related to our operations in China, see “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Operations in China”, “Item 4. Information on the Company—B. Business Overview—Regulation—
Overview of the Laws and Regulations Relating to Our Business and Operations in China—Regulations on Cybersecurity and Privacy”
and “Item 4. Information on the Company—B. Business Overview—Regulation—Overview of the Laws and Regulations Relating to Our
Business and Operations in China—Regulations on Anti-monopoly Matters related to Internet Platform Companies”;
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● We rely on contractual arrangements with the VIE and its shareholders for a limited part of our business operations in China, and these
contractual arrangements may not be as effective as direct ownership in providing us with control over the VIE. We rely on the
performance by the VIE and its shareholders of their obligations under the contracts to exercise control over the VIE. The shareholders of
the VIE may not act in the best interests of us or may not perform their obligations under these contracts. Such risks exist throughout the
period in which we intend to operate certain portion of our business through the contractual arrangements with the VIE. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Business and Industry—We depend on contractual arrangements with the VIE and
its shareholders to operate a limited part of our operations in China, which may not be as effective as direct ownership in providing
operational control”; and
● Our independent registered public accounting firm is located in and organized under the laws of the PRC, a jurisdiction where the PCAOB
is currently unable to conduct inspections without the approval of the Chinese authorities, and therefore our auditors are currently not
inspected by the PCAOB. On December 16, 2021, the PCAOB issued a report relaying to the SEC its determinations that the PCAOB is
unable to inspect or investigate completely registered public accounting firms in Mainland China and Hong Kong due to positions taken
by Chinese authorities. The report, issued under Rule 6100, lists dozens of accounting firms based in Mainland China and Hong Kong
subject to the determinations, including our independent registered public accounting firm. Under Rule 6100, the PCAOB will reassess its
determinations at least annually. Our ADSs will be delisted or trading in our ADSs would be prohibited under the Holding Foreign
Companies Accountable Act if the PCAOB is unable to inspect auditors who are located in China for three consecutive years. The
delisting of our ADSs, or the threat of their being delisted, may materially and adversely affect the value of your investment. Additionally,
the inability of the PCAOB to conduct inspections deprives our investors with the benefits of such inspections. On June 22, 2021, the U.S.
Senate passed the “Accelerating Holding Foreign Companies Accountable Act”, which, if passed by the U.S. House of Representatives
and signed into law by the President, would decrease the number of non-inspection years for foreign companies to comply with PCAOB
audits from three to two years, thus reducing the time period before their securities may be prohibited from trading or delisted. On
February 4, 2022, the U.S. House of Representatives passed the America Competes Act of 2022 which includes the exact same
amendments as the bill passed by the Senate. The America Competes Act however includes a broader range of legislation not related to
the HFCAA in response to the U.S. Innovation and Competition Act passed by the Senate in 2021. The U.S. House of Representatives and
U.S. Senate will need to agree on amendments to these respective bills to align the legislation and pass their amended bills before the
President can sign into law. It is unclear when the U.S. Senate and U.S. House of Representatives will resolve the differences in the U.S.
Innovation and Competition Act and the America Competes Act of 2022 bills currently passed, or when the U.S. President will sign on the
bill to make the amendment into law, or at all. In the case that the bill becomes the law, it will reduce the time period before our ADSs
could be delisted from the exchange and prohibited from over-the-counter trading in the U.S. from 2024 to 2023. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Operations in China—Our ADSs will be delisted and our ADSs and shares may be
prohibited from trading in the over-the-counter market under the Holding Foreign Companies Accountable Act, or the HFCAA, if the
PCAOB is unable to inspect or fully investigate auditors located in China. On December 16, 2021, PCAOB issued the HFCAA
Determination Report, according to which our auditor is subject to the determinations that the PCAOB is unable to inspect or investigate
completely. In March 2022, the SEC issued its first “Conclusive list of issuers identified under the HFCAA” indicating that those
companies are now formally subject to the delisting provisions if they remain on the list for three consecutive years. We anticipate being
added to the list shortly after the filing of this annual report on Form 20-F. Under the current law, delisting and prohibition from over-the-
counter trading in the U.S. will start taking place in 2024. If this happens there is no certainty that we will be able to list our ADS or
shares on a non-U.S. exchange or that a market for our shares will develop outside of the U.S. In addition, legislations are currently being
considered in the United States to shorten the number of non-inspection years from three years to two, which, if adopted, could cause our
ADSs to be delisted from the exchange and prohibited from over-the-counter trading in the U.S. as early as 2023. If our ADSs are delisted
from the U.S. Exchange and are prohibited from trading in the over-the-counter market in the U.S. there is no certainty that we will be
able to list on a non-U.S. exchange or that a market for our shares will develop outside of the U.S. If our ADSs are delisted from the U.S.
Exchange and are prohibited from trading in the over-the-counter market in the U.S. there is no certainty that we will be able to list on a
non-U.S. exchange or that a market for our shares will develop outside of the U.S. The delisting of our ADSs and inability to trade, or the
threat thereof, may materially and adversely affect the value of your investment.”
6
Table of Contents
Disaggregated Financial Information relating to the VIE
Historically, the VIE and its subsidiaries accounted for a small portion of our financial position, results of operations and cash flows. Set forth
below are the condensed consolidating schedule showing the financial position as of December 31, 2020 and 2021, and results of operations and
cash flows for the years ended December 31, 2019, 2020 and 2021 for (i) Futu Holdings, or the Parent; (ii) the WFOE (which is the primary
beneficiary of the VIE); (iii) our other subsidiaries (excluding the WFOE); (iv) the VIE and its subsidiaries; (v) eliminating adjustments; and (vi)
consolidated totals.
As of December 31, 2020
VIE and
VIE’s
Other
Parent
Subsidiaries WFOE
subsidiaries
HK$(in thousands)
Eliminating
Adjustments
Consolidated
Totals
As of December 31, 2021
VIE and
VIE’s
Other
Parent
Subsidiaries WFOE
subsidiaries
HK$(in thousands)
Eliminating
Adjustments
Consolidated
Totals
Condensed Consolidating Schedule of Financial
Position
Assets
Cash and cash equivalents
Cash held on behalf of clients
Restricted cash
Term deposit
Short-term investments
Amounts due from internal companies(1)
Loans and advances
Securities purchased under agreements to resell
Receivables
Prepaid assets
Investment in subsidiaries(2)
Investment in VIE(2)
Long-term investments
Operating lease right-of-use assets
Other assets
Total assets
Liabilities
Amounts due to related parties
Amounts due to internal companies(1)
Securities sold under agreements to repurchase
Payables
Borrowings
Lease liabilities
Accrued expenses and other liabilities
Total liabilities
Total shareholders’ equity(2)
37,349
—
—
—
—
4,184,401
—
—
—
—
5,086,681
—
—
—
9,655
9,318,086
—
15,833
—
695
977,735
—
16,133
1,010,396
8,307,690
— 17,204
—
993,561
42,487,090
—
300,000
—
30,525
18,825,366
—
8,077,032
9,502
19,089
176,963
375,417
71,294,545
87,169
4,245,538
5,453,037
51,052,929
4,505,083
189,646
674,463
66,207,865
5,086,680
—
—
—
—
—
—
—
—
19,267
—
177
—
—
—
—
—
177
19,090
20
—
—
—
—
3,738
—
—
—
—
—
—
—
—
—
2,043
117,085
(4,334,054)
1,034,668
42,487,090
—
300,000
37,574
—
—
—
—
—
1,169,741
6,969,446
4,514,736
54,734,351
2,065
—
—
35
—
—
—
—
2,751
—
—
—
—
—
—
—
—
—
2,102
190,424
(7,208,268)
4,555,096
54,734,351
2,065
—
1,169,741
—
29,587,306
106,203
10,447,794
18,306
—
—
23,394
243,859
650,399
101,538,514
—
—
—
6,940
—
—
—
40,415
14,072
254,602
—
—
—
—
(13,594,508)
(78,398)
—
(7,443)
—
(20,888,617)
—
80,435
—
—
—
42,628
53,141
176,204
—
(7,208,268)
—
—
—
257
(10,262)
(7,218,273)
87,459
—
4,467,861
67,192,503
6,357,405
260,579
2,187,148
80,552,955
78,398
(13,670,344)
20,985,559
46,296
29,587,306
106,203
10,447,794
11,366
80,292
—
23,394
210,887
614,707
100,379,397
87,459
7,105,635
4,467,861
67,192,372
5,667,536
217,694
2,129,186
86,867,743
13,511,654
—
—
—
—
—
78,398
—
—
—
80,535
—
243
—
—
—
—
—
243
80,292
—
—
—
1,920
—
—
—
31,900
8,254
162,897
—
—
—
—
18,825,366
—
8,077,032
11,422
—
—
—
—
(5,105,770)
(17,204)
—
—
—
(9,457,028)
— 13,514,216
—
—
—
—
—
21,620
21,712,597
208,863
393,326
71,337,767
—
—
87,169
—
72,506
(4,334,054)
—
21,955
—
—
—
32,585
40,602
145,693
17,204
—
—
—
—
—
(4,334,054)
(5,122,974)
5,453,037
51,053,624
5,482,818
222,231
731,198
63,030,077
8,307,690
—
131
689,869
—
15,083
727,038
20,985,559
7
Table of Contents
Parent
For the year ended December 31, 2019
For the year ended December 31, 2020
For the year ended December 31, 2021
Other
Subsidiaries WFOE
VIE and
VIE’s
subsidiaries
HK$(in thousands)
Eliminating
Adjustments
Consolidated
Totals
Parent
Subsidiaries WFOE
Other
VIE and
VIE’s
subsidiaries
Eliminating
Adjustments
Consolidated
Totals
Parent
HK$(in thousands)
Other
Subsidiaries WFOE
VIE and
VIE’s
subsidiaries
HK$(in thousands)
Eliminating
Adjustments
Consolidated
Totals
Condensed Consolidating
Schedule of Results of
Operations
Third-party revenues
Inter-company revenues(3)
Total costs(3)
Total expenses
Equity in gain of subsidiaries/
VIE(2)
Others, net
Income before income tax
1,240
—
(3,930)
(22,529)
1,058,376
—
(332,321)
(519,967)
—
—
—
(1)
1,939
63,742
(9,195)
(49,399)
—
(63,742)
63,742
—
1,061,555
—
(281,704)
(591,896)
3,189
—
(191)
(23,388)
3,298,700
—
(777,589)
(1,051,012)
—
—
—
(53)
8,933
94,500
(12,674)
(72,554)
—
(94,500)
94,500
—
3,310,822
—
(695,954)
(1,147,007)
2,766
—
—
(26,854)
7,090,167
—
(1,382,062)
(2,558,736)
—
—
—
(46)
22,387
187,774
(11,776)
(140,807)
—
(187,774)
187,774
—
7,115,320
—
(1,206,064)
(2,726,443)
192,322
(1,439)
8,806
(7,014)
8,807
—
—
(1,009)
(209,935)
—
—
(9,462)
1,347,485
(1,572)
21,088
(17,955)
20,727
413
—
1,876
(1,389,300)
—
—
(17,238)
2,816,673
17,625
52,695 52,741
—
(14,841)
—
(306)
(2,922,109)
—
—
2,478
expenses
165,664
207,880
8,806
6,078
(209,935)
178,493
1,325,523
1,473,232
21,087
20,081
(1,389,300)
1,450,623
2,810,210
3,187,223 52,695
57,272
(2,922,109)
3,185,291
Share of loss from equity method
investments
Income tax expense
Net income
—
—
165,664
(543)
(15,015)
192,322
—
—
8,806
—
2,729
8,807
—
—
(209,935)
(543)
(12,286)
165,664
—
—
1,325,523
(307)
(125,439)
1,347,486
—
—
21,087
—
646
20,727
—
—
(1,389,300)
(307)
(124,793)
1,325,523
—
—
2,810,210
—
—
(370,550)
—
2,816,673 52,695
—
(4,531)
52,741
—
—
(2,922,109)
—
(375,081)
2,810,210
8
Table of Contents
Condensed Consolidating
Schedules of Cash Flows
Net cash (used in) /generated
from operating activities(4)
Advances to Group companies
Receival of advances repayment
from Group companies
Investments in subsidiaries, VIE
and VIE’s subsidiary
Other investing activities
Net cash (used in)/generated
from investing activities
Proceeds from advances from
Group companies(5)
Repayment of advances from
Group companies(5)
Capital contribution from Group
companies
Other financing activities
Net cash generated from/(used
in) financing activities
Effect of exchange rate changes on
cash, cash equivalents and
restricted cash
Net (decrease)/ increase in cash,
cash equivalents and restricted
cash
Cash, cash equivalents and
restricted cash at beginning of
the year
Cash, cash equivalents and
restricted cash at end of the
year
For the year ended December 31, 2019
For the year ended December 31, 2020
For the year ended December 31, 2021
Parent
Subsidiaries WFOE
Other
VIE and
VIE’s
subsidiaries
HK$ (in thousands)
Eliminating
Adjustments
Consolidated
Totals
Parent
Other
Subsidiaries WFOE
VIE and
VIE’s
subsidiaries
HK$ (in thousands)
Eliminating
Adjustments
Consolidated
Totals
Parent
Other
Subsidiaries WFOE
VIE and
VIE’s
subsidiaries
HK$ (in thousands)
Eliminating
Adjustments
Consolidated
Totals
(10,336)
(939,807)
1,982,273
(32,740)
(1)
—
(2,502)
—
—
972,547
1,969,434
—
(30,551)
(3,049,229)
20,502,112
3
—
(14,847)
—
3,049,229
20,456,717
—
(16,465)
(4,814,377)
6,026,081
—
15
—
2,340
—
—
4,814,377
6,011,971
—
313,091
32,740
—
—
(345,831)
—
779,604
—
—
—
(779,604)
— 2,039,648
—
—
— (2,039,648)
—
(223,982)
—
—
(162,290)
—
—
—
2,233
223,982
—
—
(160,057)
(1,869,682)
—
—
(261,279)
—
—
—
17,104
1,869,682
—
—
(244,175)
(5,480,918)
(1,169,715)
—
209,477
—
—
—
(3,327)
5,480,918
—
—
(963,565)
(850,698)
(162,290)
—
2,233
850,698
(160,057)
(4,139,307)
(261,279)
—
17,104
4,139,307
(244,175)
(9,425,362)
209,477
—
(3,327)
8,255,647
(963,565)
Proceeds from issuance of ordinary
shares
1,259,317
—
—
—
1,259,317
2,339,718
—
—
—
2,339,718
10,856,524
—
—
—
—
10,856,524
—
939,807
—
32,740
(972,547)
—
(313,091)
—
(32,740)
345,831
—
—
3,049,229
—
—
(3,049,229)
—
(779,604)
—
779,604
—
—
—
4,814,377
—
—
(4,814,377)
— (2,039,648)
—
—
2,039,648
—
—
—
—
—
—
—
—
(399,031)
223,982
291,336
—
—
(223,982)
—
—
— 1,869,682
(107,695)
1,859,532
4,207,646
—
—
— (1,869,682)
—
—
—
—
6,067,178
(1,414,672)
5,480,918
1,112,366
—
—
— (5,480,918)
—
—
—
(302,306)
860,286
1,142,034
—
—
(850,698)
1,151,622
4,199,250
8,346,953
—
—
(4,139,307)
8,406,896
9,441,852
9,368,013
—
—
(8,255,647)
10,554,218
(41)
(44,625)
—
—
—
(44,666)
(33)
(1,084)
—
—
—
(1,117)
200
166,930
—
—
—
167,130
(789)
2,917,392
(1)
(269)
—
2,916,333
29,359
28,586,702
3
2,257
—
28,618,321
225
15,770,501
15
(987)
—
15,769,754
8,779
11,976,557
18
1,750
—
11,987,104
7,990
14,893,949
17
1,481
—
14,903,437
37,349
43,480,651
20
3,738
—
43,521,758
7,990
14,893,949
17
1,481
—
14,903,437
37,349
43,480,651
20
3,738
—
43,521,758
37,574
59,251,152
35
2,751
—
59,291,512
Notes:
(1)
It represents the elimination of intercompany balances among parent, the VIE and our subsidiaries.
(2)
It represents the elimination of the investment in the VIE and our subsidiaries by the Parent.
(3)
Intercompany Revenues between VIE and Other Subsidiaries
The VIE provides software development services and technical consulting services to the subsidiaries of the Group. For the years ended December 31, 2019,
2020 and 2021, technical service fees of the VIE were HK$63,742 thousand, HK$94,500 thousand and HK$187,774 thousand, respectively. The intercompany
service charge is eliminated at the consolidation level.
Intercompany Revenues between VIE and WFOE
Pursuant to the exclusive technology consulting and services agreement entered into in October 2014, between the WFOE and the VIE, which was
subsequently amended and restated in May 2015 and further in September 2018, the WFOE had the exclusive right to provide the VIE with consulting and
services related to, among other things, technology research and development, as well as maintenance of software and hardware. The VIE agreed to pay
WFOE a service fee in an amount equal to its annual net income. The WFOE may adjust the amount of service fee based on factors such as the complexity,
time spent and the commercial value of the services.
On September 30, 2021, a termination agreement was entered into among the WFOE, the VIE and its shareholders, pursuant to which the parties agreed to
terminate the prior contractual arrangements and replaced them with a new set of agreements. Pursuant to the exclusive business cooperation agreement
entered into on September 30, 2021 by and among the WFOE, the VIE and its shareholders, the VIE engages the WFOE as the exclusive service provider of
technical support, consulting services and other services to the VIE. The VIE agrees to pay a service fee at an amount equivalent to 100% of the consolidated
gross profits of the VIE for any fiscal year after offsetting the accumulated losses of the VIE and its subsidiaries in the previous fiscal years (if any) and after
deducting working capital, expenditure, taxes and other statutory contributions required in any fiscal year.
For the years ended December 31, 2019, 2020 and 2021, the WFOE did not charge any service fee from the VIE.
(4) For the years ended December 31, 2019, 2020 and 2021, cash paid by subsidiaries to the VIE for technical service fees were HK$37,631 thousand,
HK$33,669 thousand and HK$189,827 thousand, respectively.
(5) For the year ended December 31, 2019, a subsidiary paid operating expense of HK$32,740 thousand on behalf of the VIE, and the VIE repaid the advance
from the subsidiary subsequently.
9
Table of Contents
We expect that the financial position, results of operations and cash flows generated by the VIE and its subsidiaries will constitute an
immaterial portion of our consolidated financial information for the foreseeable future. However, there can be no assurance that the risks associated
with the contractual arrangement with the VIE and its shareholders, if materialized, would not materially and adversely impact our financial
position, results of operations, prospects or the value of the ADSs.
Transfer of Cash Through Our Organization
Although we consolidate the results of the VIE and its subsidiaries under U.S. GAAP, we only have access to the assets or earnings of the VIE
and its subsidiaries through our contractual arrangements with the VIE and its shareholders. The cash flows that have occurred between the VIE
and Futu Holdings and its subsidiaries are summarized as follows:
For the year ended December 31,
2021
2019
HK$
2020
HK$
HK$
US$
Cash paid by subsidiaries to the VIE for technical service fee
Advances from subsidiaries to the VIE
Repayment of advances to Group companies by the VIE
Restrictions and Limitations on Transfer of Cash
37,631
32,740
(32,740)
(in thousands)
33,669
—
—
189,827
—
—
24,423
—
—
Futu Holdings is incorporated in the Cayman Islands and its businesses in China are conducted mainly through its PRC subsidiaries and partly
through the VIE and its subsidiaries. We face various restrictions and limitations on foreign exchange, our ability to transfer cash between entities,
across borders and to U.S. investors, and our ability to distribute earnings from our subsidiaries and/or the VIE and its subsidiaries, to Futu
Holdings and holders of the ADSs as well as the ability to settle amounts owed under the contractual arrangements with the VIE.
Uncertainties regarding the interpretation and implementation of the contractual arrangements with the VIE could limit our ability to enforce
such agreements. If the PRC authorities determine that the contractual arrangements constituting part of the VIE structure do not comply with PRC
regulations, or if current regulations change or are interpreted differently in the future, our ability to settle amount owed by the VIE under the VIE
agreements may be seriously hindered.
Current PRC regulations permit our PRC subsidiaries, including the WFOE, to pay dividends to us only out of their accumulated profits, if
any, determined in accordance with PRC accounting standards and regulations. In addition, each of our PRC subsidiaries, the VIE and its PRC
subsidiaries are required to set aside at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until the
total amount set aside reaches 50% of their respective registered capital. Our PRC subsidiaries and the VIE and its subsidiaries may also allocate a
portion of their after-tax profits based on PRC accounting standards to employee welfare and bonus funds at their discretion. These reserves are not
distributable as cash dividends. Furthermore, if the WFOE incurs debt on its own behalf in the future, the instruments governing the debt may
restrict its ability to pay dividends or make other payments to us. In addition, the PRC tax authorities may require us to adjust our taxable income
under the contractual arrangements we currently have in place in a manner that would materially and adversely affect the WFOE’s ability to pay
dividends and other distributions to us. Any limitation on the ability of our PRC subsidiaries, including the WFOE, to distribute dividends to us or
on the ability of the VIE to make payments to the WFOE may restrict our ability to satisfy our liquidity requirements. See “Item 4. Information on
the Company—B. Business Overview—Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in China—
Regulations on Dividend Distribution.”
10
Table of Contents
Futu Hong Kong may be considered a non-resident enterprise for tax purposes, so that any dividends paid by our PRC subsidiaries pays to
Futu Hong Kong may be regarded as China-sourced income and, as a result, may be subject to PRC withholding tax at a rate of up to 10%. If we
are required under the PRC Enterprise Income Tax Law to pay income tax for any dividends we receive from PRC subsidiaries, or if Futu Hong
Kong is determined by the PRC government authority as receiving benefits from reduced income tax rate due to a structure or arrangement that is
primarily tax-driven, it would materially and adversely affect the amount of dividends, if any, we may pay to our shareholders and ADS holders. If
the PRC tax authorities determine that Futu Holdings is a PRC resident enterprise for enterprise income tax purposes, we may be required to
withhold a 10% tax from dividends we pay to our shareholders and ADS holders, in each case that are non-resident enterprises. See “Item 3. Key
Information—D. Risk Factors—Risks Relating to Our Operations in China—Dividends payable to our foreign investors and gains on the sale of
the ADSs or Class A ordinary shares by our foreign investors may become subject to PRC tax.”
In addition, non-resident enterprise shareholders, including our ADS holders, may be subject to PRC tax at a rate of 10% on gains realized on
the sale or other disposition of ADSs or ordinary shares if such income is treated as sourced from within the PRC. Furthermore, if Futu Holdings
were deemed to be a PRC resident enterprise, dividends paid to our non-PRC individual shareholders, including our ADS holders, and any gain
realized on the transfer of ADSs or ordinary shares by such holders may be subject to PRC tax at a rate of 20% which in the case of dividends may
be withheld at source. Any such tax may reduce the returns on your investment in the ADSs or ordinary shares. See “Item 3. Key Information—D.
Risk Factors—Risks Relating to Our Operations in China— We may be treated as a resident enterprise for PRC tax purposes under the PRC
Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.”
Our offshore entities are permitted under PRC laws and regulations to provide funding to our PRC subsidiaries only through loans or capital
contributions, subject to the approval of government authorities and limits on the amount of capital contributions and loans. This may delay or
prevent us from using the proceeds from our offshore capital raising activities to make loans or capital contribution to our PRC subsidiaries. See
“Item 3. Key Information—D. Risk Factors—Risks Relating to Our Operations in China—PRC regulation of loans to and direct investment in
PRC entities by offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of
our securities offerings to make loans or additional capital contributions to our PRC subsidiaries and the VIE and its subsidiaries.”
Additionally, PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and
trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from the State Administration of
Foreign Exchange of the PRC, or the SAFE by complying with certain procedural requirements. Dividends payments to us by Futu Hong Kong in
foreign currencies are subject to the condition that the remittance of such dividends outside of the PRC complies with certain procedures under
PRC foreign exchange regulations, such as the overseas investment registrations by our shareholders or the ultimate shareholders of our corporate
shareholders who are PRC residents. Approvals by or registration with appropriate government authorities is required where RMB is to be
converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign
currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current account transactions. If the
foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, our PRC
subsidiaries, including the WFOE, may not be able to pay dividends in foreign currencies to us and our access to cash generated from its operations
will be restricted. See “Item 3.D. Key Information—Risk Factors—Risks Related to Our Business and Industry—We are subject to PRC
restrictions on currency exchange.”
Taxation on Dividends or Distributions
Futu Holdings’ source of dividend partly comes from dividends paid by its PRC subsidiaries, including the WFOE, which in part depends on
payments received from the VIE under the contractual arrangements with the VIE. None of our subsidiaries has declared or paid any dividend or
distribution to us. We have never declared or paid any dividend on our ordinary shares and we have no current intention to pay dividends to
shareholders or holders of ADSs. We currently intend to retain most, if not all, of our available funds and any future earnings to fund the
development and growth of our business. The undistributed earnings that are subject to dividend tax are expected to be indefinitely reinvested for
the foreseeable future.
11
Table of Contents
Under the current laws of the Cayman Islands, Futu Holdings is not subject to tax on income or capital gains. Upon payments of dividends to
our shareholders, no Cayman Islands withholding tax will be imposed. For purposes of illustration, the following discussion reflects the
hypothetical taxes that might be required to be paid in Mainland China and Hong Kong, assuming that: (i) we have taxable earnings in the VIE, and
(ii) we determine to pay a dividend in the future:
Hypothetical pre-tax earnings in the VIE(1)
Tax on earnings at statutory rate of 25% at WFOE level(2)
Amount to be distributed as dividend from WFOE to Futu Hong Kong(3)
Withholding tax at tax treaty rate of 5 %
Amount to be distributed as dividend at Futu Hong Kong level and net distribution to Futu Holdings Limited(4)
100.00
(25.00)
75.00
(3.75)
71.25
Notes:
(1) For purposes of this example, the tax calculation has been simplified. The hypothetical book pre-tax earnings amount is assumed to equal Chinese taxable income.
(2) Certain of our subsidiaries and the VIE qualifies for a 15% preferential income tax rate in China. However, such rate is subject to qualification, is temporary in nature,
and may not be available in a future period when distributions are paid. For purposes of this hypothetical example, the table above reflects a maximum tax scenario
under which the full statutory rate would be effective.
(3) China’s Enterprise Income Tax Law imposes a withholding income tax of 10% on dividends distributed by a Foreign Invested Enterprise to its immediate holding
company outside of Mainland China. A lower withholding income tax rate of 5% is applied if the Foreign Invested Enterprise’s immediate holding company is
registered in Hong Kong or other jurisdictions that have a tax treaty arrangement with Mainland China, subject to a qualification review at the time of the distribution.
There is no incremental tax at Futu Hong Kong level for any dividend distribution to Futu Holdings.
(4)
If a 10% withholding income tax rate is imposed, the withholding tax will be 7.5 and the amount to be distributed as dividend at Futu Hong Kong level and net
distribution to Futu Holdings will be 67.5.
The table above has been prepared under the assumption that all profits of the VIE will be distributed as fees to our PRC subsidiaries under tax neutral contractual
arrangements. If, in the future, the accumulated earnings of the VIE exceed the service fees paid to our PRC subsidiaries (or if the current and contemplated fee structure
between the intercompany entities is determined to be non-substantive and disallowed by Chinese tax authorities), the VIE could make a non-deductible transfer to our PRC
subsidiaries for the amounts of the stranded cash in the VIE. This would result in such transfer being non-deductible expenses for the VIE but still taxable income for the
PRC subsidiaries. Our management believes that there is only a remote possibility that this scenario would happen.
Should all tax planning strategies fail the VIE could, as a matter of last resort, make a non-deductible transfer to the WFOE for amounts of stranded cash in the VIE.
This would result in the double taxation of earnings: once at the VIE level (non-deductible expense) and again at the WFOE level (for presumptive earnings on the transfer).
This has the impact of reducing the amount available above from 71.25% to approximately 53% of pre-tax income, respectively. Management believes this scenario to be
remote.
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PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not applicable.
Item 2. Offer Statistics and Expected Timetable
Not applicable.
Item 3. Key Information
A. [Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Below please find a summary of the principal risks we face, organized under relevant headings.
Risks Related to Our Business and Industry
● Our historical growth rates may not be indicative of our future growth, which makes it difficult to evaluate our future prospects.
● We are subject to extensive and evolving regulatory requirements in the markets we operate in, non-compliance with which may result in
penalties, limitations and prohibitions on our future business activities or suspension or revocation of our licenses and trading rights, and
consequently may materially and adversely affect our business, financial condition, operations and prospects. In addition, we are involved
in ongoing inquiries by relevant regulators.
● Our online client onboarding procedures historically did not strictly follow the specified steps set out by the relevant authorities in Hong
Kong, which may subject us to regulatory actions in addition to remediation, which may include reprimands, fines, limitations or
prohibitions on our future business activities and/or suspension or revocation of Futu International Hong Kong’s licenses and trading
rights.
● We do not hold any license or permit for providing securities brokerage business in Mainland China. Although we do not believe we
engage in securities brokerage business in Mainland China, there remain uncertainties to the interpretation and implementation of relevant
PRC laws and regulations. If some of our activities in Mainland China were deemed by relevant regulators as provision of securities
business such as securities brokerage services, investment consulting services, and/or futures business in Mainland China, our business,
financial condition, results of operations and prospects may be materially and adversely affected.
● We face significant competition in the online brokerage and wealth management industries, and if we are unable to compete effectively,
we may lose our market share and our results of operations and financial condition may be materially and adversely affected.
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● If we are unable to retain existing clients or attract new clients to increase their trading volume, or if we fail to offer services to address the
needs of our clients as they evolve, our business and results of operations may be materially and adversely affected.
● Because our revenues and profitability depend largely on clients’ trading volume, they are prone to significant fluctuations and are
difficult to predict. Declines in trading volumes generally result in lower revenues from transaction execution activities, which may affect
our financial condition, results of operations and prospects.
● We are subject to PRC restrictions on currency exchange.
Risks Related to Our Operations in China
● The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the
inability of the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.
● Our ADSs will be delisted and our ADSs and shares may be prohibited from trading in the over-the-counter market under the Holding
Foreign Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China. On
December 16, 2021, PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations
that the PCAOB is unable to inspect or investigate completely. In March 2022, the SEC issued its first “Conclusive list of issuers
identified under the HFCAA” indicating that those companies are now formally subject to the delisting provisions if they remain on the
list for three consecutive years. We anticipate being added to the list shortly after the filing of this annual report on Form 20-F. Under the
current law, delisting and prohibition from over-the-counter trading in the U.S. will start taking place in 2024. If this happens there is no
certainty that we will be able to list our ADS or shares on a non-U.S. exchange or that a market for our shares will develop outside of the
U.S. In addition, legislations are currently being considered in the United States to shorten the number of non-inspection years from three
years to two, which, if adopted, could cause our ADSs to be delisted from the exchange and prohibited from over-the-counter trading in
the U.S. as early as 2023. The delisting of our ADSs and inability to trade, or the threat thereof, may materially and adversely affect the
value of your investment.
● The PRC government has significant authority to regulate or intervene in a company’s operations in China at any time, such as ours,
whether such operations are conducted through a subsidiary or a consolidated variable interest entity. Therefore, investors in the ADSs
and our business face potential uncertainty from the PRC government’s policy.
● If the PRC government deems that the contractual arrangements in relation to the VIE do not comply with PRC regulatory restrictions on
foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we
could be subject to severe penalties or be forced to relinquish our interests in those operations.
● There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Risks Related to the ADSs
● The trading price of the ADSs may be volatile, which could result in substantial losses to you.
● Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any
change of control transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial, and may adversely affect
the trading market for the ADSs.
● If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price
for the ADSs and trading volume could decline.
● The depositary for the ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not
vote at shareholders’ meetings, except under limited circumstances, which could adversely affect your interests.
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● Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of the ADSs for return on your
investment.
Risks Related to Our Business and Industry
Our historical growth rates may not be indicative of our future growth, which makes it difficult to evaluate our future prospects.
We launched our online brokerage business in 2012 and experienced rapid growth since our inception. Our total revenues increased by 211.9%
from HK$1,061.6 million in 2019 to HK$3,310.8 million in 2020, and further by 114.9% from HK$3,310.8 million in 2020 to HK$7,115.3 million
(US$912.3 million) in 2021. However, our historical growth rates may not be indicative of our future growth, and we cannot assure you that we
will be able to maintain similar growth rates in the future or our efforts may prove more costly than we currently anticipate such that we may not
succeed in increasing our revenues sufficiently to offset higher expenses. If our growth rate declines, investors’ perceptions of our business and
business prospects may be adversely affected and the market price of our ADSs could decline. In addition, we have limited experience in new
services and products launched in the past few years. As our business develops and as we respond to competition, we may continue to introduce
new service offerings, make adjustments to our existing services, or make adjustments to our business operation in general. Any significant change
to our business model that does not achieve expected results may have a material and adverse impact on our financial condition and results of
operations. It is therefore difficult to effectively assess our future prospects.
We may not be able to manage our expansion effectively. Continuous expansion may increase the complexity of our business and place a strain
on our management, operations, technical systems, financial resources and internal control functions. Our current and planned personnel, systems,
resources and controls may not be adequate to support and effectively manage our future operations.
You should consider our business and prospects in light of the risks and uncertainties that fast-growing companies in a quick-evolving and
extensively regulated industry may encounter. These risks and challenges include our ability to, among other things:
● sustain high growth in the future;
● navigate a complex and evolving regulatory environment as well as economic condition and fluctuation;
● offer personalized and competitive online brokerage, wealth management and other financial services;
● increase the utilization of our services by existing and new users and clients;
● offer attractive commission rates while driving the growth and profitability of our business;
● maintain and enhance our relationships with our business partners, including funding partners for our margin financing business and fund
companies for our wealth management business;
● enhance our technology infrastructure to support the growth of our business and maintain the security of our system and the
confidentiality of the information provided and utilized across our system;
● improve our operational efficiency;
● attract, retain and motivate talented employees to support our business growth;and
● defend ourselves against legal and regulatory actions.
Our entrepreneurial and collaborative culture is important to us, and we believe it has been a major contributor to our success. We may have
difficulties maintaining such culture to meet the needs of our future and evolving operations as we continue to grow, in particular as we expand
internationally. In addition, our ability to maintain our culture as a public company, with changes in policies, practices, corporate governance and
management requirements, may be challenging. Failure to maintain our culture could have a material adverse effect on our business.
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We are subject to extensive and evolving regulatory requirements in the markets we operate in, non-compliance with which may result in
penalties, limitations and prohibitions on our future business activities or suspension or revocation of our licenses and trading rights, and
consequently may materially and adversely affect our business, financial condition, operations and prospects. In addition, we are involved in
ongoing inquiries by relevant regulators.
We are subject to extensive regulations and the markets in which we operate, including Hong Kong, Singapore and the United States, are
highly regulated. However, the online brokerage service industry (including, for example, the use of cloud-based operating, computing and record
keeping technology as well as biometric identification technology) is at a relatively early stage of development, and applicable laws, regulations
and other requirements may be changed and adopted from time to time. We may be subject to examinations and inquiries by the relevant regulators
on a regular or ad-hoc basis. Our business operations in Hong Kong are subject to applicable Hong Kong laws, regulations, guidelines, circulars,
and other regulatory guidance, or collectively the HK Brokerage Regulations, including, for example, the SFO and its subsidiary legislation. These
HK Brokerage Regulations set out the licensing requirements, regulate our operational activities and standards, and impose requirements such as
maintaining minimum liquidity or capital along with other filing, record keeping and reporting obligations relevant to our business operations. See
“Item 4. Information on the Company—B. Business Overview—Regulation—Overview of the Laws and Regulations Relating to Our Business and
Operations in Hong Kong.” In addition, our operations in the United States are subject to applicable United States laws, rules and regulatory
guidance, or collectively the US Brokerage Regulations, including, for example, the U.S. Securities and Exchange Act of 1934, or the Exchange
Act, rules and guidance adopted under the Exchange Act by the U.S. Securities and Exchange Commission, or the SEC, and rules and guidance
adopted by the Financial Industry Regulatory Authority, or FINRA. See “Item 4. Information on the Company—B. Business Overview—
Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in the United States.” Also, our operations in
Singapore are subject to applicable Singapore laws and regulatory requirements, including under the Securities and Futures Act (Chapter 289 of
Singapore), or the SFA, and its subsidiary legislation such as the Securities and Futures (Licensing and Conduct of Business) Regulations, or the
SF(LCB)R. In Singapore, we hold a Capital Markets Services License, or CMSL, issued by the Singapore regulator, the Monetary Authority of
Singapore, or the MAS, and we are required to abide by relevant regulatory notices and guidelines issued by the MAS. See “Item 4. Information on
the Company—B. Business Overview—Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in
Singapore.” Failure to comply with applicable laws and regulations in markets we operate can result in investigations and regulatory actions, which
may lead to penalties, including reprimands, fines, limitations or prohibitions on our future business activities or suspension or revocation of our
licenses or trading rights. Any outcome of such nature may affect our ability to conduct business, harm our reputation and, consequently, materially
and adversely affect our business, financial condition, results of operations and prospects.
From time to time, Futu Securities International (Hong Kong) Limited, or Futu International Hong Kong, as a HK SFC-licensed corporation
may be subject to or required to assist in inquiries or investigations by relevant regulatory authorities in Hong Kong, principally the HK SFC. The
HK SFC conducts on-site reviews and off-site monitoring to ascertain and supervise our business conduct and compliance with relevant regulatory
requirements and to assess and monitor, among other things, our financial soundness. We are subject to such regulatory examination, reviews and
inquiries from time to time. If any misconduct is identified as a result of inquiries, reviews or investigations, the HK SFC may take disciplinary
actions which could lead to revocation or suspension of licenses, public or private reprimand or imposition of pecuniary penalties against us, our
responsible officers, licensed representatives, directors or other officers. Any such disciplinary actions taken against us, our responsible officers,
licensed representatives, directors or other officers may have a material and adverse impact on our business operations and financial results. In
addition, we are subject to statutory secrecy obligations under the SFO whereby we may not be permitted to disclose details on any HK SFC
inquiries, reviews or investigations without the consent of the HK SFC. Futu Inc. and Futu Clearing Inc., as SEC-registered broker-dealers, have
been subject to examinations and enquiries initiated by the SEC and FINRA in the past. They may also be subject to similar examinations,
enquiries or other regulatory actions by such and other regulatory authorities in the future. Futu Singapore Pte. Ltd., as a Capital Markets Services
Licensee in Singapore, may be subject to similar examinations and regulatory actions initiated by the MAS or other relevant regulatory authorities
in Singapore. While we do not believe we are conducting securities business in China, we cannot rule out the possibility that we will be subject to
the supervision of the CSRC or other PRC government authorities in the future. See “Item 4. Information on the Company—B. Business Overview
—Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in China.”
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As of the date of this annual report, Futu International Hong Kong was involved in certain ongoing inquiries initiated by the HK SFC
concerning matters including, among others, client onboarding processes, risk management, client assets, cybersecurity, anti-money laundering,
counter-financing terrorism and operation of mobile application. We are unable to accurately predict the outcome of such inquiries given their
ongoing nature. See “Item 4. Information on the Company—B. Business Overview—Ongoing Regulatory Actions.” We have been and may
continue to be subject to inquiries or investigations by the HK SFC. The HK SFC may identify misconduct or material non-compliance, undertake
investigation and take regulatory actions, which may include, among other things, reprimands, fines, limitations or prohibitions on our future
business activities or suspension or revocation of Futu International Hong Kong’s licenses and trading rights. There also remains a risk that we may
not be able to rectify our practices to be in compliance with relevant HK Brokerage Regulations following the identification of any such
misconduct or material non-compliance, which may result in the HK SFC taking additional regulatory actions against us in the forms described
above. If any such outcome were to arise, there may be a material and adverse effect on our reputation, business, results of operations, financial
conditions and prospects.
Our online client onboarding procedures historically did not strictly follow the specified steps set out by the relevant authorities in Hong Kong,
which may subject us to regulatory actions in addition to remediation, which may include reprimands, fines, limitations or prohibitions on our
future business activities and/or suspension or revocation of Futu International Hong Kong’s licenses and trading rights.
As online brokerage services in Hong Kong and, in particular, the technologies and practices involved in online account opening services are
at relatively early stages of development, applicable laws, regulations, guidelines, circulars and other regulatory guidance with regard to online
client onboarding procedures remain evolving and are subject to further changes. For the online application procedures followed by certain clients
outside Hong Kong to open Hong Kong or U.S. trading accounts with us, see “Item 4. Information on the Company—B. Business Overview—Our
Services—Trading, Clearing and Settlement—Account Opening.” The HK SFC’s current position on the expressly specified non-face-to-face
approaches for account opening, including online account opening, in light of the HK SFC regulatory requirements is summarized in paragraph 5.1
of the SFC Code of Conduct and SFC circulars dated May 12, 2015, October 24, 2016, July 12, 2018 and June 28, 2019, as updated by the HK
SFC from time to time (together, the “SFC Circulars”). There are various methods set out under the SFC Circulars for online account opening, one
of which is to use e-certification services provided by certification authorities outside Hong Kong whose electronic signature certificates have
obtained mutual recognition status accepted by the Hong Kong government and the relevant local government when onboarding clients. Until
recently, our online client onboarding procedures for certain clients outside Hong Kong did not strictly follow the specified methods set out in the
SFC Circulars, and we have been testing new e-certification procedures through mutually recognized certification authorities as part of our online
onboarding process since 2019. As of the date of this annual report, we implemented such new procedure as one of the online client onboarding
procedures for our new clients. To the extent applicable, new clients are required to complete such new procedures. We have not been subject to
any enforcement disciplinary action in relation to our online client onboarding procedures. However, we have been and may continue to be subject
to inquiries or investigations by the HK SFC regarding our current and historical client onboarding procedures. There is no assurance that we will
be able to achieve full implementation in a timely manner, or at all, with respect to the adoption of e-certification procedures or remediate our
account opening or other procedures for all relevant existing clients retroactively or to make further adjustments to our online client onboarding
processes as may be required by the HK SFC. We may need to take extensive time and incur additional costs and our customer experience may be
adversely impacted. As a result, such remediation or adjustments may have a material adverse impact on our operations, business prospects, user
experience and client acquisition and retention. If our online client onboarding procedures are determined by the HK SFC to be, or have been, not
in compliance with the applicable laws, regulations, guidelines, circulars and other regulatory guidance, we may be subject to regulatory actions,
which may include, in addition to remediation, reprimands, fines, limitations or prohibitions on our future business activities and/or suspension or
revocation of Futu International Hong Kong’s licenses and trading rights.
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We do not hold any license or permit for providing securities brokerage business in Mainland China. Although we do not believe we engage in
securities brokerage business in Mainland China, there remain uncertainties to the interpretation and implementation of relevant PRC laws
and regulations. If some of our activities in Mainland China were deemed by relevant regulators as provision of securities business such as
securities brokerage services, investment consulting services, and/or futures business in Mainland China, our business, financial condition,
results of operations and prospects may be materially and adversely affected.
Pursuant to the relevant PRC laws and regulations, no entity or individual shall engage in securities business without the approval of the
securities regulatory authority of the State Council. See “Item 4. Information on the Company—B. Business Overview—Regulation—Overview of
the Laws and Regulations Relating to Our Business and Operations in China—Regulations on Securities Business.” We do not hold any license or
permit in relation to providing securities brokerage business in Mainland China. A significant portion of our technology, research and development,
management, supporting and other teams are based in Mainland China and a large number of our users are PRC residents. While we do not believe
the business we are conducting now through our subsidiaries or consolidated affiliated entities in China is securities brokerage business in China,
we cannot assure you that certain of our activities such as redirecting users in China to brokers or other licensed entities outside of China will not
be deemed as operating securities brokerage business in China. In the past, we received inquiries relating to certain aspects of our activities from
certain regulatory authorities in China. We have taken measures in a timely manner to modify and enhance our business and platforms to be in
compliance with the current applicable PRC laws and regulations related to securities brokerage business in China. However, we cannot assure you
that the measures we have taken or will take in the future will be effective or fully satisfy the relevant regulatory authorities’ requirements. Based
on the opinion of our PRC legal counsel, Han Kun Law Offices, we are not in violation of the current applicable PRC laws and regulations related
to securities brokerage business in China in any material aspects. However, there remain some uncertainties as to how the current and any future
PRC laws and regulations will be interpreted or enforced in the context of operating securities related business in Mainland China. If some of our
activities in Mainland China were deemed by relevant regulators as provision of securities business such as securities brokerage services,
investment consulting services and/or futures business in China, we will be required to obtain relevant licenses or permits from relevant regulatory
bodies, including the CSRC, and failure of obtaining such licenses or permits may subject us to regulatory actions and penalties, including fines,
suspension of parts or all of our operations in the PRC, and temporary suspension or removal of our websites, desktop devices and mobile
application in China. In such cases, our business, financial condition, results of operations and prospects may be materially and adversely affected.
In addition, while we have internal policies in place regulating relevant activities of our employees and their dealings with our business partners, if
our employees or business partners engage in certain activities that relevant authorities would require permits or licenses for, we may be subject to
regulatory enquiries or penalties and negative publicity.
We face significant competition in the online brokerage and wealth management industries, and if we are unable to compete effectively, we may
lose our market share and our results of operations and financial condition may be materially and adversely affected.
The market for online brokerage and wealth management services is relatively new, rapidly evolving and intensely competitive. We expect
competition to continue and intensify in the future. We face competition from traditional retail brokerage firms and financial service providers in
Hong Kong and worldwide, as we currently have operations in Singapore, the United States and Australia and may expand into other markets. In
order to satisfy the demands of clients for hands-on electronic trading facilities, universal access to markets, smart routing, better trading tools,
lower commissions and financing rates, we have embarked on building such facilities and service enhancements.
In addition, the online brokerage and wealth management industries exhibit massive opportunities which may attract major internet companies
to enter the market by adopting a similar business model, which may significantly affect our market share and sales volume. Further, major
international brokerage companies that have large retail online brokerage businesses as well as online brokerage units of commercial banks may
also take advantage of their established resources and satisfy applicable regulatory requirements through acquisitions and organic development.
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We expect competition to increase in the future as current competitors diversify and improve their offerings and as new participants enter the
market. We cannot assure you that we will be able to compete effectively or efficiently with current or future competitors. They may be acquired
by, receive investment from or enter into strategic relationships with, established and well-financed companies or investors, which would help
enhance their competitiveness. Furthermore, the current competitors and new entrants in the online brokerage and wealth management industries
may also seek to develop new service offerings, technologies or capabilities that could render some of the services that we offer obsolete or less
competitive, and some of them may adopt more aggressive pricing policies or devote greater resources to marketing and promotional campaigns
than we do. The occurrence of any of these circumstances may hinder our growth and reduce our market share, and thus our business, results of
operations, financial condition and prospects would be materially and adversely affected.
If we are unable to retain existing clients or attract new clients to increase their trading volume, or if we fail to offer services to address the
needs of our clients as they evolve, our business and results of operations may be materially and adversely affected.
We derive a significant portion of our revenues from our online brokerage services provided to our clients. To maintain the high growth
momentum of our platforms, we depend on retaining current clients and attracting more new clients. If there is insufficient demand for our online
brokerage and margin financing services, we might not be able to maintain and increase our trading volume and revenues as we expect, and our
business and results of operations may be adversely affected.
Our success depends largely on our ability to retain existing clients. Our clients may not continue to place trading orders or increase the level
of their trading activities through our platforms if we cannot match the prices offered by other market players or if we fail to deliver satisfactory
services. Failure to deliver services in a timely manner at competitive prices with satisfactory experience will cause our clients to lose confidence
in us and use our platforms less frequently or even stop using our platforms altogether, which in turn will materially and adversely affect our
business. Even if we are able to provide high-quality and satisfactory services through our platforms in a timely manner and at favorable price
terms, we cannot assure you that we will be able to retain existing clients due to reasons out of our control, such as our clients’ personal financial
reasons or the deterioration of the capital markets condition.
If we are unable to maintain or increase our client retention rates or generate new clients in a cost-effective manner, our business, financial
condition and results of operations would likely be adversely affected. Historically, we incurred HK$164.7 million, HK$385.3 million and
HK$1,392.1 million (US$178.5 million) in selling and marketing expenses, representing 15.5%, 11.6% and 19.6% of our total revenues in 2019,
2020 and 2021, respectively. Although we have spent significant financial resources on marketing expenses and plan to continue to do so, these
efforts may not be cost-effective to attract new clients. We cannot assure you that we will be able to maintain or grow our client base in a cost-
effective way.
We must stay abreast of the needs and preferences of our clients to serve their evolving trading needs as their investment demands change. If
we fail to retain our existing clients by offering services that cater to their evolving investment and trading needs, we may not be able to maintain
and continue to grow the trading volume facilitated by our platforms, and our business and results of operations may be adversely affected. In
addition, if we are unable to maintain, enhance or develop the methods we use to retain clients, the costs of client retention will significantly
increase, and our ability to retain clients may be harmed.
Similar to other brokerage and financial services providers, we cannot guarantee the profitability of the investment made by clients through
our platforms. The profitability of our clients’ investment is directly affected by elements beyond our control, such as economic and political
conditions, broad trends in business and finance, changes in volume of securities transactions, changes in the markets in which such transactions
occur and changes in how such transactions are processed. While we do not provide securities investment consulting services to our users and
clients, we provide a social community and information services to facilitate the provision of financial and market information. Although these
materials and commentaries contain prominent disclaimers, our clients may seek to hold us responsible when they use such information to make
trading decisions and suffer financial loss on their trades, or if their trades are not as profitable as they have expected. Furthermore, it is possible
that some clients could solely rely on certain predictive statements made by other users on our platforms, ignoring our alert warnings that clients
should make their own investment judgment and should not predict future performance based on historical records. As a result, the financial loss of
our clients may affect our performance in terms of transaction volumes and revenues as clients decide to abort trading. In addition, some clients
who have suffered substantial losses through our platforms may blame our platforms, seek to recover their damages from us or bring lawsuits
against us.
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Because our revenues and profitability depend largely on clients’ trading volume, they are prone to significant fluctuations and are difficult to
predict. Declines in trading volumes generally result in lower revenues from transaction execution activities, which may affect our financial
condition, results of operations and prospects.
Our revenues and profitability depend in part on the level of trading activity of the securities of our clients, which are often affected by factors
beyond our control, including economic and political conditions, broad trends in business and finance and changes in the markets in which such
transactions occur. Weaknesses in the markets in which we operate, including economic slowdowns, have historically resulted in reduced trading
volumes for us. Declines in trading volumes generally result in lower revenues from transaction execution activities. Lower levels of volatility
generally have the same directional impact. Declines in market values of securities or other financial instruments can also result in illiquid markets,
which can also result in lower revenues and profitability from transaction execution activities. Lower price levels of securities and other financial
instruments, as well as compressed bid/ask spreads, which often follow lower pricing, can further result in reduced revenues and profitability.
These factors can also increase the potential risk for losses on securities or other financial instruments held in inventory and failures of buyers and
sellers to fulfill their obligations and settle their trades, as well as claims and litigation. Any of the foregoing factors could have a material adverse
effect on our business, financial condition, results of operations and cash flows.
Our business is also subject to general economic and political conditions, in particular the economic and political conditions in Hong Kong,
the PRC, Singapore and the United States, such as macroeconomic and monetary policies, legislation and regulations affecting the financial and
securities industries, upward and downward trends in the business and financial sectors, inflation, currency fluctuations, availability of short-term
and long-term funding sources, cost of funding and the level and volatility of interest rates. For example, volatility and drops in stock market
performance and uncertainties in macroeconomic conditions caused by global calamities such as the ongoing COVID-19 pandemic could
negatively impact our revenues and profitability. See “—A sustained outbreak of the COVID-19 virus could have a material adverse impact on our
business, operating results and financial condition.” As a result of these risks, our income and operating results may be subject to significant
fluctuations.
Tensions in international economic relations, in particular those between the U.S. and China, may have an adverse effect on our business,
financial condition and results of operation.
There have been rising tensions in international economic relations in recent periods, including those between the United States and China. For
example, in 2018 and 2019, the United States imposed import tariffs on specified products imported from China, and China has responded by
imposing retaliatory tariffs on goods exported from the United States. In August 2020, political tensions between the United States and China have
escalated due to, among other things, trade disputes, the COVID-19 outbreak, sanctions imposed by the U.S. Department of Treasury on certain
officials of the Hong Kong Special Administrative Region and the PRC central government and the executive orders issued by former U.S.
President Donald J. Trump prohibiting certain transactions with ByteDance Ltd. and WeChat-related transactions with Tencent Holdings Ltd. and
the respective subsidiaries of such companies. Although the above-mentioned executive orders had been subsequently withdrawn by the Biden
Administration, rising trade, political and regulatory tension between the United States and China could reduce levels of trades, investments,
technological exchanges and other economic activities between the two major economies, which would have a material adverse effect on global
economic conditions and the stability of global financial markets. Any of these factors could have a material adverse effect on our business,
prospects, financial condition and results of operations.
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On August 6, 2020, the former President of the United States issued an executive order prohibiting “any transactions that is related to WeChat
by any person or with respect to any property, subject to the jurisdiction of the United States with Tencent Holdings Ltd., Shenzhen, China, or any
subsidiary of that entity, as identified by the Secretary of Commerce under section 1(c) of this order.” The executive order had been subsequently
withdrawn by the Biden Administration. As of February 28, 2022, entities directly or beneficially owned by Tencent Holdings Limited owned
21.0% of our outstanding shares and 27.6% of the total voting power of our outstanding shares, and we have certain business collaborations with
Tencent. We also have business operations and hold relevant licenses in the United States. Given that our operations in the United States have
limited revenue contribution, we are of the view that there has been no material impact of the tensions between the U.S. and China on our business
operations and financial performance as of the date of this annual report. While we do not expect that our U.S. operations will be subject to the
restrictions imposed by the executive order, we cannot assure you that there will not be rules or further executive orders prohibiting our business
collaborations with Tencent. Upon the occurrence of such events, our business will be adversely impacted. In addition, any current and future
actions or escalations by either the United States or China may cause global economic turmoil and potentially have a negative impact on our
business, financial condition and results of operations, and we cannot provide any assurance as to whether such actions will occur or the form that
they may take.
If we fail to protect our platforms or the information of our users and clients, whether due to cyber-attacks, computer viruses, physical or
electronic break-in, breaches by third parties or other reasons, we may be subject to liabilities imposed by relevant laws and regulations, and
our reputation and business may be materially and adversely affected.
Our computer system, the networks we use, the networks and online trading platforms of the exchanges and other third parties with whom we
interact, are potentially vulnerable to physical or electronic computer break-ins, viruses and similar disruptive problems or security breaches. A
party that is able to circumvent our security measures could misappropriate proprietary information or customer information, jeopardize the
confidential nature of the information we transmit over the Internet and mobile network or cause interruptions in our operations. We or our service
providers may be required to invest significant resources to protect against the threat of security breaches or to alleviate problems caused by any
breaches.
In addition, we collect, store and process certain personal and other sensitive data from our users and clients, which makes us a potentially
vulnerable target to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect
the confidential information that we have access to, our security measures could be breached. Because the techniques used to sabotage or obtain
unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may not be able to
anticipate these techniques or implement adequate preventative measures. Any accidental or intentional security breaches or other unauthorized
access to our system could cause confidential user information to be stolen and used for criminal purposes. Security breaches or unauthorized
access to confidential information could also expose us to liability related to the loss of the information, time-consuming and expensive litigation
and negative publicity. We have not experienced any material cyber-security breaches or been subject to any material breaches of any of our cyber-
security measures in the past.
In addition, leakages of confidential information may be caused by third-party service providers or business partners. If security measures are
breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed
and exploited, our relationships with users and clients could be severely damaged, we may become susceptible to future claims if our users and
clients suffer damages, and could incur significant liability and our business and operations could be adversely affected. Furthermore, our corporate
clients may utilize our technology to serve their own employees and customers. Any failure or perceived failure by us to prevent information
security breaches or to comply with privacy policies or privacy-related legal obligations, or any compromise of security that results in the
unauthorized release or transfer of personally identifiable information or other customer data, could cause our clients to lose trust in us and could
expose us to legal claims and regulatory actions.
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Our operations and services involve collection, processing, and storage of significant amounts of data concerning our users, clients, business
partners and employees and may be subject to complex and evolving laws and regulations regarding privacy and data protection and
cybersecurity. If we fail to comply with the relevant laws and regulations, our business, results of operations and financial condition may be
adversely affected.
We are subject to a variety of laws, regulations and other legal and regulatory obligations related to the protection of personal data, privacy and
information security in the regions where we do business, and there has been and may continue to be a significant increase in such laws and
regulations that restrict or control the use of personal data. See “Item 4. Information on the Company—B. Business Overview—Regulation—
Overview of the Laws and Regulations Relating to Our Business and Operations in China—Regulations on Cybersecurity and Privacy.” In China,
the Cybersecurity Law became effective in June 2017 and requires network operators to follow the principles of legitimacy in collecting and using
personal information.
In addition, the Information Security Technology—Personal Information Security Specification, or the China Specification, came into force on
October 1, 2020. Under the China Specification, after collecting the personal information, the controller of the personal information must
immediately conduct the data de-sensitization, implement the technical and administrative measures to store separately the de-sensitized data and
the data which may be used to recover the identity of the persons and make sure not to identify the persons in the subsequent process of processing
the personal information data. In addition, the data controller must provide the purpose of collecting and using subject personal information, as
well as the business functions of such purpose, and the China Specification requires the data controller to distinguish its core function from
additional functions to ensure the data controller will only collect personal information as needed.
Similarly, Hong Kong, Singapore and the United States also have their respective data privacy legislation that regulates the collection, use,
protection and handling of personal data. Under the relevant legislation, while the precise requirements may differ from jurisdiction to jurisdiction,
in general, data users are required to comply with various data protection principles in relation to the requirement of lawful and fair collection of
personal data, consent of data subjects, retention of personal data, use and disclosure of personal data, security of personal data, personal data
policies and practices, and rights to access and correction of personal data.
On August 20, 2021, the SCNPC promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection
Law, which integrates the scattered rules with respect to personal information rights and privacy protection. The Personal Information Protection
Law, which came into effect on November 1, 2021, aims at protecting the personal information rights and interests, regulating the processing of
personal information, ensuring the orderly and free flow of personal information in accordance with the law and promoting the reasonable use of
personal information. The Personal Information Protection Law applies to the processing of personal information within China, as well as certain
personal information processing activities conducted by entities outside China for natural persons within China, including those for the provision of
products and services to natural persons within China or for the analysis and assessment of acts of natural persons within China. As a result, our
overseas subsidiaries including Hong Kong subsidiary, Futu International Hong Kong, may become subject to relevant personal information
protection laws of the PRC.
Personal information, as defined in the Personal Information Protection Law, refers to information related to identified or identifiable natural
persons and is recorded by electronic or other means but excluding the anonymized information. The Personal Information Protection Law
provides the obligations of a personal information processor and the circumstances under which a personal information processor could process
personal information, which include but not limited to, where the consent of the individual concerned is obtained and where it is necessary for the
conclusion or performance of a contract to which the individual is a contractual party. The Personal Information Protection Law specifically
provides rules for processing sensitive personal information. Sensitive personal information refers to personal information that, once leaked or
illegally used, could easily lead to the infringement of human dignity or harm to the personal or property safety of an individual, including
biometric recognition, religious belief, specific identity, medical and health, financial account, personal whereabouts and other information of an
individual, as well as any personal information of a minor under the age of 14. Only where there is a specific purpose and sufficient necessity, and
under circumstances where strict protection measures are taken, may personal information processors process sensitive personal information. A
personal information processor should inform the individual of the necessity of processing such sensitive personal information and the impact
thereof on the individual’s rights and interests.
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In addition, the Personal Information Protection Law imposes pre-approval and other requirements for any cross-border data transfer by PRC
entities. Since the Personal Information Protection Law is new, there are uncertainties as to the interpretation and application of it, especially in
relation to its applicability and requirements for our offshore subsidiaries when they engage in personal information processing activities for
natural persons within China. While we do not believe the pre-approval requirements for any cross-border data transfer will apply to the way we
currently collect information from persons within China, in the event we need to transfer certain data from our PRC entities to our offshore
subsidiaries or if regulatory bodies deem our current data collection model as a cross-border data transfer, we will be subject to the relevant
requirements. Furthermore, we may need to take certain additional measures in the future to be in compliance with the Personal Information
Protection Law.
Regulatory requirements on cybersecurity and data privacy are constantly evolving and can be subject to varying interpretations or significant
changes, resulting in uncertainties about the scope of our responsibilities in that regard. For example, the SCNPC promulgated the PRC Data
Security Law, which took effect on September 1, 2021. The Data Security Law provides for a security review procedure for the data activities that
may affect national security. In addition, the Personal Information Protection Law provides that critical information infrastructure operators or
personal information processors whose processing of personal information reaches the threshold amount prescribed by the CAC, must store within
the territory of the PRC the personal information collected or generated by them within the territory of the PRC. Unless otherwise a security
assessment is not required as provided by law, administrative regulations or the national cyberspace authority, where it is necessary to provide such
information to an overseas recipient, a security assessment organized by the CAC must have been passed.
On December 28, 2021, the CAC, the NDRC, the MIIT, and several other PRC governmental authorities jointly issued the Cybersecurity
Review Measures, which became effective on February 15, 2022 and replaced the Measures for Cybersecurity Review published on April 13,
2020. Pursuant to Cybersecurity Review Measures, critical information infrastructure operators that purchase network products and services and
network platform operators engaging in data processing activities that affect or may affect national security are subject to cybersecurity review
under the Cybersecurity Review Measures. According to the Cybersecurity Review Measures, before purchasing any network products or services,
a critical information infrastructure operator shall assess potential national security risks that may arise from the launch or use of such products or
services and apply for a cybersecurity review with the cybersecurity review office of the CAC if national security will or may be affected. In
addition, network platform operators who possess personal information of more than one million users and intend to be listed at a foreign stock
exchange must be subject to the cybersecurity review.
Furthermore, the exact scope of “critical information infrastructure operators” (the “CIIO”) under the Cybersecurity Review Measures and the
current regulatory regime also remains unclear. Pursuant to the Regulations on Protection of Security of Critical Information Infrastructure, or the
CIIO Security Protection Regulations, which became effective on September 1, 2021, the competent governmental departments and the supervision
and management departments of some key industries, or the Security Protection Departments, governing such key industries and areas serve as the
departments in charge of the security protection of critical information infrastructure and the Security Protection Departments are responsible for
identifying critical information infrastructure in their respective industries and areas, timely notify the identification results to the operators. In the
event of the occurrence of any major cybersecurity incident or discovery of any major cybersecurity threat for the critical information
infrastructure, the operator shall report to the protection authorities and the public security authorities as required. As the rules for identification of
CIIO with respect to our presence in the PRC have not been formulated nor promulgated yet, and we have not received any notice from any
relevant governmental authority that we are identified as CIIO, we do not believe we are classified as a CIIO as of the date of this annual report.
However, the PRC government authorities may have wide discretion in the interpretation and enforcement of these laws; therefore, it is uncertain
whether we would be deemed as a CIIO under PRC law in the future. In the event we are classified as a CIIO or otherwise become under
investigation or review by the CAC, we may have to substantially change certain of our current practice and our operations may be materially and
adversely affected.
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In addition, the MIIT further issued the Administrative Measures on the Administration of Data Security in the Industry and Information
Technology Areas (for Trial Implementation) (Draft for Comment), or the Draft Data Security Measures in the IIT Field, on February 10, 2022.
The Draft Data Security Measures in the IIT Field stipulates that all businesses which handle industrial and telecoms data in China are required to
categorize such information into “ordinary,” “important” and “core” and businesses processing “important” and “core” data shall comply with
certain filing and reporting obligations. The Draft Data Security Measures in the IIT Field also notes that sharing “important” and “core” data to a
foreign party requires a special review and approval process. We cannot predict the impact of the above draft measures, if any, at this stage, and we
will closely monitor and assess any development in the rule-making process. If the Draft Data Security Measures in the IIT Field mandates the
review process for data shared to a foreign party, we face uncertainties as to whether our data are classified as “important” or “core” data and to
whether the data may be shared to Futu International Hong Kong. Since many of the PRC laws and regulations on cybersecurity and data privacy
are constantly evolving, there are uncertainties as to the interpretation and application of these regulations and how these will be enforced by
relevant regulatory authorities.
We cannot assure you that the measures we have taken or will take in the future will be effective or fully satisfy the relevant regulatory
authorities’ requirements, and any failure or perceived failure by us to comply with such laws and regulations may result in governmental
investigations, fines, removal of our app from the relevant application stores and/or other sanctions on us. As of the date of this annual report, we
had not been involved in any investigations on cybersecurity review made by the CAC on such basis, and we had not received any inquiry, notice,
warning, or sanctions in such respect.
The relevant regulatory authorities in China continue to monitor the websites and apps in relation to the protection of personal data, privacy
and information security, and may impose additional requirements from time to time. The relevant regulatory authorities also release, from time to
time, their monitoring results and require relevant enterprises listed in such notices to rectify their non-compliance. We have been and may also in
the future be subject to the modification and rectification imposed by the relevant regulatory authorities, including those issued publicly. For
example, in the past few years, we had received a few such rectification notices and completed the rectification work in satisfaction of the relevant
notices and regulatory requirements. We have not received further comments from the regulatory authorities on our rectification measures, nor
have we received any final clearance on these measures. There is no assurance that the regulatory authorities will deem our rectification measures
to be sufficient, or that they will issue any final clearance to us.
There are uncertainties as to the interpretation and application of laws in the jurisdictions where we operate, which laws may be interpreted
and applied in a manner that is inconsistent with our current policies and practices or require changes to the features of our system. If we are unable
to address any data security and information protection concerns, any compromise of security that results unauthorized disclosure or transfer of
personal data, or to comply with the then applicable laws and regulations, we may incur additional costs and liability and result in governmental
enforcement actions, litigation, fines and penalties or adverse publicity and could cause our users and clients to lose trust in us, which could have a
material adverse effect on our business, results of operations, financial condition and prospects. We may also be subject to new laws, regulations or
standards or new interpretations of existing laws, regulations or standards, including those in the areas of data security and data privacy, which
could require us to incur additional costs and restrict our business operations.
Our business growth and results of operations may be affected by changes in global and regional macroeconomic conditions.
The strong growth of China’s offshore investment and wealth management markets in recent years has been mainly driven by the rapid
expansion in personal investable assets attributable to the increased number of high net-worth individuals and affluent groups and their increasing
demands for geographically diverse investment portfolios. However, slowdowns in the Chinese economy will affect the income growth of such
individuals, who are the main investors in the investment and wealth management markets outside China, and add uncertainties to these markets.
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In addition, uncertainties about China, Singapore, U.S. and global economic conditions and regulatory changes pose a risk as retail investors
and businesses may postpone spending in response to credit constraint, rising unemployment rates, financial market volatility, government austerity
programs, negative financial news, declines in income or asset values and/or other factors. These worldwide and regional economic conditions
could affect and reduce investment behavior and appetites of retail investors and have a material adverse effect on the demand for our products and
services. Demand also could differ materially from our expectations as a result of currency fluctuations. Other factors that could influence
worldwide or regional demand include changes in fuel and other energy costs, conditions in the real estate and mortgage markets, unemployment,
labor and healthcare costs, access to credit, consumer confidence and other macroeconomic factors. Furthermore, eruptions of regional tensions,
such as the ongoing military conflict involving Ukraine and Russia, and the related sanctions against Russia have resulted in major economic
shocks worldwide and substantial volatility across global financial markets. These and other economic factors could materially and adversely affect
demand for our products and services. Additionally, continued turbulence in the international markets may adversely affect our ability to access the
capital markets to meet liquidity needs.
A sustained outbreak of the COVID-19 virus could have a material adverse impact on our business, operating results and financial condition.
There has been a sustained outbreak of the COVID-19 virus globally. COVID-19 had a severe and negative impact on the global economy in
2020 and 2021. Since 2020, governments around the globe have taken measures to contain the spread of the COVID-19 virus, including
quarantining individuals infected with or suspected of having COVID-19, prohibiting residents from free travel, encouraging employees of
enterprises to work remotely from home and cancelling public activities, among others. The COVID-19 has also resulted in temporary closure of
many corporate offices around the world.
In addition, as the outbreak continues to threaten global economies, it may continue to cause significant market volatility and declines in
general economic activities. Even before the outbreak of COVID-19, the global macroeconomic environment was facing numerous challenges.
There is considerable uncertainty over the long-term effects of the expansionary monetary and fiscal policies which had been adopted by the
central banks and financial authorities of some of the world’s leading economies even before 2020. Unrest, terrorist threats and the potential for
war in the Middle East and elsewhere may increase market volatility across the globe.
We have taken a series of measures in response to the outbreak to protect our employees, including, among others, temporary closure of some
offices, remote working arrangements for our employees and travel restrictions or suspension. In general, while these measures reduced the
efficiency of our operations, we were not significantly impacted in 2021 and have benefitted from an increase in funds flow and trading volume
due to clients’ switching to online trading when physical, offline facilities were closed. We cannot predict whether this increase in business activity
will continue after clients are once again able to visit physical facilities. The extent to which COVID-19 impacts our results of operations in 2022
will depend on the future developments of the pandemic, including new information concerning the availability of vaccines and the global severity
of and actions taken to contain the pandemic, which are highly uncertain and unpredictable. In addition, our results of operations could be
adversely affected to the extent that the pandemic harms the global economies in general.
Any potential impact on our results will depend on, to a large extent, future developments and new information that may emerge regarding the
duration and severity of the COVID-19 and the actions taken by government authorities and other entities to contain the COVID-19 or treat its
impact, almost all of which are beyond our control. While many of the restrictions on movement have been relaxed, there is great uncertainty as to
the future progress of the disease globally. Before vaccines are made available to the general public, any relaxation of restrictions on economic and
social life may lead to new cases which may lead to the re-imposition of restrictions. Given the general slowdown in global economic conditions,
volatility in the capital markets as well as the general negative impact of the COVID-19 pandemic on the brokerage and wealth management
industry, we cannot assure that we can launch new products and services in time or that we can maintain the growth rate we have experienced.
Because of the uncertainty surrounding the COVID-19 pandemic, the financial impact related to the pandemic of and response to the coronavirus
cannot be accurately estimated at this time, and we cannot assure you that our financial condition and operating results for 2022 will not be
adversely affected. For a more detailed description on the expected impact of COVID-19 on our business, see “Item 4. Information on the
Company—B. Business Overview—Impact of COVID-19 and Our Responses and Opportunities.”
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We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations and adversely
affect our business, financial condition or results of operation.
In addition to the impact of COVID-19, our business could be adversely affected by the effects of Ebola virus disease, H1N1 flu, H7N9 flu,
avian flu, Severe Acute Respiratory Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is
suspected of having Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS, or other epidemics, since it could require our employees to be
quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the extent that any of these
epidemics harms the Chinese and global economy in general.
We are also vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures,
break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform
failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our
ability to provide products and services through our platforms.
In addition, our results of operations could be adversely affected to the extent that any health epidemic, natural disaster or other calamities
harms the Chinese and global economies in general. We have operations in Shenzhen, Hong Kong, Singapore, the United States, and Australia and
the storage location of our user data is dependent on the platform where users are based and the jurisdiction in which users are registered.
Consequently, if any natural disasters, health epidemics or other public safety concerns were to affect Shenzhen, Hong Kong, Singapore or the
United States, our operation may experience material disruptions, which may materially and adversely affect our business, financial condition and
results of operations.
Our current level of commission and fee rates may decline in the future. Any material reduction in our commission or fee rates could reduce
our profitability.
We derive a significant portion of our revenues from commissions and fees paid by our clients for trading securities through our platforms. In
2019, 2020 and 2021, our brokerage commission income and handling charge income amounted to HK$511.4 million, HK$1,990.1 million and
HK$3,913.0 million (US$501.7 million), representing 48.2%, 60.1% and 55.0% of our total revenues during the same years, respectively. We may
experience pressure on our commission or fee rates as a result of competition we face in the online brokerage service industry. Some of our
competitors offer a broader range of services to a larger client base and enjoy higher trading volumes than we do. Consequently, our competitors
may be able and willing to offer trading services at lower commission or fee rates than we currently offer or may be able to offer. For example,
some brokers in Hong Kong and the United States offer zero commission fees or similar policies to attract retail securities investors. As a result of
this pricing competition, we could lose both market share and revenues. We believe that any downward pressure on commission or fee rates would
likely continue and intensify as we continue to develop our business and gain recognition in our markets. A decline in our commission or fee rates
could lower our revenues, which would adversely affect our profitability. In addition, our competitors may offer other financial incentives such as
rebates or discounts in order to induce trading in their systems rather than in ours. If our commission or fee rate decreases significantly, our
operating and financial results may be materially and adversely affected.
Fluctuations in market interest rates may negatively affect our financial condition and results of operations.
We derive a part of our revenues from charging interests on margin balances in connection with our margin financing and securities lending
businesses. In 2019, 2020 and 2021, our revenues from interest income derived from our margin financing and securities lending businesses
amounted to HK$258.9 million, HK$571.8 million and HK$2,118.0 million (US$271.6 million), representing 24.4%, 17.3% and 29.8% of our total
revenues during the same years, respectively. For the same years, our interest income derived from bank deposits were HK$187.2 million,
HK$208.6 million and HK$197.4 million (US$25.3 million), representing 17.6%, 6.3% and 2.8% of our total revenues during the same years,
respectively. The trend of the level of interest rates is an important factor affecting our earnings. A decline in interest rates may have a negative
impact on our interest income and thus ultimately adversely impact our total revenues. While we generally derive higher interest income when
there is an increase in market interest rates, a rise in interest rates may also cause our interest expenses to increase. If we are unable to effectively
manage our interest rate risk, changes in interest rates could have a material adverse effect on our profitability.
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Although our management believes that it has implemented effective management strategies to reduce the potential effects of changes in
interest rates on our results of operations, any substantial, unexpected or prolonged change in market interest rates could have a material adverse
effect on our financial condition and results of operations. Also, our interest rate risk modeling techniques and assumptions likely may not fully
predict or capture the impact of actual interest rate changes on our balance sheet. For further discussion of how changes in interest rates could
impact us, see “Item 11. Quantitative and Qualitative Disclosures about Market Risk—Interest Rate Risk” of this annual report.
We may not be able to develop our margin financing and securities lending business as expected and may be exposed to credit risks related to
these businesses, primarily arising from loans and advances, and receivables. In addition, we need adequate funding at reasonable costs to
successfully operate our margin financing business, and access to adequate funding at reasonable costs cannot be assured.
Our margin financing and securities lending businesses may not develop as expected if clients fail to perform contractual obligations or the
value of collateral held to secure the obligations is inadequate. As of December 31, 2019, 2020 and 2021, our loans and advances were HK$4.2
billion, HK$18.8 billion and HK$29.6 billion (US$3.8 billion), respectively. As our margin financing business expands, we may be subject to
greater credit risks.
We have adopted comprehensive internal policies and procedures designed to manage such risks. For example, once the margin value falls
below the outstanding amount of the relevant loan extended as a result of a market downturn or adverse movement in the prices of the pledged
securities, we will make a margin call requesting the client to deposit additional funds, sell securities or pledge additional securities to top up their
margin value. If the client’s margin value still falls below the required standard, we will initiate our liquidation protection mechanism on a real-
time basis to bring the client’s account into margin compliance. As we incurred losses from and experienced disputes arising out of margin
financing historically, we cannot assure you that we will not be exposed to any credit risks associated with our margin financing and securities
lending businesses, and we may continue to experience disputes with our clients after we make the margin calls. In particular, we may not always
be able to fully recover the margin value through margin calls and our exposure to credit loss may be exacerbated during periods of high market
volatility. In certain periods, the securities pledged by our clients may be concentrated on a limited number of securities which may result in a
concentration of our credit exposures to such securities. In the event we need to liquidate a large amount of certain pledged securities, it may put a
further downward pressure on the price of such securities and we may not be able to fully recover the margin value.
In addition, with regard to receivables there can be no assurance that all our counterparties will meet their payment obligations on time, in full
or at all. As of December 31, 2019, 2020 and 2021, the balance of our receivables amounted to HK$1,794.3 million, HK$8.077.0 million and
HK$10,447.8 million (US$1,339.5 million), respectively. If we fail to adequately manage our credit risks, they could materially and adversely
affect our business, results of operations and financial condition. See “—Our risk management policies and procedures may not be fully effective
in identifying or mitigating risk exposure in all market environments or against all types of risks.”
Moreover, the growth and success of our margin financing business depend on the availability of adequate funding to meet our client demand
for loans through our platforms. We provided margin financing service and securities lending services for securities listed on the Hong Kong Stock
Exchange and the major stock exchanges in the U.S. As of December 31, 2021, outstanding margin financing and securities lending balance was
HK$30.3 billion (US$3.9 billion). We derive the funding for our margin financing business from a variety of sources, including funding secured
from commercial banks, other licensed financial institutions and other parties as well as financing generated from our business operations. To the
extent there is insufficient funding from institutional funding partners who are willing to accept the credit risk related to the collateral from our
clients, the funds available for our margin financing business might be limited and our ability to provide margin financing services to our clients to
address their demand for loans would be adversely impacted. In addition, as we strive to offer our clients competitively priced services and the
online brokerage market is intensely competitive, we may attempt to further reduce our interest expenses from our funding partners. If we cannot
continue to maintain our relationship with these funding partners and obtain adequate funding at reasonable costs, we may not be able to continue
to offer or grow our margin financing business. To the extent that our funding partners find the risk-adjusted returns with us less attractive, we may
not be able to obtain the requisite level of funding at reasonable costs, or at all. If we are unable to provide our clients with margin loans or fund the
loans on a timely basis due to insufficient funding or less favorable pricing compared to those of our competitors, it would harm our business,
financial condition and results of operations.
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The wealth management products that we offer involve various risks and failure to identify or fully appreciate such risks may negatively affect
our reputation, client relationships, results of operations and financial conditions.
We offer our clients access to money market, fixed income, equity, balanced, private funds as well as bonds, catering to different investment
targets and risk preferences of our clients. These products often have complex structures and involve various risks, including default risks, interest
risks, liquidity risks, market risks, counterparty risks, fraud risks and other risks. In addition, we are subject to regulations in relation to wealth
management products offered in different jurisdictions, and there is no assurance that our operation will be deemed as in full compliance with such
regulations at all times.
Our success in offering our wealth management products and services depends, in part, on our ability to successfully identify the risks
associated with such products and services, and failure to identify or fully appreciate such risks may negatively affect our reputation, client
relationships, results of operations and financial conditions. Although we do not guarantee the principal or the return of the wealth management
products available through our platforms and do not bear any liabilities for any loss to capital invested in the products, we must be cautious of the
selection of the financial products we offer and must accurately describe the risks associated with those products for our clients. Although we
enforce and implement strict risk management policies and procedures, such risk management policies and procedures may not be fully effective in
mitigating the risk exposure for all of our clients in all market environments or covering all types of risks. If we fail to identify and fully appreciate
the risks associated with the financial products we offer, or fail to disclose such risks to our clients, or if our clients suffer financial losses or other
damages resulting from the financial products we offer, our reputation, client relationships, results of operations and financial conditions will be
materially and adversely affected.
If we fail to respond in a timely and cost-effective manner to the needs of our users and clients or if our new service offerings do not achieve
sufficient market acceptance, our business and results of operations may be materially and adversely affected.
Our future success will depend partially on our ability to develop and introduce new service offerings to respond to the evolving needs of our
users and clients in a timely and cost-effective manner. We provide services in markets that are characterized by rapid technological change,
evolving industry standards, frequent new service introductions, and increasing demand for higher levels of client experience. In recent years, we
have expanded our service offerings for our users and clients from online brokerage services to margin financing services and further to other tools
and functions, including the wealth management service we launched in August 2019, and we may continue to expand our new service offerings in
the future. In addition, we also provide certain services to corporate clients. However, we have limited experience in new service offerings, and
expansion into new service offerings may involve new risks and challenges that we may not have experienced before. We cannot assure you that
we will be able to overcome such new risks and challenges and make our new service offerings successful. Initial timetables for the introduction
and development of new service offerings may not be achieved and profitability targets may not prove feasible. External factors, such as
compliance with regulations, competition and shifting market preferences, may also impact the successful implementation of our new service
offerings. Our personnel and technology systems may fail to adapt to the changes in such new areas or we may fail to effectively integrate new
services into our existing operation. We may lack experience in managing our new service offerings. In addition, we may be unable to proceed our
operation as planned or compete effectively due to different competitive landscapes in these new areas. Even if we expand our businesses into new
jurisdictions or areas, the expansion may not yield intended profitable results. Furthermore, any new service offerings could have a significant
impact on the effectiveness of our internal control system. Failure to successfully manage these risks in the development and implementation of
new service offerings could have a material adverse effect on our business, results of operations and financial condition.
Our ability to anticipate and identify the evolving needs of our users and clients and to develop and introduce new service offerings to address
such needs will be a significant factor in maintaining or improving our competitive position and prospects for growth. We may also have to incur
substantial unanticipated costs to maintain and further strengthen such ability. Our success will also depend on our ability to develop and introduce
new services and enhance existing services for our users and clients in a timely manner. Even if we introduce new and enhanced services to the
market, they may not achieve market acceptance.
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We believe that we must continue to make investments to support ongoing research and development in order to develop new or enhanced
service offerings to remain competitive. We need to continue to develop and introduce new services that incorporate the latest technological
advancements in response to evolving user and client needs. Our business and results of operations could be adversely affected if we do not
anticipate or respond adequately to technological developments or the changing needs of our users and clients. We cannot assure you that any such
investments in research and development will lead to any corresponding increase in revenue.
We depend on our proprietary technology, and our future results may be impacted if we cannot maintain technological superiority in our
industry.
Our success in the past has largely been attributable to our sophisticated proprietary technology that has empowered the efficient operations of
our platforms. We have benefited from the fact that the type of proprietary technology equivalent to which we employ has not been widely
available to our competitors. If our technology becomes more widely available to our current or future competitors for any reason, our operating
results may be adversely affected.
Additionally, to keep pace with changing technologies and client demands, we must correctly interpret and address market trends and enhance
the features and functionality of our technology in response to these trends, which may lead to significant research and development costs. We may
be unable to accurately determine the needs of our users and clients or the trends in the online brokerage industry or to design and implement the
appropriate features and functionality of our technology in a timely and cost-effective manner, which could result in decreased demand for our
services and a corresponding decrease in our revenue. Also, any adoption or development of similar or more advanced technologies by our
competitors may require that we devote substantial resources to the development of more advanced technology to remain competitive. The markets
in which we compete are characterized by rapidly changing technology, evolving industry standards and changing trading systems, practices and
techniques. Although we have been at the forefront of many of these developments in the past, we may not be able to keep up with these rapid
changes in the future, develop new technology, realize a return on amounts invested in developing new technologies or remain competitive in the
future.
In addition, we must protect our systems against physical damage from fire, earthquakes, power loss, telecommunications failures, computer
viruses, hacker attacks, physical break-ins and similar events. Any software or hardware damage or failure that causes interruption or an increase in
response time of our proprietary technology could reduce client satisfaction and decrease usage of our services.
Unexpected network interruptions, security breaches or computer virus attacks and failures in our information technology systems could have
a material adverse effect on our business, financial condition and results of operations.
Our information technology systems support substantially all phases of our operations and are an essential part of our technology
infrastructure. If our systems fail to perform, we could experience disruptions in operations, slower response time or decreased customer
satisfaction. We must process, record and monitor a large number of transactions and our operations are highly dependent on the integrity of our
technology systems and our ability to make timely enhancements and additions to our systems. System interruptions, errors or downtime can result
from a variety of causes, including unexpected interruptions to the internet infrastructure, technological failures, changes to our systems, erroneous
or corrupted data, changes in customer usage patterns, linkages with third-party systems and power failures. Our systems are also vulnerable to
disruptions from human error, execution errors, errors in models such as those used for risk management and compliance, employee misconduct,
unauthorized trading, external fraud, computer viruses, distributed denial of service attacks, computer viruses or cyberattacks, terrorist attacks,
natural disaster, power outage, capacity constraints, software flaws, events impacting our key business partners and vendors, and other similar
events.
Our internet-based business depends on the performance and reliability of the internet infrastructure. We cannot assure you that the internet
infrastructure we depend on will remain sufficiently reliable for our needs. Any failure to maintain the performance, reliability, security or
availability of our network infrastructure may cause significant damage to our ability to attract and retain users and clients. Major risks involving
our network infrastructure include:
● breakdowns or system failures resulting in a prolonged shutdown of our servers;
● disruption or failure in the national backbone networks in China, which would make it impossible for users and clients to access our
online and mobile platforms;
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● physical or cyber based attacks on our servers and other network infrastructure, which may result in disruptions to our network and
damages to our technology infrastructure;
● damage from natural disasters or other catastrophic events such as typhoon, volcanic eruption, earthquake, flood, telecommunications
failure, or other similar events; and
● any infection by or spread of computer viruses or other system failures.
In addition, any network interruptions or inadequacy on the part of our third-party partners may result in disruptions to the services we provide
to our users and clients. For example, there have been occasions where some of our clients were not able to timely execute trades because of poor
or delayed performances of software, infrastructure or systems of our third party partners, which may be exacerbated by sudden increase in trading
or other user activity volume. We also experienced system shutdown in the past. Such disruptions and other interruptions in the availability of our
services could reduce user and client satisfaction and result in a reduction in the activity level of our users and clients as well as the number of
clients making trading transactions through our platforms. See “— Failure or poor performance of third-party software, infrastructure or systems on
which we rely could adversely affect our business.” Furthermore, increases in the volume of traffic on our online and mobile platforms could strain
the capacity of our existing computer systems and bandwidth, which could lead to slower response times or system failures. This could cause a
disruption or suspension in our service delivery, which could hurt our brand and reputation. We may need to incur additional costs to upgrade our
technology infrastructure and computer systems in order to accommodate increased demand if we anticipate that our systems cannot handle higher
volumes of traffic and transaction in the future. In addition, it could take an extended period of time to restore full functionality to our technology
or other operating systems in the event of an unforeseen occurrence, which could affect our ability to process and settle client transactions. Despite
our efforts to identify areas of risk, oversee operational areas involving risks, and implement policies and procedures designed to manage these
risks, there can be no assurance that we will not suffer unexpected losses, reputational damage or regulatory actions due to technology or other
operational failures or errors, including those of our vendors or other third parties.
Failure or poor performance of third-party software, infrastructure or systems on which we rely could adversely affect our business.
We rely on third parties to provide and maintain certain infrastructure that is critical to our business. For example, a strategic partner provides
services to us in connection with various aspects of our operations and systems. If such services become limited, restricted, curtailed or less
effective or more expensive in any way or become unavailable to us for any reason, our business may be materially and adversely affected. The
infrastructure of our third-party service providers may malfunction or fail due to events out of our control, which could disrupt our operations and
have a material adverse effect on our business, financial condition, results of operations and cash flows. Any failure to maintain and renew our
relationships with these third parties on commercially favorable terms, or to enter into similar relationships in the future, could have a material
adverse effect on our business, financial condition, results of operations and cash flows.
We also rely on certain third-party software, third-party computer systems and service providers, including clearing systems, exchange
systems, alternate trading systems, order-routing systems, internet service providers, communications facilities and other facilities. Any
interruption in these third-party services or software, deterioration in their performance, or other improper operation could interfere with our
trading activities, cause losses due to erroneous or delayed responses, or otherwise be disruptive to our business. In addition, as we work with third
parties to execute trading orders for U.S. stocks and Singapore stocks, our ability to successfully and timely execute these trades for our clients
depends on the performance of third parties systems, failure of which may result in potential losses for our clients, which in turn may result in
potential claims or litigations brought against us and adversely affect our business and reputation. In addition, if our arrangements with any third
party are terminated, we may not be able to find an alternative source of software or systems support on a timely basis or on commercially
reasonable terms. This could also have a material adverse effect on our business, financial condition, results of operations and cash flows.
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We rely on a number of external service providers for certain key market information and data, technology, processing and supporting
functions.
We rely on a number of external service providers for certain key market information and data, technology, processing and supporting
functions. Furthermore, external content providers provide us with financial information, market news, charts, futures and stock quotes and other
fundamental data that we offer to our clients and users. These service providers face technical, operational and security risks of their own. Any
significant failures by them, including improper use or disclosure of our confidential client, employee or company information, could interrupt our
business, cause us to incur losses and harm our reputation. Particularly, we have contracted with affiliates of Nasdaq,the Hong Kong Exchange and
Clearing Limited and the Singapore Exchange and a few other institutions to allow our clients to access real-time market information data, which
are essential for our clients to make their investment decisions and take actions. If the data provided by such information providers were inaccurate
or incomplete, or if such information providers fail to update or deliver the data in a timely manner as provided in the agreements, our clients may
suffer losses and our business operations and reputation can be materially and adversely affected.
We cannot assure you that the external service providers will be able to continue to provide these services to meet our current needs in an
efficient and cost-effective manner, or that they will be able to adequately expand their services to meet our needs in the future. The external
service providers’ ability to consistently provide these services is subject to risks from unfavorable political, economic, legal or other
developments, such as social or political instability, changes in governmental policies or changes in the applicable laws and regulations.
An interruption in or the cessation of service by any external service provider as a result of system failures, capacity constraints, financial
constraints or problems, unanticipated trading market closures or for any other reason and our inability to make alternative arrangements in a
smooth and timely manner, if at all, could have a material adverse effect on our business, results of operations and financial condition.
Further, disputes might arise out of or in connection with the agreements regarding our or the service providers’ performance of the obligations
thereunder. To the extent that any service provider disagrees with us on the quality of the products or services, terms and conditions of the payment
or other provisions of such agreements, we may face claims, disputes, litigations or other proceedings initiated by such service provider against us.
We may incur substantial expenses and require significant attention of management in defending against these claims, regardless of their merit. We
could also face damages to our reputation as a result of such claims, and our business, financial condition, results of operations and prospects could
be materially and adversely affected.
If major mobile application distribution channels change their standard terms and conditions in a manner that is detrimental to us, or
terminate their existing relationship with us, our business, financial condition and results of operations may be materially and adversely
affected.
We currently rely on Apple’s app store, Google’s Play Store and major PRC-based Android app stores to distribute our mobile applications to
users. As such, the promotion, distribution and operation of our application are subject to such distribution platforms’ standard terms and policies
for application developers, which are subject to the interpretation of, and frequent changes by, these distribution channels. If these third-party
distribution platforms change their terms and conditions in a manner that is detrimental to us, or refuse to distribute our application, or if any other
major distribution channel with which we would like to seek collaboration refuses to collaborate with us in the future, our business, financial
condition and results of operations may be materially and adversely affected.
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We have not obtained certain relevant licenses from PRC authorities in connection with some of the information and services available on our
platform. Future change in regulations and rules may impose additional requirements or restrictions on our platform.
PRC regulations impose sanctions for engaging in disseminating analysis, forecasting, advisory or other information related to securities and
securities markets without having obtained the Securities Investment Consultancy Qualifications in China. See “Item 4. Information on the
Company—B. Business Overview—Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in China—
Regulations on the Securities Investment Consulting Service.” We have not obtained the Securities Investment Consultancy Qualifications in
China. Without the required qualifications, we should refrain from as well as explicitly prohibit our users from sharing information related to
securities analysis, forecasting or advisory on our platform. However, we cannot assure you that our users will not post articles or share videos that
contain analysis, forecasting or advisory content related to securities on our platform. If any of the information or content displayed on our
platform is deemed as analysis, forecasting, advisory or other information related to securities or securities markets, or any of our business in the
PRC is deemed to be a service providing such information, we may be subject to regulatory measures including warnings, public condemnation,
suspension of relevant business and other measures in accordance with applicable laws and regulations. Any such penalties may disrupt our
business operations or materially and adversely affect our business, financial condition and results of operations.
In addition, as part of our services, we post videos for investor education purpose and allow certain of our users to upload and share videos on
our platforms through NiuNiu Community. According to the Administrative Provisions on Internet Audio-Video Program Services, the provider of
audio-video service is required to obtain the Audio and Video Service Permission. See “Item 4. Information on the Company—B. Business
Overview—Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in China—Regulation on Internet
Audio-Visual Program Services.” We have not obtained such license for providing internet audio-video program services through our platform in
China and may not be able to obtain such license in a timely manner, or at all. We have not received any notices nor have we been subject to
regulatory measures from the National Radio and Television Administration as of the date of this annual report. During the years ended December
31, 2019, 2020 and 2021, the revenue generated from relevant internet audio-video program services was less than 0.01% of our total revenue,
respectively, and the absence of such license did not have any material adverse impact on our business and operations. However, if we are required
to obtain an Audio and Video Service Permission or other additional licenses or approvals in connection with our video-based services in China,
we may be subject to various penalties, such as confiscation of the net revenues that were generated through the unlicensed internet activities,
imposition of fines and termination or restriction of such service offering.
Furthermore, PRC regulations require platforms that disseminate internet news and information services to obtain the License for Internet
News Information Services. See “Item 4. Information on the Company—B. Business Overview—Regulation—Overview of the Laws and
Regulations Relating to Our Business and Operations in China—Regulation on Internet News Dissemination.” We have not obtained such license
and may not be able to obtain such license in a timely manner, or at all. As our platform displays news and information related to the financial
market, we may be deemed as engaging in disseminating news and information through the internet and subject to penalties including imposition
of fines and termination or restriction of such service offering. In addition, the PRC government may impose specific requirement on financial
information services, which may also affect our business and operations.
In August 2019, we officially launched our online wealth management service which gives our clients access to money market, fixed income
and equity funds products from leading fund houses. According to the Securities Investment Funds Law, any entity that engages in the fund
services, including but not limited to sales, investment consulting, information technology system services, shall register or file with the securities
regulatory authority of the State Council. See “Item 4. Information on the Company—B. Business Overview—Regulation—Overview of the Laws
and Regulations Relating to Our Business and Operations in China—Regulation on Fund Sales Business.” We do not hold any license or permit in
the promotion of, sales of, purchase of or redemption of funds in China. We do not believe the business we are conducting now through our
subsidiaries or consolidated affiliated entities in China should be deemed as fund services in China. However, we cannot assure you that relevant
regulatory will take the same view as ours. If certain of our activities in China were deemed by relevant regulators as provision of fund services in
China, we may be subject to penalties including imposition of fines and suspend of such fund sales business.
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PRC laws and regulations are evolving, and there are uncertainties relating to the regulation of different aspects of the services we provide
through our platform in China. We cannot assure you that we will not be found in violation of any future laws and regulations or any of the laws
and regulations currently in effect due to changes in or discrepancies with respect to the relevant authorities’ interpretation of these laws and
regulations. In addition, we may be required to obtain additional license or approvals, and we cannot assure you that we will be able to timely
obtain or maintain all the required licenses or approvals or make all the necessary filings in the future.
In addition, as we do not provide cross-border currency conversion services related to Renminbi to Chinese residents or institutions, we do not
require our clients to submit evidence of approval or registration from relevant authorities with respect to the currency used for offshore
investments. However, since the PRC authorities and the commercial banks designated by the SAFE to conduct currency exchange services have
significant amount of discretion in interpreting, implementing and enforcing the relevant currency exchange rules and regulations, and for many
other factors that are beyond our control, we may be subject to further regulatory requirements, including but not limited to implementing
additional and burdensome measures to monitor the source and use of funds in the accounts of our clients, or verify evidence of approval from
relevant authorities.
Employee misconduct could expose us to significant legal liability and reputational harm.
We operate in an industry in which integrity and the confidence of our users and clients are of critical importance. During our daily operations,
we are subject to the risks of errors and misconduct by our employees, which include:
● engaging in misrepresentation or fraudulent activities when marketing or performing online brokerage and other services to users and
clients;
● improperly using or disclosing confidential information of our users and clients or other parties;
● conducting unauthorized activities such as assisting with illegal currency conversion by Chinese investors; or
● otherwise not complying with applicable laws and regulations or our internal policies or procedures.
If any of our employees engages in illegal or suspicious activities or other misconduct, we could suffer serious harm to our reputation,
financial condition, client relationships and ability to attract new clients and even be subject to regulatory sanctions and significant legal liability. If
any sanction was imposed against an employee during his employment with us, even for matters unrelated to us, and his ability to perform certain
regulated functions at his current employment with us was temporary impaired due to the sanction. We may also be subject to negative publicity
from the sanction that would adversely affect our brand, public image and reputation, as well as potential challenges, suspicions, investigations or
alleged claims against us. It is not always possible to deter misconduct by our employees or senior management during the ongoing operations of
our business or uncover any misconduct occurred in their past employment, and the precautions we take to detect and prevent any misconduct may
not always be effective. Misconduct by our employees, or even unsubstantiated allegations of misconduct, could result in a material adverse effect
on our reputation and our business.
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Any future change in the regulatory and legal regime for the securities brokerage and wealth management industries in regions where we
operate may have a significant impact on our business model.
Firms in the securities brokerage and wealth management industries have been subject to an increasingly regulated environment over
recent years, and penalties and fines sought by regulatory authorities have also increased. This regulatory and enforcement environment has created
uncertainties with respect to various types of products and services that historically had been offered by us and that were generally believed to be
permissible and appropriate. For example, the U.S. securities regulators are currently conducting an industry-wide review of the marketing and
other business practices of online and app-based broker-dealers, and have also pursued a number of enforcement actions against firms in our
industry, including one which resulted in the imposition of substantial monetary sanctions on a leading app-based broker-dealer in the United
States. The regulatory scrutiny appears to focus on certain digital engagement practices utilized by on-line and app-based broker-dealers, the
adequacy of risk disclosures to retail customers, and whether or not payment for order flow compromises a broker-dealer’s obligation to obtain best
execution for its customers. While our entities in the United States do not pay for order flow, certain of our user engagement practices in the United
States, such as offering prizes (of nominal value) and badges (of no economic value) for trading activity, and related disclosures could be impacted
by the current regulatory scrutiny. In this regard, the Chairman of the SEC has indicated a concern that certain digital engagement practices may
encourage investors to trade more often than might be appropriate, and has questioned whether this creates a conflict of interest between the
broker-dealers and their customers. The current regulatory review is at the stage of information gathering and the SEC has not publicly concluded
that any of the digital engagement practices such as those that we use are illegal or improper. However, there can be no assurance that the SEC will
not adopt new rules or guidance that may adversely impact our digital engagement practices, business and operating results.
In a separate matter, the State of Massachusetts has sued a leading app-based broker-dealer alleging, among other things, that certain of their
customer communications constitute a form of recommendation, thereby triggering a duty of the broker-dealer to act in the best interest of its
customers. This case is currently pending. Futu Inc.’s business strategy is based on providing a trading platform without making investment
recommendations or providing investment advice. An expansion of the definition of what constitutes an investment recommendation could have a
material impact on Futu Inc.’s business operation. The pending study and enforcement actions against other firms in our industry could lead to new
rules or requirements that could have a material adverse effect upon our business operations in the United States. Legislative changes in
rules promulgated by government agencies and self-regulatory organizations in various jurisdictions that oversee our businesses and changes in the
interpretation or enforcement of existing laws and rules, such as the potential imposition of transaction taxes, may directly affect our model of
operation and profitability.
We had incurred net losses in the past, and we cannot assure you that we will continue to be profitable in the future.
In 2016 and 2017, we had net losses of HK$98.5 million and HK$8.1 million, respectively. Although we have become profitable since 2018,
we cannot assure you that we continue to be profitable in the future. We anticipate that our operating costs and expenses will increase in the
foreseeable future as we continue to grow our business, attract users and clients, further enhance and develop our service offerings, enhance our
technology capabilities and increase our brand recognition. These efforts may prove more costly than we currently anticipate, and we may not
succeed in increasing our revenues sufficiently to offset these higher expenses. There are other external and internal factors that could negatively
affect our financial condition. For example, the trading volume facilitated by our platforms may be lower than expected, which may lead to lower
than expected revenues. Furthermore, we have adopted a share incentive plan in the past and may adopt new share incentive plans in the future,
which have caused, and will result in, significant share-based compensation expenses to us. We generate a substantial majority of our total revenues
from commission fees charged to clients who trade through our platforms. Any material decrease in our commission fees would have a substantial
impact on our financial conditions. As a result of the foregoing and other factors, we may continue to incur net losses in the future.
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If there is any negative publicity with respect to us, including our business model and practices, our industry peers or our industries in general,
the trading price of our ADSs may be volatile and our business and results of operations may be materially and adversely affected.
Our reputation and brand recognition plays an important role in earning and maintaining the trust and confidence of individuals or enterprises
that are current or potential users and clients. Our reputation and brands are vulnerable to many threats that can be difficult or impossible to
control, and costly or impossible to remediate. Our reputation and brands have been, and may in the future be, negatively affected by a number of
factors, including, among others, regulatory developments, inquiries or investigations, lawsuits initiated by clients or other third parties, employee
misconduct, perceptions of conflicts of interest and rumors, unfavorable statements made by media outlets, research firms or government officials,
even if such statements represent merely personal opinions, are baseless or have been properly refuted. Furthermore, despite our efforts to address
negative publicity and correct misinformation about our business model and practices, our reputation may continue to be harmed by such negative
publicity and misinformation, and our ADSs may experience substantial price volatility as a result.
In addition, any perception that the quality of our online brokerage and other financial services may not be the same as or better than that of
other online brokerage and financial service firms can also damage our reputation. Moreover, any negative media publicity about the financial
service industry in general or product or service quality problems of other firms in the industry, including our competitors, may also negatively
impact our reputation and brand. If we are unable to maintain a good reputation or further enhance our brand recognition, our ability to attract and
retain users, clients, third-party partners and key employees could be harmed and, as a result, our business and revenues would be materially and
adversely affected.
Policy change relating to investable assets could have an adverse impact on our addressable market.
One of the key drivers for the growth of global online securities market is the investable assets of retail investors. If the regulatory authorities
of the relevant jurisdictions governing investable assets of retail investors impose new or amended laws and regulations with respect to these
assets, for example, certain control on the funds flow or restricted use of the assets by the investors, the size of investable assets readily available
for the online securities market may be significantly reduced, which will result in slow down of the growth of our total addressable market and may
subsequently adversely affect our business development and expansion.
In particular, the change of the regulations in the jurisdictions where we have presence may affect the trading activities of our clients, which
may significantly reduce the trading volume facilitated by our platforms. As our revenues from brokerage commission income depend heavily on
the total trading volume facilitated by our platforms, the occurrence of any of the above regulatory changes would have a material and adverse
impact on our business, operating and financial results.
We may not succeed in promoting and sustaining our brand, which could have an adverse effect on our future growth and business.
A critical component of our future growth is our ability to promote and sustain our brand. Promoting and positioning our brand and platforms
will depend largely on the success of our marketing efforts, our ability to attract users and clients cost-efficiently and our ability to consistently
provide high-quality services and a superior experience. We have incurred and will continue to incur significant expenses related to advertising and
other marketing efforts, which may not be effective and may adversely affect our net margins.
In addition, to provide a high-quality user and client experience, we have invested and will continue to invest substantial amounts of resources
in the development and functionality of our platforms, website, technology infrastructure and client service operations. Our ability to provide a
high-quality user and client experience is also highly dependent on external factors over which we may have little or no control, including, without
limitation, the reliability and performance of software vendors and business partners. Failure to provide our users and clients with high quality
services and experience for any reason could substantially harm our reputation and adversely impact our efforts to develop a trusted brand, which
could have a material adverse effect on our business, results of operations, financial condition and prospects.
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Fraudulent or illegal activities on our platforms could negatively impact our brand and reputation and cause the loss of users and clients. As a
result, our business may be materially and adversely affected.
We have implemented stringent internal control policies, insider trading, anti-money laundering and other anti-fraud rules and mechanisms on
our platforms. Nevertheless, we remain subject to the risk of fraudulent or illegal activities both on our platforms and associated with our users and
clients, funding and other business partners, and third parties handling user and client information. Our resources, technologies and fraud detection
tools may be insufficient to accurately detect and prevent fraudulent or illegal activities. Significant increases in fraudulent or illegal activities
could negatively impact our brand and reputation, reduce the trading volume facilitated by our platforms and therefore harm our operating and
financial results. For example, the HK SFC has in the past issued restriction notices to prohibit order placing in certain client accounts linked to
suspected market misconduct. Any misconduct of or violation by our clients of applicable laws and regulations could lead to regulatory inquiries
and investigations that involve us, which may affect our business operation and prospects. We might also incur higher costs than expected in order
to take additional steps to reduce risks related to fraudulent and illegal activities. High-profile fraudulent or illegal activities could also lead to
regulatory intervention, and may divert our management’s attention and cause us to incur additional regulatory and litigation expenses and costs. In
addition, we could suffer serious harm to our reputation, financial condition, client relationships and ability to attract new clients and even be
subject to regulatory sanctions and significant legal liability, if any of our employees engages in illegal or suspicious activities or other misconduct.
See “—Employee misconduct could expose us to significant legal liability and reputational harm.” Although we have not experienced any material
business or reputational harm as a result of fraudulent or illegal activities in the past, we cannot rule out the possibility that any of the foregoing
may occur causing harm to our business or reputation in the future. If any of the foregoing were to occur, our results of operations and financial
conditions could be materially and adversely affected.
We face risks related to our “know-your-client” procedures when our clients provide outdated, inaccurate, false or misleading information.
We collect personal information during the account opening and registration process and screen accounts against databases for purposes of
verifying client identity and detecting risks. Although we require our clients to submit documents for proof of their identity and address for
completing the account registration and to update such information from time to time, we face risks as the information provided by our clients may
be outdated, inaccurate, false or misleading. Despite the fact that we have appropriate ongoing monitoring procedures in place to keep customer
information up to date pursuant to applicable regulatory requirements, we cannot fully verify the accuracy, currency and completeness of such
information beyond reasonable effort. For example, certain of our clients are holders of the PRC identity cards. As the PRC identity cards are
usually effective for more than ten years or some may have no expiration term, some clients may have changed their domicile or citizenship during
the terms of their PRC identity cards and therefore be subject to applicable laws and regulations of jurisdictions other than the PRC. In this
situation, our provision of products and services to such clients could be in violation of the applicable laws and regulations in the jurisdictions
where those clients reside, of which we may have no awareness until we are warned by the relevant supervising authorities. We could still be
subject to certain legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation resulting from such violations.
Our platforms and internal systems rely on software and technological infrastructure that are highly technical, and if they contain undetected
errors, our business could be adversely affected.
Our platforms and internal systems rely on software that is highly technical and complex. In addition, our platforms and internal systems
depend on the ability of the software to store, retrieve, process and manage immense amounts of data. The software on which we rely has
contained, and may now or in the future contain, undetected errors or bugs. Some errors may only be discovered after the code has been released
for external or internal use. Errors or other design defects within the software on which we rely may result in a negative experience for users and
financial service providers, delay introductions of new features or enhancements, result in errors or compromise our ability to protect data or our
intellectual property. Any errors, bugs or defects discovered in the software on which we rely could result in harm to our reputation, loss of users or
financial service providers or liability for damages, any of which could adversely affect our business, results of operations and financial conditions.
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A significant decrease in our liquidity could negatively affect our business and financial management as well as reduce client confidence in our
company.
Maintaining adequate liquidity is crucial to our business operations. We meet our liquidity needs primarily through cash generated by client
trading activities and operating earnings, as well as cash provided by external financing. Fluctuations in client cash or deposit balances, as well as
changes in regulatory treatment of client deposits or market conditions, may affect our ability to meet our liquidity needs. A reduction in our
liquidity position could reduce our users’ and clients’ confidence, which could result in the loss of client trading accounts, or could cause us to fail
to satisfy our liquidity requirements. In addition, if we fail to meet regulatory capital guidelines, regulators could limit our operations.
Factors which may adversely affect our liquidity position include having temporary liquidity demands due to timing differences between
brokerage transaction settlements and the availability of segregated cash balances, unanticipated outflows of company cash, fluctuations in cash
held in banking or brokerage client trading accounts, a dramatic increase in clients’ margin-financing activities, increased capital requirements,
changes in regulatory guidance or interpretations, other regulatory changes, or a loss of market or client confidence.
If cash generated by client trading activities and operating earnings is not sufficient for our liquidity needs, we may be forced to seek external
financing. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing
costs could increase. Financing may not be available on acceptable terms, or at all, due to market conditions or disruptions in the credit markets. If
we experience any significant decrease in our liquidity, our business, financial condition and results of operations could be adversely impacted.
A significant change in clients’ cash allocations could negatively impact our net interest revenues and financial results.
We derive interest income from depositing un-invested cash balances in our clients’ brokerage trading accounts opened with us at our bank
partners. In 2019, 2020 and 2021, we generated HK$187.2 million, HK$208.6 million and HK$197.4 million (US$25.3 million) in interest income
from bank deposit, respectively, a significant portion of which was derived from uninvested cash balances in our clients’ accounts. As a result, a
significant reduction in our clients’ allocation to cash, a change in the allocation of that cash (for example as a result of using cash to purchase
mutual funds through our platforms), or a transfer of cash out of their accounts opened through our platforms could reduce our interest income and
negatively impact our financial results.
Our clearing operations expose us to liability for errors in clearing functions.
Our HK SFC-licensed subsidiary, Futu International Hong Kong, provides clearing and execution services for our online brokerage business
involving securities listed on the Hong Kong Stock Exchange or qualified under the Hong Kong, Shanghai and Shenzhen Stock Connect. Our U.S.
subsidiary, Futu Clearing Inc., has been approved to provide clearing and settlement services for securities transactions in the U.S. financial
markets. Clearing and execution services include the confirmation, receipt, settlement, delivery and record-keeping functions involved in securities
transactions. Clearing brokers also assume direct responsibility for the possession or control of client securities and other assets and the clearing of
client securities transactions. However, clearing brokers also must rely on third-party clearing system and organizations, such as Hong Kong’s
Central Clearing and Settlement System, or CCASS, and the Depositary Trust Clearing Corporation and its subsidiaries in the United States, in
settling client securities transactions. Clearing brokers are also responsible for protecting client assets and complying with relevant customer
protecting regulations. Clearing securities firms, such as Futu International Hong Kong and Futu Clearing Inc., are subject to substantially more
regulatory oversight and examination than introducing brokers who rely on others to perform clearing functions. Errors in performing clearing
functions, including clerical and other errors related to the handling of funds and securities held by us on behalf of clients, could lead to regulatory
fines and civil penalties as well as losses and liability in related legal proceedings brought by clients and others.
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Our corporate actions are substantially controlled by our founder, chairman and chief executive officer, Mr. Leaf Hua Li, who has the ability to
control or exert significant influence over important corporate matters that require approval of shareholders, which may deprive you of an
opportunity to receive a premium for your ADSs and materially reduce the value of your investment.
As of February 28, 2022, Mr. Leaf Hua Li, our founder, chairman and chief executive officer, beneficially owned 34.3% of our outstanding
shares and 67.4% of the total voting power of our outstanding shares. Accordingly, Mr. Li has significant influence in determining the outcome of
any corporate transaction or other matter submitted to the shareholders for approval, including mergers, consolidations, election of directors and
other significant corporate actions. This concentration of ownership may also discourage, delay or prevent a change in control of our company,
which could deprive our shareholders of an opportunity to receive a premium for their shares as part of a sale of our company and might reduce the
price of the ADSs. These actions may be taken even if they are opposed by our other shareholders, including the holders of the ADSs.
Our success depends on the continuing service of our key employees, including our senior management members and other talent, who are
highly sought after in the market. If we fail to hire, retain and motivate our key employees, our business may suffer.
Our key executives have substantial experience and have made significant contributions to our business, and our continued success is
dependent upon the retention of our key management executives, as well as the services provided by our staff of trading system, technology and
programming specialists and a number of other key managerial, marketing, planning, financial, legal and compliance, technical and operations
personnel. The loss of such key personnel could have a material adverse effect on our business. Growth in our business is dependent, to a large
degree, on our ability to retain and attract such employees.
Competition for well-qualified employees in all aspects of our business, including software engineers and other technology professionals, is
intense globally. Our continued ability to compete effectively depends on our ability to attract new employees and to retain and motivate existing
employees. If we do not succeed in attracting well-qualified employees or retaining and motivating existing employees and key senior
management, our business, results of operations, financial condition and prospects may be adversely affected.
Any failure to protect our intellectual property could harm our business and competitive position.
We believe that trademarks, trade secrets, patents, copyright and other intellectual property we use are critical to our business. We rely on a
combination of trademark, patent, copyright and trade secret protection laws, as well as confidentiality procedures and contractual provisions to
protect our intellectual property and our brand. Despite our efforts to protect our intellectual property rights, the steps we take in this regard might
not be adequate to prevent or deter infringement or other misappropriation of our intellectual property rights by competitors, former employees or
other third parties. We have filed, and may in the future file, intellectual property applications on certain of our innovations. We cannot guarantee
that any of our present or future patents or other intellectual property rights will not lapse or be invalidated, circumvented, challenged, or
abandoned. Litigation or proceedings before governmental authorities, administrative and judicial bodies may be necessary in the future to enforce
our intellectual property rights and to determine the validity and scope of our rights. As a result, we may not be able to adequately protect our
intellectual property rights, which could adversely affect our revenues and competitive position. Because of the rapid pace of technological change,
nor can we assure you that all of our proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner,
or at all.
Furthermore, parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, and we may
not be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all.
In addition, while we typically require our employees who may be involved in the development of intellectual property to execute agreements
assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who in fact develops intellectual
property that we regard as our own. In addition, such agreements may be breached. Accordingly, we may be forced to bring claims against third
parties, or defend claims that they may bring against us related to the ownership of such intellectual property.
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Furthermore, policing unauthorized use of proprietary technology is difficult and expensive, and we may need to resort to litigation to enforce
or defend intellectual property or to determine the enforceability, scope and validity of our proprietary rights or those of others. Such litigation and
an adverse determination in any such litigation could result in substantial costs and diversion of resources and management attention. The
experience and capabilities of China courts in handling intellectual property litigation varies and outcomes are unpredictable.
We may be subject to intellectual property infringement claims, which may be expensive to defend and disruptive to our business and
operations.
Content sourced from third parties is frequently posted on our platforms by our employees and users and clients. Although we follow common
content management and review practices to monitor the content uploaded to our platforms, we may not be able to identify all content that may
infringe on third-party rights. We cannot be certain that information posted on our platforms and other aspects of our business do not or will not
infringe upon or otherwise violate trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights held by other
parties. In addition, we use third-party licensed software for our business and on our platforms. Nevertheless, we may be from time to time in the
future be subject to legal proceedings and claims relating to the intellectual property rights of others. In addition, there may be other parties’
trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights that are infringed by our platforms or services or
other aspects of our business without our knowledge. Holders of such intellectual property rights may seek to enforce such intellectual property
rights against us in China, Hong Kong, the United States, Singapore or other jurisdictions. If any infringement claims are brought against us, we
may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their
merits.
We may be held liable for information or content displayed on, retrieved from or linked to our platforms, which may materially and adversely
affect our business and operating results.
The PRC government has adopted regulations governing internet access and distribution of information over the internet. Under these
regulations, internet content providers and internet publishers are prohibited from posting or displaying over the internet content that, among other
things, violates PRC laws and regulations, impairs public interest or the national dignity of China, contains terrorism, extremism, or content of
force or brutality, or is reactionary, obscene, superstitious, fraudulent or defamatory. Failure to comply with these requirements may result in the
revocation of licenses to provide internet content and other licenses, the closure of the concerned websites and criminal liabilities. In the past,
failure to comply with these requirements has resulted in the closure of certain websites. The website operator may also be held liable for the
censored information displayed on or linked to the website.
In particular, the MIIT has published regulations that subject website operators to potential liability for content displayed on their websites and
the actions of users and others using their systems, including liability for violations of PRC laws and regulations prohibiting the dissemination of
content deemed to be socially destabilizing. The Ministry of Public Security has the authority to order any local internet service provider to block
any internet website at its sole discretion, or to stop the dissemination over the internet of information which it believes to be socially destabilizing.
Furthermore, we are required to report any suspicious content to relevant governmental authorities, and to undergo computer security inspections.
If it is found that we fail to implement the relevant safeguards against security breaches, our business in China may be shut down.
According to the Administrative Provisions on Mobile Internet Applications Information Services which was promulgated by the Cyberspace
Administration of China and became effective in August 2016, providers of mobile apps shall not create, copy, publish or distribute information
and content through mobile applications that is prohibited by laws and regulations. We are required to adopt and implement management systems
of information security and establish and improve procedures on content examination and administration. We must adopt measures such as
warning, restricted release, suspension of updates and closing of accounts, keep relevant records, and report unlawful content to competent
government authorities. We have implemented internal control procedures screening the information and content on our platforms interface to
ensure their compliance with these provisions. However, there can be no assurance that all of the information or content displayed on, retrieved
from or linked to our mobile apps complies with the requirements of the provisions at all times. If our mobile apps are found to violate the
provisions, we may be subject to penalties, including warning, service suspension or removal of our mobile apps from the relevant mobile app
store, which may materially and adversely affect our business and operating results.
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We may be subject to litigation and regulatory investigations and proceedings, and may not always be successful in defending ourselves against
such claims or proceedings.
We are subject to lawsuits and other claims in the ordinary course of our business. Our business operations entail substantial litigation and
regulatory risks, including the risk of lawsuits and other legal actions relating to information disclosure, client on boarding procedures, sales
practices, product design, fraud and misconduct, and control procedures deficiencies, as well as the protection of personal and confidential
information of our clients. We may be subject to arbitration claims and lawsuits in the ordinary course of our business. We may also be subject to
inquiries, inspections, investigations and proceedings by regulatory and other governmental agencies. See “—We are subject to extensive and
evolving regulatory requirements in the markets we operate in, non-compliance with which may result in penalties, limitations and prohibitions on
our future business activities or suspension or revocation of our licenses and trading rights, and consequently may materially and adversely affect
our business, financial condition, operations and prospects. In addition, we are involved in ongoing inquiries by relevant regulators” and “Item 4.
Information on the Company—B. Business Overview—Ongoing Regulatory Actions.” Actions brought against us may result in settlements,
injunctions, fines, penalties, suspension or revocation of license, reprimands or other results adverse to us that could harm our reputation. Even if
we are successful in defending ourselves against these actions, the costs of defending against such actions may be significant to us. In market
downturns, the number of legal claims and the amount of damages sought in legal proceedings may increase.
In addition, we may face arbitration claims and lawsuits brought by our users and clients who have used our online brokerage or other
financial services and found them unsatisfactory. We may also encounter complaints alleging misrepresentation with regard to our platforms and/or
services. This risk may be heightened during periods when credit, equity or other financial markets are deteriorating in value or are volatile, or
when clients are experiencing losses. Actions brought against us may result in settlements, awards, injunctions, fines, penalties or other results
adverse to us including harm to our reputation. Even if we are successful in defending against these actions, the defense of such matters may result
in our incurring significant expenses. Predicting the outcome of such matters is inherently difficult, particularly where claimants seek substantial or
unspecified damages, or when arbitration or legal proceedings are at an early stage. A significant judgment or regulatory action against us or a
material disruption in our business arising from adverse adjudications in proceedings against the directors, officers or employees would have a
material adverse effect on our liquidity, business, financial condition, results of operations and prospects.
Our risk management policies and procedures may not be fully effective in identifying or mitigating risk exposure in all market environments
or against all types of risks.
We have devoted significant resources to developing our risk management policies and procedures and will continue to do so. Nonetheless, our
policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure in all market environments
or against all types of risks. Many of our risk management policies are based upon observed historical market behavior or statistics based on
historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations upon which these methods
are based may not be valid. As a result, these methods may not predict future exposures accurately, which could be significantly greater than what
our models indicate. This could cause us to incur losses or cause our risk management strategies to be ineffective. Other risk management methods
depend upon the evaluation of information regarding markets, business partners, clients, catastrophe occurrence or other matters that are publicly
available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated.
In addition, although we perform due diligence on potential clients, we cannot assure you that we will be able to identify all the possible issues
based on the information available to us. If a user or client does not meet the relevant qualification requirements under applicable laws but is still
able to use our services, we may be subject to regulatory actions and penalties and held liable for damages. Management of operational, legal and
regulatory risks requires, among other things, policies and procedures to properly record and verify a large number of transactions and events, and
these policies and procedures may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks.
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From time to time we may evaluate and potentially consummate investments and acquisitions or enter into alliances, which may require
significant management attention, disrupt our business and adversely affect our financial results.
We may evaluate and consider strategic investments, combinations, acquisitions or alliances to further increase the value of our platforms and
better serve our users and clients. These transactions could be material to our financial condition and results of operations if consummated. We may
not have the financial resources necessary to consummate any acquisitions in the future or the ability to obtain the necessary funds on satisfactory
terms. Any future acquisitions may result in significant transaction expenses and risks associated with entering new markets in addition to
integration and consolidation risks. Because acquisitions historically have not been a core part of our growth strategy, we have no material
experience in successfully utilizing acquisitions. We may not have sufficient management, financial and other resources to integrate any such
future acquisitions or to successfully operate new businesses, and we may be unable to profitably operate our expanded company.
Increases in labor costs and enforcement of stricter labor laws and regulations may adversely affect our business and results of operations.
The economy in the countries and regions that we operate in has experienced increases in inflation and labor costs in recent years. As a result,
average wages are expected to continue to increase. In addition, we are required by the local laws and regulations to make the required
contributions for various statutory employee benefits, such as pension, housing fund, medical insurance, work-related injury insurance,
unemployment insurance and maternity insurance to designated government agencies and designated pension trustees, and take out employees’
compensation insurance policies for the benefit and protection of our employees, to the extent required under applicable local laws. The relevant
government agencies may examine whether an employer has paid the required contributions or has in place adequate insurance coverage in relation
to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines,
imprisonment and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. Unless we
are able to control our labor costs or pass on these increased labor costs, our financial condition and results of operations may be adversely
affected.
If we fail to maintain an effective system of internal controls, we may be unable to accurately or timely report our results of operations or
prevent fraud, and investor confidence and the market price of the ADSs may be materially and adversely affected.
Since our initial public offering, we have become subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act, or
Section 404, requires that we include a report from management on the effectiveness of our internal control over financial reporting in our annual
report on Form 20-F. In addition, as we have ceased to be an “emerging growth company” as such term is defined in the JOBS Act, our
independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting.
Our management has concluded that our internal control over financial reporting was effective as of December 31, 2021. See “Item 15.
Controls and Procedures—Management’s Annual Report on Internal Control over Financial Reporting.” If we fail to maintain the adequacy of our
internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to
conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 and our independent
registered public accounting firm may not be able to conclude that we have effective internal control over financial reporting at a reasonable
assurance level. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our
financial statements and fail to meet our reporting obligations, which would likely cause investors to lose confidence in our reported financial
information. This could in turn limit our access to capital markets, harm our results of operations, and lead to a decline in the trading price of the
ADSs. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and
subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be
required to restate our financial statements for prior periods. Furthermore, we have incurred and anticipate that we will continue to incur
considerable costs, management time and other resources in an effort to comply with Section 404 of the Sarbanes-Oxley Act and other
requirements.
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Fluctuations in exchange rates could have a material adverse effect on our results of operations and the price of the ADSs.
The conversion of Renminbi into foreign currencies, including U.S. dollars, is based on rates set by the People’s Bank of China. The Renminbi
has fluctuated against the U.S. dollar, at times significantly and unpredictably. The value of Renminbi against the U.S. dollar and other currencies
is affected by changes in China’s political and economic conditions and by China’s foreign exchange policies, among other things. We cannot
assure you that Renminbi will not appreciate or depreciate significantly in value against the U.S. dollar in the future. It is difficult to predict how
market forces or PRC or U.S. government policy may impact the exchange rate between Renminbi and the U.S. dollar in the future.
Any significant appreciation or depreciation of Renminbi may materially and adversely affect our costs, expenses and financial position, and
the value of, and any dividends payable on, the ADSs in U.S. dollars. For example, to the extent that we need to convert U.S. dollars we receive
into Renminbi to pay our operating expenses, appreciation of Renminbi against the U.S. dollar would have an adverse effect on the RMB amount
we would receive from the conversion. Conversely, a significant depreciation of Renminbi against the U.S. dollar may significantly reduce the U.S.
dollar equivalent of our earnings, which in turn could adversely affect the price of the ADSs.
Very limited hedging options are available in China to reduce our exposure to exchange rate fluctuations. In 2021, we purchased derivatives in
an effort to reduce our exposure to foreign currency exchange risk due to exchange rate movements between Hong Kong dollars and Renminbi.
However, the effectiveness of these hedges may be limited and we may not be able to adequately hedge our exposure or at all. In addition, our
currency exchange losses may be magnified by PRC exchange control regulations that restrict our ability to convert Renminbi into foreign
currency. As a result, fluctuations in exchange rates may have a material adverse effect on your investment.
Our anticipated international expansion will subject us to additional risks and increased legal and regulatory requirements, which could have a
material effect on our business.
Our historical operations have been focused on Hong Kong. We have expanded our operations into the United States, Singapore and Australia,
and may expand further into other international markets. As we enter countries and markets that are new to us, we must tailor our services and
business model to the unique circumstances of such countries and markets, which can be complex, difficult, costly and divert management and
personnel resources. In addition, we may face competition in other countries from companies that may have more experience with operations in
such countries or with global operations in general. Laws and business practices that favor local competitors or prohibit or limit foreign ownership
of certain businesses or our failure to adapt our practices, systems, processes and business models effectively to the client preferences of each
country into which we expand, could slow our growth. Certain markets in which we operate have, or certain new markets in which we may operate
in the future may have, lower margins than our more mature markets, which could have a negative impact on our overall margins as our revenues
from these markets grow over time.
In addition to the risks outlined elsewhere in this section, our international expansion is subject to a number of other risks, including:
● currency exchange restrictions or costs and exchange rate fluctuations;
● exposure to local economic or political instability, threatened or actual acts of terrorism and security concerns in general;
● weaker or uncertain enforcement of our contractual and intellectual property rights;
● preferences by local populations for local service providers;
● slower adoption of the internet and mobile devices as advertising, broadcast and commerce mediums and the lack of appropriate
infrastructure to support widespread internet and mobile device usage in those markets;
● difficulties in attracting and retaining qualified employees in certain international markets, as well as managing staffing and operations
due to increased complexity, distance, time zones, language and cultural differences; and
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● uncertainty regarding liability for services and content, including uncertainty as a result of local laws and lack of precedent.
Such international expansion will also subject us to additional legal and regulatory control and requirements. For example, as a result of our
expansion into the United States and Singapore, we are subject to the US Brokerage Regulations and the Singapore Brokerage Regulations,
respectively. For securities including stocks, options and futures traded on the major exchanges in the U.S. and the Singapore Exchange, we
aggregate trade instructions from clients and collaborate with qualified local third-party clearing brokers for execution and settlement. In the case
of securities traded on the major U.S. stock exchanges, we also execute and settle some of the transactions through our clearing system platform.
From our client’s perspective, the trading process is seamless as we handle all client communications and touchpoints, including delivery and
receipt of funds. Our wholly-owned subsidiary, Futu Inc., is registered with the SEC as a broker-dealer and is a member in good standing of
FINRA. Another wholly-owned subsidiary of ours, Futu Clearing Inc., is also a member in good standing of FINRA and Depository Trust &
Clearing Corporation, or DTCC, with capacity to provide clearing services in the U.S. As we continue to expand our business in the United States,
we will be subject to the rules and regulations imposed by the SEC, FINRA and other regulatory authorities.
In Singapore, our wholly-owned subsidiary, Futu Singapore is registered with the MAS as a Capital Markets Services License holder, and is
subject to the Singapore Brokerage Regulations, as well as any rules and regulations imposed by the MAS.
In November 2021, we acquired 100% of the issued share capital of an Australian company and renamed it Futu Securities (Australia) Ltd,
which has since become our wholly-owned subsidiary. Futu Securities (Australia) Ltd holds an Australian Financial Services License (AFSL), a
license granted and regulated by the Australian Securities and Investments Commission (ASIC).
In addition, U.S. domestic and foreign stock exchanges, other self-regulatory organizations and state and foreign securities commissions can
censure, fine, issue cease-and-desist orders, or suspend or expel a broker-dealer or any of its officers or employees. Our ability to comply with all
applicable laws and rules is largely dependent on our internal system to ensure compliance, as well as our ability to attract and retain qualified
compliance personnel. We could be subject to disciplinary or other actions in the future due to claimed noncompliance, which could have a
material adverse effect on our business, financial condition and results of operations. To continue to expand our services internationally, we may
have to comply with the regulatory controls of each country in which we conduct or intend to conduct business, the requirements of which may not
be clearly defined. The varying compliance requirements of these different regulatory jurisdictions, which are often unclear, may limit our ability to
continue existing international operations and further expand internationally.
Any failure by us or our third-party service providers to comply with applicable anti-money laundering laws and regulations could damage our
reputation.
We are required to comply with applicable anti-money laundering and counter terrorism laws and regulations in Hong Kong, the U.S.,
Singapore and other relevant jurisdictions. These laws and regulations require financial institutions to establish sound internal control policies and
procedures to guard against money laundering and terrorist financing. Such policies and procedures require us to, among other things, designate an
independent anti-money laundering reporting officer, establish a customer due diligence system in accordance with relevant rules, record the details
of client activities and report suspicious transactions to the relevant authorities. In addition, we are required to train our personnel and periodically
test the adequacy of our policies and procedures.
We have implemented various policies and procedures in compliance with all applicable anti-money laundering and anti-terrorist financing
laws and regulations, including internal controls and “know-your-customer” procedures, for preventing money laundering and terrorist financing.
In addition, our institutional partners in Hong Kong, Singapore and the United States have their own appropriate anti-money laundering policies
and procedures with respect to accounts opening services for our clients. Certain of our institutional partners are subject to anti-money laundering
obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the relevant regulators. We have
adopted commercially reasonable procedures for monitoring our institutional partners. In the event that we fail to fully comply with the applicable
laws and regulations, the relevant government authorities may freeze our assets or impose fines or other penalties on us. There can be no assurance
that there will not be failures in detecting money laundering or other illegal or improper activities, which may adversely affect our business,
reputation, financial condition and results of operations.
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Our policies and procedures may not be completely effective in detecting suspicious activity and preventing other parties from using us or any
of our institutional funding partners as a conduit for money laundering (including illegal cash operations) or terrorist financing without our
knowledge. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing, our reputation could suffer
and we could become subject to regulatory fines, sanctions, or legal enforcement, including being added to any “blacklists” that would prohibit
certain parties from engaging in transactions with us, all of which could have a material adverse effect on our financial condition and results of
operations. Even if we and our institutional funding partners comply with the applicable anti-money laundering laws and regulations, we and our
institutional funding partners may not be able to fully eliminate money laundering and other illegal or improper activities in light of the complexity
and the secrecy of these activities. Any negative perception of the industry, such as that arising from any failure of other online brokerage firms to
detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine
the trust and credibility we have established, and negatively impact our financial condition and results of operation. See also “—We are subject to
extensive and evolving regulatory requirements in the markets we operate in, non-compliance with which may result in penalties, limitations and
prohibitions on our future business activities or suspension or revocation of our licenses and trading rights, and consequently may materially and
adversely affect our business, financial condition, operations and prospects. In addition, we are involved in ongoing inquiries by relevant
regulators.”
Our business may be affected by the Competition Ordinance of Hong Kong.
The Competition Ordinance (Chapter 619 of the Laws of Hong Kong) came into full effect in Hong Kong on December 14, 2015. The
Competition Ordinance prohibits and deters undertakings in all sectors from adopting anti-competitive conduct which has the object or effect of
preventing, restricting or distorting competition in Hong Kong. Therefore, we are generally subject to the Competition Ordinance. The key
prohibitions include (i) prohibition of agreements between businesses which have the object or effect of preventing, restricting or distorting
competition in Hong Kong; and (ii) prohibiting companies with a substantial degree of market power, including monopolists, from abusing their
power by engaging in conduct that has the object or effect of harming competition in Hong Kong. Various factors may be taken into consideration
in determining whether an undertaking has a substantial degree of market power, including the market share of the undertaking; the undertaking’s
power to make pricing and other decisions; and any barriers to entry to competitors into the relevant market. There are very severe penalties for
breaches of the Competition Ordinance, including financial penalties of up to 10.0% of the total gross revenues obtained in Hong Kong for each
year of infringement, up to a maximum of three years in which the contravention occurs.
We are not currently subject to any investigations, inquiries or penalties in respect of breaches under the Competition Ordinance. We may
nevertheless face difficulties and may need to incur legal costs in ensuring our compliance with the Competition Ordinance. We may also
inadvertently infringe the Competition Ordinance and under such circumstance, we may be subject to fines, claims for damages and/or other
penalties, incur substantial legal costs and experience business disruption and/or negative media coverage, which could adversely affect our
business, results of operations and reputation.
We have limited business insurance coverage.
We currently carry limited insurance in connection with our online brokerage business. However, we do not carry business interruption
insurance to compensate for losses that could occur to the extent not required. We also do not maintain general product liability insurance or key-
man insurance, and only maintain limited general property insurance. We consider our insurance coverage to be reasonable in light of the nature of
our business, but we cannot assure you that our insurance coverage is sufficient to prevent us from any loss or that we will be able to successfully
claim our losses under our current insurance policies on a timely basis, or at all. If we incur any loss that is not covered by our insurance policies,
or the compensated amount is significantly less than our actual loss, our business, financial condition and results of operations could be materially
and adversely affected.
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We may not be able to obtain additional capital when desired, on favorable terms or at all. If we fail to meet the capital requirement pursuant to
applicable rules, our business operations and performance will be adversely affected.
We anticipate that the net proceeds we received from our securities offering, together with our current cash, cash provided by operating
activities and funds available through our bank loans and credit facilities, will be sufficient to meet our current and anticipated needs for general
corporate purposes for at least the next 12 months. However, we need to make continued investments in facilities, hardware, software,
technological systems and to retain talented personnel to remain competitive. Due to the unpredictable nature of the capital markets and our
industry, we cannot assure you that we will be able to raise additional capital on terms favorable to us, or at all, if and when required, especially if
we experience disappointing operating results. If adequate capital is not available to us as required, our ability to fund our operations, take
advantage of unanticipated opportunities, develop or enhance our infrastructure or respond to competitive pressures could be significantly limited,
which would adversely affect our business, financial condition and results of operations. If we do raise additional funds through the issuance of
equity or convertible debt securities, the ownership interests of our shareholders could be significantly diluted. These newly issued securities may
have rights, preferences or privileges senior to those of existing shareholders. Our broker-dealer and insurance-broker subsidiaries, Futu Securities
International (Hong Kong) Limited, Futu Inc., Futu Clearing Inc., Futu Singapore Pte. Ltd., and Futu Insurance Brokers (Hong Kong) Limited are
subject to capital requirements determined by their respective regulators. If we fail to maintain the required level of liquid capital, the HK SFC, the
SEC or the MAS may take actions against us and our business will be adversely affected.
Internet-related issues may reduce or slow the growth in the use of our services in the future. In particular, our future growth depends on the
further acceptance of the internet and particularly the mobile internet as an effective platform for assessing trading and other financial
services and content.
Critical issues concerning the commercial use of the internet, such as ease of access, security, privacy, reliability, cost, and quality of service,
remain unresolved and may adversely impact the growth of internet use. If internet usage continues to increase rapidly, the internet infrastructure
may not be able to support the demands placed on it by this growth, and its performance and reliability may decline. Continuous rapid growth in
internet traffic may cause decreased performance, outages and delays. Our ability to increase the speed with which we provide services to users and
clients and to increase the scope and quality of such services is limited by and dependent upon the speed and reliability of our users’ and clients’
access to the internet, which is beyond our control. If periods of decreased performance, outages or delays on the internet occur frequently or other
critical issues concerning the internet are not resolved, overall internet usage or usage of our web-based services could increase more slowly or
decline, which would cause our business, results of operations and financial condition to be materially and adversely affected.
Furthermore, while the internet and the mobile internet have gained increased popularity in China and Hong Kong as well as other parts of the
world as platforms for financial products and content in recent years, many investors have limited experience in trading and using other financial
services online. For example, investors may not find online content to be reliable sources of financial product information. If we fail to educate
investors about the value of our platforms and our services, our growth will be limited and our business, financial performance and prospects may
be materially and adversely affected. The further acceptance of the internet and particularly the mobile internet as an effective and efficient
platform for trading and other financial services and content is also affected by factors beyond our control, including negative publicity around
online and mobile brokerage services and restrictive regulatory measures taken by the PRC government. If online and mobile networks do not
achieve adequate acceptance in the market, our growth prospects, results of operations and financial condition could be harmed.
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We depend on contractual arrangements with the VIE and its shareholders to operate a limited part of our operations in China, which may not
be as effective as direct ownership in providing operational control.
Although the vast majority of our business is conducted in Hong Kong, we depend on the VIE to conduct a limited part of our operations in
China pursuant to a series of contractual arrangements. Historically, such operations constituted an immaterial portion of our consolidated total
revenues and total assets. In 2019, 2020 and 2021, we generated 0.2%, 0.3% and 0.3% of our total revenues through the VIE in China, respectively,
whose assets accounted for 0.1%, 0.1% and 0.1% of our total assets during the same years, respectively. For a description of these contractual
arrangements, see “Item 4. Information on the Company—C. Organizational Structure—Contractual Arrangements with the VIE and Its
Shareholders.” These contractual arrangements may not be as effective as direct ownership in providing us with control over the VIE. If the VIE or
its shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by the VIE is
indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies
under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in
connection with litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity
interest in the VIE, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest
will be disposed pursuant to the contractual arrangement or ownership by the record holder of the equity interest.
All of these contractual arrangements are governed by and interpreted in accordance with PRC law, and disputes arising from these contractual
arrangements will be resolved through arbitration in China. However, such arbitration provisions do not apply to claims made under the United
States federal securities laws. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result,
uncertainties in the PRC legal system could limit our ability to enforce these contractual arrangements. In the event that we are unable to enforce
these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements,
it would be very difficult to exert effective control over the VIE. We currently expect the VIE and its subsidiaries to constitute an immaterial
portion of our financial position, results of operations and cash flows for the foreseeable future. However, if we lose operational control over the
VIE, our financial condition and results of operations may be materially and adversely affected. See “—Risks Related to Our Operations in China
—There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.”
The shareholders of the VIE in China may have potential conflicts of interest with us, which may materially and adversely affect our business
and financial condition.
In connection with our operations in China, we depend on the shareholders of the VIE to abide by the obligations under such contractual
arrangements. The interests of these shareholders in their individual capacities as the shareholders of the VIE may differ from the interests of our
company as a whole, as what is in the best interests of the VIE, including matters such as whether to distribute dividends or to make other
distributions to fund our offshore requirement, may not be in the best interests of our company. There can be no assurance that when conflicts of
interest arise, any or all of these individuals will act in the best interests of our company or those conflicts of interest will be resolved in our favor.
In addition, these individuals may breach or cause the VIE and its subsidiaries to breach or refuse to renew the existing contractual arrangements
with us.
Currently, we do not have arrangements to address potential conflicts of interest the shareholders of the VIE may encounter, on the one hand,
and as a beneficial owner of our company, on the other hand. We, however, could, at all times, exercise our option under the exclusive option
agreement to cause them to transfer all of their equity ownership in the VIE to a PRC entity or individual designated by us as permitted by the then
applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of attorney-in-fact of the then existing
shareholders of the VIE as provided under the power of attorney agreements, directly appoint new directors of the VIE. We rely on the
shareholders of the VIE to comply with PRC laws and regulations, which protect contracts and provide that directors and executive officers owe a
duty of loyalty to our company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gains, and
the laws of the Cayman Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to
our best interests. However, the legal frameworks of China and the Cayman Islands do not provide guidance on resolving conflicts in the event of a
conflict with another corporate governance regime. If we cannot resolve any conflicts of interest or disputes between us and the shareholders of the
VIE, we would have to rely on legal proceedings, which could result in disruption of our business and subject us to substantial uncertainty as to the
outcome of any such legal proceedings.
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We are subject to PRC restrictions on currency exchange.
Some of our expenses and a limited portion of our revenues are denominated in Renminbi. The Renminbi is currently convertible under the
“current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which
includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or the VIE. Certain of our PRC
subsidiaries may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the
approval of the SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or
eliminate our ability to purchase foreign currencies in the future for current account transactions. Foreign exchange transactions under the capital
account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities.
Since a part of our future net income and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange
may limit our ability to utilize cash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies
to our shareholders, including holders of Class A ordinary shares or the ADSs, and may limit our ability to obtain foreign currency through debt or
equity financing for PRC our subsidiaries and the VIE.
In addition, as we do not provide cross-border currency conversion services related to Renminbi to Chinese residents or institutions, we do not
require our clients to submit evidence of approval or registration from relevant authorities with respect to the currency used for offshore
investments. However, since the PRC authorities and the commercial banks designated by the SAFE to conduct currency exchange services have
significant amount of discretion in interpreting, implementing and enforcing the relevant currency exchange rules and regulations, and for many
other factors that are beyond our control, we may be subject to further regulatory requirements, including but not limited to implementing
additional and burdensome measures to monitor the source and use of funds in the accounts of our clients, or verify evidence of approval from
relevant authorities.
Risks Related to Our Operations in China
The PRC government has significant authority to regulate or intervene in a company’s operations in China at any time, such as ours, whether
such operations are conducted through a subsidiary or a consolidated variable interest entity. Therefore, investors in the ADSs and our
business face potential uncertainty from the PRC government’s policy.
We conduct our operations in China through our PRC subsidiaries and the VIE. Our operations in China are governed by PRC laws and
regulations. The PRC government’s significant oversight over our business operation could result in a material adverse change in our operations
and the value of our ADSs. The Chinese government may intervene or influence our operations at any time, or may exert more oversight and
control over offerings conducted overseas and/or foreign investment in China-based issuers, which could result in a material change in our
operations and/or the value of our ADSs. Any actions by the Chinese government to exert more oversight and control over offerings that are
conducted overseas and/or foreign investment in China-based issuers could significantly limit or completely hinder our ability to offer or continue
to offer securities to investors and cause the value of such securities to significantly decline or become worthless.
The new, stricter regulations or interpretations of existing regulations imposed by the central or local governments may require additional
expenditures and efforts on our part to ensure our compliance with such regulations or interpretations, and if relevant regulations are issued and
become effective in a short notice, we may not be able to take the required actions in a timely manner without allocating significant resource.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
A part of our operations is conducted in the PRC and is governed by PRC laws, rules and regulations. Our PRC subsidiaries and the VIE and
its subsidiaries are subject to laws, rules and regulations applicable to foreign investment in China. Some of our activities outside the PRC are also
subject to the extra-territorial jurisdiction under the relevant PRC laws and regulations. The PRC legal system is a civil law system based on
written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
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In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in
general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign
investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not
sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies.
In particular, because these laws, rules and regulations are relatively new, and because of the limited number of published decisions and the
nonbinding nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to
enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and
unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a
timely basis or at all, and which may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until
after the occurrence of the violation.
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and
management attention. Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and
contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we
enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered into and could
materially and adversely affect our business, financial condition and results of operations.
In addition, the PRC government has significant oversight and discretion over the conduct of our operations and may intervene or influence
our operations as the government deems appropriate to further regulatory, political and social goals. The PRC government has recently published
new policies that significantly affected certain industries such as the internet industries, and we cannot rule out the possibility that it will in the
future release further regulations or policies or take regulatory actions regarding our industry that could adversely affect our business, financial
condition and results of operations. Furthermore, the PRC government has recently indicated an intent to exert more oversight and control over
securities offerings and other capital markets activities that are conducted overseas and foreign investment in companies like us.
The trade war between the U.S. and China, and on a larger scale internationally, may dampen growth in China and other markets where the
majority of our clients reside, and our activities and results of operations may be negatively impacted.
In the past few years, the United States imposed additional import tariffs on specified products imported from China. As a result, China has
responded by imposing retaliatory tariffs on goods exported from the United States. Although we are not subject to any of those tariff measures, the
proposed tariffs may adversely affect the economic growth in China and other markets as well as the financial condition of our clients. With the
potential decrease in the spending powers of our target clients, we cannot guarantee that there will be no negative impact on our operations. In
addition, the current and future actions or escalations by either the U.S. or China that affect trade relations may cause global economic turmoil and
potentially have a negative impact on our business, financial condition and results of operations, and we cannot provide any assurance as to
whether such actions will occur or the form that they may take.
Uncertainties exist with respect to the enforcement of Anti-Monopoly Guidelines for Internet Platforms and how it may impact our business
operations.
According to Anti-monopoly Law of the PRC which was released on August 30, 2007 and became effective from August 1, 2008, business
operators holding dominant market positions shall not abuse such position to restrict trading counterparts to transact only with such business
operators or only with designated business operators without a justifiable reason. Where a business operator has violated the Anti-monopoly Law
of the PRC by abusing its dominant market position, the anti-monopoly enforcement agency shall order the business to stop the illegal act and
confiscate the illegal income; a fine of 1% to 10% of the business operator’s revenue from the preceding year shall be imposed.
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In February 2021, the Anti-monopoly Commission of the State Council promulgated the Guidelines to Anti-Monopoly in the Field of Internet
Platform, or the Anti-Monopoly Guidelines for Internet Platforms. The Anti-Monopoly Guidelines for Internet Platforms is consistent with the
Anti-Monopoly Law and prohibits monopoly agreements, abuse of a dominant position and concentration of undertakings that may have the effect
to eliminate or restrict competition in the field of platform economy. More specifically, the Anti-Monopoly Guidelines for Internet Platforms
outlines certain practices that may, if without justifiable reasons, constitute abuse of a dominant position, including without limitation, tailored
pricing using big data and analytics, actions or arrangements deemed as exclusivity arrangements, using technological means to block competitors’
interface, using bundle services to sell services or products, and compulsory collection of user data. To determine the abuse of dominant market
positions in the field of platform economy, relevant markets shall be firstly defined, whether business operators have dominant positions in the
relevant markets should be analyzed, and then whether abuse of its dominant market positions was constituted shall be analyzed specifically on a
case-by-case basis. In addition, the Anti-Monopoly Guidelines for Internet Platforms expressly provides that concentration involving variable
interest entities will also be subject to antitrust filing requirements. The Anti-Monopoly Guidelines for Internet Platforms became effective on
February 7, 2021, but uncertainties exist with respect to its enforcement. Although we believe we do not engage in any of the foregoing situations,
we cannot assure you that the regulators will take the same view as ours. If certain of our activities in China were deemed by relevant regulators as
violation of the Anti-Monopoly Guidelines for Internet Platforms, it may result in governmental investigations, fines and/or other sanctions against
us. As of the date of this annual report, we have not been subject to any administrative penalties, regulatory actions or inquires in connection with
anti-monopoly.
If the PRC government deems that the contractual arrangements in relation to the VIE do not comply with PRC regulatory restrictions on
foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could
be subject to severe penalties or be forced to relinquish our interests in those operations.
The PRC government regulates internet-based businesses through strict business licensing requirements and other government regulations.
These laws and regulations also include limitations on foreign ownership of PRC companies that engage in internet-based businesses. Specifically,
the Special Administrative Measures for Entry of Foreign Investment (Negative List) (2021 Version), or the Negative List, which came into effect
on January 1, 2022 and replace the previous version provides that foreign investors are generally not allowed to own more than 50% of the equity
interests in a value-added telecommunication service provider other than an e-commerce service, domestic multi-party communications service,
store-and-forward service, and call center service provider which does not apply to us.
Because we are an exempted company incorporated in the Cayman Islands, we are classified as a foreign enterprise under PRC laws and
regulations, and our wholly-owned PRC subsidiaries, including without limitation Shensi Beijing and Futu Internet Technology (Shenzhen) Co.,
Ltd. are foreign-invested enterprises, or FIEs. To comply with PRC laws and regulations, we conduct a limited part of our operations in China
through the VIE and its subsidiaries. Shensi Beijing has entered into a series of contractual arrangements with the VIE and its shareholders. In
addition, pursuant to the resolutions of all shareholders of Futu Holdings Limited and the resolutions of the board of directors of Futu Holdings
Limited, the board of directors of Futu Holdings Limited or any officer authorized by such board shall cause Shensi Beijing to exercise Shensi
Beijing’s rights under the power of attorney agreements entered into among Shensi Beijing, Shenzhen Futu and the shareholders of Shenzhen Futu,
as well as Shensi Beijing’s rights under the exclusive option agreement between Shensi Beijing and Shenzhen Futu. As a result of these resolutions
and the provision of unlimited financial support from our Company to Shenzhen Futu, we are considered to be the primary beneficiary of the VIE
for accounting purposes under U.S. GAAP. For a description of these contractual arrangements, see “Item 4. Information on the Company—C.
Organizational Structure—Contractual Arrangements with the VIE and Its Shareholders.”
We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Han Kun
Law Offices, our PRC legal counsel, based on its understanding of the relevant laws and regulations currently in effect, is of the opinion that each
of the contracts among Shensi Beijing, the VIE and its shareholders is valid, binding and enforceable in accordance with its terms. However, as
there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers
and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules and the Telecommunications Regulations and the relevant
regulatory measures concerning the telecommunications industry, there can be no assurance that the PRC government authorities, such as the
MOFCOM, the MIIT, or other authorities that regulate the telecommunications industry, would agree that our corporate structure or any of the
above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with
requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are
uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.
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If our corporate structure and contractual arrangements are deemed by governmental regulators having competent authority to be illegal, either
in whole or in part, we may lose control of the VIE and have to modify such structure to comply with regulatory requirements. However, there can
be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractual
arrangements are found to be in violation of any existing or future PRC laws or regulations or if these regulations or the interpretation of existing
regulations change or are interpreted differently in the future, the relevant regulatory authorities would have broad discretion in dealing with such
violations, including:
● revoking our business and operating licenses;
● levying fines on us;
● confiscating any of our income that they deem to be obtained through illegal operations;
● shutting down our services;
● discontinuing or restricting our operations in China;
● imposing conditions or requirements with which we may not be able to comply;
● requiring us to change our corporate structure and contractual arrangements, including terminating the contractual arrangement with the
VIE and deregistering the equity pledges of the VIE, which in turn would affect our ability to consolidate or exert effective control over
the VIE;
● restricting or prohibiting our use of the proceeds from overseas offering to finance the PRC VIE’s business and operations; and
● taking other regulatory or enforcement actions that could be harmful to our business.
Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to our
corporate structure and contractual arrangements. See “—Uncertainties exist with respect to the interpretation and implementation of the PRC
Foreign Investment Law and its Implementation Regulations and how they may impact the viability of our current corporate structure, corporate
governance and business operations.” Occurrence of any of these events could materially and adversely affect our business, financial condition and
results of operations. In addition, if the imposition of any of these penalties or requirement to restructure our corporate structure causes us to lose
the rights to direct the activities of the VIE or our right to receive its economic benefits, we would no longer be able to consolidate the financial
results of the VIE in our consolidated financial statements. See “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements with the VIE and Its Shareholders.” In addition, our ADSs may decline in value if we are unable to assert our contractual control
rights over the assets or receive the economic benefits of the VIE and its subsidiaries that conduct some of our operations.
If we exercise the option to acquire equity ownership of the VIE, the ownership transfer may subject us to certain limitations and substantial
costs.
Pursuant to the Provisions on Administration of Foreign-Invested Telecommunications Enterprises, the ultimate foreign equity ownership in a
value-added telecommunications services provider cannot exceed 50%. In addition, the main foreign investor who invests in a value-added
telecommunications business in China must possess prior experience in operating value-added telecommunications businesses and a proven track
record of business operations in such industry, or the Qualification Requirements. Currently, none of the applicable PRC laws, regulations, or rules
provides clear guidance or interpretation on the Qualification Requirements. Although we have taken many measures to meet the Qualification
Requirements, we still face the risk of not satisfying the requirements promptly.
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If the PRC laws were revised to allow foreign investors to hold more than 50% of the equity interests of value-added telecommunications
enterprises, we might be unable to unwind our contractual arrangements with the VIE before we are able to comply with the Qualification
Requirements, or if we attempt to unwind our contractual arrangements with the VIE before we are able to comply with the Qualification
Requirements, we may be ineligible to operate our value-added telecommunication enterprises and may be forced to suspend their operations.
Pursuant to our contractual arrangements with the VIE, Shensi Beijing or its designated person has the exclusive right to purchase all or part of
the equity interests in the VIE at the lower of the amount of their respective paid-in capital in the VIE and the lowest price permitted under
applicable PRC laws. Subject to relevant laws and regulations, the shareholders of the VIE shall return any amount of purchase price they have
received to Shensi Beijing. If such a transfer takes place, the relevant tax authority may ask Shensi Beijing to pay enterprise income tax for
ownership transfer income with reference to the market value, in which case the amount of tax could be substantial.
Our contractual arrangements with the VIE may result in adverse tax consequences to us in the PRC.
We could face adverse tax consequences if the PRC tax authorities determine that our contractual arrangements with the VIE were not made
on an arm’s length basis and adjust our income and expenses for PRC tax purposes by requiring a transfer pricing adjustment. A transfer pricing
adjustment could adversely affect us by (i) increasing the tax liabilities of the VIE without reducing the tax liability of our subsidiaries, which
could further result in late payment fees and other penalties to the VIE for underpaid taxes; or (ii) limiting the ability of the VIE to obtain or
maintain preferential tax treatments and other financial incentives.
We may lose the ability to use and benefit from assets held by the VIE that are material to the operation of our business if the VIE goes
bankrupt or becomes subject to dissolution or liquidation proceeding.
As part of our contractual arrangements with the VIE, the VIE may in the future hold certain assets that are material to the operation of our
business. If the VIE goes bankrupt and all or part of its assets become subject to liens or rights of third-party creditors, we may be unable to
continue some or all of our business activities, which could materially and adversely affect our business, financial condition and results of
operations. Under the contractual arrangements, the VIE may not, in any manner, sell, transfer, mortgage or dispose of its assets or legal or
beneficial interests in the business without our prior consent. If the VIE undergoes voluntary or involuntary liquidation proceeding, unrelated third-
party creditors may claim rights to some or all of these assets, thereby hindering our ability to operate our business, which could materially and
adversely affect our business, financial condition and results of operations.
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Uncertainties exist with respect to the interpretation and implementation of the PRC Foreign Investment Law and its Implementation
Regulations and how they may impact the viability of our current corporate structure, corporate governance and business operations.
The National People’s Congress approved the PRC Foreign Investment Law, or the Foreign Investment Law, on March 15, 2019 and the State
Council approved the Regulation on Implementing the Foreign Investment Law, or the Implementation Regulations on December 12, 2019,
effective from January 1, 2020, to replace prior laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture
Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their
implementation rules and ancillary regulations. The Foreign Investment Law embodies an expected PRC regulatory trend to rationalize its foreign
investment regulatory regime in line with prevailing international practice and the legislative efforts to unify the corporate legal requirements for
both foreign and domestic investments. However, since the Foreign Investment Law and the Implementation Regulations are relatively new,
uncertainties still exist in relation to its interpretation and implementation. For instance, under the Foreign Investment Law, “foreign investment”
refers to the investment activities directly or indirectly conducted by foreign individuals, enterprises or other entities in China. Though it does not
explicitly classify contractual arrangements as a form of foreign investment, there is no assurance that foreign investment via contractual
arrangement would not be interpreted as a type of indirect foreign investment activities under the definition in the future. In addition, the definition
contains a catch-all provision which includes investments made by foreign investors through means stipulated in laws or administrative regulations
or other methods prescribed by the State Council. Therefore, it still leaves leeway for future laws, administrative regulations or provisions
promulgated by the State Council to provide for contractual arrangements as a form of foreign investment. In any of these cases, it will be
uncertain whether our contractual arrangements will be deemed to be in violation of the market access requirements for foreign investment under
the PRC laws and regulations. Furthermore, if future laws, administrative regulations or provisions prescribed by the State Council mandate further
actions to be taken by companies with respect to existing contractual arrangements, we may face substantial uncertainties as to whether we can
complete such actions in a timely manner, or at all. Failure to take timely and appropriate measures to cope with any of these or similar regulatory
compliance challenges could materially and adversely affect our current corporate structure, corporate governance and business operations.
The approval, filing or other requirements of the CSRC, the CAC or other PRC government authorities may be required under PRC law in
connection with our issuance of securities overseas.
The Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, purport to require offshore
special purpose vehicles that are controlled by PRC companies or individuals and that have been formed for the purpose of seeking a public listing
on an overseas stock exchange through acquisitions of PRC domestic companies or assets to obtain approval from the CSRC prior to publicly
listing their securities on an overseas stock exchange. The interpretation and application of the regulations remain unclear. If CSRC’s approval
under the M&A Rules is required, it is uncertain whether it would be possible for us to obtain the approval, and any failure to obtain or delay in
obtaining CSRC approval for our future issuance of securities overseas would subject us to sanctions imposed by the CSRC and other PRC
regulatory agencies.
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Furthermore, the recently issued Opinions on Strictly Cracking Down on Illegal Securities Activities emphasized the need to strengthen the
administration over “illegal securities activities” and the supervision on overseas listings by China-based companies, and proposed to take effective
measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-
listed companies, although such opinions did not specify the definition of “illegal securities activities.” On December 24, 2021, the CSRC
published the draft Administrative Provisions of the State Council on the Overseas Issuance and Listing of Securities by Domestic Companies
(Draft for Comments), or the Draft Overseas Listing Regulations, and the draft Measures for the Overseas Issuance and Listing of Securities
Record-filings by Domestic Companies (Draft for Comments), or the Draft Overseas Listing Measures, for public comments. These drafts stipulate
that PRC domestic companies that seek to offer and list securities in overseas markets directly or indirectly shall complete the filing procedures
with and report relevant information to the CSRC. Pursuant to these drafts, if the issuer meets the following conditions, its offering and listing will
be deemed as an “indirect overseas offering and listing by a PRC domestic company” and is therefore subject to the filing requirement: (i) the
revenues, profits, total assets or net assets of the Chinese operating entities in the most recent financial year accounts for more than 50% of the
corresponding data in the issuer’s audited consolidated financial statements for the same period; (ii) the majority of senior management in charge
of business operation are Chinese citizens or have domicile in PRC, and its principal place of business is located in PRC or main business activities
are conducted in PRC. In addition, these drafts prescribe that the domestic enterprises should submit filing documents to the CSRC within three
business days after the submission of the application for overseas initial public offering, and after completing the filing procedures for an overseas
initial public offering and listing, for the purposes of implementing and strengthening the CSRC’s supervision, the issuer will need to comply with
continuous filing and reporting requirements after such offering and listing, among others, including the following: (i) reporting material events
which arose prior to such offering and listing, (ii) filing for follow-on offerings after the initial offering and listing, (iii) filing for transactions in
which the issuer issues securities for acquiring assets, and (iv) reporting material events after the initial offering and listing. However, the Draft
Overseas Listing Regulations and the Draft Overseas Listing Measures were released for public comment only, there remains substantial
uncertainty, including but not limited to its final content, adoption timeline, effective date or relevant implementation rules. As of the date of this
annual report, we cannot predict the impact of these regulations on maintain the listing status of our ADSs and/or other securities, or any of our
future offerings of securities overseas in a foreign country.
In addition, on December 28, 2021, the CAC, and several other regulatory authorities in China jointly promulgated the Cybersecurity Review
Measures, which came into effect on February 15, 2022. Pursuant to the Cybersecurity Review Measures, (i) where the relevant activity affects or
may affect national security, a CIIO that purchases network products and services, or an internet platform operator that conducts data process
activities, shall be subject to the cybersecurity review, (ii) an application for cybersecurity review shall be made by an issuer who is an internet
platform operator holding personal information of more than one million users before such issuer applies to list its securities on a foreign stock
exchange, and (iii) relevant governmental authorities in the PRC may initiate cybersecurity review if they determine an operator’s network
products or services or data processing activities affect or may affect national security. As the Cybersecurity Review Measures was newly issued,
there remain uncertainties as to how it would be interpreted and enforced, and to what extent it may affect us.
Pursuant to Article 6 of the Negative List, if a PRC company, which engages in any business where foreign investment is prohibited under the
Negative List, or prohibited businesses, seeks an overseas offering or listing, it must obtain the approval from competent governmental authorities.
Additionally, foreign investors in such PRC company must not take part in the company’s operation or management, and their shareholding ratio
should be subject to regulations relating to the management of PRC securities investments by foreign investors. The Negative List has made it clear
that the application scope of Article 6 is limited to domestic enterprises engaged in “prohibited businesses” from directly overseas or listing.
According to a set of Q&A published on the NDRC’s official website, a NDRC official indicated that after a PRC company submits its application
for overseas listing to the CSRC and where matters relating to prohibited businesses under the Negative List are implicated, the CSRC will consult
the regulatory authorities having jurisdiction over the relevant industries and fields.
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If the CSRC, the CAC or other relevant PRC regulatory agencies subsequently determine that prior approval is required for any of our future
offerings of securities overseas or to maintain the listing status of our ADSs, we cannot guarantee that we will be able to obtain such approval in a
timely manner, or at all. The CSRC, the CAC or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us,
not to proceed with such offering or maintain the listing status of our ADSs. If we proceed with any of such offering or maintain the listing status
of our ADSs without obtaining these regulatory agencies’ approval to the extent it is required, or if we are unable to comply with any new approval
requirements which might be adopted for offerings that we have completed prior to the publication of the above-referenced opinions, we may face
regulatory actions or other sanctions from these regulatory agencies. These regulatory agencies may impose fines and penalties on our operations in
China, limit our ability to pay dividends outside of China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds
from offering of securities overseas into China or take other actions that could have a material adverse effect on our business, financial condition,
results of operations and prospects, as well as the trading price of the ADSs.
Furthermore, if there are any other approvals, filings and/or other administration procedures to be obtained from or completed with the CSRC,
the CAC or other PRC regulatory agencies as required by any new laws and regulations for any of our future proposed offering of securities
overseas or the listing of the ADSs, we cannot assure you that we can obtain the required approval or complete the required filings or other
regulatory procedures in a timely manner, or at all. Any failure to obtain the relevant approvals or complete the filings and other relevant regulatory
procedures may subject us to regulatory actions or other sanctions from the CSRC or other PRC regulatory agencies, which may have a material
adverse effect on our business, financial condition or results of operations.
PRC regulations relating to investments in offshore companies by PRC residents may subject our PRC-resident beneficial owners or our PRC
subsidiaries to liability or penalties or otherwise limit our PRC subsidiaries’ ability to increase their registered capital or distribute profits.
In July 2014, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore
Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or the SAFE Circular 37, which replaces the previous
SAFE Circular 75. The SAFE Circular 37 requires PRC residents, including PRC individuals and PRC corporate entities, to register with SAFE or
its local branches in connection with their direct or indirect offshore investment activities. See “Item 4. Information on the Company—B. Business
Overview—Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in China—Regulations on Foreign
Exchange—Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents.” The SAFE Circular 37 is applicable to our
shareholders who are PRC residents and may be applicable to any offshore acquisitions that we may make in the future.
Under SAFE Circular 37, PRC residents who make, or have prior to the implementation of SAFE Circular 37 made, direct or indirect
investments in offshore special purpose vehicles, or SPVs, are required to register such investments with SAFE or its local branches. In addition,
any PRC resident who is a direct or indirect shareholder of an SPV, is required to update its registration with the local branch of SAFE with respect
to that SPV, to reflect any material change. Moreover, any subsidiary of such SPV in China is required to urge the PRC resident shareholders to
update their registration with the local branch of SAFE to reflect any material change. If any PRC resident shareholder of such SPV fails to make
the required registration or to update the registration, the subsidiary of such SPV in China may be prohibited from distributing its profits or the
proceeds from any capital reduction, share transfer or liquidation to the SPV, and the SPV may also be prohibited from making additional capital
contributions into its subsidiaries in China. In February 2015, SAFE promulgated a Notice on Further Simplifying and Improving Foreign
Exchange Administration Policy on Direct Investment, or SAFE Notice 13. Under SAFE Notice 13, applications for foreign exchange registration
of inbound foreign direct investments and outbound direct investments, including those required under SAFE Circular 37, must be filed with
qualified banks instead of SAFE. Qualified banks should examine the applications and accept registrations under the supervision of SAFE. Prior to
our listing on the Nasdaq Global Select Market, we have used our best efforts to notify PRC residents or entities who directly or indirectly hold
shares in our Cayman Islands holding company and who are known to us as being PRC residents to complete the foreign exchange registrations.
However, we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company, nor can we
compel our beneficial owners to comply with SAFE registration requirements. We cannot assure you that all other shareholders or beneficial
owners of ours who are PRC residents or entities have complied with, and will in the future make, obtain or update any applicable registrations or
approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply with SAFE regulations, or failure by us to
amend the foreign exchange registrations of our PRC subsidiaries, could subject us to fines or legal sanctions, restrict our overseas or cross-border
investment activities, limit our PRC subsidiaries’ ability to increase their registered capitals or to make distributions or pay dividends to us or affect
our ownership structure, which could adversely affect our business and prospects.
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Furthermore, as these foreign exchange and outbound investment related regulations are relatively new and their interpretation and
implementation has been constantly evolving, it is unclear how these regulations, and any future regulation concerning offshore or cross-border
investments and transactions, will be interpreted, amended and implemented by the relevant government authorities. For example, we may be
subject to a more stringent review and approval process with respect to our foreign exchange activities, such as remittance of dividends and
foreign-currency-denominated borrowings, which may adversely affect our financial condition and results of operations. We cannot assure you that
we have complied or will be able to comply with all applicable foreign exchange and outbound investment related regulations. In addition, if we
decide to acquire a PRC domestic company, we cannot assure you that we or the owners of such company, as the case may be, will be able to
obtain the necessary approvals or complete the necessary filings and registrations required by the foreign exchange regulations. This may restrict
our ability to implement our acquisition strategy and could adversely affect our business and prospects.
Any failure to comply with PRC regulations regarding our employee share incentive plans may subject the PRC plan participants or us to fines
and other legal or administrative sanctions.
Under the applicable regulations and SAFE rules, PRC resident who participate in an employee stock ownership plan or a stock option plan in
an overseas publicly listed company are required to register with SAFE and complete certain other procedures. In February 2012, SAFE
promulgated the Notices on Issues concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive
Plans of Overseas Publicly-Listed Companies, or the Stock Option Rules. Pursuant to the Stock Option Rules, if a PRC resident participates in any
stock incentive plan of an overseas publicly-listed company, a qualified PRC domestic agent must, among other things, file on behalf of such
participant an application with SAFE to conduct the SAFE registration with respect to such stock incentive plan and obtain approval for an annual
allowance with respect to the purchase of foreign exchange in connection with the exercise or sale of stock options or stock such participant holds.
Such participating PRC residents’ foreign exchange income received from the sale of stock and dividends distributed by the overseas publicly-
listed company must be fully remitted into a PRC collective foreign currency account opened and managed by the PRC agent before distribution to
such participants. We and our PRC resident employees who have been granted stock options or other share-based incentives of our Company are
subject to the Stock Option Rules since our Company becomes an overseas listed company, and we currently withhold income tax from our PRC
resident employees in connection with their exercise of options. If we or our PRC resident participants fail to comply with these regulations, or if
our PRC resident participants fail to pay or we fail to withhold their income taxes according to relevant laws, rules and regulations, we and/or our
PRC resident participants may be subject to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC
subsidiaries and limit our PRC subsidiaries’ ability to distribute dividends to us. We also face regulatory uncertainties that could restrict our ability
to adopt additional incentive plans for our directors, executive officers and employees under PRC law. See “Item 4. Information on the Company—
B. Business Overview—Regulation—Overview of the Laws and Regulations Relating to Our Business and Operations in China—Regulations on
Foreign Exchange—Regulations on Employee Share Incentive Plans of Overseas Publicly-Listed Company.”
In addition, on October 12, 2021, the SAT has issued the Notice of the State Administration of Taxation on Several Measures for Deepening
the Reform of “Streamlining Administration, Instituting Decentralization, Improving Regulation and Optimizing Services” in the Taxation Field to
Cultivate and Stimulate the Vitality of Market Players, or the SAT Notice 69. The SAT Notice 69 requires domestic enterprises to report their share
incentive plans to the tax authorities in charge, which gives the equities of an overseas enterprise to their employees. Under the SAT Notice 69, our
employees working in China who exercise share incentive awards will be subject to PRC individual income tax. Our PRC subsidiary has the
obligation to make filings related to employee share incentive awards with relevant tax authorities and to withhold individual income taxes of those
employees who exercise their share incentive awards. If our employees fail to pay or we fail to withhold their income taxes according to relevant
laws and regulations, we may face sanctions imposed by the tax authorities or other PRC governmental authorities.
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PRC regulation of loans to and direct investment in PRC entities by offshore holding companies and governmental control of currency
conversion may delay or prevent us from using the proceeds of our securities offerings to make loans or additional capital contributions to our
PRC subsidiaries and the VIE and its subsidiaries.
Futu Holdings Limited is an offshore holding company with part of our operations conducted in China. We may make loans to our PRC
subsidiaries and VIE subject to the approval, registration, and filing with governmental authorities and limitation of amount, or we may make
additional capital contributions to our wholly foreign-owned subsidiaries in China. Any loans provided by us to our PRC subsidiaries and VIE are
subject to PRC regulations and foreign exchange loan registrations. Such loans to any of our PRC subsidiaries and VIE cannot exceed a statutory
limit and must be filed with SAFE through the online filing system of SAFE pursuant to the applicable PRC regulations. Any loan to be provided
by us to our PRC subsidiaries and VIE with a term of one year or more must be recorded and registered with the National Development and
Reform Commission. In addition, a foreign invested enterprise shall use its capital pursuant to the principle of authenticity and self-use within its
business scope. The capital of a foreign invested enterprise shall not be used for the following purposes: (i) directly or indirectly used for payment
beyond the business scope of the enterprises or the payment prohibited by relevant laws and regulations; (ii) directly or indirectly used for
investment in securities or investments other than banks’ principal-secured products unless otherwise provided by relevant laws and regulations;
(iii) the granting of loans to non-affiliated enterprises, except where it is expressly permitted in the business license; and (iv) paying the expenses
related to the purchase of real estate that is not for self-use (except for the foreign-invested real estate enterprises).
In light of the various requirements imposed by PRC regulations on loans to and direct investment in PRC entities by offshore holding
companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government
approvals or filings on a timely basis, if at all, with respect to future loans by us to our PRC subsidiary or VIE or with respect to future capital
contributions by us to our PRC subsidiary. If we fail to complete such registrations or obtain such approvals, our ability to use the proceeds from
our securities offerings to capitalize or otherwise fund our PRC operations may be negatively affected, which could adversely affect our liquidity
and our ability to fund and expand our business.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject
to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside the PRC with “de facto
management body” within the PRC is considered a “resident enterprise” and will be subject to the enterprise income tax on its global income at the
rate of 25%. The implementation rules define the term “de facto management body” as the body that exercises full and substantial control and
overall management over the business, productions, personnel, accounts and properties of an enterprise. The Notice Regarding the Determination
of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the basis of de facto management bodies, or the SAT
Circular 82, issued by the SAT on April 22, 2009, and amended on December 29, 2017, provides certain specific criteria for determining whether
the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only
applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the
criteria set forth in the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in
determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an offshore incorporated enterprise controlled by a
PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China and
will be subject to PRC enterprise income tax on its global income only if all of the following conditions are met: (i) the primary location of the day-
to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s financial and human resource matters are made or are
subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary assets, accounting books and records, company seals,
and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least 50% of board members with voting rights or senior
executives habitually reside in the PRC.
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We believe that our Cayman Islands holding company, Futu Holdings Limited, is not a PRC resident enterprise for PRC tax purposes.
However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the
interpretation of the term “de facto management body.” If the PRC tax authorities determine that our Cayman Islands holding company is a PRC
resident enterprise for enterprise income tax purposes, non-resident enterprise shareholders, including the ADS holders, may be subject to PRC tax
at a rate of 10% on gains realized on the sale or other disposition of ADSs or Class A Ordinary Shares, if such income is treated as sourced from
within the PRC. Any PRC tax liability may be reduced by an applicable tax treaty. However, it is unclear whether non-PRC shareholders of our
Company would be able to claim the benefits of any tax treaties between their country of tax residence and the PRC in the event that we are treated
as a PRC resident enterprise. Any such tax may reduce the returns on your investment in the ADSs or Class A Ordinary Shares.
In addition to the uncertainties as to the application of the “resident enterprise” classification, we cannot assure you that the PRC government
will not amend or revise the taxation laws, rules and regulations to impose stricter tax requirements or higher tax rates. Any of such changes could
materially and adversely affect our financial condition and results of operations.
Dividends payable to our foreign investors and gains on the sale of the ADSs or Class A Ordinary Shares by our foreign investors may become
subject to PRC tax.
Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is
applicable to dividends payable to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC
or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business,
to the extent such dividends are derived from sources within the PRC. Similarly, any gain realized on the transfer of ADSs or Class A Ordinary
Shares by such investors is also subject to PRC tax at a current rate of 10%, subject to any reduction or exemption set forth in applicable tax
treaties or under applicable tax arrangements between jurisdictions, if such gain is regarded as income derived from sources within the PRC. If we
are deemed a PRC resident enterprise, dividends paid on our Class A Ordinary Shares or ADSs, and any gain realized from the transfer of our
Class A Ordinary Shares or ADSs, would be treated as income derived from sources within the PRC and would as a result be subject to PRC
taxation. Furthermore, if we are deemed a PRC resident enterprise, dividends payable to individual investors who are non-PRC residents and any
gain realized on the transfer of ADSs or Class A Ordinary Shares by such investors may be subject to PRC tax at a current rate of 20%, subject to
any reduction or exemption set forth in applicable tax treaties or under applicable tax arrangements between jurisdictions. If we or any of our
subsidiaries established outside China are considered a PRC resident enterprise, it is unclear whether holders of the ADSs or Class A Ordinary
Shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends
payable to our non-PRC investors, or gains from the transfer of the ADSs or Class A Ordinary Shares by such investors, are deemed as income
derived from sources within the PRC and thus are subject to PRC tax, the value of your investment in the ADSs or Class A Ordinary Shares may
decline significantly.
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We and our shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets
attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.
In February 2015, SAT issued a Public Notice Regarding Certain Corporate Income Tax Matters on Indirect Transfer of Properties by Non-Tax
Resident Enterprises(“SAT Public Notice 7”). SAT Public Notice 7 extends its tax jurisdiction to transactions involving transfer of other taxable
assets through offshore transfer of a foreign intermediate holding company. In addition, SAT Public Notice 7 provides clear criteria for assessment
of reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and sale of equity through a
public securities market. SAT Public Notice 7 also brings challenges to both foreign transferor and transferee (or other person who is obligated to
pay for the transfer) of taxable assets. In October 2017, SAT issued the Announcement of the State Administration of Taxation on Issues
Concerning the Withholding of Non-resident Enterprise Income Tax at Source, which came into effect on December 1, 2017. The SAT Bulletin 37
further clarifies the practice and procedure of the withholding of non-resident enterprise income tax. Where a non-resident enterprise transfers
taxable assets indirectly by disposing of the equity interests of an overseas holding company, which is an indirect transfer, the non-resident
enterprise as either transferor or transferee, or the PRC entity that directly owns the taxable assets, may report such Indirect Transfer to the relevant
tax authority. Using a “substance over form” principle, the PRC tax authority may disregard the existence of the overseas holding company if it
lacks a reasonable commercial purpose and was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived
from such indirect transfer other than transfer of shares or ADSs acquired and sold on public markets may be subject to PRC enterprise income tax,
and the transferee or other person who is obligated to pay for the transfer is obligated to withhold the applicable taxes, currently at a rate of 10%.
Both the transferor and the transferee may be subject to penalties under PRC tax laws if the transferee fails to withhold the taxes and the transferor
fails to pay the taxes.
We face uncertainties as to the reporting and other implications of certain past and future transactions that involve PRC taxable assets, such as
offshore restructuring, sale of the shares in our offshore subsidiaries and investments. Our company may be subject to filing obligations or taxed if
our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions,
under SAT Public Notice 7 or SAT Bulletin 37, or both.
If the custodians or authorized users of our controlling non-tangible assets, including our corporate chops and seals, fail to fulfill their
responsibilities, or misappropriate or misuse these assets, our business and operations may be materially and adversely affected.
Under PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that our
business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is
registered and filed with the relevant local branch of the market supervision administration.
In order to maintain the physical security of our corporate chops and the corporate chops of our PRC entities, we generally store these items in
secured locations accessible only by the authorized personnel of each of our PRC subsidiary and consolidated entities. Although we monitor such
authorized personnel, there is no assurance such procedures will prevent all instances of abuse or negligence. Accordingly, if any of our authorized
personnel misuse or misappropriate our corporate chops or seals, we could encounter difficulties in maintaining control over the relevant entities
and experience significant disruption to our operations. If a designated legal representative obtains control of the corporate chops in an effort to
obtain control over any of our PRC subsidiary or consolidated entities, we, our PRC subsidiaries or consolidated entities would need to pass a new
shareholder or board resolution to designate a new legal representative and we would need to take legal action to seek the return of the corporate
chops, apply for new corporate chops with the relevant authorities, or otherwise seek legal redress for the violation of the representative’s fiduciary
duties to us, which could involve significant time and resources and divert management attention away from our regular business. In addition, the
affected entity may not be able to recover corporate assets that are sold or transferred out of our control in the event of such a misappropriation if a
transferee relies on the apparent authority of the representative and acts in good faith.
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China’s M&A Rules and certain other PRC regulations establish complex procedures for certain acquisitions of PRC companies by foreign
investors, which could make it more difficult for us to pursue growth through acquisitions in China.
A number of PRC laws and regulations have established procedures and requirements that could make merger and acquisition activities in
China by foreign investors more time consuming and complex. In addition to the Anti-monopoly Law itself, these include the Regulations on
Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies in 2006 and
amended in 2009, and the Rules of the Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of
Domestic Enterprises by Foreign Investors, or the Security Review Rules, promulgated in 2011. These laws and regulations impose requirements in
some instances that the Ministry of Commerce be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise. In addition, the Anti-Monopoly Law requires that the anti-monopoly enforcement agency be notified in advance of
any concentration of undertaking if certain thresholds are triggered. On February 7, 2021, the Anti-Monopoly Committee of the State Council
published the Guidelines to Anti-monopoly in the Field of Internet Platforms, which stipulates that any concentration of undertakings involving
variable interest entities is subject to anti-monopoly review. Moreover, the Security Review Rules specify that mergers and acquisitions by foreign
investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto
control over domestic enterprises that raise “national security” concerns are subject to strict review by the Ministry of Commerce, and prohibit any
attempt to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. On December 19,
2020, the NDRC and the Ministry of Commerce jointly issued the Measures for the Security Review for Foreign Investment, which took effect on
January 18, 2021. These measures set forth the provisions concerning the security review mechanism on foreign investment, including, among
others, the types of investments subject to review, and the review scopes and procedures. In the future, we may grow our business by acquiring
complementary businesses. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming,
and any required approval processes, including approval from the Ministry of Commerce and other PRC government authorities, may delay or
inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
Discontinuation of any of the preferential tax treatments and government subsidies or imposition of any additional taxes and surcharges could
adversely affect our financial condition and results of operations.
The VIE and our PRC subsidiaries currently benefit from a number of preferential tax treatments. For example, Shenzhen Futu is entitled to
enjoy a 15% preferential enterprise income tax rate from December 2019 as it has been qualified as a “High and New Technology Enterprise”
under the Enterprise Income Tax Law and related regulations. Futu Network Technology (Shenzhen) Co., Ltd. is entitled to enjoy a 15%
preferential income tax rate from 2019 as it has been qualified as an “High and New Technology Enterprise” under the PRC Enterprise Income Tax
Law and related regulations. The discontinuation of any of the preferential income tax treatment currently enjoyed by the VIE or our PRC
subsidiaries could have an adverse effect on our result of operations and financial condition. We cannot assure you that we will be able to maintain
or lower our current effective tax rate in the future.
In addition, our PRC subsidiaries have received various financial subsidies from PRC local government authorities. The financial subsidies
result from discretionary incentives and policies adopted by PRC local government authorities. Local governments may decide to change or
discontinue such financial subsidies at any time. The discontinuation of such financial subsidies or imposition of any additional taxes could
adversely affect our financial condition and results of operations.
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We may rely on dividends and other distributions on equity paid by our PRC subsidiaries to fund any cash and financing requirements we
may have, and any limitation on the ability of our PRC subsidiaries to make payments to us could have a material and adverse effect on our
ability to conduct our business.
Futu Holdings Limited is a holding company incorporated under the laws of the Cayman Islands and as such rely on dividends and other
distributions on equity from our PRC subsidiaries to satisfy part of our liquidity requirements. Pursuant to the Enterprise Income Tax Law, a
withholding tax rate of 10% currently applies to dividends paid by a PRC “resident enterprise” to a foreign enterprise investor, unless any such
foreign investor’s jurisdiction of incorporation has a tax treaty with China that provides for preferential tax treatment. Pursuant to the Arrangement
between the Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on
Income, such withholding tax rate may be lowered to 5% if a Hong Kong resident enterprise owns no less than 25% of a PRC enterprise.
Furthermore, the Administrative Measures for Non-Resident Taxpayers to Enjoy Treatments under Treaties, which became effective in January
2020, require non-resident enterprises to determine whether they are qualified to enjoy the preferential tax treatment under the tax treaties and file
relevant report and materials with the tax authorities. In addition, based on the Circular on Several Questions regarding the “Beneficial Owner” in
Tax Treaties, or Circular 9, issued on February 3, 2018 by the SAT, which became effective from April 1, 2018, when determining the applicant’s
status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several factors,
including without limitation, whether the applicant is obligated to pay more than 50% of the applicant’s income in twelve months to residents in
third country or region, whether the business operated by the applicant constitutes the actual business activities, and whether the counterparty
country or region to the tax treaties does not levy any tax or grant tax exemption on relevant incomes or levy tax at an extremely low rate, will be
taken into account, and it will be analyzed according to the actual circumstances of the specific cases. There are also other conditions for enjoying
the reduced withholding tax rate according to other relevant tax rules and regulations. See “Overview of the Laws and Regulations Relating to Our
Business and Operations in Hong Kong—Regulations on Tax.” As of December 31, 2021, the total retained earnings of our subsidiaries and the
VIE and its subsidiaries located in China accounted for a relatively small portion of our total retained earnings and we currently do not have any
plan to make offshore distribution. We intend to re-invest all earnings, if any, generated from our PRC subsidiaries for the operation and expansion
of our business in China. Our determination regarding our qualification to enjoy the preferential tax treatment could be challenged by the relevant
tax authority and we may not be able to complete the necessary filings with the relevant tax authority and enjoy the preferential withholding tax
rate of 5% under the arrangement with respect to dividends to be paid by our PRC subsidiaries to our Hong Kong subsidiary.
The PCAOB is currently unable to inspect our auditor in relation to their audit work performed for our financial statements and the inability of
the PCAOB to conduct inspections over our auditor deprives our investors with the benefits of such inspections.
Our auditor, the independent registered public accounting firm that issues the audit report included in our annual report filed with the SEC, as
an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board
(United States), or the PCAOB, is subject to the laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its
compliance with the applicable professional standards. Since our auditor is located in China, a jurisdiction where the PCAOB has been unable to
conduct inspections without the approval of the Chinese authorities, our auditor is not currently inspected by the PCAOB.
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This lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating audits and quality control procedures of our
independent registered public accounting firm. As a result, we and investors in our securities are deprived of the benefits of such PCAOB
inspections. The inability of the PCAOB to conduct inspections of auditors in China makes it more difficult to evaluate the effectiveness of our
independent registered public accounting firm’s audit procedures or quality control procedures as compared to auditors outside of China that are
subject to the PCAOB inspections, which could cause investors and potential investors in our securities to lose confidence in our audit procedures
and reported financial information and the quality of our financial statements.
Our ADSs will be delisted and our ADSs and shares may be prohibited from trading in the over-the-counter market under the Holding Foreign
Companies Accountable Act, or the HFCAA, if the PCAOB is unable to inspect or fully investigate auditors located in China. On December 16,
2021, PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations that the PCAOB is
unable to inspect or investigate completely. In March 2022, the SEC issued its first “Conclusive list of issuers identified under the HFCAA”
indicating that those companies are now formally subject to the delisting provisions if they remain on the list for three consecutive years. We
anticipate being added to the list shortly after the filing of this annual report on Form 20-F. Under the current law, delisting and prohibition
from over-the-counter trading in the U.S.will start taking place in 2024. If this happens there is no certainty that we will be able to list our ADS
or shares on a non-U.S. exchange or that a market for our shares will develop outside of the U.S. In addition, legislations are currently being
considered in the United States to shorten the number of non-inspection years from three years to two, which, if adopted, could cause our ADSs
to be delisted from the exchange and prohibited from over-the-counter trading in the U.S. as early as 2023. If our ADSs are delisted from the
U.S. Exchange and are prohibited from trading in the over-the-counter market in the U.S. there is no certainty that we will be able to list on a
non-U.S. exchange or that a market for our shares will develop outside of the U.S. The delisting of our ADSs and inability to trade, or the
threat thereof, may materially and adversely affect the value of your investment.
As part of a continued regulatory focus in the United States on access to audit and other information currently protected by national law, in
particular in Mainland China and Hong Kong, the Holding Foreign Companies Accountable Act, or the HFCAA has been signed into law on
December 18, 2020. The HFCAA states that if the SEC determines that we have filed audit reports issued by a registered public accounting firm
that has not been subject to inspection for the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares or ADSs
from being traded on a national securities exchange or in the over-the-counter trading market in the U.S. Accordingly, under the current law this
will happen in 2024.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements
of the HFCAA. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be
subsequently established by the SEC.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the
number of consecutive non-inspection years required for triggering the prohibitions under the HFCAA from three years to two. The SEC is also
assessing how to implement other requirements of the HFCAA, including the listing and trading prohibition requirements described above.
On November 5, 2021, the SEC approved the PCAOB Rule 6100 that provides a framework for the PCAOB to determine whether it is unable
to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more
authorities in that jurisdiction. The rule states that the PCAOB will make these determinations promptly.
On December 2, 2021, the SEC adopted final amendments to its rules implementing the HFCAA, or the Final Amendments. The Final
Amendments include requirements to disclose information, including the auditor name and location, the percentage of shares of the issuer owned
by governmental entities, whether governmental entities in the applicable foreign jurisdiction with respect to the auditor has a controlling financial
interest with respect to the issuer, the name of each official of the Chinese Communist Party who is a member of the board of the issuer, and
whether the articles of incorporation of the issuer contains any charter of the Chinese Communist Party. The Final Amendments also establish
procedures the SEC will follow in identifying issuers and prohibiting trading by certain issuers under the HFCAA. According to the Final
Amendments, the SEC will identify Commission-Identified Issuers for fiscal years beginning after December 18, 2020. A Commission-Identified
Issuer will be required to comply with the submission and disclosure requirements in the annual report for each year in which it was identified. If a
registrant is identified as a Commission-Identified Issuer based on its annual report for the fiscal year ended December 31, 2021, the registrant will
be required to comply with the submission or disclosure requirements in its annual report filing covering the fiscal year ended December 31, 2022.
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On December 16, 2021, the PCAOB issued the HFCAA Determination Report, according to which our auditor is subject to the determinations
that the PCAOB is unable to inspect or investigate completely. The HFCAA Determination Report is a report relaying to the SEC its
determinations that the PCAOB is unable to inspect or investigate completely registered public accounting firms in Mainland China and Hong
Kong due to positions taken by Chinese authorities. The report, issued under Rule 6100, lists dozens of accounting firms based in Mainland China
and Hong Kong subject to the determinations. Under Rule 6100, the PCAOB will reassess its determinations at least annually. Our auditor, the
independent registered public accounting firm that issues the audit report included elsewhere in this annual report, as an auditor of companies that
are traded publicly in the United States and a firm registered with the PCAOB, is subject to laws in the United States pursuant to which the
PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Since our auditor is located in China, a
jurisdiction where the PCAOB has been unable to conduct inspections without the approval of the Chinese authorities, our auditor is currently not
inspected by the PCAOB.
The HFCAA or other efforts to increase U.S. regulatory access to audit information could cause investor uncertainty for affected issuers,
including us, and the market price of the ADSs could be adversely affected. Additionally, whether the PCAOB will be able to conduct inspections
of our auditor before the issuance of our financial statements on Form 20-F for the year ended December 31, 2023, which is due by April 30, 2024,
or at all, is subject to substantial uncertainty and depends on factors out of our and our auditor’s control. If our auditor is unable to be inspected in
time, we could be subject to additional submission and disclosure requirements, delisted from the Nasdaq Global Market and our ADSs will not be
permitted for trading “over-the-counter” either. On June 22, 2021, the U.S. Senate passed a bill known as the Accelerating Holding Foreign
Companies Accountable Act, to amend Section 104(i) of the Sarbanes-Oxley Act of 2002 (15 U.S.C. 7214(i)) to prohibit securities of any
registrant from being listed on any of the U.S. securities exchanges or traded over-the-counter if the auditor of the registrant’s financial statements
is not subject to PCAOB inspection for two consecutive years, instead of three consecutive years as currently enacted in the HFCAA. On February
4, 2022, the U.S. House of Representatives passed the America Competes Act of 2022 which includes the exact same amendments as the bill
passed by the Senate. The America Competes Act however includes a broader range of legislation not related to the HFCAA in response to the
U.S. Innovation and Competition Act passed by the Senate in 2021. The U.S. House of Representatives and U.S. Senate will need to agree on
amendments to these respective bills to align the legislation and pass their amended bills before the President can sign into law. It is unclear when
the U.S. Senate and U.S. House of Representatives will resolve the differences in the U.S. Innovation and Competition Act and the America
Competes Act of 2022 bills currently passed, or when the U.S. President will sign on the bill to make the amendment into law, or at all. In the case
that the bill becomes the law, it will reduce the time period before our ADSs could be delisted from the exchange and prohibited from over-the-
counter trading in the U.S. from 2024 to 2023. Such a delisting or prohibition from trading would substantially impair your ability to sell or
purchase our ADSs when you wish to do so, and the risk and uncertainty associated with delisting or prohibition from trading would have a
negative impact on the price of our ADSs. Also, such a delisting would significantly affect our ability to raise capital on terms acceptable to us, or
at all, which would have a material adverse impact on our business, financial condition and prospects.
It may be difficult for overseas authorities to conduct investigations or collect evidence within China.
Shareholder claims or regulatory investigations that are common in the United States generally are difficult to pursue as a matter of law or
practicality in China. For example, in China, there are significant legal and other obstacles to providing information needed for regulatory
investigations or litigations initiated outside China. Although the authorities in China may establish a regulatory cooperation mechanism with the
securities regulatory authorities of another country or region to implement cross-border supervision and administration, such cooperation with the
securities regulatory authorities in the Unities States may not be efficient in the absence of mutual and practical cooperation mechanism.
Furthermore, according to Article 177 of the PRC Securities Law(“Article 177”), which became effective in March 2020, no overseas authorities,
including the SEC, the PCAOB, and the U.S. Department of Justice, can directly conduct investigation or evidence collection activities within the
PRC and no entity or individual in China may provide documents and information relating to securities business activities to overseas authorities
without PRC government approval. While detailed interpretation of or implementation rules under Article 177 are yet to be promulgated, the
inability for overseas authorities to directly conduct investigation or evidence collection activities within China may further increase difficulties
faced by you in protecting your interests.
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Proceedings instituted by the SEC against the “big four” PRC-based accounting firms, including our independent registered public accounting
firm, could result in financial statements being determined to not be in compliance with the requirements of the Exchange Act.
Starting in 2011 the “big four” China-based accounting firms, including our independent registered public accounting firm, were affected by a
conflict between U.S. and Chinese law. Specifically, for certain U.S.-listed companies operating and audited in China, the SEC and the PCAOB
sought to obtain from the Chinese firms access to their audit work papers and related documents. The firms were, however, advised and directed
that under Chinese law, they could not respond directly to the U.S. regulators on those requests, and that requests by foreign regulators for access to
such papers in China had to be channeled through the CSRC.
In late 2012, this impasse led the SEC to commence administrative proceedings under Rule 102(e) of its Rules of Practice and also under the
Sarbanes-Oxley Act of 2002 against the Chinese accounting firms, including our independent registered public accounting firm. A first instance
trial of the proceedings in July 2013 in the SEC’s internal administrative court resulted in an adverse judgment against the firms. The
administrative law judge proposed penalties on the firms including a temporary suspension of their right to practice before the SEC, although that
proposed penalty did not take effect pending review by the Commissioners of the SEC. On February 6, 2015, before a review by the Commissioner
had taken place, the firms reached a settlement with the SEC. Under the settlement, the SEC accepted that future requests by the SEC for the
production of documents will normally be made to the CSRC. The firms were to receive matching Section 106 requests, and are required to abide
by a detailed set of procedures with respect to such requests, which in substance require them to facilitate production via the CSRC. If they failed
to meet specified criteria, during a period of four years starting from the settlement date, the SEC retained authority to impose a variety of
additional remedial measures on the firms depending on the nature of the failure. Under the terms of the settlement, the underlying proceeding
against the four China-based accounting firms was deemed dismissed with prejudice four years after entry of the settlement. The four-year mark
occurred on February 6, 2019. We cannot predict if the SEC will further challenge the four China-based accounting firms’ compliance with U.S.
law in connection with U.S. regulatory requests for audit work papers or if the results of such a challenge would result in the SEC imposing
penalties such as suspensions. If additional remedial measures are imposed on the “big four” China-based accounting firms, including our
independent registered public accounting firm, we could be unable to timely file future financial statements in compliance with the requirements of
the Exchange Act.
In the event the “big four” China-based accounting firms become subject to additional legal challenges by the SEC or PCAOB, depending
upon the final outcome, listed companies in the United States with major PRC operations may find it difficult or impossible to retain auditors in
respect of their operations in the PRC, which could result in financial statements being determined to not be in compliance with the requirements of
the Exchange Act, including possible delisting. Moreover, any negative news about any such future proceedings against these audit firms may
cause investor uncertainty regarding China-based, U.S.-listed companies and the market price of our ADSs may be adversely affected.
If our independent registered public accounting firm was denied, even temporarily, the ability to practice before the SEC and we were unable
to timely find another registered public accounting firm to audit and issue an opinion on our financial statements, our financial statements could be
determined not to be in compliance with the requirements of the Exchange Act. Such a determination could ultimately lead to the delisting of the
ADSs from Nasdaq Global Select Market or deregistration from the SEC, or both, which would substantially reduce or effectively terminate the
trading of the ADSs in the United States.
Risks Related to the ADSs
The trading price of the ADSs may be volatile, which could result in substantial losses to you.
The trading price of the ADSs has been volatile and has ranged from a low of US$8.16 to a high of US$204.25 since the ADSs started to trade
on the Nasdaq Global Market on March 8, 2019. The market price for the ADSs may continue to be volatile and subject to wide fluctuations in
response to factors including, but not limited to, the following:
● regulatory developments affecting us or our industry or China-based companies in general;
● adverse market rumors, speculations, media reports or other negative publicity involving us or our industry or China-based companies in
general, some of which may be unsubstantiated or inaccurate;
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● announcements of studies and reports relating to the quality of our credit offerings or those of our competitors;
● changes in the economic performance or market valuations of other financial service providers;
● actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
● changes in financial estimates by securities research analysts;
● conditions in the market for financial services;
● announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital
raisings or capital commitments;
● additions to or departures of our senior management;
● fluctuations of exchange rates between the Renminbi and the U.S. dollar;
● release or expiry of lock-up or other transfer restrictions on our outstanding shares or the ADSs; and
● sales or perceived potential sales of additional ordinary shares or ADSs.
In addition, the stock market in general, and the market prices for internet-related companies and companies with operations in China in
particular, have experienced volatility that often has been unrelated to the operating performance of such companies. The securities of some China-
based companies that have listed their securities in the United States have experienced significant volatility since their initial public offerings in
recent years, including, in some cases, substantial declines in the trading prices of their securities. The trading performances of these companies’
securities after their offerings may affect the attitudes of investors towards Chinese companies listed in the United States in general, which
consequently may impact the trading performance of the ADSs, regardless of our actual operating performance. In addition, any negative news or
perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or other matters of other Chinese
companies may also negatively affect the attitudes of investors towards Chinese companies in general, including us, regardless of whether we have
engaged in any inappropriate activities. Furthermore, the stock market in general has experienced large price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry fluctuations may
adversely affect the market price of the ADSs. Volatility or a lack of positive performance in the ADS price may also adversely affect our ability to
retain key employees, most of whom have been granted options or other equity incentives.
In the past, shareholders of public companies have often brought securities class action suits against those companies following periods of
instability in the market price of their securities. If we were involved in a class action suit, it could divert a significant amount of our management’s
attention and other resources from our business and operations and require us to incur significant expenses to defend the suit, which could harm our
results of operations. Any such class action suit, whether or not successful, could harm our reputation and restrict our ability to raise capital in the
future. In addition, if a claim is successfully made against us, we may be required to pay significant damages, which could have a material adverse
effect on our financial condition and results of operations.
Our dual-class voting structure will limit your ability to influence corporate matters and could discourage others from pursuing any change of
control transactions that holders of our Class A ordinary shares and the ADSs may view as beneficial, and may adversely affect the trading
market for the ADSs.
Our authorized share capital is divided into Class A ordinary shares and Class B ordinary shares. Holders of Class A ordinary shares is entitled
to one vote per share, while holders of Class B ordinary shares are entitled to twenty votes per share. Each Class B ordinary share is convertible
into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are not convertible into Class B ordinary shares
under any circumstances. Upon any sale, transfer, assignment or disposition of any Class B ordinary shares by a holder thereof to any non-affiliate
of such holder, each of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share.
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As of February 28, 2022, Mr. Leaf Hua Li, our founder, chairman of the board of directors and chief executive officer, and Qiantang River
Investment Limited, an existing shareholder of ours beneficially own all of our issued Class B ordinary shares. These Class B ordinary shares
constitute 42.1% of our total issued and outstanding share capital and 93.6% of the aggregate voting power of our total issued and outstanding
share capital due to the disparate voting powers associated with our dual-class share structure. As a result of the dual-class share structure and the
concentration of ownership, holders of Class B ordinary shares have considerable influence over matters such as decisions regarding mergers and
consolidations, election of directors and other significant corporate actions. Such holders may take actions that are not in the best interest of us or
our other shareholders. This concentration of ownership may discourage, delay or prevent a change in control of our company, which could have
the effect of depriving our other shareholders of the opportunity to receive a premium for their shares as part of a sale of our company and may
reduce the price of the ADSs. This concentrated control will limit your ability to influence corporate matters and could discourage others from
pursuing any potential merger, takeover or other change of control transactions that holders of Class A ordinary shares and ADSs may view as
beneficial.
In addition, certain shareholder advisory firms have announced changes to their eligibility criteria for inclusion of shares of public companies
on certain indices, including the S&P 500, to exclude companies with multiple classes of shares and companies whose public shareholders hold no
more than 5% of total voting power from being added to such indices. Several shareholder advisory firms have also announced their opposition to
the use of multiple class structures. As a result, the dual class structure of our ordinary shares may prevent the inclusion of the ADSs representing
Class A ordinary shares in such indices and may cause shareholder advisory firms to publish negative commentary about our corporate governance
practices or otherwise seek to cause us to change our capital structure. Any such exclusion from indices could result in a less active trading market
for the ADSs. Any actions or publications by shareholder advisory firms critical of our corporate governance practices or capital structure could
also adversely affect the value of the ADSs.
If securities or industry analysts do not publish research or publish inaccurate or unfavorable research about our business, the market price
for the ADSs and trading volume could decline.
The trading market for the ADSs will depend in part on the research and reports that securities or industry analysts publish about us or our
business. If research analysts do not establish and maintain adequate research coverage or if one or more of the analysts who covers us downgrades
the ADSs or publishes inaccurate or unfavorable research about our business, the market price for the ADSs would likely decline. If one or more of
these analysts cease coverage of our company or fail to publish reports on us regularly, we could lose visibility in the financial markets, which, in
turn, could cause the market price or trading volume for the ADSs to decline.
The depositary for the ADSs will give us a discretionary proxy to vote our Class A ordinary shares underlying your ADSs if you do not vote at
shareholders’ meetings, except under limited circumstances, which could adversely affect your interests.
Under the deposit agreement for the ADSs, if you do not give instructions for voting the Class A ordinary shares underlying your ADSs, the
depositary will give us a discretionary proxy to vote those Class A ordinary shares at the shareholders’ meeting if:
● we have timely instructed the depositary to disseminate a notice of meeting and provided the depositary with a notice of meeting and
related voting materials;
● we have instructed the depositary that we wish a discretionary proxy to be given;
● we have informed the depositary that as of the instruction date we reasonably don’t know of any substantial opposition as to a matter to be
voted on at the meeting; and
● a matter to be voted on at the meeting would not have a material adverse impact on shareholders’ interests.
The effect of this discretionary proxy is that you cannot prevent our Class A ordinary shares underlying your ADSs from being voted at the
shareholder meeting if the circumstances described above are met. This may make it more difficult for shareholders to influence the management
of our company. Holders of our ordinary shares are not subject to this discretionary proxy.
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Because we do not expect to pay dividends in the foreseeable future, you must rely on price appreciation of the ADSs for return on your
investment.
We currently intend to retain most, if not all, of our available funds and any future earnings to fund the development and growth of our
business. As a result, we do not expect to pay any cash dividends in the foreseeable future. Therefore, you should not rely on an investment in the
ADSs as a source for any future dividend income.
Our board of directors has complete discretion as to whether to distribute dividends. In addition, our shareholders may by ordinary resolution
declare a dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to
certain restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided that
in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course
of business. Even if we decide to declare and pay dividends, the timing, amount and form of future dividends, if any, will depend on, among other
things, our future results of operations and cash flows, our capital requirements and surplus, the amount of distributions, if any, received by us from
our subsidiaries, our financial condition, contractual restrictions and other factors deemed relevant by our board of directors. Accordingly, the
return on your investment in the ADSs will likely depend entirely upon any future price appreciation of the ADSs. There is no guarantee that the
ADSs will appreciate in value or even maintain the price at which you purchased the ADSs. You may not realize a return on your investment in the
ADSs and you may even lose your entire investment in the ADSs.
Substantial future sales or perceived potential sales of the ADSs in the public market could cause the price of the ADSs to decline.
Sales of substantial amounts of the ADSs in the public market, or the perception that these sales could occur, could adversely affect the market
price of the ADSs and could materially impair our future ability to raise capital through equity offerings in the future. All of the ADSs sold in our
initial public offering and follow-on offering are freely tradable without any restriction or further registration under the U.S. Securities Act of 1933,
as amended, or the Securities Act, unless held by our “affiliates” as that term is defined in Rule 144 under the Securities Act. All of our shares
outstanding prior to our initial public offering are “restricted securities” as defined in Rule 144 and, in the absence of registration, may not be sold
other than in accordance with Rule 144 under the Securities Act or another exemption from registration.
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The voting rights of holders of ADSs are limited by the terms of the deposit agreement, and you may not be able to exercise your right to direct
how the Class A ordinary shares that are represented by your ADSs are voted.
Holders of ADSs do not have the same rights as our registered shareholders. As a holder of ADSs, you will not have any right to attend general
meetings of our shareholders or to cast any votes at such meetings. You will only be able to exercise the voting rights which are carried by the
underlying Class A ordinary shares represented by your ADSs indirectly by giving voting instructions to the depositary in accordance with the
provisions of the deposit agreement. If we instruct the depositary to ask for your instructions, then upon receipt of such voting instructions, the
depositary will try, as far as practicable, to vote the underlying Class A ordinary shares that are represented by your ADSs, in accordance with your
instructions. If we do not instruct the depositary to ask for your instructions, the depositary may still vote in accordance with instructions you give,
but it is not required to do so. You will not be able to directly exercise your right to vote with respect to the underlying Class A ordinary shares
represented by your ADSs unless you withdraw the shares and become the registered holder of such shares prior to the record date for the general
meeting. Under our amended and restated memorandum and articles of association, the minimum notice period required for convening a general
meeting is 10 calendar days. When a general meeting is convened, you may not receive sufficient advance notice of the meeting to withdraw the
shares underlying your ADSs and to vote directly with respect to any specific matter or resolution to be considered and voted upon at the general
meeting. In addition, under our memorandum and articles of association, for the purposes of determining those shareholders who are entitled to
attend and vote at any general meeting, our directors may close our register of members and/or fix in advance a record date for such meeting, and
such closure of our register of members or the setting of such a record date may prevent you from withdrawing the Class A ordinary shares
underlying your ADSs and becoming the registered holder of such shares prior to the record date, so that you would not be able to attend the
general meeting or to vote directly. If we ask for your instructions, the depositary will notify you of the upcoming vote and will arrange to deliver
our voting materials to you. We have agreed to give the depositary at least 30 days’ prior notice of shareholder meetings. Nevertheless, we cannot
assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the underlying shares represented
by your ADSs. In addition, the depositary and its agents are not responsible for failing to carry out voting instructions or for their manner of
carrying out your voting instructions. This means that you may not be able to exercise your right to direct how the shares underlying your ADSs
are voted and you may have no legal remedy if the shares underlying your ADSs are not voted as you requested.
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights
available to you in the United States unless we register both the rights and the securities to which the rights relate under the Securities Act or an
exemption from the registration requirements is available. Under the deposit agreement, the depositary will not make rights available to you unless
both the rights and the underlying securities to be distributed to ADS holders are either registered under the Securities Act or exempt from
registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to
endeavor to cause such a registration statement to be declared effective and we may not be able to establish a necessary exemption from
registration under the Securities Act. Accordingly, you may be unable to participate in our rights offerings in the future and may experience
dilution in your holdings.
You may not receive cash dividends if the depositary decides it is impractical to make them available to you.
The depositary will pay cash distributions on the ADSs only to the extent that we decide to distribute dividends on our Class A ordinary shares
or other deposited securities, and we do not have any present plan to pay any cash dividends in the foreseeable future. To the extent that there is a
distribution, the depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on our Class A ordinary
shares or other deposited securities after deducting its fees and expenses. You will receive these distributions in proportion to the number of
Class A ordinary shares your ADSs represent. However, the depositary may, at its discretion, decide that it is inequitable or impractical to make a
distribution available to any holders of ADSs. For example, the depositary may determine that it is not practicable to distribute certain property
through the mail, or that the value of certain distributions may be less than the cost of mailing them. In these cases, the depositary may decide not
to distribute such property to you.
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We and the depository are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement,
and we may terminate the deposit agreement, without the prior consent of the ADS holders.
We and the depository are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such
agreement, without the prior consent of the ADS holders. We and the depositary may agree to amend the deposit agreement in any way we decide
is necessary or advantageous to us. Amendments may reflect, among other things, operational changes in the ADS program, legal developments
affecting ADSs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment are
disadvantageous to ADS holders, ADS holders will only receive 30 days’ advance notice of the amendment, and no prior consent of the ADS
holders is required under the deposit agreement. Furthermore, we may decide to terminate the ADS facility at any time for any reason. For
example, terminations may occur when we decide to list our shares on a non-U.S. securities exchange and determine not to continue to sponsor an
ADS facility or when we become the subject of a takeover or a going-private transaction. If the ADS facility will terminate, ADS holders will
receive at least 90 days’ prior notice, but no prior consent is required from them. Under the circumstances that we decide to make an amendment to
the deposit agreement that is disadvantageous to ADS holders or terminate the deposit agreement, the ADS holders may choose to sell their ADSs
or surrender their ADSs and become direct holders of the underlying Class A ordinary shares, but will have no right to any compensation
whatsoever.
ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable
outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A ordinary shares provides that, to the fullest extent permitted by law, ADS
holders waive the right to a jury trial of any claim they may have against us or the depositary arising out of or relating to our shares, the ADSs or
the deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based
on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a
contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the
United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including
under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-
exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial
waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe
that this is the case with respect to the deposit agreement and the ADSs. It is advisable that you consult legal counsel regarding the jury waiver
provision before entering into the deposit agreement.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under
the deposit agreement or the ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled
to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us and/or the depositary. If a
lawsuit is brought against us and/or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial
court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had,
including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit
agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial
owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and
regulations promulgated thereunder.
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You may be subject to limitations on transfer of your ADSs.
Your ADSs are transferable on the books of the depositary. However, the depositary may close its books at any time or from time to time when
it deems it expedient in connection with the performance of its duties. The depositary may close its books from time to time for a number of
reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact
number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public
holidays. The depositary may refuse to deliver, transfer or register transfers of the ADSs generally when our share register or the books of the
depositary are closed, or at any time if we or the depositary thinks it is advisable to do so because of any requirement of law or of any government
or governmental body, or under any provision of the deposit agreement, or for any other reason.
Certain judgments obtained against us by our shareholders may not be enforceable.
We are an exempted company incorporated under the laws of the Cayman Islands. We conduct our operations outside the United States and
substantially all of our assets are located outside the United States. In addition, substantially all of our directors and executive officers and the
experts named in this annual report reside outside the United States, and most of their assets are located outside the United States. As a result, it
may be difficult or impossible for you to bring an action against us or against them in the United States in the event that you believe that your
rights have been infringed under the U.S. federal securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws
of the Cayman Islands, Hong Kong, China or other relevant jurisdiction may render you unable to enforce a judgment against our assets or the
assets of our directors and officers.
You may face difficulties in protecting your interests, and your ability to protect your rights through U.S. courts may be limited, because we are
incorporated under Cayman Islands law.
We are an exempted company limited by shares incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our
memorandum and articles of association, the Companies Act (As Revised) of the Cayman Islands and the common law of the Cayman Islands. The
rights of shareholders to take action against our directors, actions by our minority shareholders and the fiduciary duties of our directors to us under
Cayman Islands law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived
in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose
courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of
our directors under Cayman Islands law are not as clearly established as they would be under statutes or judicial precedent in some jurisdictions in
the United States. In particular, the Cayman Islands has a less developed body of securities laws than the United States. Some U.S. states, such as
Delaware, have more fully developed and judicially interpreted bodies of corporate law than the Cayman Islands. In addition, Cayman Islands
companies may not have standing to initiate a shareholder derivative action in a federal court of the United States.
Shareholders of Cayman Islands exempted companies like us have no general rights under Cayman Islands law either (i) to inspect corporate
records, other than the memorandum and articles of association and any special resolutions passed by such companies, and the registers of
mortgages and charges of such companies, or (ii) to obtain copies of lists of shareholders of these companies. Our directors have discretion under
our memorandum and articles of association to determine whether or not, and under what conditions, our corporate records may be inspected by
our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain the information
needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Certain corporate governance practices in the Cayman Islands, which is our home country, differ significantly from requirements for
companies incorporated in other jurisdictions such as the United States. As a result of all of the above, public shareholders may have more
difficulty in protecting their interests in the face of actions taken by our management, members of our board of directors or our controlling
shareholders than they would as public shareholders of a company incorporated in the United States.
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Our amended and restated memorandum and articles of association contain anti-takeover provisions that could discourage a third party from
acquiring us, which could limit our shareholders’ opportunity to sell their shares, including Class A ordinary shares represented by the ADSs,
at a premium.
Our memorandum and articles of association contains provisions to limit the ability of others to acquire control of our company or cause us to
engage in change-of-control transactions. These provisions could have the effect of depriving our shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging third parties from seeking to obtain control of our company in a tender offer or similar
transaction. For example, our board of directors has the authority, without further action by our shareholders, to issue preferred shares in one or
more series and to fix their designations, powers, preferences, privileges, and relative participating, optional or special rights and the qualifications,
limitations or restrictions, including dividend rights, conversion rights, voting rights, terms of redemption and liquidation preferences, any or all of
which may be greater than the rights associated with our ordinary shares. Preferred shares could be issued quickly with terms calculated to delay or
prevent a change in control of our company or make removal of management more difficult. If our board of directors decides to issue preferred
shares, the price of the ADSs may fall and the voting and other rights of the holders of our ordinary shares and the ADSs may be materially and
adversely affected.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions
applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and
regulations in the United States that are applicable to U.S. domestic issuers, including:
● the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
● the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under
the Exchange Act;
● the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for
insiders who profit from trades made in a short period of time; and
● the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We are required to file an annual report on Form 20-F within four months of the end of each fiscal year. In addition, we intend to publish our
results on a quarterly basis as press releases, distributed pursuant to the rules and regulations of the Nasdaq Global Market. Press releases relating
to financial results and material events will also be furnished to the SEC on Form 6-K. However, the information we are required to file with or
furnish to the SEC will be less extensive and less timely compared to that required to be filed with the SEC by U.S. domestic issuers. As a result,
you may not be afforded the same protections or information that would be made available to you were you investing in a U.S. domestic issuer.
As a company incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate
governance matters that differ significantly from the Nasdaq listing standards; these practices may afford less protection to shareholders than
they would enjoy if we complied fully with the Nasdaq listing standards.
As a Cayman Islands company listed on the Nasdaq Global Market, we are subject to the Nasdaq listing standards. However, the Nasdaq
rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate governance
practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq listing standards. Currently, we rely on home
country practice as our audit committee consists of two independent directors. We also rely on home country practice exemption with respect to the
requirement for annual shareholders meeting and did not hold an annual shareholders meeting in 2021. As a result, our shareholders are afforded
less protection than they would otherwise enjoy under the Nasdaq listing standards applicable to U.S. domestic issuers.
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We are a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, can rely on exemptions from certain
corporate governance requirements that provide protection to shareholders of other United States domestic companies.
We are a “controlled company” as defined under the Nasdaq Stock Market Rules because Mr. Leaf Hua Li, our founder, chairman of the board
of directors and chief executive officer, owns more than 50% of our total voting power. We are permitted to elect to rely, and are currently relying,
on certain exemptions from corporate governance rules under the Nasdaq Stock Market Rules. Currently, the majority of our board of directors are
not independent directors. In addition, the compensation of our executive officers are not determined or recommended solely by independent
directors, and our director nominees are not selected or recommended solely by independent directors. As a result, you do not have the same
protection afforded to shareholders of companies that are subject to these corporate governance requirements.
There can be no assurance that we will not be a passive foreign investment company, or PFIC, for United States federal income tax purposes
for any taxable year, which could subject United States investors in the ADSs or ordinary shares to significant adverse United States income tax
consequences.
We will be classified as a passive foreign investment company, or PFIC, for any taxable year if either (a) 75% or more of our gross income for
such year consists of certain types of “passive” income or (b) 50% or more of the value of our assets (generally determined on the basis of a
quarterly average) during such year produce or are held for the production of passive income, or the asset test. Although the law in this regard is
unclear, we intend to treat the VIE (including its subsidiaries) as being owned by us for United States federal income tax purposes, not only
because we exercise effective control over the operation of such entities but also because we are entitled to substantially all of their economic
benefits, and, as a result, we consolidate their results of operations in our consolidated financial statements. Based on our current estimates of the
composition of our income and valuation of our assets, including goodwill, we believe that we may be treated as a PFIC for our taxable year ended
December 31, 2021. However, no assurances regarding our PFIC status can be provided for any past, current or future taxable years.
U.S. Holders should consult with their tax advisors regarding the implications of owning stock in a PFIC. Because the value of our assets for
purposes of the asset test may be determined by reference to the market price of the ADSs, fluctuations in the market price of the ADSs may cause
us to become a PFIC for the current or subsequent taxable years. The determination of whether we will be or become a PFIC will also depend, in
part, on the composition and classification of our income and assets. Because there are uncertainties in the application of the relevant rules, it is
possible that the IRS may challenge our classification of certain income and assets as non-passive which may result in our being or becoming a
PFIC in the current or subsequent years. In addition, the composition of our income and assets will also be affected by how, and how quickly, we
use our liquid assets. If we determine not to deploy significant amounts of cash for active purposes or if it were determined that we do not own the
stock of the VIE for United States federal income tax purposes, our risk of being a PFIC may substantially increase. Because there are uncertainties
in the application of the relevant rules and PFIC status is a factual determination made annually after the close of each taxable year, there can be no
assurance that we will not be a PFIC for the current taxable year or any future taxable year. Because of the uncertainties involved in establishing
our PFIC status, our U.S. tax counsel expresses no opinion regarding our PFIC status.
If we are a PFIC in any taxable year, a U.S. Holder (as defined in “Item 10. Additional Information—E. Taxation—United States Federal
Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of the
ADSs or ordinary shares and on the receipt of distributions on the ADSs or ordinary shares to the extent such gain or distribution is treated as an
“excess distribution” under the United States federal income tax rules and such holder may be subject to burdensome reporting requirements.
Further, if we are a PFIC for any year during which a U.S. Holder holds the ADSs or our ordinary shares, we generally will continue to be treated
as a PFIC for all succeeding years during which such U.S. Holder holds the ADSs or our ordinary shares. For more information, see “Item 10.
Additional Information—E. Taxation—United States Federal Income Tax Considerations—Passive Foreign Investment Company Rules.”
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Techniques employed by short sellers may drive down the market price of our ADSs.
Short selling is the practice of selling securities that the seller does not own but rather has borrowed from a third-party with the intention of
buying identical securities back at a later date to return to the lender. The short seller hopes to profit from a decline in the value of the securities
between the sale of the borrowed securities and the purchase of the replacement shares, as the short seller expects to pay less in that purchase than
it received in the sale. As it is in the short seller ’s interest for the price of the security to decline, many short sellers publish, or arrange for the
publication of, negative opinions regarding the relevant issuer and its business prospects in order to create negative market momentum and
generate profits for themselves after selling a security short. These short attacks have, in the past, led to selling of shares in the market.
China-based issuers that are listed in the United States have been the subject of short selling. Much of the scrutiny and negative publicity has
centered on allegations of a lack of effective internal control over financial reporting resulting in financial and accounting irregularities and
mistakes, inadequate corporate governance policies or a lack of adherence thereto and, in many cases, allegations of fraud. As a result, many of
these companies have conducted, or are now conducting internal and external investigations into the allegations and, in the interim, are subject to
shareholder lawsuits and/or SEC enforcement actions.
We may be the subject of the unfavorable allegations made by short sellers in the future. Any such allegations may be followed by periods of
instability in the market price of our ADSs and negative publicity. If and when we become the subject of any unfavorable allegations, whether such
allegations are proven to be true or untrue, we could have to expend a significant amount of resources to investigate such allegations and/or defend
ourselves. While we would strongly defend against any such short seller attacks, we may be constrained in the manner in which we can proceed
against the relevant short seller by principles of freedom of speech, applicable federal or state law or issues of commercial confidentiality. Such a
situation could be costly and time-consuming and could distract our management from growing our business. Even if such allegations are
ultimately proven to be groundless, allegations against us could severely impact our business operations and shareholders’ equity, and the value of
any investment in our ADSs could be greatly reduced or rendered worthless.
Item 4. Information on the Company
A. History and Development of the Company
We commenced our operations in December 2007 through Shenzhen Futu Network Technology Co., Ltd., or Shenzhen Futu, a limited liability
company established under the laws of the PRC, to provide internet technology and software development services.
Futu Securities International (Hong Kong) Limited, or Futu International Hong Kong, was incorporated under the laws of Hong Kong by Mr.
Leaf Hua Li, our founder, chairman and chief executive officer, in April 2012. In October 2012, Futu International Hong Kong became a securities
dealer registered with the HK SFC by obtaining a Type 1 License for dealing in securities. Futu International Hong Kong obtained a Type 2
License for dealing in future contracts, a Type 4 License for advising on securities, a Type 9 License for asset management, a Type 5 License for
advising on future contracts, a Type 7 License for providing automated trading services and a Type 3 License for leveraged foreign exchange
trading from the HK SFC subsequently in July 2013, June 2015, July 2015, August 2018, August 2019 and December 2020, respectively. In
October 2014, Mr. Li transferred all of Futu International Hong Kong’s shares to Futu Holdings Limited, or Futu Holdings, our holding company.
In April 2014, Futu Holdings was incorporated under the laws of the Cayman Islands as our holding company. In May 2014, Futu Securities
(Hong Kong) Limited, or Futu Hong Kong, was incorporated under the laws of Hong Kong as a wholly-owned subsidiary of Futu Holdings. Futu
Hong Kong established two wholly-owned PRC subsidiaries, Shensi Network Technology (Beijing) Co., Ltd., or Shensi Beijing, and Futu Network
Technology (Shenzhen) Co., Ltd., or Futu Network, in September 2014 and October 2015, respectively. We also refer to Shensi Beijing as the
WFOE in this annual report. Due to restrictions imposed by PRC laws and regulations on foreign ownership of companies that engage in internet
and other related business, Shensi Beijing later entered into a series of contractual arrangements with Shenzhen Futu, which we refer to as the VIE
in this annual report, and its shareholders. For more details, see “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements with the VIE and Its Shareholders.” As a result of our direct ownership in our WFOE and the VIE contractual arrangements, we are
regarded as the primary beneficiary of the VIE. We treated the VIE and its subsidiaries as our consolidated affiliated entities under U.S. GAAP, and
have consolidated the financial results of these entities in our consolidated financial statements in accordance with U.S. GAAP.
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We operate our business mainly through Futu International Hong Kong, which is a HK SFC-regulated entity that holds the relevant licenses
related to our securities brokerage and wealth management business. In 2019, 2020 and 2021, we generated revenues of HK$1,029.8 million,
HK$3,248.3 million and HK$6,795.2 million (US$871.2 million), accounting for 97.0%, 98.1% and 95.5% of our total revenues, respectively,
from Futu International Hong Kong, whose assets amounted to HK$20.7 billion, HK$70.0 billion and HK$92.0 billion (US$11.8 billion),
accounting for 96.9%, 98.1% and 90.6% of our total assets as of the end of the same years, respectively, taking intercompany transaction offset into
consideration. We also conduct research and development activities in China through Futu Network and the VIE. In 2019, 2020 and 2021, we
generated revenues of HK$2.3 million, HK$9.3 million and HK$24.0 million (US$3.1 million), accounting for 0.2%, 0.3% and 0.3% of our total
revenues, respectively, from Futu Network and the VIE, whose assets amounted to HK$380.5 million, HK$371.0 million and HK$482.3 million
(US$61.8 million), accounting for 1.8%,0.5%and 0.5% of our total assets as of the end of the same years, respectively, taking intercompany
transaction offset into consideration.
We strategically established Futu Financial Limited, Futu Lending Limited, Futu Network Technology Limited and Futu Trustee Limited, each
a wholly-owned subsidiary of our company in Hong Kong, in April 2017, April 2017, August 2015 and August 2017, respectively, for the purpose
of our potential business expansion in the future. In August 2019, we acquired Golden Jade Wealth Management Limited, and renamed it as Futu
Insurance Brokers (Hong Kong) Limited in January 2020. Futu Insurance Brokers (Hong Kong) Limited was registered with the Professional
Insurance Brokers Association in Hong Kong immediately before the commencement of the new regulatory regime for insurance intermediaries on
September 23, 2019. Hence, under the Insurance Ordinance (Cap 41 of the Laws of Hong Kong), Futu Insurance Brokers (Hong Kong) Limited is
deemed to be a licensed insurance broker company for a period of three years from the commencement of the new regime unless the license is
revoked in accordance with the Insurance Ordinance (Cap 41 of the Laws of Hong Kong). Futu Trustee Limited is a trust company registered under
Part VIII Section 11 of the Trustee Ordinance (Chapter 29 of Laws of Hong Kong) on August 28, 2017 and was granted a full Trust and Company
Service Provider (TCSP: TC006475) License on April 26, 2019 under the Hong Kong Anti-Money Laundering and Anti-Terrorism Financing
Ordinance (Chapter 615 of Laws of Hong Kong).
In addition, we established Futu Inc., Futu Clearing Inc., Moomoo Inc., Futu Futures Inc. and Futu Wealth Advisors Inc., each a wholly-owned
subsidiary of Futu US Inc., our subsidiary in the United States, in December 2015, August 2018, March 2018, May 2019 and July 2020,
respectively, in order to improve our ability to offer investing services in overseas markets. Futu Inc. is registered as a broker-dealer with the SEC
and is a member in good standing of the Financial Industry Regulatory Authority, or FINRA, authorized to conduct business as an introducing
broker in compliance with SEC and FINRA rules. Futu Clearing Inc. is also registered with the SEC as a broker-dealer and is a member in good
standing of FINRA as well as a member of Depository Trust & Clearing Corporation, or DTCC, with capacity to provide clearing services in the
United States. Moomoo Inc. operates the international version of our trading platform primarily for U.S. and Singapore retail investors. Futu
Futures Inc. is registered as a futures commission merchant with the Commodity Futures Trading Commission and is a member of good standing of
the National Futures Association. Futu Wealth Advisors Inc. is registered with the SEC as a registered investment advisor.
In October 2020, Futu Singapore Pte. Ltd., our wholly-owned subsidiary in Singapore, obtained the Capital Markets Services (CMS) License
from the Monetary Authority of Singapore.
In November 2021, we acquired 100% of the issued share capital of an Australian company and renamed it Futu Securities (Australia) Ltd,
which has since become our wholly-owned subsidiary. Futu Securities (Australia) Ltd holds an Australian Financial Services License (AFSL).
On March 8, 2019, the ADSs representing our Class A ordinary shares commenced trading on Nasdaq under the symbol “FHL.” We raised
from our initial public offering US$91.9 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses
payable by us. On October 17, 2019, we changed our symbol from “FHL” to “FUTU.”
In August 2020, we completed a follow-on public offering of ADSs, and raised US$301.8 million in net proceeds after deducting underwriting
discounts and offering expenses payable by us. In December 2020, we raised US$262.5 million in net proceeds from the private placement of our
Class A ordinary shares in the form of prepaid warrants to a leading global investment firm.
In April 2021, we completed a follow-on public offering of ADSs, and raised US$1,397.5 million in net proceeds after deducting the
underwriters’ discount and offering expenses payable by us.
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Our principal executive offices are located at 11/F, Bangkok Bank Building, No. 18 Bonham Strand W, Sheung Wan, Hong Kong S.A.R.,
People’s Republic of China. Our telephone number at this address is +852 2523-3588. Our registered office in the Cayman Islands is located at the
offices of Maples Corporate Services Limited at PO Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman Islands. Our agent for service of
process in the United States is Cogency Global Inc. located at 122 East 42nd Street, 18th Floor, New York, NY 10168.
SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC on www.sec.gov. You can also find information on our website http://ir.futuholdings.com. The information contained
on our website is not a part of this annual report.
B. Business Overview
We are a one-stop financial technology platform transforming the investing experience with our fully digitalized securities brokerage and
wealth management services. We launched our business on the premise that no one should be precluded from investing on the basis of prohibitive
transaction costs or market inexperience. Technology permeates every part of our business, allowing us to offer a redefined user experience built
upon a secure, stable, agile and scalable online platform.
A securities brokerage service provider at inception, we are now an all-rounded online financial services platform, seamlessly integrating
products and services including trading, wealth management, market data and information, user community, investor education, and corporate
services. As an intuitive and easy-to-navigate platform, we serve over 17.4 million users from over 200 countries and regions. We provide a
comprehensive range of investment products, including equities and derivatives across major global exchanges, margin financing and securities
lending, as well as fund and bond investments, leveraging our 44 licenses, registrations and memberships across Hong Kong, Singapore, the U.S.,
Australia and Europe. Our vibrant user community further engages our users and provides them with direct access to listed companies, fund
houses, exchanges, media and research institutions. In addition, the investment education courses on our platform equip our users with necessary
investment knowhow to make informed investment decisions.
We provide investing services through our proprietary digital platforms, Futubull and moomoo, highly integrated applications accessible
through any mobile device, tablet or desktop. Our primary fee-generating services include trade execution – which allows our clients to trade
securities, such as stocks, ETFs, warrants, options and futures, across different markets – as well as margin financing and securities lending. In
August 2019, we introduced our wealth management business by launching the Futu Money Plus wealth management service, which offers fund
products from 60 leading fund houses around the world as of December 31, 2021, catering to different investment targets and risk preferences of
our clients. As of December 31, 2021, over 139,000 clients held wealth management positions, and the total client asset balance in wealth
management products was HK$18.8 billion (US$2.4 billion).
We enhance our users’ and clients’ investing experience with market data and information services such as news, research, and powerful
analytical tools, providing our clients with a data rich foundation to simplify the investing decision-making process. In addition, we provide our
corporate clients services ranging from IPO subscription, investor relations, ESOP solutions to trust services. We provide these services primarily
under our integrated enterprise service brand, Futu I&E. As of December 31, 2021, we had 400 ESOP solutions clients, as well as 236 IPO
subscription and investor relations clients.
We further broaden our reach and promote the exchange of information through NiuNiu/Moo Community, our social network services. We
have embedded social media tools to create a network centered around our users, reduce information asymmetry and support the investing
decision-making process. For instance, users can exchange market views, watch live broadcasts of corporate events and participate in investment
education courses. Our social network serves as a powerful engagement tool where in December 2021, the average DAUs reached over 985,000.
User activities provide invaluable user data which informs our product development and monetization efforts.
We have developed a proprietary and highly automated technology infrastructure encompassing every aspect of our business operations, from
account opening, fund transfer, trading and investment to risk management. Our team is centered around research and development. As of
December 31, 2021, approximately 65% of our workforce engaged in research and development, reflecting the degree to which technological
excellence is entrenched in every aspect of our business.
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The emerging affluent and technology-savvy population we primarily serve allows us to pursue the massive opportunity in the digitalization of
the securities brokerage and wealth management industry. Our platforms have attracted and gathered a vast base of young, active, high-quality and
rapidly expanding users and clients. Our paying clients have an average age of 37 and are generally high earning, with average assets exceeding
HK$300,000 on our platforms as of December 31, 2021. On average, a client who traded in 2021 executed over 161 trades with a total trading
volume of HK$5.7 million (US$0.7 million). On average, we retained over 97% of our paying clients on a quarterly basis in 2021. We grow our
client base mainly through online and offline marketing and promotional activities, word-of-mouth referrals, third-party channel partners and our
corporate services. As of December 31, 2021, we had a user base of 17.4 million, 2,751,239 registered clients, and 1,244,222 paying clients.
We closely collaborate with our strategic investor, Tencent Holding Limited, or Tencent, across a number of areas including our enterprise
business, technology infrastructure and talent recruitment and training. Our collaboration is in part driven by our shared values of technological
excellence and innovation. In December 2018, Shenzhen Futu, one of our operating entities in China, entered into a strategic cooperation
framework agreement with Shenzhen Tencent Computer System Co., Ltd. (深圳市腾讯计算机系统有限公司), a subsidiary of Tencent. Pursuant to
the strategic cooperation framework agreement, subject to further definitive agreements to be entered into between the parties and to the extent in
compliance with applicable laws and regulations, Tencent agreed to cooperate with us in traffic, content and cloud areas through Tencent’s online
platform. In addition, to the extent permitted by the applicable laws and regulations, we and Tencent agreed to further explore and pursue
additional cooperation opportunities for potential cooperation in the area of fintech-related products and services to expand both parties’
international operations.
We have achieved significant growth in our user and client base, client assets, and revenues. Our paying clients increased from 198,382 as of
December 31, 2019 to 516,721 as of December 31, 2020 and further to 1,244,222 as of December 31, 2021. In 2021, we achieved 140.8% year-
over-year growth in our total number of paying clients. Our total client asset balance increased from HK$87.1 billion as of December 31, 2019 to
HK$285.2 billion as of December 31, 2020, and further to HK$407.8 billion (US$52.3 billion) as of December 31, 2021. Our total revenues grew
from HK$1,061.6 million in 2019 to HK$3,310.8 million in 2020, and further to HK$7,115.3 million (US$912.3 million) in 2021. We had a net
income of HK$165.7 million in 2019 and a net income of HK$1,325.5 million in 2020, and our net income further grew to HK$2,810.2 million
(US$360.3 million) in 2021.
Impact of COVID-19 and Our Responses and Opportunities
An outbreak of respiratory illness, namely COVID-19, caused by a novel coronavirus, was reported in December 2019 and was subsequently
declared as a pandemic by the World Health Organization in March 2020. In an effort to halt the outbreak, governments around the world placed
significant restrictions on travel, implemented mandatory quarantine and/or closed certain businesses, work places and facilities.
The ongoing COVID-19 pandemic has disrupted the business operations of many companies worldwide. We have taken a series of measures in
response to the outbreak to protect our employees, including, among other things, temporary closure of some offices, remote working arrangements
for our employees and travel restrictions or suspension. Our operations, including our services to our clients and internal control over financial
reporting, have not been materially and adversely affected by these measures as we timely implemented our business continuity plan.
Many traditional financial institutions that rely heavily on offline account opening and customer service models have had to suspend the
operations at their physical branches as a result of the pandemic, which underscores the merits of a pure online one-stop financial technology
platform where clients can enjoy an end-to-end mobile experience encompassing account opening, trade execution, margin lending, mutual fund
investments, market news and social interaction.
We witnessed huge market volatility in the global capital markets in 2021. Such volatility has led to new trading account opening,increasing
trading velocity and higher net asset inflow, which benefited our operating and financial results for the period. Despite the increased market
volatility, our rigorous risk management systems and procedures have prevented us from incurring any material losses in relation to margin
financing business. To date, we have not identified any material COVID-19-related contingencies or impairments.
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However, there is still uncertainty around the duration of the pandemic and the possibility of other effects on our business. In the event that this
epidemic cannot be effectively and timely contained, our ability to consistently offer new products and services in the future may be disrupted,
which in turn may harm the growth rate and retention of our clients, as well as our financial performance generally. The near-term economic
impact of the COVID-19 outbreak is also uncertain.
Our Platform
Overview
We operate a leading technology-driven online securities brokerage and wealth management platform, which enables us to digitally deliver a
wide range of products and services to our users and clients in an integrated way. We enable an omni-terminal access to our platform from mobile
phones, tablets and computers, either through our purpose-built applications or internet browsers. We have been licensed in Hong Kong by the HK
SFC for our securities business since 2012. As of December 31, 2021, we held 44 licenses, registrations and memberships across Hong Kong,
Singapore, the U.S., Australia and Europe. For more details on our licenses, see “—Licenses.”
Our platform, Futubull, is mainly available to users based in Hong Kong and Mainland China. Through Futubull, investors can trade securities
across major exchanges in Hong Kong and the U.S. and qualified securities under Stock Connect, with access to margin financing and securities
lending. We also offer wealth management services through our Futu Money Plus brand on Futubull, where our clients can get access to a suite of
fund and bond products. In addition to our core investment offerings, we also provide our users with a variety of value-added services designed to
facilitate the investing process including real-time stock quotes, market data and news as well as an interactive user community where our users
can exchange investment views and experience. We offer corporate services through our Futu I&E brand, such as IPO subscription, investor
relations and ESOP solution services. We also provide trust services to corporate clients.
As part of our international expansion, we developed and launched moomoo, the international version of Futubull, in the U.S. and Singapore.
Through moomoo, investors in the U.S. can trade securities such as stocks, ETFs, warrants, options and futures listed on the major stock exchanges
in the U.S., the Hong Kong Stock Exchange and securities of companies qualified under the Hong Kong, Shanghai and Shenzhen Stock Connect.
Through moomoo, investors in Singapore can trade securities such as stocks, ETFs, warrants, options and futures listed on the Singapore Exchange,
the major stock exchanges in the U.S. and the Hong Kong Stock Exchange, with access to wealth management services. Real-time stock quotes,
market data and news as well as user communities where our users can exchange investment views and experience are available to the users in both
the U.S. and Singapore.
Our platforms are underpinned by a premier user experience. We provide completely online-based account opening services. We have
streamlined the account opening, fund transfer and trade execution processes on our platforms to provide convenient and seamless investment
experiences. Account opening on our platforms requires filling out an online application which takes less than three minutes, followed by
verification procedures facilitated by automated risk management systems. We also provide easy-to-use fund transfer services facilitating swift
deposit and withdrawal of funds, allowing for bank-to-brokerage fund transfers in as fast as a few seconds. In addition, we provide our users and
clients access to all of our products and services from a single profile on our platforms.
We serve both users and clients. Our user base has grown from 7.5 million as of December 31, 2019 to 11.9 million as of December 31, 2020,
and further to 17.4 million as of December 31, 2021. Our MAUs increased from 615,199 in December 2019 to 1,831,807 in December 2020, and
further to 2,219,274 in December 2021. Our average DAUs increased from 208,340 in December 2019 to 679,565 in December 2020, and further
to 985,630 in December 2021. Our user base is a critical source of data for our platforms, a pipeline for growing our client base and the foundation
of our social community.
Platform Cornerstones
We aim to provide a superior and comprehensive investing experience through the following three cornerstones:
● Convenience: digitalized, seamless with excellence in execution.
● Connectivity: interactive and engaging.
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● Stability: reliable and secure.
Convenience
We have designed every step of our investing experience, from sourcing and researching ideas to trade execution and subsequent portfolio
management, with a goal to create a simple and convenient experience. We identify the hurdles that investors, particularly retail investors, face
along the investing journey, and we strive to mitigate inconvenience and information asymmetry through our platforms with data and technology.
For example:
● we digitally provide all brokerage and wealth management services, including trade execution, cross-market funding, clearing and
settlement, fund subscription and redemption;
● we were the first brokerage company in Hong Kong to offer completely online-based trading account opening service among leading
players; and
● our users and clients can access our platforms anytime through a unified account on multiple devices, including Apple and Android devices
as well as Windows- or Mac-based desktop operating systems.
Connectivity
We are reinventing how retail investors discover and execute investment opportunities, particularly by offering a social community that has
become an integral part of our platforms. We have created a medium by which users, investors, companies, analysts, media and key opinion leaders
connect and interact as participants of a community. Major interactive tools and functions of our NiuNiu Community include courses, live
broadcasts and forum. Our Moo Community offers similar interactive tools and functions as the NiuNiu Community.
Our interactive tools drive a community experience built on a lively and dynamic venue for exchanging investment ideas and experience. We
leverage in-house and external resources to publish investment content on our platforms through multiple formats, including short-form videos,
recorded online lessons, chat rooms and live broadcasts. These tools and functions allow our users and clients to review content as well as interact
with each other, opening up vibrant avenues for an active exchange of ideas and information. We believe that community engagement serves to
break down barriers to investing and promote more investment transactions.
Our community platforms allow us to solicit direct feedback from our most active users and clients, with whom we have, in many instances,
direct lines of communication regarding their investing experience. This allows us to identify the pain points in our user experience and improve
our platforms, often in real time, contributing further to our user and client engagement and stickiness.
Stability
We recognize that the reliability and security of our platforms are of paramount importance to gaining client’s trust, and we continue to invest
in our technology to safeguard our client’s assets and information. For example:
● our platforms feature an automated multi-level protection mechanism to ensure the services and functions we deliver to our users and clients
are secure;
● we have adopted strict security policies and measures, including encryption technology and a two-factor authentication function, to protect
our proprietary data such as clients’ personal information and trading data;
● our cloud technology allows us to process large amounts of data in-house, which significantly reduces the risks involved in data storage and
transmission;
● we back up our data at different servers spread across different locations;
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● we process and execute all of our orders and transactions electronically, greatly minimizing risks associated with human error while
maintaining the stability of our platforms. Our overall system has achieved 99.93% availability rate in 2021;
● our proprietary technology system analyzes and predicts malicious attacks and enables us to respond to challenges and attacks promptly.
Our Services
We provide our users and clients a comprehensive set of services throughout their investing experience. Our core services include trade
execution, margin financing and securities lending, as well as wealth management. We provide a variety of value-added services in addition to our
core offerings, many of which are free of charge, to address our clients’ broader investment demands as well as to increase general client
engagement. All our services can be accessed through our platforms with a single profile across various terminals.
Trading, Clearing and Settlement
We provide trading, clearing and settlement services beginning with account opening and extending through portfolio management.
We operate our securities brokerage business in Hong Kong through Futu Securities International (Hong Kong) Limited, or Futu International
Hong Kong, our wholly-owned subsidiary incorporated in Hong Kong, which is a licensed company permitted by the HK SFC to carry out
securities dealing and is regulated by the Securities and Futures Ordinance. We were granted a Type 1 License for dealing in securities in 2012 and
have become a participant of the Stock Exchange of Hong Kong Limited as a licensed broker since then. See “—Licenses.”
We conduct our operations in the United States mainly through Futu Inc. In February 2019, FINRA approved Futu Inc. as an underwriting or
selling group participant.
We conduct our operations in Singapore mainly through Futu Singapore Pte. Ltd., or Futu SG, which is a Capital Markets Services, or CMS,
license holder regulated by the Monetary Authority of Singapore.
In November 2021, we acquired 100% of the issued share capital of an Australian company and renamed it Futu Securities (Australia) Ltd,
which has since become our wholly-owned subsidiary.
Account Opening
Our users and clients can access all of our products and services with a single profile created on our platforms. Opening a securities brokerage
account has historically been a time-consuming and paper-intensive process. In developing our platforms, we intended to reduce unnecessary
friction and meaningfully improve the account opening process, which we believe is a significant driver of our client base growth. Our users can
open multiple trading accounts for different products under a single profile at once. Users can complete an account opening application online in as
little as three minutes on our platforms. Once a trading account is approved, a user may place orders through the Futubull or moomoo platform
which is accessible through any mobile device, tablet or desktop. In 2021, we opened over 1,331,000 new accounts, as compared to over 701,000
in 2020. We are the first licensed brokerage company to provide 100% online-based trading account opening services among leading players in
Hong Kong.
For investors who are residents in Hong Kong , the U.S. and Singapore, the two steps involved in opening trading accounts with us are set
forth below:
● Step 1: Online application. Users of our Futubull or moomoo platform, either through our mobile or desktop application, can click an
embedded link to submit an online account opening application by following simple instructions. Users are required to provide certain
basic information regarding their financial conditions, such as employment history, source of funds and other related information. Users
must also read and consent to a standard client agreement and other required documents as well as risk disclosure.
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● Step 2: Verification procedures. Upon receiving a completed online application, we will proceed to verify the applicant’s identity. We
automatically use the information supplied by the user to perform know-your-client and anti-money laundering screening. If a user’s
application passes the screening, the user is approved for a brokerage account. Occasionally, a second tier of review may necessitate a few
additional steps for clients who need to authenticate their identities or verify their credentials.
Corporates that would like to open an account with us are required to satisfy our counterparty risk requirements, such as providing a deed of
guarantee. In addition, we perform our corporate due diligence procedures (including but not limited to, obtaining and verifying its identity and its
ultimate beneficial owner, and conducting background check and client risk assessments) in accordance with the anti-money laundering guidelines
issued and updated by the HK SFC from time to time. After the corporate is onboarded, we monitor their transactions and conduct due diligence on
an ongoing basis.
Fund transfer
We provide timely and free fund transfer services to our clients, enabling them to capture fast-moving investment opportunities. We support
various fund transfer methods, including via eDDA, bank-securities account transfer, FPS, internet banking, wire transfer, ACH, ATM/over-the-
counter transfer and cheque. Bank-to-brokerage fund transfers can be completed in as fast as a few seconds, and are normally completed within
five minutes.
We do not charge our clients any withdrawal fees from their trading accounts. Cash withdrawal from trading accounts are normally completed
within one trading day after settlement, whereas withdrawals from fund products normally take approximately two to five trading days, due to
longer fund settlement time of the fund houses.
As the technologies and practices in connection with online trading accounts opening services are in the early stages of development, we are
subject to evolving laws, regulations, guidelines, and other regulatory requirements with respect to our online account opening procedures. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are subject to extensive and evolving regulatory
requirements in the markets we operate in, non-compliance with which may result in penalties, limitations and prohibitions on our future business
activities or suspension or revocation of our licenses and trading rights, and consequently may materially and adversely affect our business,
financial condition, operations and prospects. In addition, we are involved in ongoing inquiries by relevant regulators.” See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Business and Industry—Our online client onboarding procedures historically did not strictly
follow the specified steps set out by the relevant authorities in Hong Kong, which may subject us to regulatory actions in addition to remediation,
which may include reprimands, fines, limitations or prohibitions on our future business activities and/or suspension or revocation of Futu
International Hong Kong’s licenses and trading rights.”
Trade execution
We provide easy-to-use trade execution services, allowing our clients to trade securities, such as stocks, ETFs, warrants, options and futures,
across different markets. We serve clients from different countries and regions through our licensed subsidiaries in Hong Kong, Singapore and the
U.S.:
● Hong Kong: We operate our securities brokerage business in Hong Kong through Futu International Hong Kong, our wholly-owned
subsidiary incorporated in Hong Kong. We have been licensed by the HK SFC to carry out securities dealing and have become a
participant of the Hong Kong Stock Exchange as a licensed broker since 2012. We also cooperate with CCASS to provide clearing and
execution services for our brokerage business involving securities listed on the Hong Kong Stock Exchange and select stocks qualified
under Stock Connect.
● Singapore: We carry out our operations in Singapore through our Singapore-incorporated subsidiary Futu Singapore Pte. Ltd., a licensed
corporation registered with the Monetary Authority of Singapore with the Capital Markets Services License (CMSL). Futu Singapore Pte.
Ltd. is able to provide securities and futures trade execution and clearing services by partnering with qualified third parties who are
Singapore Exchange (SGX) securities and derivatives Trading Member and Clearing Member.
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● United States: We carry out our operations in the U.S. through our U.S.-incorporated subsidiaries, including Futu Inc., a licensed broker-
dealer in the U.S., and Futu Clearing Inc., a licensed provider of clearing and settlement services for securities transactions in the U.S.
financial markets in cooperation with the Depositary Trust Clearing Corporation and its subsidiaries.
The trade execution process is entirely online and automated. These automated processes include order confirmation, receipt, settlement,
delivery and record-keeping. From the client’s perspective, the process is seamless as we handle all client communications and touchpoints,
including delivery and receipt of funds. We provide comprehensive order types to meet our clients’ different trading strategies, including
limit/market order, auction limit/market order, odd-lot order, stop loss limit/market order, touch limit/market order, and trailing stop loss
limit/market order. In addition, we provide API services that allow clients to trade through our platforms using their own program.
We aggregate orders simultaneously and form trading instructions which are subsequently delivered to respective exchanges. Funds or
securities are then transferred to or from our bank accounts upon settlement, which we then further remit back to the relevant trading accounts,
after deducting the fees for our securities brokerage services, and are generally settled within two business days.
Prior to using our platforms for the first time, our users and clients are required to accept our standard general terms and conditions which set
out the key terms to our operations, and include other provisions such as anti-money laundering and data privacy.
As a licensed securities broker in Hong Kong with integration into the trading systems of the Hong Kong Stock Exchange and CCASS, Futu
International Hong Kong can independently manage all steps involved in processing securities transactions, including order confirmation, receipt,
settlement, delivery, dividend collection and record-keeping, for securities listed on the Hong Kong Stock Exchange, including stocks, ETFs,
warrants, options, futures, callable bull/bear contracts and stocks under Stock Connect. We also provide new share subscription and proprietary
grey market trading services (also known as dark pool trading services) for IPOs on the Hong Kong Stock Exchange. Additionally, we had 500
throttling controllers connected to the trading system of the Hong Kong Stock Exchange as of December 31, 2021, allowing us to execute a large
amount of trading transactions simultaneously and respond quickly to sudden surges in order volumes. As of the date of this annual report, we were
capable of processing 1,000 Hong Kong listed securities trades per second.
For securities including stocks, options and futures traded on the major exchanges in the U.S. and the Singapore Exchange, we aggregate trade
instructions from clients and, without disclosing underlying client names or fund details, collaborate with qualified local third-party clearing
brokers for execution and settlement. The agreements we enter into with such third-party clearing brokers are for an indefinite term, charging a
fixed commission rate which they deduct directly from our account with them, and requiring us to pay a monthly minimum aggregate commission
regardless of trading activity. In the case of securities traded on the major U.S. stock exchanges, we also execute and settle some of the transactions
through our clearing system platform. From our client’s perspective, the trading process is seamless as we handle all client communications and
touchpoints, including delivery and receipt of funds. We also provide new share subscription services in relation to selected IPOs on the New York
Stock Exchange and the Nasdaq Stock Market.
As a result of the operational efficiencies afforded by our technology, we sustainably charge a competitive brokerage commission rate for
online trading as compared to most of our market peers. In general, our revenues from securities brokerage services include brokerage
commissions and handling charges from our clients, which are recognized on a trade-date basis when the relevant transactions are executed.
In 2021, the total value for transactions executed through our platforms with respect to securities listed on the Hong Kong Stock Exchange and
the major stock exchanges in the U.S. reached HK$2,272.1 billion (US$291.3 billion) and HK$3,706.6 billion (US$475.2 billion), respectively,
compared to HK$1,261.3 billion and HK$2,167.7 billion, respectively, in 2020, and HK$427.6 billion and HK$427.3 billion, respectively, in 2019.
The brokerage commission and handling charge income we earned for securities traded on the Hong Kong Stock Exchange and the major stock
exchanges in the U.S. accounted for 17.3% and 37.6% of our total revenues in 2021, respectively, 21.4% and 38.7% of our total revenues in 2020,
respectively, and 24.7% and 23.4% of our total revenues in 2019, respectively. As of December 31, 2019, 2020 and 2021, the total balance of client
assets was HK$87.1 billion, HK$285.2 billion and HK$407.8 billion (US$52.3 billion), respectively.
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Margin Financing and Securities Lending Services
Our margin financing and securities lending services provide real-time, cross-market securities-backed financing to our clients. We have
grown these services rapidly since introduction, a reflection, we believe, of both our ability to cross-sell as well as our clients’ receptivity to
increasingly sophisticated investing tools delivered seamlessly. As of December 31, 2021, 40.5% of our clients who had traded through our
platforms had used our margin financing and securities lending services.
Margin Financing
We offer margin financing to clients who trade securities listed on the Hong Kong Stock Exchange, the major exchanges in the U.S. and
qualified securities under the Hong Kong, Shanghai and Shenzhen Stock Connect, and charge an annualized interest rate on margin financing.
All financing extended to our clients is secured by acceptable securities pledged to us. Our trading system can automatically pledge cross-
market account assets so that the value in a client’s multiple trading accounts, which may include cash in different currencies and acceptable
securities listed on the three different markets, will be aggregated when calculating the value of the client’s collateral based on real time market
foreign exchange rates. This provides significant efficiencies as it eliminates the costs and procedures involved in cross-market currency translation
or exchange.
Our clients are eligible for margin financing services when they hold securities that are acceptable as pledges to us in their accounts. The credit
line for each eligible client is determined based on the value of the securities across all of his or her trading accounts. Our eligible clients can opt to
open margin financing accounts with us to enjoy such services. The margin financing services for eligible clients will automatically be activated
when the funds in their accounts are not sufficient to purchase the desired securities and there is still sufficient balance in their credit lines.
A list of securities acceptable as collateral to us and their respective margin ratios are regularly updated and shared with our clients. The
margin ratio for each of the acceptable securities is individually determined by our risk management team based on a number of factors including
market capitalization, historical price volatility and turnover, financial fundamentals, prevailing market conditions, as well as financing terms
offered by major financial institutions. The margin ratio is monitored in real time, and reviewed and adjusted on a regular basis, more frequently in
the case of a significant and rapid price fluctuation. See “—Risk Management—Margin Financing Risk Management.”
When we launched our margin financing business, we financed mostly from our own working capital and shareholder loans. We have
diversified the funding source of our margin financing through collaboration with our financial institution partners where we can combine
collateral from our clients into portfolios and pledge the portfolios to financial institutions for commercial loans. As of December 31, 2021, 56.3%
of margin financing was financed through our financial institution partners. For margin financing services related to securities listed on the Hong
Kong Stock Exchange and major exchanges in the U.S., we have entered into loan facility agreements with commercial banks in which we agree
on the maximum facility limit, maturity and annualized interest rates. In addition, for securities listed on the major exchanges in the U.S., a third-
party brokerage company we partner with for trade execution and settlement also extends to us margin financing credit on an aggregate basis,
which we then distribute to our clients based on their orders after the relevant commissions and fees that we incur are deducted by such third-party
brokerage company. The business agreement we have entered into with such partner has an indefinite term and requires us to continuously
maintain sufficient margin requirements to reduce the risks involved with margin financing. Another source of funding comes from short-term
securities sold under global master repurchase agreements to repurchase transactions with financial institution partners on industry-standard terms.
Securities Lending
For clients who trade securities listed on the Hong Kong Stock Exchange and major exchanges in the U.S., we offer securities lending services
by lending securities we obtain from our securities lending partners. This service allows our clients to pursue short-selling strategies. We launched
our securities lending services for U.S. listed securities in February 2017 and for Hong Kong listed securities in December 2020. To borrow
securities, our clients must pledge cash or acceptable securities from their trading accounts with us. The interest rate that we charge our clients is
based on an annualized interest rate charged by our securities lending partners, plus a certain premium which we earn as interest income which is
calculated based on the market value of securities borrowed, the duration of the loan and the short-selling interest rate.
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Upon making a margin financing or securities lending order, the relevant funds or securities will be transferred to the client. Our clients are
generally required to settle the margin financing and securities lending fees at the end of each month. As of December 31, 2019, 2020 and 2021,
our margin financing and securities lending balance was HK$4.8 billion, HK$19.5 billion and HK$30.3 billion (US$3.9 billion), respectively. For
the years ended December 31, 2019, 2020 and 2021, our interest income derived from margin financing and securities lending business was 24.4%,
17.3% and 29.8% of our total revenues, respectively. We charge brokerage commission fees and platform service fees on margin trading and short
selling. See “—Our Services—Trading, Clearing and Settlement.”
Stock Yield Enhancement Program
We launched the Stock Yield Enhancement Program, or the SYEP, in October 2019 with a third-party brokerage company. This program
allows clients to earn interest on their U.S. securities positions by lending their securities out to that third-party brokerage company. Our clients can
choose to opt in and out of the program at any time. When clients choose to participate in the program, we transfer their U.S. securities positions
into a stock yield enhancement program account with the third-party brokerage company. Any interest income earned from these securities
borrowed from our clients is split among the third-party brokerage company, the client and us.
Wealth Management Services
We offer online wealth management services under the brand Futu Money Plus through our Futubull and moomoo platforms, which provide
our clients with access to mutual funds and bonds, catering to different investment targets and risk preferences of our clients. Our Futubull platform
also offers clients access to private funds.
● Mutual Funds. We selectively work with established fund houses to distribute their fund products, including money market, fixed income,
equity and balanced fund products. In addition, our clients can opt to automatically invest idle funds in their accounts to money market
funds to earn interest, which can be redeemed upon trading. Our clients can also choose to rebalance their fund allocation manually or
automatically according to portfolio changes made by selected portfolio managers. We currently charge zero subscription fees from our
clients, and share management fees based on negotiated commercial terms with the fund houses that provide mutual fund products,
generally on a non-exclusive basis, such agreement being effective for an indefinite period. As of December 31, 2021, we had established
partnerships with 60 reputable asset management companies and offered over 200 mutual fund products to our clients.
● Private Funds. In June 2020, we began to offer private funds on Futubull, including fixed income funds, hedge funds and alternative
investments, to professional investors only. We charge a subscription fee on the private funds and share management and incentive fees
with the fund houses. We may also enter into sub-distribution agreements with other distributors to offer private funds.
● Bond Trading. In September 2020, we launched bond trading services on Futubull for fixed income securities listed on the Hong Kong
Stock Exchange, which are available to professional investors only. For bond trading, we charge a fixed commission rates based on the
trading volume, a platform service fee per transaction and an annualized fee on settlement as custodian.
● Bank Sweep. We offer bank sweep services to Futu Inc. clients. Bank sweep services automatically deposit a client’s idle U.S. dollar-
denominated funds into interest-bearing bank accounts maintained by us. This service allows clients to earn interest income at 0.03% per
annum on their idle funds, while such funds remain available for trading as the deposited funds can be redeemed upon trading.
We do not disclose client information to the fund houses we collaborate with, and execute transactions solely through our own aggregated
accounts. Our clients complete the entire transaction, access updated transaction records and monitor changes in positions through our platforms.
We automatically deduct the relevant commissions and fees from our clients’ accounts after each transaction.
As of December 31, 2021, over 139,000 clients held wealth management positions with us, with client asset balance in wealth management
products totaling HK$18.8 billion (US$2.4 billion).
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Market Data and Information Services
Market Data
We provide real-time stock quotes across Hong Kong, Mainland China, the United States and Singapore equity markets. Our U.S. Level II
stock quotes are free for all clients. Our Hong Kong Level II stock quotes are free for all Mainland China-based clients, and for a monthly fee for
clients based elsewhere. We also offer a variety of advanced stock quote services to our clients, for which we charge a monthly fee.
We provide a number of advanced and intuitive tools which allow our users and clients to customize the manner in which they monitor the
capital markets. For instance, they can filter the broader market across a range of criteria including industry, valuation, trading volume and price
volatility over a certain period of time. These filters are available across markets so our users and clients can monitor multiple markets
simultaneously.
On an individual company basis, users and clients can review and track detailed fundamental and technical analyses, including recent
transaction details such as trading volumes by major brokers, historical and current valuations, analyst ratings and target prices, operating and
financial metrics, compiled news and research, and other company specific content.
For each mutual fund, users and clients are able to monitor fund performances, review detailed quantitative analyses, read complied news and
fund specific content, and understand fund basics such as duration, top holdings and geographic and industry concentrations.
Information Services
We distill investment information and trends into engaging, accessible and diversified content, guiding investors along the investing
experience and helping to simplify the decision-making process.
Our information services generally include real-time news alerts, such as earnings releases and corporate announcements, topical industry or
company-level deep dives and proprietary data flows such as our compiled IPO pipeline that we complied from external sources. We deliver our
content across different formats including short-form news, graphics, essays and videos. Content is grouped by animated tags that facilitate easy
searches and allow our users and clients to customize information feeds.
We aggregate and curate our content through our internal content creation team and through collaboration with third-party resources, including
leading international news agencies and market centers.
User Community and Social Interaction Functions
We broaden our reach and promote the exchange of information through NiuNiu/Moo Community, our social network services on Futubull and
moomoo platforms, which have embedded social media tools to create a network centered around users. This user community reduces information
asymmetry, supports the discovery of investment opportunities, facilitates investment decision-making and establishes a sense of camaraderie
among our users.
On NiuNiu/Moo Community, we provide a variety of interactive tools and free content, including:
● Courses. We provide our users with necessary investment know-how through pre-recorded videos and graphical presentations on financial
terminology, investment products and other investment related topics, leveraging both our in-house and external resources;
● Live Broadcasts. Our users can watch live broadcasts hosted by enterprise clients such as listed companies and fund houses. Live
broadcasts include earnings results, product launch and promotions, as well as investor Q&A sessions, which can be later replayed on
demand; and
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● Forum. Our clients can post and share their trading history, investment views and market insights, and interact with each other.
We have fostered a vibrant NiuNiu/Moo Community, serving as an open forum for users to share insights, ask questions and exchange ideas,
which enables our users to maintain a strong sense of belonging. Specifically, NiuNiu/Moo Community offers the following unique features:
● participant diversity, as users can interact directly with other users, company executives, analysts and opinion leaders within the investing
community, such as financial journalists and academics;
● extensive content, ranging from investing basics to sophisticated analytical guides for professional investors;
● lively and dynamic delivery, as all our content is designed for digital consumption and delivered through multiple media formats, such as
short-form videos, recorded online lessons, chat rooms, live broadcasts and presentation slides; and
● feedback channel, as we use NiuNiu/Moo Community as an important source of feedback, which guides us to continue to optimize our
product and service offerings.
As of December 31, 2021, over 1,100 entities, including public and private companies, fund houses, exchanges, and media and research
institutions, held accounts in our user community. On average, we had an aggregate of approximately 190,000 UGCs generated on NiuNiu/Moo
Community on each trading day in 2021, which included a multitude of posts, comments and other interactive reactions to social media content. We
continue to find ways to enhance the quality of content within our ecosystem. For example, we launched NiuNiu Stars, a systematic creator
incentive program where we invite and reward content creators to further contribute to our user community with creative and high-quality content.
Corporate Services
We provide IPO subscription, investor relations and ESOP solution services to corporate clients under our integrated enterprise service brand,
Futu I&E. We also provide trust services to corporate clients. We offer a variety of IPO subscription services to investors and have served as the
co-bookrunner and co-manager for a number of landmark Hong Kong and U.S. initial public offerings. We have worked with 236 corporate clients
as of December 31, 2021 to distribute or promote their shares to retail investors during or after their initial public offerings. After companies are
listed, we continue to deliver a range of investor relations services to help companies manage their ongoing relationships with shareholders.
We also provide a one-stop ESOP service to help enterprise clients with their ESOP administration, including the granting, vesting, exercise
and settlement of the stock awards. In addition, we provide relevant tax consulting and withholding, trust service and foreign exchange registration.
As of December 31, 2021, we have entered into ESOP service contracts with 400 corporate clients.
We provide a range of investor relations services to help companies manage their ongoing relationship with shareholders after they go public,
including investor education, community events, video broadcasts, etc. We also launched the Futu Enterprise Platform, a one-stop investor
relations data management service, where corporate clients can effectively monitor various market indicators to timely track market dynamics and
communicate with investors more effectively.
We launched our trust services in March 2021 to provide ESOP trust and family trust solutions to corporate and individual clients,
encompassing company formation, trust establishment, trust management, etc.
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Our Users and Clients
Demographic
As of December 31, 2021, we had 17.4 million users on our platforms, among which 2,751,239 were our registered clients and 1,244,222 were
paying clients. Since the remaining user base of 14.6 million as of December 31, 2021 are yet to be our registered clients, we believe such large
user base demonstrates our significant potential to convert these users into our registered and paying clients, which contribute to the growth of our
trading volume and ultimately drive our revenues. As we expand our business in the future, leveraging our large user base, we will continue to
explore more monetization opportunities. For example, we cross-sell wealth management products to our paying clients to further penetrate into
their wallet share. We may further monetize our user traffic through new business initiatives such as targeted advertisement. In addition, by
providing free market data and information, a socially engaged online community and superior user experience on our platforms, our user and
client base has grown rapidly by existing users’ word-of-mouth referral, which has enabled us to promote our brand with relatively low marketing
costs.
Users
Our users engage Futubull and moomoo by downloading our mobile or desktop applications, or visiting our website, and registering a user
account. Users are able to receive market data, select research and other information services and engage in the NiuNiu/Moo Community free of
charge. The number of our users is determined based on the user accounts registered with Futubull and moomoo. As of December 31, 2021, we had
17.4 million users from over 200 countries and regions, with over 16.2 million users on Futubull and over 1.1 million users on moomoo.
Our user base has grown from 7.5 million as of December 31, 2019 to 11.9 million as of December 31, 2020, and further to 17.4 million as of
December 31, 2021. We had 2,219,274 MAUs in December 2021, as compared to 1,831,807 in December 2020, and 615,199 in December 2019. In
December 2021, we had an average of 985,630 DAUs, compared to 679,565 in December 2020 and 208,340 in December 2019. Users who have
not opened trading accounts with us represent an important pipeline for our client acquisition.
Clients
Our clients are defined as users who have opened trading accounts with us, and our paying clients are defined as our clients who have assets in
their trading accounts with us. Our client base has grown from 717,842 as of December 31, 2019 to 1,419,734 as of December 31, 2020 and further
to 2,751,239 as of December 31, 2021. On average, we retained over 97% of our paying client base on a quarterly basis in 2021.
Our clients are generally high earning, with average assets of paying clients exceeding HK$300,000 on our platforms as of December 31,
2021. In addition, our clients are generally young. As of December 31, 2021, the average age of our paying clients was 37. The demographics of
our client base are substantially the same as our broader user base.
Corporate clients
Our corporate clients are defined as corporate users to whom we have provided any of our corporate services. The number of our corporate
clients grew significantly since 2018. As of December 31, 2019, 2020 and 2021, we provided IPO subscription and investor relation services to 42,
105 and 236 IPO corporate clients, respectively. As of December 31, 2019, 2020 and 2021, we entered into ESOP service contracts with 79, 159
and 400 corporate clients, respectively.
Our corporate clients actively contribute to our user community by delivering timely product and business updates to our users, thereby
breaking down information asymmetry and providing bases for investment decisions.
User and Client Acquisition
We grow our client base mainly through online and offline marketing and promotional activities, word-of-mouth referrals, third-party channel
partners and our corporate services.
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For our online and offline marketing and promotional activities, we from time to time acquire users and clients through cooperation with
external marketing channels, such as social media platforms, internet TV and short-form video platforms, search engines, key opinion leaders and
offline marketing channels. We also conduct promotions and marketing campaigns on our platforms, such as offering free commissions to clients
who open trading accounts with us within a certain period of time and promoting client referrals.
We cooperate with third-party channel partners who address similar client profiles as ours to acquire users and clients.
We also bring in a considerable number of clients through corporate services. For example, through providing ESOP services, we are able to
directly connect with the employees of our corporate clients once an employee ESOP account has been established.
User and Client Experience
We have developed our proprietary and customized customer service system to connect our users and clients with our customer service staff
and technology experts. Users and clients are able to reach our customer service representatives and technology specialists around the clock. Our
customer service representatives receive regular training regarding our platforms and services as well as critical communication skills such as
managing client complaints and other troubleshooting. We document user and client behavior, as well as complaints and feedback, and apply
advanced analytical methods to better anticipate further areas of improvement.
We proactively seek user and client feedback. For example, we initiate online communications and activities on major social media and our
NiuNiu/Moo Community to seek feedback from our users and clients about their investing experience. We reach out to our most active clients to
discuss their experience with our platforms and solicit ways in which we can improve.
Technology
We have developed a proprietary and highly automated technology infrastructure including integrated account opening, trading, clearing, risk
management and business and operation systems, to support each aspect of our business. The purpose-built nature of our technology provides two
crucial advantages. First, our platforms are adaptable and we can react quickly to industry and regulatory change. Second, our platforms are highly
scalable.
In May 2020, we established a technology committee headed by Mr. Leaf Hua Li, our founder, chairman and chief executive officer, and
comprised of key personnel in our research and development department to fulfill the function of our previous chief technology officer position.
The key responsibilities of the technology committee include formulating technology development strategies, optimizing the existing technology
infrastructure and implementing large-scale technology projects. The committee members have extensive experience in the industry and will
further boost our technology leadership and advancement. Our strategic investor, Tencent, has advised on the formation and operation of our
technology committee.
Industry-leading Proprietary Integrated Cross-market System
We operate an easy-to-use and integrated cross-market system which allows our clients to execute trades on all three markets from a single
platform. We developed this system internally, with unified functionality extending from core trading to risk management as well as multi-
currency, multi-market settlement. This allows our clients to effectively view the markets we serve as a unified market, and avoid many of the
traditional frictions associated with cross-market trading.
We have developed an interconnected set of online brokerage process systems to support our cross-market trading function efficiently. Our
system uses modular architecture to abstract all tasks and steps involved in the online brokerage process, configure new business processes and
quickly support any evolving business needs. Our system features real-time advanced service-level-agreement (SLA) monitoring and quality
monitoring services, and is able to ensure consistent superior client experience. By virtue of our technical edge, the online application process for
opening an account can typically be completed in as little as three minutes.
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Highly Stable, Scalable and Secure System
We use distributed infrastructure as the foundation for our trading system, employing a number of interrelated servers in order to mitigate the
risk of a single server disrupting the whole system. In the event an error occurs with any single server, our distributed technology ensures an
immediate and automatic switch to additional servers to ensure continuous operation. Our overall system achieved a 99.93% availability rate in
2021, and our core servers are deployed in different locations as a matter of disaster avoidance and recovery.
Our platforms adopt modular architecture that consists of multiple connected components, each of which can be separately upgraded and
replaced without compromising the functionality of other components. If we experience a sudden surge in activity or trading volume, we can
execute a system expansion within minutes and the overall architecture can support more than ten times the peak activity level of the current
platforms.
We utilize sophisticated user interface design technology and embed a number of modules in each user interface. By simply duplicating one
specific existing user interface module as needed, we effectively improve the accuracy and efficiency of user interface development. At the same
time, using modular design technology in our user interface development ensures the stability and consistency of UI performance and functionality
among different user interfaces, which eventually improves user experience.
We recognize that the reliability and security of our platforms is critical to our clients. Our platforms feature an automated multi-level
protection mechanism to ensure the services we deliver to our users and clients are secure. We have adopted strict security policies and measures,
including data encryption and a two-factor authentication function, to protect our proprietary data such as clients’ personal information and trading
data. Our technology system analyzes and predicts malicious attacks and enables us to respond to challenges and attacks promptly.
Agile Research and Development Capability
Through the construction of research and development tools and components, we improve our research and development efficiency while
ensuring quality and system stability. In 2021, our technology team released 153 new versions of our mobile app and desktop client. To further
improve research and development efficiency, we built our activity configuration system with configurable template abstraction for various routine
operational activities. The average launch cycle and necessary manpower for such activities have been effectively reduced compared to traditional
development methods.
In addition, we believe that our heavily tech- and research- and development-oriented employee structure lays a solid foundation for our ability
to continually develop innovative solutions and enhance our existing service offerings. Our research and development teams are primarily
organized into four areas, including finance business, internet business, big data and growth as well as engineering technology. Our core research
and development team consists of experienced engineers and technology experts with extensive experience in structure design supporting massive
transactions, and the majority of them have work experience with leading internet and technology platforms in China. Most of our research and
development personnel are based in Shenzhen, China.
Risk Management
We have established a comprehensive and robust technology-driven risk management system to manage risks across our business and ensure
compliance with relevant laws and regulations. Our risk management committee formulates key risk management policies and procedures and
consists of a compliance officer with over 20 years of experience in the auditing, compliance and regulatory profession, a certified accounting
officer with the Hong Kong Institute of Certified Public Accountants with over 10 years of experience in the financial industry, a risk officer who
has over 17 years of experience in trading and risk management businesses, and 4 seasoned responsible officers in the brokerage industry. Our risk
management committee empowers our risk management team, consisting of 8 employees having relevant experience between 8 to 22 years, to
execute these policies and procedures.
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Our risk management team meets regularly to examine credit, operational, compliance and enterprise risks and update guidelines and measures
as necessary. Key tasks of our risk management team include client verifications, storage of client information, evaluation of clients’ risk profiles,
monitoring of infrastructure performance and stability, evaluation of risk concentrations, building and maintaining credit models, performing
system-wide stress tests and conducting peer benchmarking and exogenous risk assessments. Our internal control, legal and compliance, and
internal audit teams coordinate with our risk management team to jointly conduct regular and ad hoc audits on our business to ensure more
effective internal control, daily operation, finance and accounting management and business operation.
Brokerage Service Risk Management
We monitor client transactions on a real-time basis, seeking to identify any unusual or irregular trading activity. We have dedicated personnel
to monitor account opening, security of funds and trading activities of clients and elevate any irregularities immediately. In accordance with the
relevant laws and regulations regarding client funds custody, we are required to maintain accounts with recognized commercial banks for the
deposit of our client funds for settlement. To prevent misappropriation of client deposits, we have centralized the storage of our clients’ trading
data. We have also centralized management of the securities brokerage trading systems and settlement systems to enhance the security of client
deposits.
As part of our risk management practice, we operate a strict due diligence of client information during the “know your-client” process. Our
account opening procedures are designed to ensure that our clients’ account opening information is accurate, sufficient and in compliance with
applicable Hong Kong regulations and our internal control policies. For China-based clients, we collaborate with our third-party partners who are
able to access the national citizen identity database of the Ministry of Public Security of China and the China Union Pay System to verify the
identity and bank card information submitted by our prospective clients. For Hong Kong-based clients who apply to open trading accounts with us
online, in addition to submitting personal identity information and documents, we require each prospective client to link his or her personal bank
account opened with a qualified bank in Hong Kong with the trading account to be opened with us and transfer no less than HK$10,000 to avoid
fraud. For offline account opening application, our verification staff will meet the prospective clients in person and interview them to verify the
information submitted.
We have established rigorous anti-money laundering internal control policies covering client identification, record keeping of client identity
information and transaction records, reporting on large-sum and suspicious transactions, internal operation rules and control measures,
confidentiality, training and publicity, anti-money laundering auditing, assisting investigation and execution as well as on-site inspections.
Margin Financing Risk Management
We calculate margin requirements of each of our clients on a real-time basis across different markets and currencies. To ensure that the clients
meet the margin requirements, we have adopted a margin call mechanism to control the overall risks involved in our margin financing business. A
margin call requires that our clients pledge additional collateral in the form of either cash or acceptable securities to re-establish a minimum ratio of
the value of the collateral to the amount of the margin loan balance.
A decline in the value of collateral may result in a margin call. Once a margin call is initiated, we will notify the client and request the client to
increase pledged collateral or reduce exposure by liquidating all or some of the securities portfolio. If the client is unable to satisfy the margin call
requirement within 48 hours and the value of the collateral remains below the required level, normally we will exercise our sole discretion to
liquidate securities positions to facilitate margin compliance. In some cases, if the value of the collateral falls below the required level and
deteriorates sharply, we may liquidate positions without giving prior notification to the client. Our risk management system monitors and manages
clients’ credit risks.
All collateral is displayed on liquidation monitoring screens that are part of the tools our technical staff utilizes to monitor the performance of
our systems during the relevant market hours. At the same time our clients can also monitor, in real-time, the value of the collateral supporting their
margin loans and will automatically receive a warning message when approaching a margin limit. This feature allows our clients to proactively
manage their financed positions and avoid unnecessary or forced liquidations.
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Effective from January 1, 2020, we adopted FASB ASC Topic 326-“Financial Instruments-Credit Losses,” or ASC Topic 326, which replaced
the incurred loss methodology with the current expected credit loss methodology. We adopted ASC Topic 326 using the modified retrospective
approach for all in-scope assets. For the year ended December 31, 2020 and 2021, expected credit loss expenses of HK$9.1 million and HK$3.2
million (US$0.4 million) resulting from the assessment of credit losses for the loans and advances under ASC Topic 326, respectively, was
recognized in “Others, net”.
Wealth Management Risk Management
We process each purchase and redemption order automatically online, and record such order in our internal system in real time. Our risk
management team is able to monitor corresponding order data in real time. At the same time, information on changes in positions and orders will
be updated in real time for the client. We submit aggregated orders to the corresponding fund houses. Upon the fund house’s confirmation of
successful purchase or redemption, we will update the client’s account accordingly. As a result, we do not undertake any credit risk in connection
with our wealth management services.
In order to ensure data accuracy in the transaction settlement process, we have developed a strict verification and reconciliation process,
including the reconciliation of purchase and redemption orders and changes in clients’ positions with corresponding fund houses within each
trading day.
For bond trading, we submit each buy and sell order to a financial institution partner through real-time APIs, and record such order in our
system. For each buy order, we first freeze a client’s cash based on the expected order amount, and then submit the order to the bank partner. When
the trade is completed, we will update the client’s account accordingly and unfreeze the order amount. We therefore ensure that the client has
sufficient cash to close the trade.
In addition, we have adopted client suitability assessment and investment products due diligence procedures for our wealth management
business. Each client is required to fill in a suitability questionnaire for the purpose of assessing client’s risk profile, and we assign risk ratings for
every mutual fund, private fund and bond we offer. A client can only purchase wealth management products with risk ratings that match his or her
risk profile. Only professional investors can access private funds and bonds through our platforms. We currently do not provide financing to clients
to purchase wealth management products.
Social Network Community Risk Management
We have adopted a number of measures to monitor and manage potential risks in connection with information disseminated on our
NiuNiu/Moo Community. For example, we have an automatic filtering mechanism that prevents offensive, fraudulent and other inappropriate
content from being posted to our platforms. Moreover, we perform manual inspection of each post and live broadcast video uploaded to our NiuNiu
Community, to ensure that content that is against our platform policies and applicable laws and regulations will be removed and responsible content
creators are banned from posting going forward. In addition, we frequently share information on stock investment risks on NiuNiu Community to
provide warnings against fraudulent activities and raise our users’ risk awareness. On our Moo Community, we have also adopted measures to
monitor and manage inappropriate content in a timely manner. These measures include keyword filtering, AI-based image recognition, user
reporting as well as manual review.
Data Security and Protection
We have established a comprehensive security system, Futu Monolith Safety Protection System, or FMSPS, to provide industry-leading level
of protection of information related to our clients, their accounts and their transactions with the support of our network situational awareness and
risk management system. FMSPS has obtained ISO27001 Information Securities Management System Certification.
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We have a data security team of engineers and technicians dedicated to protecting the security of our data. We have also adopted a strict data
protection policy to ensure the security of our proprietary data. We apply encryption algorithms with high security levels to all user activities such
as logins, account asset reviews and transaction-making to ensure data safety. Our official website is equipped with a 2048-bit EV certificate, and
all data transmissions are completed through encrypted channels. Our Futubull and moomoo platforms maintain a high data protection standard,
with a random key applied to each data transmission to ensure the security of the information. To ensure data security and avoid data leakage, we
have established stringent internal protocols under which we have clear instructions on how to handle and store the different types of data that we
receive. We categorize the operating, business and management data that we receive into varying levels of sensitivity. For confidential personal
data, we grant classified access only to limited employees with strictly defined and layered access authority. We have also set up a firewall to
segregate our core user data and require strict access digital permission to access any core data throughout our entire operation. We strictly control
and manage the use of data within our various departments and do not share any personal data of our users and clients with external third parties.
We have measures in place to prevent staff from improperly using client information. We also seek consent from our users as to the methods and
ways in which we collect and use their data, in accordance with the data protection laws and regulations in the relevant local jurisdictions.
On the client side, we have developed a proprietary two-factor authentication function to provide enhanced account security. If a client logs in
to his or her account through a different device, both the account password and a dynamic verification token are required for authentication. Two-
factor authentication is also required when a client wants to access his or her core data, such as account opening information and account assets.
We store such core data on an isolated network separately from other data, which has greatly improved our data security. A client can also activate
the two-factor authentication function for placing trading orders, where he or she is required to provide both the transaction password and a
dynamic verification token.
Aside from maintaining regular self-inspection to ensure compliance, we have also engaged external law firms and professional cybersecurity
teams to conduct regular cybersecurity studies, examinations and inspections so as to optimize our systems and boost our risk prevention
capabilities. While we are subject to similar data and privacy protection requirements in other markets in which we operate, including the U.S. and
Singapore, we have been closely monitoring the latest regulatory developments and optimizing our compliance practices. We continuously and
actively communicate with regulators, strengthen internal training to enhance employees’ awareness on personal information protection, and hone
our capabilities of safeguarding personal information. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and
Industry—If we fail to protect our platforms or the confidential information of our users and clients, whether due to cyber-attacks, computer
viruses, physical or electronic break-in, breaches by third parties or other reasons, we may be subject to liabilities imposed by relevant laws and
regulations, and our reputation and business may be materially and adversely affected.”
Intellectual Property
As of December 31, 2021, we owned 47 computer software copyrights in China relating to various aspects of our operations. We also
maintained trademark registrations worldwide, including 295 in Mainland China, 274 in Hong Kong, 19 in the United States, 32 in Singapore and
19 in other countries and regions. As of December 31, 2021, we had 130 patents granted in China, 2 patents granted in Hong Kong and 2 patents
granted in Singapore. As of December 31, 2021, we had registered over 100 domain names, including, for instance, futuhk.com, fututrade.com,
futusg.com, futunn.com, futuholdings.com, moomoo.com, futuie.com.
Marketing and Brand Promotion
We have a marketing committee responsible for formulating our marketing and brand promotion strategies, which are refreshed on a monthly
basis. This same committee then guides our dedicated marketing team to implement such strategies and handle our marketing and brand promotion
activities.
We conduct digital advertising via search engines, app stores, advertising networks, video sharing websites, and microblogging sites. Our
utilization of search engines is mainly through paid search, whereby we purchase key words and brand-link products. With the help of online
advertising networks, we can run our advertisements through a variety of online media. We upload our promotional videos to popular video sharing
sites. We also periodically send e-mails and SMS messages to our clients to highlight our platforms’ latest services and functions, promotional
items and marketing events.
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In addition, we host online seminars and lectures to enhance our brand recognition. We also conduct offline advertising via outdoor bulletin
boards, magazines, campus promotions and television commercials. Our offline advertising plays an important role in cultivating brand image and
generating public awareness.
Competition
The market for online brokerage and wealth management services is emerging and rapidly evolving. As one of the first movers in online
brokerage market, we position ourselves as an online brokerage and wealth management company based in Hong Kong with an expanded
international footprint in the United States as well as strong background and abundant resources in China. We currently compete with three types of
competitors in this market including (i) pure-play online brokerage and wealth management companies; (ii) hybrid brokerage and wealth
management companies featuring a combination of online and offline channels and (iii) brokerage and/or wealth management business units within
commercial banks.
We compete primarily on the basis of:
● client base and client experience;
● technology infrastructure;
● research and development capabilities;
● security and credibility of the platforms;
● operational compliance with applicable regulatory requirements; and
● brand recognition and reputation.
We believe that we are well-positioned to effectively compete on the basis of the factors listed above. However, many of our current or future
competitors may have longer operating histories, greater brand recognition, stronger infrastructure, larger client bases or greater financial, technical
or marketing resources than we do.
Licenses
We are subject to regulatory requirements and relevant restrictions in jurisdictions where we have operations.
In Hong Kong, due to the licensing requirements of the HK SFC, Futu International Hong Kong is required to obtain necessary licenses to
conduct its business in Hong Kong. Futu International Hong Kong’s business and responsible personnel are subject to the relevant laws and
regulations and the respective rules of the HK SFC. Futu International Hong Kong currently holds a Type 1 License for dealing in securities, a
Type 2 License for dealing in futures contracts, a Type 3 License for leveraged foreign exchange trading, a Type 4 License for advising on
securities, a Type 5 License for advising on futures contracts, a Type 7 License for providing automated trading services and a Type 9 License for
asset management. Futu International Hong Kong is not required to apply for a Type 8 License in order to conduct margin financing business, as it
is licensed to carry out Type 1 regulated activities. See “—Regulation—Overview of the Laws and Regulations Relating to Our Business and
Operations in Hong Kong—Introduction.” These licenses have no expiry date and will remain valid unless they are suspended, revoked or
cancelled by the HK SFC. We pay standard governmental annual fees to the HK SFC and are subject to continued regulatory obligations and
requirements, including the maintenance of minimum paid-up share capital and liquid capital, maintenance of segregated accounts, maintenance of
insurance against certain specific risks, and submission of audited accounts and other required documents, among others. See “—Regulation—
Overview of the Laws and Regulations Relating to Our Business and Operations in Hong Kong—Continuing Obligations of Licensed
Corporations.” Futu International Hong Kong has also been a Hong Kong stock exchange participant since October 29, 2012. Furthermore, Futu
International Hong Kong has been registered as a Mandatory Provident Fund Intermediary with the Mandatory Provident Fund Schemes Authority
in Hong Kong since August 2020.
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In addition, Futu Lending Limited is licensed under the Money Lenders Ordinance (Chapter 163 of Laws of Hong Kong) to conduct money
lending activities under its money lenders license. Futu Trustee Limited holds a full Trust and Company Service Provider (TCSP: TC006475)
License under the Hong Kong Anti-Money Laundering and Anti-Terrorism Financing Ordinance (Chapter 615 of Laws of Hong Kong). The
licenses are subject to renewal.
In 2019, we acquired Golden Jade Wealth Management Limited, a registered insurance broker company which is deemed to be a licensed
insurance broker during a transitional period of three years from the commencement of the new regulatory regime for insurance intermediaries on
September 23, 2019 under the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong) (and prior to September 23, 2019, a member of the
Professional Insurance Brokers Association). In January 2020, we renamed Golden Jade Wealth Management Limited as Futu Insurance Brokers
(Hong Kong) Limited. In June 2021, Futu Insurance Brokers (Hong Kong) Limited was granted an insurance broker company license by the
Insurance Authority of Hong Kong to replace the license held since September 23, 2019 under the Transitional Provisions in Schedule 11 of the
Insurance Ordinance .
We are also subject to applicable laws and regulations in China and the United States as we have a business presence there. In the United
States, we have two indirect, wholly-owned, SEC-registered broker-dealers that are also members in good standing with FINRA. Futu Inc. is an
introducing broker-dealer retailing corporate equities and options. Futu Clearing Inc. is a member in good standing with DTCC. Futu Clearing Inc.
provides clearing and execution services to its correspondents. We will continue to seek and maintain all the required licenses and approvals or
make all the necessary filings with the competent authorities required for the expansion of our business in the future.
Our wholly-owned subsidiary in Singapore, Futu Singapore Pte. Ltd., was issued a CMSL (License No. CMS101000) from the Monetary
Authority of Singapore on January 6, 2021. This version of Futu Singapore Pte. Ltd.’s CMSL supersedes a previous version issued by MAS on
October 1, 2020.
In November 2021, we acquired 100% of the issued share capital of an Australia company and renamed it Futu Securities (Australia) Ltd,
which has since become our wholly-owned subsidiary. Futu Securities (Australia) Ltd holds an Australian Financial Services License (AFSL). We
expect to use this license to provide online brokerage and other financial services in Australia.
Insurance
We provide social security insurance including medical insurance, maternity insurance, workplace injury insurance, unemployment insurance
and pension benefits through a PRC government-mandated multi-employer defined contribution plan for our China-based employees. We also offer
additional life and medical insurance to our China-based employees through commercial providers. We contribute to Mandatory Provident Fund
and provide labor insurance and medical insurance for our Hong Kong-based employees. In accordance with the Securities and Futures (Insurance)
Rules of Hong Kong, we have purchased and maintained insurance for any loss incurred by us due to any loss to our clients’ assets in our custody
that are caused by fraudulent conduct of our employees, robbery, theft or other misconduct. In addition, our U.S. subsidiaries provide health
insurances to our U.S.-based employees. We do not maintain business interruption insurance or key-man insurance. We believe that our insurance
coverage is adequate to cover our key assets, facilities and liabilities.
Futu Singapore Pte. Ltd., or Futu SG, contributes to the Central Provident Fund, or CPF, a compulsory comprehensive savings and pension
plan for working Singaporeans and permanent residents. Besides CPF, we provide medical insurance and work-injury compensation insurance, or
WICA, for all our Singapore-based employees. We also acquired Public Liability insurance that covers our Singapore offices.
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Employee Welfare
As a people-first company, we have implemented various measures and policies to create a safe and healthy work environment, including:
● Employee development. We provide our employees with various online and offline training sessions and courses on technical knowledge
and skills, including financial markets, products, marketing, coding, designing, etc. In 2021, total attendance in these technical training
sessions exceeded 13,000. We also provide a series of management and leadership workshops for management at all levels. In 2021, our
employees collectively spent over 430 hours on management training. In addition, we encourage and sponsor our employees to further
their education and obtain additional qualifications such as the Securities Qualification Certificate issued by the Securities Association of
China.
● Health, safety and wellbeing. We promote work-life balance and create a healthy working environment by providing fitness facilities,
annual check-ups, and social and team-bonding activities. We also conduct internal employee satisfaction surveys on an anonymous basis
to obtain feedback and address employee concerns. In 2021, we invited over 1,100 employees who have joined our company for over six
months to partake in an organizational and talent management survey, for which we achieved a response rate of over 76%. Based on the
survey feedback, we were one of the four winners out of 249 companies of the “2021 China Organizational Capabilities Survey Best
Practice Award” co-sponsored by Tencent Consulting, KNX, a one-stop human capital management SaaS service provider, and YCA Y-
Triangle CEO Alliance. We were recognized for our capabilities to achieve effective internal management.
● Anti-discrimination and anti-sexual harassment. We have strict policies on equal employment opportunities, prohibiting discrimination of
any form and ensuring our compliance with relevant laws and social responsibility requirements. We have a zero-tolerance policy on
sexual harassment and we treat any complaints we receive seriously and in strict confidence. We have established effective reporting
channels, and retain record of all complaints handled by our relevant departments.
● COVID-19 response. In response to the COVID-19 pandemic, we have taken a series of health and safety measures to protect our
employees, including arranging remote working, frequently cleaning and disinfecting office premises and establishing protocols to timely
update our employees on COVID-related emergencies.
Social Responsibility
We are committed to ethical business practices and social responsibility as well as contributing to the wider community.
● Anti-bribery, anti-corruption and anti-money laundering. We have implemented internal control policies on anti-corruption, anti-money
laundering, fraud, business conduct and ethics, and require our employees to complete relevant trainings. We have established an internal
audit team responsible for leading investigations and reporting cases to the audit committee, as well as an internal control team that assists
with investigations and follow-ups on rectification and improvement. We regularly conduct internal audits on high-risk business
operations and management area, and evaluate the effectiveness of our internal control. We also have whistleblowing policies and
reporting channels in place, whilst ensuring the confidentiality of any reports. Our employees responsible for handling whistleblower
reports are required to sign a confidentiality agreement, and any employee who discloses any information in contravention of the relevant
laws and regulations will be dismissed. Our business partners are generally required to enter into anti-bribery agreements with us. We
adopt anti-money laundering policies and review and update policies and procedures, if needed, as part of the company’s framework in
managing money laundering and terrorism financing risks.
● Sustainable sourcing. When selecting suppliers, we take into account a set of sustainable development criteria such as the commitment to
anti-commercial bribery and unethical business practices.
● Product responsibility. We aim to provide transparent, affordable and easy-to-use services, and offer free investment courses to help
investors better understand investment risks. With respect to privacy protection, we have obtained the ISO27001 system certification and
have adopted data privacy-related protection systems and evaluation methods.
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● Community service. We participate in the annual “Oxfam Trailwalker” fundraising sports event organized by Oxfam Hong Kong, a
charitable organization focusing on global poverty alleviation. The contributions to this event are dedicated to global poverty and disaster
relief. In 2020, when COVID-19 was raging in Hong Kong and the city was in shortage of masks, we purchased 35,000 masks from Japan
and delivered them to vulnerable individuals such as patients. In early 2022, we donated HKD$10 million to charities and over 1 million
doses of rapid testing kits to NGOs, including Hong Kong Federation of Education Workers, YMCA, etc., amid home-testing kits
shortage.
Environmental Protection
As a high-tech company, we encourage our employees to adopt sustainable practices to reduce our carbon footprint, including promoting
energy-saving measures, reducing paper wastage, and avoiding unnecessary travel. We actively respond to any government requirements on waste
sorting, recycling and waste reduction, to further lessen waste and pollution.
Seasonality
While we have not observed any apparent seasonality, our results of operations are subject to fluctuation and changes in market conditions. For
example, investor sentiment and trading volume may be influenced by capital market conditions, resulting in fluctuation in brokerage commission
and fee income we earn. Our margin financing business is subject to influences from market factors such as market liquidity, interest rate and
investor sentiment. The impact of fluctuation and changes of market conditions, however, was not apparent historically due to the rapid growth of
our business historically. Due to our limited operating history, the trends that we have experienced in the past may not apply to, or be indicative of,
our future operating results.
Ongoing Regulatory Actions
We are subject to various regulatory requirements, including those specified in law, regulations and guidelines issued by the competent
regulatory authorities in Hong Kong, the United States, Singapore and Australia, including but not limited to the HK SFC, MAS, SEC, FINRA and
the ASIC.
Futu International Hong Kong is a licensed corporation under the SFO and may be subject to HK SFC inquiries and investigations from time
to time. As of the date of this annual report, Futu International Hong Kong had been involved in certain ongoing inquiries initiated by the HK SFC
concerning matters including, among others, client onboarding processes, risk management, client assets, cybersecurity, anti-money laundering,
counter-financing terrorism and operation of mobile application. The HK SFC’s inquiries and other related HK SFC actions remain ongoing and
are subject to statutory secrecy under Section 378 of the SFO. Therefore, no additional details about them can be disclosed in this annual report
unless otherwise consented by the HK SFC.
As the foregoing inquiries and other related HK SFC actions from the HK SFC remain ongoing, it is not possible for us to accurately predict if
any disciplinary action will be taken against Futu International Hong Kong after the conclusion of the inquiries, if so, the nature and extent of any
such action. If, after the HK SFC’s inquiries and other related HK SFC actions have been concluded, the HK SFC identifies misconduct or material
non-compliance, the HK SFC can take various regulatory actions, which may include, among other things, reprimands, fines and/or suspension or
revocation of licenses and trading rights and, if imposed, might materially and adversely affect our reputation, business, prospects and financial
conditions. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are subject to extensive and
evolving regulatory requirements in the markets we operate in, non-compliance with which may result in penalties, limitations and prohibitions on
our future business activities or suspension or revocation of our licenses and trading rights, and consequently may materially and adversely affect
our business, financial condition, operations and prospects. In addition, we are involved in ongoing inquiries by relevant regulators.”
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Regulation
Overview of the Laws and Regulations Relating to Our Business and Operations in Hong Kong
As we provide online brokerage services primarily from our subsidiaries in Hong Kong, our business operations are subject to the laws of
Hong Kong. The key laws and regulations which relate to our business and operations in Hong Kong are summarized as follows:
Introduction
The Securities and Futures Ordinance, or the SFO, including its subsidiary legislation, is the principal legislation regulating the securities and
futures industry in Hong Kong, including the regulation of securities, futures and leveraged foreign exchange markets, the offering of investments
to the public in Hong Kong, and intermediaries and their conduct of regulated activities. In particular, Part V of the SFO deals with licensing and
registration matters.
The SFO is administered by the HK SFC which is an independent statutory body in Hong Kong set up to regulate the securities and futures
markets and the non-bank leveraged foreign exchange market in Hong Kong.
In addition, the Companies (Winding Up and Miscellaneous Provisions) Ordinance including its subsidiary legislation provides that the HK
SFC is responsible for authorizing the registration of prospectuses for offerings of shares and debentures in Hong Kong and/or granting exemptions
from strict compliance with the provisions in the Hong Kong Companies (Winding Up and Miscellaneous Provisions) Ordinance. The SFO
provides that the HK SFC is also responsible for authorizing certain securities (including the relevant offering documents) that are not shares or
debentures.
The Hong Kong securities and futures industry (with respect to listed instruments) is also governed by the rules and regulations introduced and
administered by the Hong Kong Stock Exchange and the Hong Kong Futures Exchange.
Types of regulated activities
The SFO provides a licensing regime where a person needs to obtain a license to carry on a business in any of the following regulated
activities as defined in Schedule 5 to the SFO:
License
License
Type 1:
Type 2:
Type 3:
Type 4:
Type 5:
Type 6:
Type 7:
Type 8:
Type 9:
Type 10:
Type 11:
Type 12:
Notes:
Regulated Activity(1)
Regulated Activity
Dealing in securities
Dealing in futures contracts
Leveraged foreign exchange trading
Advising on securities
Advising on futures contracts
Advising on corporate finance
Providing automated trading services
Securities margin financing
Asset management
Providing credit rating services
Dealing in OTC derivative products or advising on OTC derivative products(2)
Providing client clearing services for OTC derivative transactions(3)
(1) On September 27, 2019, the HK SFC launched a consultation on a proposal to regulate depositaries of SFC-authorized collective investment
schemes. Depositaries operating in Hong Kong would be licensed by or registered with the HK SFC for a new type of regulated activity (Type
13 (acting as a depositary (trustee/custodian) of an SFC-authorized collective investment scheme)) and be subject to the ongoing supervision
of the HK SFC or the Hong Kong Monetary Authority. The consultation is still pending and the licensing requirement with respect to Type 13
regulated activity is not yet in operation.
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(2) The amendments to the SFO in relation to Type 11 regulated activity are not yet in operation. The day on which the Type 11 regulated activity
will come into operation will be appointed by the Secretary for Financial Services and the Treasury by notice published in the Gazette.
(3) The Type 12 regulated activity added by the Securities and Futures (Amendment) Ordinance 2014 (6 of 2014) came into operation on
September 1, 2016, in so far as it relates to paragraph (c) of the new definition of excluded services in Part 2 of Schedule 5 to the SFO. The
licensing requirement with respect to Type 12 regulated activity is not yet in operation and the effective date will be appointed by the Secretary
for Financial Services and the Treasury by notice published in the Gazette.
As of the date of this annual report, Futu International Hong Kong was licensed under the SFO to conduct the following regulated activities:
Futu International Hong Kong
Notes:
Type 1, Type 2, Type 3(1), Type 4, Type 5, Type 7(2) and Type 9(3)
Regulated Activities by Type of License
(1) The following condition is currently imposed on Futu International Hong Kong in relation to Type 3 regulated activity:
(i) the licensee shall not provide discretionary account services to clients.
(2) The following conditions are currently imposed on Futu International Hong Kong in relation to Type 7 regulated activity:
(i)
the licensee or any company within the same group of companies as the licensee shall not engage in any principal trading activities in the
platform.
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(ii) the licensee shall: (1) notify the HK SFC of any incident of material service breakdown or disruption of the operations of the platform
affecting its clients within one business day. (2) provide the HK SFC with any updated independent review report of the platform when
available. (3) provide the HK SFC with the following reports within two weeks after the end of each month or upon request: (a) a
statistical summary of shares allotted pursuant to an initial public offering for which transactions have been executed; (b) a statistical
summary of transaction volume, expressed in number of trades; number of shares traded; and total settlement value in respect of each
issuer’s shares reported in (a) above; (c) a statistical summary of transaction volume expressed in total settlement value by each of the top
ten clients in respect of each issuer’s shares reported in (a) above; (d) an analysis of (i) amount receivable from each of the top ten clients;
and (ii) amount payable to each of the top ten clients arising from dealing in each issuer’s shares reported in (a) above, including, the
name of each client and type of client account (i.e. cash or margin account) and relevant amount receivable or payable to each client at the
end of the trading day; (e) a statistical summary of total number of clients participated in the pre-initial public offering trading with
breakdown into different client types in each issuer’s shares reported in (a) above; and (f) a statistical summary of total value of trades
recorded in the pre-initial public offering trading with breakdown into trades executed for different client types in each issuer’s shares
reported in (a) above. (4) for the avoidance of doubt, have arrangements in place to ensure that it and its clients will be able to comply
with the Client Identity Rule Policy issued by the HK SFC. (5) upon request, provide the HK SFC with: (a) a list of all clients who have
access to the platform; and (b) a list of all clients who have placed orders or traded on the platform in respect of any particular trading day.
(iii) the licensee shall: (1) have appropriate arrangements in place that enable it to: (a) monitor orders placed into and transactions undertaken
on the platform to identify suspected breaches of any rules relating to fair and orderly trading on the platform and conduct that may
constitute market abuse; (b) report to the HK SFC as soon as practicable any suspected breaches of its rules relating to fair and orderly
trading on the platform or suspected market abuse; and (c) upon request from the HK SFC, supply relevant information to the HK SFC as
soon as practicable regarding any suspected breaches or suspected market abuse and provide full assistance to the HK SFC in inquiring
into or investigating the suspected breaches or suspected market abuse. (2) notify the HK SFC of any material changes to the matters
specified below, prior to the changes taking effect: (a) corporate structure and governance arrangements; (b) business plans or operations;
(c) the platform (including changes in trading rules, operating hours, operator of the system, hardware, software, and other technology);
and (d) its contractual responsibilities for clients of the platform. (3) notify the HK SFC as soon as practicable of the causes, or possible
causes, of and the remedial actions for material delay or failure to the operation of the platform effecting the clients upon its occurrence.
(4) notify the HK SFC as soon as practicable of any suspected breaches of its rules relating to fair and orderly trading on the platform or
suspected market abuse. (5) put in place appropriate business continuity plans and disaster recovery programmes for its operations and the
platform and notify the HK SFC of any material changes to the plans or programmes.
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(iv) the licensee shall: (1) only provide Automated Trading Services via an electronic trading platform, for the purpose of trading shares
allotted pursuant to an initial public offering only on the day immediately before their official listing on The Stock Exchange of Hong
Kong Limited (SEHK). (2) have controls that: (a) are designed to ensure the integrity of its trading methodology; and (b) enable fair and
orderly trading on the platform. (3) provide sufficient pre-trade order information and post-trade transaction information to its clients. (4)
have appropriate arrangements in place that ensure the required information about executed transactions of shares allotted pursuant to an
initial public offering is reported to SEHK in the prescribed manner and within the prescribed time limit in accordance with the rules of
SEHK. (5) have appropriate arrangements in place to minimise the settlement failure of executed transactions. (6) have appropriate
written policies and procedures to handle outstanding orders and executed transactions under contingency situations including, but not
limited to, (a) postponement, cancellation or alternation to the terms and conditions of an initial public offering; (b) suspension,
breakdown, or disruption of the platform; and (c) adverse weather like typhoon or black rainstorm. These policies and procedures should
be provided to its clients prior to their using of the platform. (7) keep for a period of not less than seven years the following records in
respect of the activities on the platform in such a manner as to enable them to be readily accessible and readily convertible into written
form in the Chinese or English language; and provide any of those records to the HK SFC upon request: (a) client details, including their
registered names and addresses, dates of admission and cessation, authorised traders and related details, and client agreements; (b) details
of restricting, suspending, or terminating any client’s access, including related reasons; (c) all notices and other information, whether
written or communicated through electronic means, provided to clients generally; (d) routine daily and monthly summary of trading on the
platform including: (i) shares allotment details of clients pursuant to an initial public offering; and (ii) transaction volume, expressed in
number of trades; number of shares traded; and total settlement value. (8) keep for a period of not less than two years time-sequenced
records of orders and any other actions or activities on the platform as particularised below in such a manner as to enable them to be
readily accessible and readily convertible into written form in the Chinese or English language; and provide any of those records to the
HK SFC upon request: (a) date and time that the order was received, executed, modified, cancelled and expired (where applicable); (b)
identity of the client and authorised trader initiating the entry, modification, cancellation and execution of the order; (c) particulars of the
order and any subsequent modification and execution of the order (where applicable), including but not limited to, the shares involved, the
size and side (buy or sell) of the order, the order type, and any order designation, time and price limit and other conditions specified by the
client initiating the order; and (d) particulars of the allocation and re-allocation (where applicable) of an execution.
(3) The following conditions are currently imposed on Futu International Hong Kong in relation to Type 9 regulated activity:
(i)
the licensee shall not provide a service of managing a portfolio of futures contracts for another person;
(ii) the licensee shall not conduct business involving the discretionary management of any “collective investment scheme” as defined under
the SFO; and
(iii) the licensee shall only provide services to “professional investors” as defined under the SFO and its subsidiary legislation.
In addition to the above licenses granted to Futu International Hong Kong by the HK SFC, Futu Lending Limited also holds a money lenders
license issued by the licensing court under the Money Lenders Ordinance, which allows it to provide loans to its clients in its ordinary course of
business. Furthermore, Futu International Hong Kong has been registered as a Mandatory Provident Fund Intermediary with the Mandatory
Provident Fund Schemes Authority in Hong Kong since August 2020.
Overview of Licensing Requirements under the SFO
Under the SFO, any person who carries on a business in a regulated activity or holds itself out as carrying on a business in a regulated activity
must be licensed under the relevant provisions of the SFO to carry on that regulated activity, unless any exemption under the SFO applies. This
applies to a corporation carrying on a business in a regulated activity and to any individuals acting on behalf of that corporation in carrying on such
activities, as further described below. It is an offense for a person to conduct any regulated activity without the appropriate license issued by the
HK SFC.
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Further, if a person (whether by itself or another person on his behalf, and whether in Hong Kong or from a place outside of Hong Kong)
actively markets to the public in Hong Kong any services that it provides and such services, if provided in Hong Kong, would constitute a
regulated activity, then that person is also subject to the licensing requirements under the SFO.
Responsible Officers
In order for a licensed corporation to carry on any of the regulated activities, it must appoint no less than two Responsible Officers for each
regulated activity conducted by a licensed corporation, at least one of whom must be an executive director, to supervise each regulated activity.
An “executive director” of a licensed corporation is defined as a director of the corporation who (a) actively participates in or (b) is responsible
for directly supervising, the business of a regulated activity or activities for which the corporation is licensed. Every executive director of the
licensed corporation who is an individual must apply to the HK SFC to be approved as a Responsible Officer of such licensed corporation in
relation to the regulated activities.
Managers-in-Charge of Core Functions, or MICs
A licensed corporation is required to designate certain individuals as MICs and provide to the HK SFC information about its MICs and their
reporting lines. MICs are individuals appointed by a licensed corporation to be principally responsible, either alone or with others, for managing
each of the following eight core functions of the licensed corporation:
(a) overall management oversight;
(b) key business lines;
(c) operational control and review;
(d) risk management;
(e)
finance and accounting;
(f)
information technology;
(g) compliance; and
(h) anti-money laundering and counter-terrorist financing.
The management structure of a licensed corporation (including its appointment of MICs) should be approved by the board of the licensed
corporation. The board should ensure that each of the licensed corporation’s MICs has acknowledged his or her appointment as MIC and the
particular core function(s) for which he or she is principally responsible.
Licensed Representatives
In addition to the licensing requirements for corporations that carry on regulated activities, any individual who:
(a) performs any regulated function for his principal which is a licensed corporation in relation to a regulated activity carried on as a business;
or
(b) holds himself out as performing such regulated function, must separately be licensed under the SFO as a Licensed Representative
accredited to his principal.
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Fit and Proper Requirement
Persons who apply for licenses to carry on regulated activities under the SFO must satisfy, and continue to satisfy the HK SFC after the grant
of such licenses by the HK SFC, that they are fit and proper persons to be so licensed. The Fit and Proper Guidelines issued by the HK SFC under
section 399 of the SFO summaries certain matters that the HK SFC will generally consider when determining whether the applicant is a fit and
proper person to be licensed under the SFO. Effective from January 1, 2022, the additional fit and proper guidelines for corporations and
authorized financial institutions applying or continuing to act as sponsors and compliance advisers are addressed under the Guidelines on
Competence and Guidelines on Continuous Professional Training.
Under the Fit and Proper Guidelines, the HK SFC will consider the following matters of the applicant in addition to any other issues as it may
consider to be relevant:
(a)
the financial status or solvency;
(b) the educational or other qualifications or experience having regard to the nature of the functions to be performed;
(c)
the ability to carry on the regulated activity competently, honestly and fairly; and
(d) the reputation, character, reliability and financial integrity.
The HK SFC will consider the above matters in respect of the person (if an individual), the corporation and any of its officers (if a corporation)
or the institution, its directors, chief executive, managers and executive officers (if an authorized financial institution).
In addition to the above, the HK SFC may also take into account of the following matters:
(a) any decisions made by the Monetary Authority, the Insurance Authority, the Mandatory Provident Fund Schemes Authority or any other
authorities or organizations performing similar functions as those of HK SFC (in the HK SFC’s opinion) whether in Hong Kong or
elsewhere in respect of the applicant;
(b) any information relating to:
(i) any person who is or is to be employed by, or associated with, the applicant for the purpose of the regulated activity in question;
(ii) any person who will be acting for or on behalf of the applicant in relation to the regulated activity in question; and
(iii) if the applicant is a corporation in a group of companies, any other corporation within the same group of companies or any substantial
shareholder or officer of any such corporation;
(c) whether the applicant has established effective internal control procedures and risk management systems to ensure its compliance with all
applicable regulatory requirements under any of the relevant provisions; and
(d) the state of affairs of any other business which the person carries on or proposes to carry on.
Continuing Obligations of Licensed Corporations
Licensed corporations, Licensed Representatives and Responsible Officers must remain fit and proper at all times. They are required to comply
with all applicable provisions of the SFO and its subsidiary rules and regulations, as well as the codes and guidelines issued by the HK SFC.
Outlined below are some of the key continuing obligations of our licensed corporations under the SFO:
● maintenance of minimum paid-up share capital and liquid capital, and submission of financial returns to the HK SFC in accordance with
the requirements under the Securities and Futures (Financial Resources) Rules of Hong Kong (“FRR”);
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● maintenance of segregated account(s), and custody and handling of client securities in accordance with the requirements under the
Securities and Futures (Client Securities) Rules (Chapter 571H of the Laws of Hong Kong);
● maintenance of segregated account(s), and holding and payment of client money in accordance with the requirements under the Securities
and Futures (Client Money) Rules (Chapter 571I of the Laws of Hong Kong);
● issuance of contract notes, statements of account and receipts in accordance with the requirements under the Securities and Futures
(Contract Notes, Statements of Account and Receipts) Rules (Chapter 571Q of the Laws of Hong Kong);
● maintenance of proper records in accordance with the requirements prescribed under the Securities and Futures (Keeping of Records)
Rules (Chapter 571O of the Laws of Hong Kong);
● submission of audited accounts and other required documents in accordance with the requirements under the Securities and Futures
(Accounts and Audit) Rules (Chapter 571P of the Laws of Hong Kong);
● maintenance of insurance against specific risks for specified amounts in accordance with the requirements under the Securities and
Futures (Insurance) Rules (Chapter 571AI of the Laws of Hong Kong);
● payment of annual fees and submission of annual returns to the HK SFC within one month after each anniversary date of the license;
● notification to the HK SFC of certain changes and events in accordance with the requirements under the Securities and Futures (Licensing
and Registration) (Information) Rules (Chapter 571S of the Laws of Hong Kong);
● notification to the HK SFC of any changes in the appointment of MICs or any changes in certain particulars of MICs pursuant to the
Circular to Licensed Corporations Regarding Measures for Augmenting the Accountability of Senior Management dated December 16,
2016 issued by the HK SFC;
● compliance with the continuous professional training and related record keeping requirements under the Guidelines on Continuous
Professional Training issued by the HK SFC;
● implementation of appropriate policies and procedures relating to client acceptance, client due diligence, record keeping, identification
and reporting of suspicious transactions and staff screening, education and training in accordance with the requirements under the
Guideline on Anti-Money Laundering and Counter-Terrorist Financing issued by the HK SFC, or the AML/CTF Guideline;
● compliance with the business conduct requirements under the Code of Conduct for Persons Licensed by or Registered with the HK SFC,
the Management, Supervision and Internal Control Guidelines for Persons Licensed by or Registered with the HK SFC and the Fit and
Proper Guidelines;
● compliance with employee dealings requirements under the Code of Conduct for Persons Licensed by or Registered with the HK SFC,
which requires licensed corporations to implement procedures and policies on employee trading, to actively monitor the trading activities
in their employees’ accounts and their related accounts;
● compliance with the Advertising Guidelines Applicable to Collective Investment Schemes Authorized under the Product Codes, the
Guidelines on Disclosure of Fees and Charges Relating to Securities Services and other applicable codes, circulars and guidelines issued
by the HK SFC; and
● compliance with the requirements in relation to provision of order execution, distribution or advisory services in respect of investment
products via online platforms under the Guidelines on Online Distribution and Advisory Platforms issued by the HK SFC.
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The Securities and Futures (Financial Resources) Rules of Hong Kong (FRR)
Subject to certain exemptions specified under the FRR, a licensed corporation is required to maintain minimum paid-up share capital in
accordance with the FRR. The following table sets out a summary of the key requirements on minimum paid-up share capital under the FRR which
are applicable to Futu International Hong Kong:
Futu International Hong Kong
Regulated Activities
A corporation licensed for Type 1, Type 2,Type 3,Type 4,
Type 5, Type 7 and Type 9 regulated activities
Minimum Amount of
Paid-up Share Capital
HK$
30,000,000
In addition, the FRR also requires a licensed corporation to maintain minimum liquid capital. The minimum liquid capital requirements under
the FRR that are applicable to Futu International Hong Kong are the higher of the amount of (a) and (b) below:
(a)
the amount of:
Futu International Hong Kong
Regulated Activities
A corporation licensed for Type 1, Type 2, Type 3, Type 4,
Type 5, Type 7 and Type 9 regulated activities
Minimum Amount of
Paid-up Share Capital
HK
15,000,000
(b) in the case of a corporation licensed for Type 3 regulated activity (whether or not it is also licensed for any other regulated activity),
means the sum of its variable required liquid capital which means 5% of the aggregate of (i) its adjusted liabilities, (ii) the aggregate of the initial
margin requirements in respect of outstanding futures contracts and outstanding unlisted options contracts held by it on behalf of its clients, and
(iii) the aggregate of the amounts of margin required to be deposited in respect of outstanding futures contracts and outstanding unlisted options
contracts held by it on behalf of its clients, to the extent that such contracts are not subject to the requirement of payment of initial margin
requirements and 1.5% of its aggregate gross foreign currency position which means the aggregate of (i) the value of assets, other than fixed assets,
beneficially owned by Futu International Hong Kong which are denominated in the foreign currency, (ii) all of Futu International Hong Kong’s on-
balance sheet liabilities, other than excluded liabilities, which are denominated in the foreign currency and (iii) the aggregate of the total amount of
the foreign currency in respect of which Futu International Hong Kong is exposed to the risk of a decline or rise in the value of the foreign currency
under outstanding contracts (including spot contracts).
Securities and Futures (Client Securities) Rules (Chapter 571H of the Laws of Hong Kong) (the “Client Securities Rules”)
The repledging limit stipulated under section 8A of the Client Securities Rules applies to an intermediary which is licensed for dealing in
securities and/or securities margin financing and where the intermediary or an associated entity of such intermediary repledges securities collateral
of the intermediary. On each business day, the intermediary shall ascertain the aggregate market value of the repledged securities collateral, which
shall be calculated by reference to the respective closing prices of the collateral on that business day.
Pursuant to section 8A of the Client Securities Rules, if the aggregate market value of the repledged securities collateral as calculated above
exceeds 140% of the intermediary’s aggregate margin loans on the same business day, or the Relevant Day, the intermediary shall by the close of
business on the next business day following the Relevant Day, or the Specified Time, withdraw, or causes to be withdrawn, from deposit an amount
of repledged securities collateral such that the aggregate market value of the repledged securities collateral at the Specified Time, which is
calculated by reference to the respective closing prices on the Relevant Day, does not exceed 140% of the intermediary’s aggregate margin loans as
of the close of business on the Relevant Day.
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Exchange and Clearing Participantship
As of the date of this annual report, Futu International Hong Kong was a participant of the following:
The Stock Exchange of Hong Kong (SEHK)
Exchange / Clearing House
Hong Kong Securities Clearing Company Limited (HKSCC)
SEHK Options Clearing House Limited (SEOCH)
HKFE Clearing Corporation Limited (HKCC)
Hong Kong Futures Exchange Limited (HKFE)
Trading Rights
Type of Participantship
Participant
China Connect Exchange Participant
Options Trading Exchange Participant
Direct Clearing Participant
China Connect Clearing Participant
Direct Clearing Participant
Clearing Participant
Futures Commission Merchant
In addition to the licensing requirements under the SFO, the rules promulgated by the Stock Exchange of Hong Kong and the Hong Kong
Futures Exchange require any person who wishes to trade on or through their respective facilities to hold a trading right, or Trading Right. The
Trading Right confers on its holder the eligibility to trade on or through the relevant exchange. However, the holding of a Trading Right does not,
of itself, permit the holder to actually trade on or through the relevant exchange. In order to do this, it is also necessary for the person to be
registered as a participant of the relevant exchange in accordance with its rules, including those requiring compliance with all relevant legal and
regulatory requirements.
The Stock Exchange of Hong Kong Trading Rights and the Hong Kong Futures Exchange Trading Rights are issued by the Stock Exchange of
Hong Kong and the Hong Kong Futures Exchange at a fee and in accordance with the procedures set out in their respective rules. Alternatively, the
Stock Exchange of Hong Kong Trading Rights and the Hong Kong Futures Exchange Trading Rights can be acquired from existing Trading Right
holders subject to the rules of the respective exchanges.
Exchange Participantship
The table below sets out a summary of the requirements for becoming an exchange participant of the relevant exchange:
Legal Status
Being a company limited by shares incorporated in
Stock Exchange Participant / Stock Options
Exchange Participant
Futures Exchange Participant
SFC Registration
Trading Right
Financial Standing
Financial Resources Requirement
Clearing Participantship
Hong Kong
Being a licensed corporation qualified to carry out
Type 1 regulated activity under the SFO
Holding a Stock Exchange Trading Right
Having good financial standing and integrity
Complying with the minimum capital requirement,
liquid capital requirement and other financial
resources requirements as specified by the FRR
Being a licensed corporation qualified to carry
out Type 2 regulated activity under the SFO
Holding a Futures Exchange Trading Right
An entity must be an exchange participant of the relevant exchange before it can become a clearing participant of the following clearing
houses, namely the HKSCC, HKCC and SEOCH.
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HKSCC
HKSCC has, among others, two categories of participantship: (1) the Direct Clearing Participant; and (2) the General Clearing Participant. The
requirements of Direct Clearing Participantship are as follows:
● to be an Exchange Participant of the Stock Exchange of Hong Kong;
● to undertake to (i) sign a participant agreement with HKSCC; (ii) pay to HKSCC an admission fee of HK$50,000 in respect of each Stock
Exchange Trading Right held by it; and (iii) pay to HKSCC its contribution to the guarantee fund of HKSCC as determined by HKSCC
from time to time subject to a minimum cash contribution of the higher of HK$50,000 or HK$50,000 in respect of each Stock Exchange
Trading Right held by it;
● to open and maintain a single current account with one of the CCASS designated banks and execute authorizations to enable the
designated bank to accept electronic instructions from HKSCC to credit or debit the account for CCASS money settlement, including
making payment to HKSCC;
● to provide a form of insurance to HKSCC as security for liabilities arising from defective securities deposited by it into CCASS, if so
required by HKSCC; and
● to have a minimum liquid capital of HK$3,000,000.
SEOCH
SEOCH has two categories of participantship: (1) the Direct Clearing Participant; and (2) the General Clearing Participant. The requirements
of Direct Clearing Participantship are as follows:
● be an Options Trading Exchange Participant of the Stock Exchange of Hong Kong;
● have in place procedures and a back office computer system appropriate to the type of SEOCH Participant applied for;
● have a liquid capital of not less than the higher of :
(a)
its required liquid capital under the Securities and Futures (Financial Resources) Rules; or
(b) HK$5,000,000; and
● contribute HK$1,500,000 to the reserve fund under the rules of SEOCH.
HKCC
HKCC has two categories of participantship: (1) the General Clearing Participant; and (2) the Clearing Participant. The requirements of
Clearing Participantship are as follows:
● be an Exchange Participant of the Hong Kong Futures Exchange;
● have a liquid capital of not less than the higher of :
(a)
its required liquid capital under the Securities and Futures (Financial Resources) Rules; or
(b) HK$5,000,000; and
● contribute HK$1,500,000 participant deposit to the reserve fund under the rules of HKCC.
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China Connect Exchange Participant
China Connect is open to all Exchange Participants, but Exchange Participants who wish to participate must satisfy certain eligibility
requirements published on the Stock Exchange website at http://www.hkex.com.hk/mutualmarket.
Only the following Exchange Participants shall be eligible to apply for registration and to remain registered as China Connect Exchange
Participants: (1) Exchange Participants that are CCASS Clearing Participants, and (2) Exchange Participants that are not CCASS Clearing
Participants but have entered into a valid, binding and effective CCASS Clearing Agreement with a CCASS GCP which is and remains registered
by HKSCC as a China Connect CCASS Clearing Participant for the clearing of its China Connect Securities Trades (capitalized terms of which are
defined in the Rules of the Hong Kong Stock Exchange).
The Stock Exchange may publish the China Connect Exchange Participant Registration Criteria (as defined in the Rules of the Stock
Exchange) and a list of the China Connect Exchange Participants registered from time to time on the website of the Stock Exchange or by other
means that it considers appropriate.
China Connect Clearing Participant
Only China Connect Clearing Participants may use China Connect Clearing Services relating to the clearing and settlement of China Connect
Securities Trades. The requirements for being accepted for registration and remaining registered as a China Connect Clearing Participant are as
follows:
● to be a Direct Clearing Participant or a General Clearing Participant;
● to undertake to pay HKSCC such amount of Mainland Settlement Deposit, Mainland Security Deposit, Marks and Collateral as may be
specified by HKSCC in accordance with the Operational Procedures of HKSCC in relation to CCASS; and
● to meet all other relevant China Connect Clearing Participant Registration Criteria.
HKSCC may from time to time prescribe additional eligibility criteria for participants to be accepted for registration and to remain registered
as China Connect Clearing Participants. HKSCC may publish the China Connect Clearing Participant Registration Criteria and a list of China
Connect Clearing Participants on the website of the Stock Exchange or by other means that it considers appropriate.
Anti-Money Laundering and Counter-Terrorist Financing
Licensed corporations are required to comply with the applicable anti-money laundering and counterterrorist financing laws and regulations in
Hong Kong as well as the AML/CTF Guideline and the Prevention of Money Laundering and Terrorist Financing Guideline issued by the
Securities and Futures Commission for Associated Entities published by the HK SFC.
The AML/CTF Guideline provides practical guidance to assist licensed corporations and their senior management in formulating and
implementing their own policies, procedures and controls in order to meet applicable legal and regulatory requirements in Hong Kong. Under the
AML/CTF Guideline, licensed corporations should, among other things:
● assess the risks of any new products and services before they are introduced and ensure that appropriate additional measures and controls
are implemented to mitigate and manage the risks associated with money laundering and terrorist financing;
● consider the delivery and distribution channels (which may include sales through online, postal or telephone channels where a non-face-
to-face account opening approach is used and business sold through intermediaries) and the extent to which they are vulnerable to abuse
for money laundering and terrorist financing;
● identify the client and verify the client’s identity and any beneficial owner’s identity by reference to any documents, information or data
from reliable and independent sources, and take steps from time to time to ensure that the client information obtained is up-to-date and
relevant;
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● conduct on-going monitoring of activities of the clients to ensure that they are consistent with the nature of business, the risk profile and
source of funds, as well as identify transactions that are complex, large or unusual, or patterns of transactions that have no apparent
economic or lawful purpose and which may indicate money laundering and terrorist financing;
● maintain a database of names and particulars of terrorist suspects and designated parties which consolidates the information from various
lists that have been made known to them, as well as conduct comprehensive on-going screening of the client database; and
● conduct on-going monitoring for identification of suspicious transactions and ensure compliance with their legal obligations of reporting
funds or property known or suspected to be proceeds of crime or terrorist property to the Joint Financial Intelligence Unit, a unit jointly
run by the Hong Kong Police Force and the Hong Kong Customs & Excise Department to monitor and investigate suspicious financial or
money laundering activities.
We set out below a brief summary of the principal legislation in Hong Kong that is concerned with anti-money laundering and counter-terrorist
financing.
Anti-Money Laundering and Counter-Terrorist Financing Ordinance (Chapter 615 of the Laws of Hong Kong), or the AMLO
Among other things, the AMLO imposes on certain institutions (which include licensed corporations as defined under the SFO) certain
requirements relating to customer due diligence and record-keeping. The AMLO empowers the relevant regulatory authorities to supervise
compliance with the requirements under the AMLO. In addition, a financial institution must take all reasonable measures to (1) ensure that proper
safeguards exist to prevent contravention of specific provisions in the AMLO, and (2) mitigate money laundering and terrorist financing risks.
Licensing Requirements for Trust or Company Service Providers (“TCSP”) under the AMLO
A person who carries on or wishes to carry on a trust or company service business in Hong Kong is required to apply for a license under the
AMLO, unless any exemption under the AMLO applies. The Companies Registry of Hong Kong is responsible for the administration of the
licensing regime for TCSPs. It is an offense for a person to carry on a trust or company service business in Hong Kong without a license.
A TCSP license, once granted, will generally be valid for three years. The Companies Registry of Hong Kong is empowered to grant, refuse to
grant, renew, suspend or revoke a license, and impose or vary any conditions in relation to a license. TCSP licensees are required to obtain prior
approval from the Registrar of Companies of Hong Kong before any person becomes an ultimate owner, a partner or a director of a licensee. They
should also give notifications to the Registrar of Companies of Hong Kong of any changes in particulars previously provided in connection with an
application for the grant or renewal of a license within one month of the change. A TCSP licensee who intends to cease to carry on the trust or
company service business is also required to, before the intended date of cessation, notify the Registrar of Companies of Hong Kong of that
intention and the intended date of cessation.
TCSP licensees are also required to comply with the statutory customer due diligence and record-keeping requirements as set out in Schedule
2 to the AMLO.
The Companies Registry of Hong Kong published the “Guideline on Licensing of Trust or Company Service Providers” to provide
information on the licensing requirements and the “Guideline on Compliance of Anti-Money Laundering and Counter-Terrorist Financing
Requirements for Trust or Company Service Providers” to provide guidance on the ongoing obligations of TCSP licensees. The register of
licensees, which contains the name and business address of every TCSP licensee, is maintained by the Registrar of Companies of Hong Kong and
is available for public inspection.
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Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong), or the DTROP
Among other things, the DTROP contains provisions for the investigation of assets suspected to be derived from drug trafficking activities, the
freezing of assets on arrest and the confiscation of the proceeds from drug trafficking activities by the competent authorities. It is an offense under
the DTROP for a person to deal with any property knowing or having reasonable grounds to believe it to represent the proceeds from drug
trafficking. The DTROP requires a person to report to an authorized officer if he/she knows or suspects that any property (in whole or in part
directly or indirectly) represents the proceeds of drug trafficking or is intended to be used or was used in connection with drug trafficking, and
failure to make such disclosure constitutes an offense under the DTROP.
Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong), or the OSCO
Among other things, the OSCO empowers officers of the Hong Kong Police Force and the Hong Kong Customs & Excise Department to
investigate organized crime and triad activities, and confers jurisdiction on the Hong Kong courts to confiscate the proceeds of organized and
serious crimes, to issue restraint orders and charging orders in relation to the property of defendants of specified offenses under the OSCO. The
OSCO extends the money laundering offense to cover the proceeds from all indictable offenses in addition to drug trafficking.
United Nations (Anti-Terrorism Measures) Ordinance (Chapter 575 of the Laws of Hong Kong), or the UNATMO
Among other things, the UNATMO stipulates that it is a criminal offense to: (1) provide or collect property (by any means, directly or
indirectly) with the intention or knowledge that the property will be used to commit, in whole or in part, one or more terrorist acts; or (2) make any
property or financial (or related) services available, by any means, directly or indirectly, to or for the benefit of a person knowing that, or being
reckless as to whether, such person is a terrorist or terrorist associate, or collect property or solicit financial (or related) services, by any means,
directly or indirectly, for the benefit of a person knowing that, or being reckless as to whether, the person is a terrorist or terrorist associate. The
UNATMO also requires a person to disclose his knowledge or suspicion of terrorist property to an authorized officer, and failure to make such
disclosure constitutes an offense under the UNATMO.
Personal Data (Privacy) Ordinance (Chapter 486 of the Laws of Hong Kong), or the PDPO
The PDPO imposes a statutory duty on data users to comply with the requirements of the six data protection principles (the “Data Protection
Principles”) contained in Schedule 1 to the PDPO. The PDPO provides that a data user shall not do an act, or engage in a practice, that contravenes
a Data Protection Principle unless the act or practice, as the case may be, is required or permitted under the PDPO. The six Data Protection
Principles are:
● Principle 1 — purpose and manner of collection of personal data;
● Principle 2 — accuracy and duration of retention of personal data;
● Principle 3 — use of personal data;
● Principle 4 — security of personal data;
● Principle 5 — information to be generally available; and
● Principle 6 — access to personal data.
Non-compliance with a Data Protection Principle may lead to a complaint to the Privacy Commissioner for Personal Data (the “Privacy
Commissioner”). The Privacy Commissioner may serve an enforcement notice to direct the data user to remedy the contravention and/ or instigate
prosecution actions. A data user who contravenes an enforcement notice commits an offense which may lead to a fine and imprisonment.
The PDPO also gives data subjects certain rights, inter alia:
● the right to be informed by a data user whether the data user holds personal data of which the individual is the data subject;
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● if the data user holds such data, to be supplied with a copy of such data; and
● the right to request correction of any data they consider to be inaccurate.
The PDPO criminalizes, including but not limited to, the misuse or inappropriate use of personal data in direct marketing activities, non-
compliance with a data access request and the unauthorized disclosure of personal data obtained without the relevant data user’s consent. An
individual who suffers damage, including injured feelings, by reason of a contravention of the PDPO in relation to his or her personal data may
seek compensation from the data user concerned.
The Money Lenders Ordinance
Money lenders and money-lending transactions in Hong Kong are regulated by the Money Lenders Ordinance. In general, any person who
carries on business as a money lender must apply for and maintain a money lenders license (valid for 12 months) granted by the licensing court
under the Money Lenders Ordinance, unless any exemption under the Money Lenders Ordinance applies.
An application for or renewal of this license is subject to any objection by the Registrar of Money Lenders (the role is presently performed by
the Registrar of Companies) and the Commissioner of Police. The Commissioner of Police is responsible for enforcing the Money Lenders
Ordinance, including carrying out examinations on applications for money lenders licenses, renewal of licenses and endorsements on licenses, and
is responsible for investigations of complaints against money lenders.
The register of licensed money lenders is currently kept in the Companies Registry of Hong Kong and is available for inspection. The Money
Lenders Ordinance provides for protection and relief against excessive interest rates and extortionate stipulations in respect of loans by, for
example, making it an offense for a person to lend money at an effective interest rate exceeding 60% per annum or extortionate provisions. It also
stipulates various mandatory documentary and procedural requirements that are required to be observed by a money lender in order to enforce in
the courts of law a lending agreement or security being the subject of the Money Lenders Ordinance.
Recently, the Companies Registry of Hong Kong has introduced more stringent licensing conditions on all money lenders licenses, with an aim
to facilitate effective enforcement of the statutory ban on separate fee charging by money lenders and their connected parties, ensure better
protection of privacy of intending borrowers, enhance transparency and disclosure, promote the importance of prudent borrowing, address
increasing public concern about over-indebtedness and ensure better regulation of money lending-related practices. For example, one of the
additional licensing conditions is that all money lenders should include a warning statement in their advertisements in relation to their money
lending business, namely “Warning: You have to repay your loans. Don’t pay any intermediaries.”
Additional licensing conditions came into effect on December 1, 2016, October 11, 2018 and March 16, 2021. The Companies Registry of
Hong Kong also published “Guidelines on Licensing Conditions of Money Lenders License” to provide guidance for money lenders licenses on the
requirements of the licensing conditions. One of the additional licensing conditions is that a money lender shall comply with the Guideline on
Compliance of Anti-Money Laundering and Counter-Terrorist Financing Requirements for Licensed Money Lenders, which is similar to the
AML/CTF Guideline.
The Insurance Ordinance (Chapter 41 of the Laws of Hong Kong), or the IO
The IO (along with its subsidiary legislation) provides the regulatory framework for the business of insurers and insurance intermediaries
(covering insurance agents and brokers) in Hong Kong. The IO provides that a person must not carry on a regulated activity, or must not hold out
that the person is carrying on a regulated activity, in the course of business or employment, or for reward unless the person holds an appropriate
type of insurance intermediary license or is exempt under the IO. Regulated activities include:
● negotiating or arranging a contract of insurance;
● inviting or inducing a person to enter into a contract of insurance (or attempting to do so);
● inviting or inducing a person to make a material decision in relation to a contract of insurance (or attempting to do so); and
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● giving regulated advice.
Types of Licensed Insurance Brokers
The licensing regime under the IO prescribes two types of licensed insurance brokers:
● licensed insurance broker companies, which is a company that is granted a license to carry out regulated activities and to perform the act
of negotiating or arranging an insurance contract as an agent of any policy holder or potential policy holder; and
● licensed technical representatives (broker), which is an individual who is granted a license to carry on regulated activities, as an agent of
any licensed insurance broker company.
Application for licensing
An application for an insurance intermediary license under the IO should be made to the Insurance Authority of Hong Kong, or the IA.
Effective September 23, 2019, the IA took over the regulation of insurance intermediaries from the three self-regulatory organizations (i.e., the
Insurance Agents Registration Board established under the Hong Kong Federation of Insurers, the Hong Kong Confederation of Insurance Brokers,
or the HKCIB and the Professional Insurance Brokers Association, or the PIBA, and became the sole regulator to license and supervise all
insurance intermediaries in Hong Kong.
A license granted to a licensed insurance broker company or licensed technical representative by the IA is valid for three years or, if the IA
considers it appropriate in a particular case, another period determined by the IA. The IA maintains a register of licensed intermediaries on its
website.
Transitional Arrangements for Insurance Brokers
To facilitate a smooth transition, all insurance brokers who were validly registered with the HKCIB and the PIBA immediately before
September 23, 2019 are deemed as licensed insurance brokers under the IO for a period of three years. The incumbent chief executives of the
insurance broker companies are also eligible for the transitional arrangements. The IA will, staggered over the three-year transitional period, invite
deemed licensees to submit applications to the IA for granting of formal licenses and approvals.
Requirements for Broker Companies
Under the IO, a person who is, is applying to be, or is applying for a renewal of a license to be, a licensed insurance broker is required to
satisfy the IA that he/she/it is a fit and proper person. In addition, the responsible officer(s), controller(s), and director(s) (where applicable) of a
licensed insurance broker company are also required to be fit and proper persons. These “fit and proper” requirements aim at ensuring that the
licensed insurance brokers are competent, reliable and financially sound, and have integrity.
The IO imposes requirements (set out in rules made under section 129 of the IO) on licensed insurance broker companies in relation to the
following aspects:
● capital and net assets;
● professional indemnity insurance;
● client accounts;
● proper books and accounts; and
● accounting disclosure.
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The IO (and rules, regulations, codes and guidelines administered or issued by the IA) also includes requirements, which focus on the
interactions which licensed insurance brokers have with policy holders and potential policy holders when carrying on regulated activities. These
requirements include:
● the statutory conduct requirements, with which licensed insurance brokers must comply in carrying on regulated activities, in sections 90
and 92 of the IO;
● the relevant requirements set out in the rules, regulations, codes and guidelines made or issued under the IO; and
● the general principles, standards and practices set out in the Code of Conduct for Licensed Insurance Brokers.
Hong Kong Taxation
Hong Kong profits tax is chargeable on every person, including corporations, carrying on a trade, profession or business in Hong Kong in
respect of profits arising in or derived from Hong Kong from such trade, profession or business (excluding profits arising from the sale of capital
assets). However, profits arising from the sale of capital assets are not subject to Hong Kong profit tax. Whether (i) an activity amounted to trade,
profession or business; (ii) an asset is capital in nature or revenue in nature; and/or (iii) profits are arising in or derived from Hong Kong are
questions of fact. Under the current Hong Kong Inland Revenue Ordinance, Hong Kong profits tax for a corporation from the year of assessment
2018/2019 onwards is generally 8.25% on assessable profits up to HK$2.0 million; and 16.5% on any part of assessable profits over HK$2.0
million.
In addition, if the transfer of a share is required to be registered in a share register in Hong Kong, or Hong Kong Share, stamp duty will be
payable by the person(s) who effects any sale or purchase of such Hong Kong Share. The stamp duty in relation to transfer of Hong Kong Share is
charged at the ad valorem rate of 0.13% of the consideration for, or (if greater) the value of, the shares transferred on each of the seller and
purchaser. In other words, a total of 0.26% of the consideration for, or (if greater) the value of, the shares transferred is currently payable on a
typical sale and purchase transaction of Hong Kong Share. In addition, the instrument of transfer (if required) will be subject to a flat rate of stamp
duty of HK$5.00.
Overview of the Laws and Regulations Relating to Our Business and Operations in China
This section sets forth a summary of the most significant laws, regulations and rules that affect our business activities in the PRC or the rights
of our shareholders to receive dividends and other distributions from us.
Regulations on Securities Business
Regulations on the Engagement of Securities Business within the Territory of the PRC by Foreign-Invested Securities Companies
On December 29, 1998, the Standing Committee of the National People’s Congress, or the SCNPC, promulgated the Securities Law of the
PRC, or the Securities Law, and most recently amended on December 28, 2019 and became effective on March 1, 2020, governs all the issuance or
trading of shares, corporate bonds or any other securities approved by the State Council within China. No entities or individuals shall engage in
securities business in the name of a securities company without the approval by the securities regulatory authority of the State Council.
The State Council promulgated the Regulations on the Supervision and Administration of Securities Companies on April 23, 2008 and most
recently amended on July 29, 2014, which clarifies that the operation of securities businesses or establishment of representative agencies in China
by foreign-invested securities companies shall be subject to the approval of the securities regulatory authority of the State Council.
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We redirect our users and clients to open accounts and make transactions outside China, which may be considered as “engaging in securities
business within the territory of the People’s Republic of China” and an approval from State Council securities regulatory authority may be
required. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We do not hold any license or permit for
providing securities brokerage business in Mainland China. Although we do not believe we engage in securities brokerage business in Mainland
China, there remain uncertainties to the interpretation and implementation of relevant PRC laws and regulations. If some of our activities in
Mainland China were deemed by relevant regulators as provision of securities business such as securities brokerage services, investment consulting
services, and/or futures business in Mainland China, our business, financial condition, results of operations and prospects may be materially and
adversely affected.”
Regulations on the Securities Investment Consulting Service
On December 25, 1997, the China Securities Regulatory Committee, or the CSRC issued the Interim Measures for the Administration of
Securities or Futures Investment Consulting, or the Interim Measures for Securities Investment Consulting, which became effective on April 1,
1998. According to the Interim Measures for Securities Investment Consulting, the securities investment consulting service means any analysis,
prediction, recommendations or other directly or indirectly charged consulting services provided by securities investment consulting institutions
and their investment consultants to securities investors or clients, including: (i) to accept any entrustment from any investor or client to provide
securities or futures investment consulting services; (ii) to hold any consulting seminar, lecture or analysis related to securities or futures
investment; (iii) to write any article, commentary or report on securities or futures investment consultancy in any newspaper or periodical, or to
provide securities or futures investment consulting services through media such as radio or television; (iv) to provide securities or futures
investment consulting services through telecommunications facilities such as telephone, fax, computer network; and (v) other forms recognized by
the CSRC. In addition, all institutions shall obtain the operation permits issued by the CSRC and all person must obtain professional qualification
as a securities investment consultant and joining a qualified securities investment consulting institution before engaged in securities investment
consulting service.
On October 11, 2001, the CSRC promulgated the Notice with Respect to Certain Issues on Regulating the Securities Investment Consulting
Services Provided for the Public, which became effective on the same day and was amended on October 30, 2020, stipulates that media which
disseminate securities-related information shall not publish or broadcast any analysis, prediction or recommendation in respect of the trends of
securities markets and securities products, as well as the feasibility of the securities investment made by any institution which does not obtain the
operation permits for securities investment consulting services from CSRC or any individual who is not employed by a qualified securities
investment consulting services institution and who does not satisfy the relevant professional requirements. Any media in violation of the foregoing
stipulation will be subject to reprimand or exposure by the CSRC, or be transferred to competent department or judicial organ for further handling.
On December 5, 2012, the CSRC published the Interim Provisions on Strengthening the Regulation over Securities Investment Consulting
Services by Using “Stock Recommendation Software” Products, or the Interim Provisions, which came into effect on January 1, 2013 and was last
amended on October 30, 2020. Pursuant to the Interim Provisions, “stock recommendation software” are defined as any software products,
software tools or terminal devices with one or more of the following securities investment consulting services: (i) Providing investment analysis on
specific securities investment products or predicting the price trends of specific securities investment products; (ii) Recommending the selection of
specific securities investments products; (iii) Recommending the timing for trading specific securities investments products; and/or (iv) Providing
other securities investment analysis, prediction or recommendations. Therefore, selling or providing “stock recommendation software” products to
investors and directly or indirectly obtain economic benefits therefrom shall be considered as engaging in securities investment consulting business
and the operation permits for securities investment consulting services from CSRC shall be obtained.
On July 14, 2021, the CSRC issued the Measures for Administrative Penalties on Illegal Securities and Futures Activities, which became
effective on the same day. Pursuant to the Measures for Administrative Penalties on Illegal Securities and Futures Activities, any individual or
entity may be subject to an administrative penalty when violating any of the relevant laws, regulations, or rules on securities and futures.
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On December 20, 2019, the People’s Bank of China, or the PBOC, the CSRC, the SAFE and other regulatory departments jointly promulgated
the Notice on Further Regulating Financial Marketing and Publicity Activities, which came into effect on January 25, 2020. Pursuant to the Notice
on Further Regulating Financial Marketing and Publicity Activities, “financial marketing and publicity activities” refers to the advertising and
promotional activities of the financial institutions from the banking, securities and insurance sectors as well as institutions that conduct financial
activities or financial related activities, or the Financial Offerings Providers, via the use of various promotional tools and approaches, which shall
be conducted within the scope of the financial businesses approved by the financial supervision authorities under the State Council and its local
regulatory agencies. A market entity which fails to obtain the required qualifications for the relevant financial activities is prohibited from carrying
out marketing and advertising activities relating to such financial activities, except for marketing and advertising activities performed by
information publishing platforms or medias as entrusted by Financial Offerings Providers that have acquired qualifications for financial business
operations by operation of law.
We cannot assure you that any information or content provided on our website, desktop devices and mobile application in China will not be
considered as engaging in investment consulting business for providing the public with securities analysis, forecast or recommendations through
the forum or broadcasting of pre-recorded videos. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—
We have not obtained certain relevant licenses from PRC authorities in connection with some of the information and services available on our
platform. Future change in regulations and rules may impose additional requirements or restrictions on our platform.”
Regulations on Offshore Stocks Investment
On January 29, 1996, the State Council promulgated the Foreign Exchange Administration Regulations of the PRC, which was last amended
and such amendment became effective on August 5, 2008. Pursuant to the Foreign Exchange Administration Regulations of the PRC, Chinese
nationals shall register with the foreign exchange administration department of the State Council for any foreign direct investment or engagement
in any issuance or transaction of offshore valuable securities or derivative products. On December 25, 2006, the PBOC promulgated the
Administrative Measures for Personal Foreign Exchange, which further clarifies that any offshore equity, fixed-income or other approved financial
investments by Chinese nationals, shall be conducted through a qualified domestic financial institution. On January 5, 2007, the SAFE published
the Implementation of the Administrative Measures for Personal Foreign Exchange and last amended on May 29, 2016, under which Chinese
nationals are limited to a foreign exchange quota of US$50,000 per year for approved uses only.
In addition, pursuant to the SAFE Officials Interview on Improving the Management of Declarations of Individual Foreign Exchange
Information on December 31, 2016, Chinese nationals can only engage in offshore investments under capital items only provided methods such as
Qualified Domestic Institutional Investors, otherwise Chinese nationals can only purchase foreign currency for the purpose of external payments
within the scope of current items, including private travel, overseas study, business trips, family visits, overseas medical treatment, trade in goods,
purchase of non-investment insurance and consulting services. Furthermore, in 2016, CSRC published a response letter to investors on its website
to remind domestic investors that any offshore investments conducted by ways which are not explicitly specified under applicable PRC Laws, may
not be adequately protected by the PRC Laws.
We do not convert Renminbi into Hong Kong dollars or U.S. dollars for our clients, and require those who would like to trade securities listed
on the Hong Kong Stock Exchange or any major stock exchange in the United States through our platforms to inject funding into their respective
trading accounts in Hong Kong in either Hong Kong dollars or U.S. dollars. See “Item 3. Key Information—D. Risk Factors—Risks Related to
Our Business and Industry—We are subject to PRC restrictions on currency exchange.”
Regulations on brokerage business involving securities qualified under the Hong Kong, Shanghai and Shenzhen Stock Connect
On September 30, 2016, the CSRC promulgated the Several Provisions on the Inter-connected Mechanism for Trading on Stock Markets in
China and Hong Kong, which regulates that the Shanghai Stock Exchange and the Shenzhen Stock Exchange separately shall set up technical
connections with the Stock Exchange of Hong Kong Limited to allow investors in China and Hong Kong to, through their local securities
companies or brokers, trade qualified shares listed on the stock exchange of the other side, including the Shanghai-Hong Kong Stock Connect
Program and the Shenzhen-Hong Kong Stock Connect Program.
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The Implementing Measures of the Shanghai Stock Exchange for the Shanghai-Hong Kong Stock Connect Program, promulgated on
September 26, 2014 by the Shanghai Stock Exchange, and last amended on January 22, 2021 and such amendment became effective on February 1,
2021, and the Implementing Measures of the Shenzhen Stock Exchange for the Shenzhen-Hong Kong Stock Connect Program, promulgated on
September 30, 2016 by the Shenzhen Stock Exchange, and last amended on January 22, 2021 and such amendment became effective on February
1, 2021, clarify that the securities qualified under the Shanghai-Hong Kong Stock Connect Program and the Shenzhen-Hong Kong Stock Connect
Program shall be quoted and traded in Renminbi.
Our clients could trade securities qualified under the Hong Kong, Shanghai and Shenzhen Stock Connect through our platforms.
Regulation on Fund Sales Business
On October 28, 2003, the SCNPC promulgated the Securities Investment Funds Law and amended on April 24, 2015, which indicated that any
agencies that engages in the fund services, including but not limited to sales, investment consulting, information technology system services, shall
be registered or filed with the provisions of the securities regulatory authority of the State Council. The Measures for Supervision and
Administration of Sales Agencies for Publicly-offered Securities Investment Funds, which was promulgated by the CSRC on August 28, 2020 and
became effective on October 1, 2020, further regulates that securities companies and other institutions, subject to satisfaction of the relevant
requirements, shall apply for business qualification for sales of funds from the local branches of the CSRC. We cannot assure you that our current
operation model will not be deemed as operating fund sales business in China, which may subject us to further inquiries or rectifications. See “Item
3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We have not obtained certain relevant licenses from PRC
authorities in connection with some of the information and services available on our platform. Future change in regulations and rules may impose
additional requirements or restrictions on our platform.”
Regulations on Internet Service
Regulation on Foreign Investment
The Foreign Investment Law, promulgated by the National People’s Congress on March 15, 2019, has come into effect on January 1, 2020 and
has replaced the trio of old laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-
foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and
ancillary regulations. The Foreign Investment Law is formulated to further expand opening-up, vigorously promote foreign investment and protect
the legitimate rights and interests of foreign investors. According to the Foreign Investment Law, China adopts a system of national treatment plus
Negative List with respect to foreign investment administration, and the Negative List will be issued by, amended or released upon approval by the
State Council, from time to time. Foreign investment and domestic investment in industries outside the scope of the Negative List would be treated
equally.
On December 27, 2021, the Ministry of Commerce, or the MOFCOM, and the National Development and Reform Commission, or the NDRC,
promulgated the Special Administrative Measures for Entrance of Foreign Investment (Negative List) (2021 version), or the Negative List, which
became effective on January 1, 2022. The Negative List sets out the industries in which foreign investments are prohibited or restricted. Foreign
investors would not be allowed to make investments in prohibited industries, while foreign investments must satisfy certain conditions stipulated in
the Negative List for investment in restricted industries. According to the Negative List, the proportion of foreign investment in entities engaged in
value-added telecommunication services (excluding e-commerce, domestic multi-party communications services, store-and-forward services, and
call center services) shall not exceed 50%.
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On December 26, 2019, the Stated Council issued the Implementation Regulations for the Foreign Investment Law of the PRC, or the
Implementation Regulations, which also became effective on January 1, 2020. Under the Implementation Regulations, in the event of any
discrepancy between provisions or regulations on foreign investment formulated or promulgated prior to January 1, 2020 and the Foreign
Investment Law and the Implementation Regulations, the Foreign Investment Law and the Implementation Regulations shall prevail. The
Implementation Regulations also indicated that foreign investors that invest in sectors on the Negative List in which foreign investment is restricted
shall comply with special management measures with respect to shareholding, senior management personnel and other matters in the Negative List.
The Foreign Investment Law and the Implementation Regulations do not mention the relevant concept and regulatory regime of VIE structures.
However, since the Foreign Investment Law is relatively new, uncertainties still exist in relation to its interpretation and implementation. See “Item
3. Key Information—D. Risk Factors—Risks Related to Our Operations in China—Uncertainties exist with respect to the interpretation and
implementation of the PRC Foreign Investment Law and its Implementation Regulations and how they may impact the viability of our current
corporate structure, corporate governance and business operations.”
On December 30, 2019, the MOFCOM and the SAMR jointly promulgated the Measures for Information Reporting on Foreign Investment,
which became effective on January 1, 2020, replacing the then existing filing and approval procedures regarding the establishment and change of
foreign-invested companies. Where foreign investors make investments in China directly or indirectly, such foreign investors or foreign-invested
enterprises shall submit their investment information to the competent commerce authorities in accordance with the Measures for Information
Reporting on Foreign Investment.
On December 19, 2020, the NDRC and the MOFCOM jointly promulgated the Measures for the Security Review of Foreign Investment,
which became effective on January 18, 2021. Pursuant to the Measures for the Security Review of Foreign Investment, the NDRC and the
MOFCOM will establish a working mechanism office in charge of the security review of foreign investment, and any foreign investment which has
or could have an impact on national security shall be subject to security review by such working mechanism office. The Measures for the Security
Review of Foreign Investment further require that a foreign investor or its domestic affiliate shall apply for clearance of national security review
with the working mechanism office before they conduct any investment into any of the following fields: (i) investment in the military industry or
military-related industry, and investment in areas in proximity of defense facilities or military establishment; and (ii) investment in any important
agricultural product, important energy and resources, critical equipment manufacturing, important infrastructure, important transportation services,
important cultural products and services, important information technologies and internet products and services, important financial services,
critical technologies and other important fields which concern the national security where actual control over the invested enterprise is obtained.
We are a Cayman Island company and our businesses in China are mainly internet information services, internet Audio-Visual Programs
services and internet news information service, which are restricted or prohibited for foreign investors by the Foreign Investment Catalog and the
Negative List. We conduct a limited part of our business operations that is restricted or prohibited for foreign investment through the VIE.
Regulations on Telecommunication Services
The Telecommunications Regulations of the PRC (2016 Revision), or the Telecom Regulations, promulgated on September 25, 2000 by the
State Council and most recently amended on February 6, 2016, which distinguish “basic telecommunications services” from “value-added
telecommunications services.” The basic telecommunications services provider who provides public network infrastructure, public data
transmission and basic voice communications services shall obtain a Basic Telecommunications Service Operating License, and the commercial
telecommunications service provider shall obtain an operating license from the Ministry of Industry and Information Technology, or the MIIT, or
its counterparts at provincial level prior to its commencement of operations. The Administrative Measures for Telecommunication Business
Operating License, promulgated by the MIIT with latest amendments became effective on September 1, 2017, set forth the types of licenses
required for value-added telecommunication services and the qualifications and procedures for obtaining such licenses.
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The Administrative Measures on Internet Information Services (2011 Revision), promulgated on September 25, 2000 and amended on
January 8, 2011 by the State Council, further defines that commercial internet information services providers, which mean providers of information
or services to internet users with charge, shall obtain an Internet Content Provider License or the ICP License, from competent government
authorities before providing any commercial internet content services within the PRC. To comply with the relevant laws and regulations, Shenzhen
Futu holds a valid ICP License. The Catalog of Classification of Telecommunications Services (2015 Edition), promulgated by the MIIT on
December 28, 2015 and amended on June 6, 2019, further divides ICP services into information publication platform and delivery services,
information search and inquiry services, information communities platform services, instant message services, and information security and
management services.
Regulation on Internet Audio-Visual Program Services
The Administrative Provisions on the Internet Audio-Video Program Services, or the Audio-Video Program Provisions, promulgated on
December 20, 2007, and amended on August 28, 2015, by the Ministry of Information Industry (the predecessor of the MIIT) and the State
Administration of Press, Publication, Radio, Film and Television (the predecessor of the National Radio and Television Administration), or the
SAPPRFT, stipulates that providers of internet audio-visual program services should obtain an Audio and Video Service Permission, or AVSP. The
Categories of the Internet Audio-Video Program Services, or the Audio-Video Program Categories, promulgated on March 17, 2010, and amended
on March 10, 2017, by SAPPRFT, classifies internet audio-video programs into four categories. Aggregating and broadcasting service of arts,
entertainment, technology, finance and economics, sports, education and other specialized audio-video programs falls into Category II of above
four categories. In general, providers of internet audio-visual program services must be either state-owned or state-controlled entities, and their
businesses must satisfy the overall planning and guidance catalog for internet audio-visual program service determined by SAPPRFT. In addition,
foreign-invested enterprises are not allowed to engage in the above-mentioned services. Failure to obtain AVSP, we may be subject to fines and
legal sanctions, and our business, financial conditions and results of operations may be affected. See “Risk Factors—Risks Related to Our Business
and Industry—We have not obtained certain relevant licenses from PRC authorities in connection with some of the information and services
available on our platform. Future change in regulations and rules may impose additional requirements or restrictions on our platform.”
Regulation on Internet Culture Activities
The Interim Administrative Provisions on Internet Culture, or the Internet Culture Provisions, promulgated on February 17, 2011, and
amended on December 15, 2017, by the Ministry of Culture (the predecessor of the Ministry of Culture and Tourism), stipulates that providers of
internet cultural products or services, such as internet shows or programs and internet games must file an application for establishment to the
competent culture administration authorities for approval and must obtain the online culture operating permit. If any entity engages in commercial
internet culture activities without approval, the cultural administration authorities or other relevant government may order such entity to cease to
operate internet culture activities as well as levying penalties including administrative warning and fines up to RMB30,000. In addition, foreign-
invested enterprises are not allowed to engage in the above-mentioned services except online music. As of the date of this annual report, Shenzhen
Futu holds a valid Online Culture Operating Permit.
Regulation on Production and Operation of Radio and Television Programs
The Administration of Production and Operation of Radio and Television Programs, promulgated on July 19, 2004, and amended on August
28, 2015 by the SAPPRFT and October 29, 2020 by the National Radio and Television Administration, or the NRTA, provides that entities
engaging in the production of radio and television programs must obtain a License for Production and Operation of Radio and TV Programs from
the SAPPRFT or its counterparts at the provincial level. Entities with the License for Production and Operation of Radio and TV Programs must
conduct their business operations strictly in compliance with the approved scope of production and operations. In addition, foreign-invested
enterprises are not allowed to product or operate the radio and TV programs.
As of the date of this annual report, to comply with the relevant laws and regulations, Shenzhen Futu holds a valid License for Production and
Operation of Radio and TV Programs as required by the Radio and TV Programs Regulations.
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Regulation on Internet News Dissemination
Displaying news on a website and disseminating news through the internet are highly regulated in the PRC. The Provisional Measures for
Administrating Internet Websites Carrying on the News Displaying Business, jointly promulgated by the News Office of State Council and the
Ministry of Industry and Information Technology in November 2000, requires an ICP operator (other than a government authorized news unit) to
obtain an approval from the News Office of State Council to post news on its website or to disseminate news through the internet. Furthermore, the
disseminated news must come from government-approved sources pursuant to contracts between the ICP operator and the sources, copies of which
must be filed with the relevant government authorities.
The Provisions for the Administration of Internet News Information Services was promulgated by the Cyberspace Administration of China, or
the CAC, on May 2, 2017, and became effective on June 1, 2017 stipulates that the providers of internet news information (includes reports and
comments relating to social and public affairs such as politics, economy, military affairs and foreign affairs, as well as relevant reports and
comments on social emergencies) services to the public in a variety of ways, including editing and publishing internet news information, reposting
internet news information and offering platforms for users to disseminate internet news information, shall obtain the internet news license from the
CAC. Various qualifications and requirements which service providers shall meet have been provided in this regulation. For those who carrying out
Internet-based news information service activities without being licensed or beyond the licensed scope, the competent cyberspace administration
shall order them to cease the relevant service activities and impose a fine no less than RMB10,000 and up to RMB30,000. In addition, such
regulation also stipulates that no organization may establish Internet-based news information service agencies in the form of Sino-foreign joint
ventures, Sino-foreign cooperative ventures or wholly foreign-owned enterprises.
The Implementation Rules for the Administration of the Licensing for Internet-based News Information Services, promulgated on May 22,
2017, by the CAC, and became effective on June 1, 2017, further clarifies that only a news agency (including the controlling shareholder of a news
agency) or an entity under news publicity authorities may apply for a license for editing and publishing services in respect of internet-based news
information. Foreign-invested enterprises are not allowed to establish any internet-based news information service entities.
Currently, our website and mobile application in China contain news and financial information, thus the relevant PRC government authorities
may require us to obtain an internet news license which we do not hold at present. See “Item 3. Key Information—D. Risk Factors—Risks Related
to Our Business and Industry—We have not obtained certain relevant licenses from PRC authorities in connection with some of the information
and services available on our platform. Future change in regulations and rules may impose additional requirements or restrictions on our platform.”
Regulations on Cybersecurity and Privacy
Regulations on Cybersecurity
On December 13, 2005, the Ministry of Public Security, or the MPS, promulgated the Provisions on Technological Measures for the Internet
Security Protection, or the Internet Protection Measures, which took effect on March 1, 2006. Pursuant to the Internet Protection Measures, internet
service providers and entity users of interconnection shall not public or divulge user registration information without the consent of the users or
otherwise specified in the relevant laws and regulations. In addition, the Internet Protection Measures requires all internet service providers and
entity users of interconnection to take proper measures to control computer viruses, back up data, and keep records of certain information about
their users (including user registration information, log-in and log-out time, IP address, content and time of posts by users) for at least sixty days.
On June 22, 2007, the Administrative Measures for Multi-level Protection of Information Security were jointly promulgated by four PRC
regulatory agencies, including the MPS, under which companies operating and using information systems shall protect the information systems and
any system equal to or above level II as determined in accordance with these measures, a record-filing with the competent authority is required.
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On November 7, 2016, the SCNPC promulgated the Cybersecurity Law of the PRC, or the Cybersecurity Law, which became effective on
June 1, 2017. The Cybersecurity Law regulates all the construction, operation, maintenance, use of networks and the supervision and
administration of network security within the territory of China, and pursuant to which, network operators shall follow their cybersecurity
obligations pursuant to the requirements of the classified protection system for cybersecurity, including: (a) formulating internal security
management systems and operating instructions, determining the persons responsible for cybersecurity, and implementing the responsibility for
cybersecurity protection; (b) taking technological measures to prevent computer viruses, network attacks, network intrusions and other actions
endangering cybersecurity; (c) taking technological measures to monitor and record the network operation status and cybersecurity incidents, and
such records shall be kept for no less than 6 months; (d) taking measures such as data classification, and back-up and encryption of important data;
and (e) other obligations stipulated by laws and administrative regulations. In addition, the Cybersecurity Law further requires network operators to
take all necessary measures in accordance with applicable laws, regulations and compulsory national requirements to safeguard the safe and stable
operation of the networks, respond to network security incidents effectively, prevent illegal and criminal activities, and maintain the integrity,
confidentiality and usability of network data. In addition, on September 22, 2020, the MPS issued the Guiding Opinions on Implementing the
Cybersecurity Protection System and Critical Information Infrastructure Security Protection System to further improve the national cybersecurity
prevention and control system.
On December 29, 2017, the Personal Information Security Specification, or China Specification, was promulgated by the General
Administration of Quality Supervision, Inspection and Quarantine and last amended on March 6, 2020 and came into force on October 1, 2020,
which set a national standard for personal information security. Although the China Specification is not a mandatory regulation, it is likely that the
China Specification will be relied on by Chinese government agencies as a standard to determine whether businesses have abided by China’s data
protection rules.
On December 28, 2021, the CAC, the NDRC, the MIIT and several other PRC governmental authorities jointly issued the Cybersecurity
Review Measures, which became effective on February 15, 2022 and replaced the Measures for Cybersecurity Review published on April 13,
2020. Pursuant to Cybersecurity Review Measures, critical information infrastructure operators that purchase network products and services and
network platform operators engaging in data processing activities that affect or may affect national security are subject to cybersecurity review
under the Cybersecurity Review Measures. According to the Cybersecurity Review Measures, before purchasing any network products or services,
a critical information infrastructure operator shall assess potential national security risks that may arise from the launch or use of such products or
services, and apply for a cybersecurity review with the cybersecurity review office of CAC if national security will or may be affected. In addition,
network platform operators who possess personal information of more than one million users, and intend to be listed at a foreign stock exchange
must be subject to the cybersecurity review.
On June 10, 2021, the SCNPC issued the Data Security Law, which came into effect on September 1, 2021. The Data Security Law clarifies
the scope of data to cover a wide range of information records generated from all aspects of production, operation and management of government
affairs and enterprises in the process of the gradual transformation of digitalization, and requires that data collection shall be conducted in a
legitimate and proper manner, and theft or illegal collection of data is not permitted. Data processors shall establish and improve the whole-process
data security management rules, organize and implement data security trainings as well as take appropriate technical measures and other necessary
measures to protect data security. In addition, data processing activities shall be conducted on the basis of the graded protection system for
cybersecurity. Monitoring of the data processing activities shall be strengthened, and remedial measures shall be taken immediately in case of
discovery of risks regarding data security related defects or bugs. In case of data security incidents, responding measures shall be taken
immediately, and disclosure to users and report to the competent authorities shall be made in a timely manner.
On July 6, 2021, the relevant PRC government authorities made public the Opinions on Strictly Cracking Down Illegal Securities Activities in
Accordance with the Law, or the July 6 Opinion, which called for the enhanced cross-border regulatory cooperation and administration and
supervision of overseas-listed China-based companies. Along with the promulgation of the July 6 Opinion, laws and regulations regarding data
security, cross-border data flow and management of confidential information are expected to undergo further changes, which may require increased
information security responsibilities and stronger cross-border information management mechanism and process.
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On July 30, 2021, the State Council promulgated the Regulations on Protection of Security of Critical Information Infrastructure, effective on
September 1, 2021, pursuant to which, a “critical information infrastructure” refers to critical network facilities and information systems involved
in important industries and sectors, such as public communication and information services, energy, transportation, water conservancy, finance,
public services, governmental digital services, science and technology related to national defense industry, as well as those which may seriously
endanger national security, national economy and citizen’s livelihood or public interests if damaged or malfunctioned, or if any leakage of data in
relation thereto occurs. The competent governmental departments and supervision and management departments of the aforementioned important
industries will be responsible for (i) organizing the identification of critical information infrastructures in their respective industries in accordance
with relevant identification rules, and (ii) promptly notifying the identified operators and the public security department of the State Council of the
identification results. In the event of occurrence of any major cybersecurity incident or discovery of any major cybersecurity threat for the critical
information infrastructure, the operator shall report to the protection authorities and the public security authorities as required.
On December 31, 2021, the CAC and other relevant PRC government authorities promulgated the Administrative Provisions on Internet
Information Service Algorithm Recommendation, which shall come into effect on March 1, 2022. The Administrative Provisions on Internet
Information Service Algorithm Recommendation implements classification and hierarchical management for algorithm recommendation service
providers based on varies criteria. Moreover, it requires algorithmic recommendation service providers to provide users with options that are not
specific to their personal characteristics, or provide users with convenient options to cancel algorithmic recommendation services. If the users
choose to cancel the algorithm recommendation service, the algorithm recommendation service provider shall immediately stop providing relevant
services. Algorithmic recommendation service providers shall also provide users with the function to select, modify or delete user labels which are
used for algorithmic recommendation services.
On September 17, 2021, the CAC and other eight government authorities jointly issued the Guiding Opinions on Strengthening the
Comprehensive Governance of Internet Information Service Algorithms, with the aim to, within three years, gradually establish a comprehensive
governance pattern for algorithm security with a complete governance mechanism, a refined regulatory system and a standardized algorithm
ecosystem. According to the Guiding Opinions on Strengthening the Comprehensive Governance of Internet Information Service Algorithms,
enterprises shall establish an algorithm security accountability system and a system for the review of scientific and technological ethics, enhance
the organizational structure for algorithm security, intensify efforts in the prevention of risks and the handling of hidden dangers, and increase the
capacity and level in handling algorithm security emergencies. Enterprises shall raise their awareness of responsibility and assume primary
responsibilities for outcomes caused by the application of algorithms.
Regulations on Privacy Protection
The PRC Constitution states that PRC law protects the freedom and privacy of communications of citizens and prohibits infringement of these
rights. In recent years, PRC government authorities have enacted legislation on internet use to protect personal information from any unauthorized
disclosure. On May 28, 2020, the National People’s Congress adopted the Civil Code, which came into effect on January 1, 2021. The Civil Code
provides in a stand-alone chapter of right of personality and reiterates that the personal information of a natural person shall be protected by the
law. Any organization or individual shall legitimately obtain such person information of others in due course on a need-to-know basis and ensure
the safety and privacy of such information, and refrain from excessively handling or using such information.
On December 29, 2011, the MIIT issued The Several Provisions on Regulating the Market Order of Internet Information Services, which
became effective on March 15, 2012 and provides that an internet information service provider may not collect any user’s personal information or
provide any such information to third parties without such user’s consent. Pursuant to The Several Provisions on Regulating the Market Order of
Internet Information Services, internet information service providers are required to, among others, (i) expressly inform the users of the method,
content and purpose of the collection and processing of such users’ personal information and may only collect such information necessary for the
provision of its services; and (ii) properly maintain the users’ personal information, and in case of any leak or possible leak of a user’s personal
information, internet information service providers must take immediate remedial measures and, in severe circumstances, make an immediate
report to the telecommunications regulatory authority.
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In addition, on December 28, 2012, the Decision on Strengthening Network Information Protection promulgated by the SCNPC which
requires internet service providers to establish and publish policies regarding the collection and use of electronic personal information and to take
necessary measures to ensure the security of the information and to prevent leakage, damage or loss. On July 16, 2013, MIIT promulgated the
Regulations on Protection of the Personal Information of Telecommunications and Internet Users, or the Regulations on Personal Information
Protection, which enhance the legal protection over user information security and privacy on the Internet. The Regulations on Personal Information
Protection require that telecommunications business operators and internet information service providers shall, in the course of providing services,
collect and use the personal information of users in a lawful and proper manner by following the principle that information collection or use is
necessary and responsible for the security of the personal information of users collected and used in the course of providing services.
Pursuant to the Ninth Amendment to the Criminal Law, issued by the SCNPC on August 29, 2015, which became effective on November 1,
2015, any internet service provider that fails to fulfill the obligations related to internet information security administration and refuses to rectify
upon orders is subject to criminal penalty for causing (i) any dissemination of illegal information in large scale; (ii) any significant damages due to
the leakage of the user’s information; (iii) any serious loss of criminal evidence; or (iv) other serious harm, and any individual or entity information
may be subject to criminal penalty for (a) illegally selling or providing personal information to third parties, or (b) stealing or illegally obtaining
any personal information.
Any violation of these laws and regulations may subject the internet information service provider to warnings, fines, confiscation of illegal
gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities.
With respect to the security of information collected and used by operators of mobile apps, pursuant to the Announcement of Conducting
Special Supervision against the Illegal Collection and Use of Personal Information by Apps, which was issued on January 23, 2019, the operators
shall collect and use personal information in compliance with the Cybersecurity Law and be responsible for the security of personal information
obtained from users and take effective measures to strengthen the protection of personal information.
On April 10, 2019, the MPS issued the Guidelines for Internet Personal Information Security Protection, which is applicable to entities or
individuals who control and process personal information by providing services through the Internet, private networks or non-networked
environments, and requires such entities and individuals to establish personal information management systems, implement technical protection
measures and protect personal information in business processes.
Furthermore, in order to improve the protection of personal information, the National Information Security Standardization Technical
Committee also issued the Guide to Self-evaluation of Collection and Use of Personal Information by Mobile Internet Applications (Apps) on July
22, 2020 regarding the security of information collected and used by operators of mobile apps.
On March 12, 2021, the CAC, the MIIT, the MPS and the SAMR collectively issued the Notice on Promulgation of the Rules on the Scope of
Necessary Personal Information for Common Types of Mobile Internet Applications, which came into effect on May 1, 2021. The notice clarifies
that network operators shall not collect personal information irrelevant to the services they provide, and the app operators shall not refuse to
provide basic services to users on the ground of users’ refusal to provide their personal non-essential information. In particular, as for online
communities apps, the necessary personal information includes mobile phone numbers of registered users, and as for online streaming and online
video apps, the basic functional services should be accessible without collecting personal information from users.
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The SCNPC promulgated the Personal Information Protection Law of the PRC, or the Personal Information Protection Law on August 20,
2021, which entered into force on November 1, 2021. According to the Personal Information Protection Law, personal information is all kinds of
information, recorded by electronic or other means, related to identified or identifiable natural persons, not including information after
anonymization handling. The principles of legality, propriety, necessity, and sincerity shall be observed for personal information handling.
Moreover, the Personal Information Protection Law specifically specified the rules for handling sensitive personal information, which means
personal information that, once leaked or illegally used, may easily cause harm to the dignity of natural persons or grave harm to personal or
property security, including information on biometric characteristics, financial accounts and individual location tracking, as well as the personal
information of minors under the age of 14. Personal information handlers shall bear responsibility for their personal information handling activities,
and adopt the necessary measures to safeguard the security of the personal information they handle. Otherwise, the personal information handlers
will be ordered to correct or suspend or terminate the provision of services, confiscation of illegal income, fines or other penalties. Any personal
information processor outside the territory of the PRC under the circumstance where the activities of domestic natural persons are analyzed and
evaluated shall establish a special agency or designate a representative within the territory of the PRC to be responsible for handling matters
relating to personal information protection. Where a personal information processor really needs to provide personal information outside the
territory of the People’s Republic of China due to business or other needs, it shall meet one of the conditions prescribed by the Personal
Information Protection Law, such as, passing the security evaluation organized by the CAC, or other conditions prescribed by laws, administrative
regulations or the CAC. Where an overseas organization or individual engages in the personal information processing activities infringing upon the
personal information rights and interests of PRC citizens or endangering the national security and public interests of the PRC, the CAC may
include such organization or individual in the list of subjects to whom provision of personal information is restricted or prohibited, announce the
same, and take measures such as restricting or prohibiting provision of personal information to such organization or individual.
For the protection of personal information, network operators like us may not disclose or tamper with personal information that we have
collected. Moreover, we may not provide personal information to third parties without prior consent. See “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Business and Industry—If we fail to protect our platforms or the confidential information of our users and clients,
whether due to cyber-attacks, computer viruses, physical or electronic break-in, breaches by third parties or other reasons, we may be subject to
liabilities imposed by relevant laws and regulations, and our reputation and business may be materially and adversely affected.”
Regulations on Intellectual Property
Software
The State Council and the National Copyright Administration have promulgated various rules and regulations relating to protection of software
in China. According to these rules and regulations, software owners, licensees and transferees may register their rights in software with the
Copyright Protection Center or its local branches and obtain software copyright registration certificates. Although such registration is not
mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered software
rights may be entitled to better protections.
Trademark
According to the Trademark Law of the PRC, adopted in 1982 and last amended in 2019, as well as the Implementation Regulation of the
Trademark Law of the PRC adopted by the State Council in 2002 and subsequently amended in 2014, the Trademark Law of the PRC has adopted
a “first-to-file” principle with respect to trademark registrations, and the registered trademarks are granted a term of ten years which may be
renewed for consecutive ten-year periods upon request by the trademark owner. Upon expiry of the period of validity, the registrant shall go
through the formalities for renewal within twelve months prior to the date of expiry as required if the registrant needs to continue to use the
trademark. Where the registrant fails to do so, a grace period of six months may be granted. The period of validity for each renewal of registration
is ten years, from the day immediately after the expiry of the preceding period of validity for the trademark. In the absence of a renewal upon
expiration, the registered trademark shall be cancelled.
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Copyright
On September 7, 1990, the SCNPC promulgated the PRC Copyright Law, which was last amended on November 11, 2020 and such
amendment became effective on June 1, 2021, and the Implementation of Copyright Law of PRC, was promulgated on January 30, 2013 and
became effective on March 1, 2013. The PRC Copyright Law and its implementation regulations are the principal laws and regulations governing
related matters of copyright. Pursuant to the amended PRC Copyright Law, products disseminated over the internet and software products, among
the subjects, are entitled to copyright protections. Registration of copyright is voluntary, and it is administrated by the China Copyright Protection
Center.
On May 18, 2006, the State Council promulgated the Regulations on the Protection of the Right to Network Dissemination of Information, as
amended on January 30, 2013. Under these regulations, an owner of the network dissemination rights with respect to written works or audio or
video recordings who believes that information storage, search or link services provided by an internet service provider infringe his or her rights
may require that the internet service provider delete, or disconnect the links to, such works or recordings.
Domain name
In China, the administration of PRC internet domain names is mainly regulated by the MIIT, under supervision of the China Internet Network
Information Center, or CNNIC. On August 24, 2017, the MIIT promulgated the Administrative Measures for Internet Domain Names, or the
Domain Name Measures, and became effective on November 1, 2017. The principle of “first apply, first register” applies to domain name
registration service in accordance with the Domain Name Measures. In the event that there is any change to the contact information of a domain
name holder, the holder shall go through formalities for changes to the registered information of its domain name with the domain name registrar
concerned within 30 days after such change arises.
According to the Circular of the MIIT on Regulating the Use of Domain Names in Providing Internet based Information Services issued by the
MIIT on November 27, 2017, and became effective on January 1, 2018, an internet access service provider shall, pursuant to requirements stated in
the Anti-Terrorism Law of the PRC and the Cybersecurity Law of the PRC, verify the identities of internet-based information service providers,
and the internet access service providers shall not provide access services for those who fail to provide their real identity information.
Patent
The National People’s Congress promulgated the PRC Patent Law in 1984 and last amended on October 17, 2020 and such amendment
became effective on June 1, 2021. Any invention, utility model or design must meet three conditions to be patentable: novelty, inventiveness and
practical applicability. Patents cannot be granted for scientific discoveries, rules and methods for intellectual activities, methods used to diagnose or
treat diseases, animal and plant breeds or substances obtained by means of nuclear transformation. The Patent Office under the State Intellectual
Property Office is responsible for receiving, examining and approving patent applications. A patent is valid for a twenty-year term for an invention,
a ten-year term for a utility model and a fifteen-year term for a utility design, starting from the application date. Except under certain specific
circumstances provided by law, any third party user must obtain consent or a proper license from the patent owner to use the patent, or else the use
will constitute an infringement of the rights of the patent holder.
Regulations on Foreign Exchange
Regulations on Foreign currency exchange
The core regulations governing foreign currency exchange in China is the PRC Foreign Exchange Administration Regulation, which was
promulgated and became effective on August 5, 2008. Under the PRC Foreign Exchange Administration Regulations, Renminbi is freely
convertible into foreign currencies without prior approval from SAFE for payments of current account items, such as distribution of dividends,
interest payments and trade and service-related foreign exchange transactions. On the contrast, approval from or registration with appropriate
government authorities is required where Renminbi is to convert into foreign currency and remitted out of China to pay capital account items, such
as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China.
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Pursuant to the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, or the
SAFE Circular 59 promulgated by SAFE on November 19, 2012, which became effective on December 17, 2012 and last amended on
December 30, 2019, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign
exchange capital accounts and guarantee accounts, the reinvestment of Renminbi proceeds by foreign investors in the PRC, and remittance of
foreign exchange profits and dividends by a foreign invested enterprise to its foreign shareholders no longer require the approval or verification of
SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously.
On March 30, 2015, SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of
Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or SAFE Circular 19, effective on June 1, 2015 and amended on
December 30, 2019, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the
Payment and Settlement of Foreign Currency Capital of Foreign — Invested Enterprises. According to SAFE Circular 19, foreign-invested
enterprises are allowed, within the scope of business, to settle their foreign exchange capital in their capital accounts, for which the relevant foreign
exchange bureau has confirmed monetary capital contribution rights and interests (or for which the bank has registered the injection of the
monetary capital contribution into the accounts), on a discretionary basis according to the actual needs of their business operation. On June 9, 2016,
SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement
Management Policy of Capital Account, or SAFE Circular 16, which became effective in June 2016. SAFE Circular 19 and SAFE Circular 16
prohibit foreign-invested enterprises from using Renminbi fund converted from their foreign exchange capitals for expenditure beyond their
business scopes, providing entrusted loans or repaying loans between non-financial enterprises. On October 23, 2019, the SAFE issued SAFE
Circular 28, which expressly allows foreign-invested enterprises that do not have equity investments in their approved business scope to use their
capital obtained from foreign exchange settlement to make domestic equity investments provided that the investments are bona fide investments
and comply with the foreign investment-related laws and regulations.
In January 2017, SAFE promulgated the Circular on Further Improving Reform of Foreign Exchange Administration and Optimizing
Genuineness and Compliance Verification, or SAFE Circular 3, which stipulates several capital control measures with respect to the outbound
remittance of profit of more than USD50,000 from domestic entities to offshore entities, including (i) under the principle of genuine transaction,
banks shall check board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and
(ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Further, according to SAFE Circular 3,
domestic entities shall make detailed explanations of the sources of capital and utilization arrangements, and provide board resolutions, contracts
and other proof when completing the registration procedures in connection with an outbound investment.
According to the SAFE Circular on Optimizing Foreign Exchange Administration to Support the Development of Foreign-related Business,
which was promulgated and became effective on April 10, 2020, the reform to facilitate payment of income under capital accounts shall be
extended nationwide. Enterprises, if they meet the bona fide and compliant use of funds requirements under the prevailing administrative
provisions on use of income from capital projects, may use income under capital accounts, such as capital funds, proceeds from issuance of foreign
debt and overseas listing, in domestic payment without the need to provide banks with verification materials for each transaction.
Regulations on Dividend distribution
The principal regulations governing distribution of dividends of foreign-owned enterprises include the Company Law of the PRC, and the
Wholly Foreign-owned Enterprise Law, which was replaced by the Foreign Investment Law promulgated on March 15, 2019 and became effect on
January 1, 2020. Pursuant to these regulations, a wholly foreign-owned enterprise in China, or a WFOE, may pay dividends only out of its
accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, a WFOE is required to allocate
at least 10% of its accumulated profits each year, if any, to statutory reserve funds unless its reserves have reached 50% of the registered capital of
the enterprises. These reserves are not distributable as cash dividends. The proportional ratio for withdrawal of rewards and welfare funds for
employees shall be determined at the discretion of the WFOE. Profits of a WFOE shall not be distributed before the losses thereof before the
previous accounting years have been made up. Any undistributed profit for the previous accounting years may be distributed together with the
distributable profit for the current accounting year.
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Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents
Pursuant to the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing
and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, which was issued and became effective on July 4, 2014, PRC
residents, including PRC institutions and individuals, are required to register with local branches of SAFE in connection with their direct
establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally
owned assets or equity interest in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose
vehicle.” SAFE Circular 37 further requires amendment to the registration in the event of any significant changes with respect to the special
purpose vehicle, including but not limited to increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger,
division or other material event.
In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC
subsidiaries of that special purpose vehicle may be prohibited from making distributions of profit to the offshore parent and from carrying out
subsequent cross-border foreign exchange activities and the special purpose vehicle may be restricted in their ability to contribute additional capital
into its PRC subsidiary.Failure to comply with the various SAFE registration requirements described above could result in liability under PRC law
for foreign exchange evasion, including (i) of up to 30% of the total amount of foreign exchange remitted overseas and deemed to have been
evasive, and (ii) in circumstances involving serious violations, a fine of no less than 30% of and up to the total amount of remitted foreign
exchange deemed evasive. Furthermore, the persons-in-charge and other persons at our PRC subsidiaries who are held directly liable for the
violations may be subject to criminal sanctions.
In February 2015, SAFE promulgated the Circular of Further Simplifying and Improving the Policies of Foreign Exchange Administration
Applicable to Direct Investment, or SAFE Circular 13, which became effective on June 1, 2015 and amended on December 30, 2019. The SAFE
Circular 13 cancels the administrative approval requirements of foreign exchange registration of foreign direct investment and overseas direct
investment, and simplifies the procedure of foreign exchange-related registration, and foreign exchange registrations of foreign direct investment
and overseas direct investment will be handled by the banks designated by the foreign exchange authority instead of SAFE and its branches.
As of the date of this annual report, Mr. Leaf Hua Li has completed the SAFE registration pursuant to SAFE Circular 37. We have notified
substantial beneficial owners of ordinary shares who we know are PRC residents of their filing obligation. Nevertheless, we may not be aware of
the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and there can be no
assurance that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules, and there is no
assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. See
“Item 3. Key Information—D. Risk Factors—Risks Related to Our Operations in China—PRC regulations relating to investments in offshore
companies by PRC residents may subject our PRC-resident beneficial owners or our PRC subsidiaries to liability or penalties or otherwise limit our
PRC subsidiaries’ ability to increase their registered capital or distribute profits.”
Regulations on Employee Share Incentive Plans of Overseas Publicly-Listed Company
On February 15, 2012, SAFE promulgated the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals
Participation in Share Incentive Plan of Companies Listed Overseas, or the 2012 SAFE Notice. Under such notice and other relevant rules and
regulations, PRC residents, including PRC citizens or non-PRC citizens who reside in China for a continuous period of not less than one year, that
participate in any share incentive plan of any overseas publicly-listed company are required to register with SAFE or its local branches and
complete certain other procedures. Participants of a share incentive plan who are PRC residents must retain a qualified PRC agent, which could be
a PRC subsidiary of the overseas publicly listed company or another qualified institution selected by the PRC subsidiary, to conduct the SAFE
registration and other procedures with respect to the share incentive plan on behalf of the participants.
We and our executive officers and other employees who are PRC residents that have been granted share incentive awards are subject to these
regulations. Failure by these individuals to complete their SAFE registrations may subject such individuals and us to fines and other legal
sanctions.
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In addition, the SAT has issued certain circulars concerning employee share incentive awards. Under these circulars, our employees working in
China who exercise share incentive awards will be subject to PRC individual income tax. Our PRC subsidiary has the obligation to make filings
related to employee share incentive awards with relevant tax authorities and to withhold individual income taxes of those employees who exercise
their share incentive awards. If our employees fail to pay or we fail to withhold their income taxes according to relevant laws and regulations, we
may face sanctions imposed by the tax authorities or other PRC governmental authorities.
Regulations on M&A and Overseas Listings
Six PRC regulatory agencies, including the CSRC, jointly issued the Regulations on Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors, or the M&A Rules, which became effective on September 8, 2006 and was amended on June 22, 2009. The M&A Rules, among
other things, require offshore special purpose vehicles, formed for overseas listing purposes through acquisitions of PRC domestic companies and
controlled by PRC companies or individuals, must obtain approval from the CSRC prior to publicly listing such special purpose vehicle’s securities
on an overseas stock exchange.
In addition, pursuant to the Circular of the General Office of State Council on Establishing the Security Review System for Merger and
Acquisition of Domestic Enterprises by Foreign Investors issued by the General Office of the State Council on February 3, 2011 and took effect on
March 3, 2011 and the Provisions of the MOFCOM on the Implementation of the Safety Review System for Merger and Acquisition of Domestic
Enterprises by Foreign Investors issued by the MOFCOM that became effective in September 1, 2011, mergers and acquisitions by foreign
investors that raise “national defense and security” concerns and mergers and acquisitions through which foreign investors may acquire de facto
control over domestic enterprises that raise “national security” concerns are subject to strict review by the MOFCOM, and the rules prohibit any
activities attempting to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement.
On July 6, 2021, the General Office of the State Council and General Office of the Central Committee of the Communist Party of China issued
Opinions on Strictly Cracking Down Illegal Securities Activities in Accordance with the Law. The opinions emphasized the need to strengthen the
administration over illegal securities activities and the supervision on overseas listings by China-based companies and proposed to take effective
measures, such as promoting the construction of relevant regulatory systems to deal with the risks and incidents faced by China-based overseas-
listed companies.
Regulations on Anti-monopoly Matters related to Internet Platform Companies
The PRC Anti-monopoly Law, which took effect on August 1, 2008, prohibits monopolistic conduct such as entering into monopoly
agreements, abusing market dominance and concentration of undertakings that may have the effect of eliminating or restricting competition. The
PRC Anti-monopoly Law requires that the Anti-monopoly law enforcement agency be notified in advance of any transaction where the parties’
turnover in the China market and/or global market exceed certain thresholds and the buyer would obtain control of, or decisive influence over, the
target as a result of the business combination. As further clarified by the Provisions of the State Council on the Threshold of Filings for
Undertaking Concentrations issued by the State Council in 2008 and amended in September 2018, such thresholds include: (i) the total global
turnover of all operators participating in the transaction exceeds RMB10 billion in the preceding fiscal year and at least two of these operators each
had a turnover of more than RMB400 million within China in the preceding fiscal year, or (ii) the total turnover within China of all the operators
participating in the transaction exceeded RMB2 billion in the preceding fiscal year, and at least two of these operators each had a turnover of more
than RMB400 million within China in the preceding fiscal year. There are numerous factors the Anti-monopoly law enforcement agency considers
in determining “control” or “decisive influence,” and, depending on certain criteria, the Anti-monopoly law enforcement agency may conduct Anti-
monopoly review of transactions in respect of which it was notified.
On September 11, 2020, the Anti-monopoly Bureau of the State Council issued the Anti-monopoly Compliance Guideline for Operators,
which requires, under the PRC Anti-monopoly Law, operators to establish Anti-monopoly compliance management systems to prevent Anti-
monopoly compliance risks.
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On February 7, 2021, the Anti-monopoly Bureau of the State Council officially promulgated the Guidelines to Anti-monopoly in the Field of
Internet Platforms, or the Anti-monopoly Guidelines for Internet Platforms. Pursuant to an official interpretation from the Anti-monopoly Bureau
of the State Council, the Anti-monopoly Guidelines for Internet Platforms mainly covers five aspects, including general provisions, monopoly
agreements, abusing market dominance, concentration of undertakings, and abusing of administrative powers eliminating or restricting
competition. The Anti-monopoly Guidelines for Internet Platforms prohibits certain monopolistic acts of Internet platforms so as to protect market
competition and safeguard interests of users and undertakings participating in Internet platform economy, including without limitation, prohibiting
platforms with dominant position from abusing their market dominance (such as discriminating customers in terms of pricing and other
transactional conditions using big data and analytics, coercing counterparties into exclusivity arrangements, using technology means to block
competitors’ interface, favorable positioning in search results of goods displays, using bundle services to sell services or products, compulsory
collection of users’ unnecessary data. In addition, the Anti-monopoly Guidelines for Internet Platforms also reinforces antitrust merger review for
Internet platform related transactions to safeguard market competition.
Regulations on Tax
Regulations on Enterprise Income Tax
On March 16, 2007, the National People’s Congress promulgated the Enterprise Income Tax Law of the PRC, which was last amended on
December 29, 2018.
On December 6, 2007, the State Council enacted the Regulations for the Implementation of the Enterprise Income Tax Law, which was
amended on April 23, 2019, or collectively with the Enterprise Income Tax Law of the PRC, the EIT Laws. Under the EIT Laws, both resident
enterprises and non-resident enterprises are subject to tax in the PRC. Resident enterprises are defined as enterprises that are established in China in
accordance with PRC laws, or that are established in accordance with the laws of foreign countries but are actually or in effect controlled from
within the PRC (“de facto management bodies” in PRC). Non-resident enterprises are defined as enterprises that are organized under the laws of
foreign countries and whose actual management is conducted outside the PRC, but have established institutions or premises in the PRC, or have no
such established institutions or premises but have income generated from inside the PRC. Under the EIT Laws and relevant implementing
regulations, a uniform corporate income tax rate of 25% is applied. However, if non-resident enterprises have not formed permanent establishments
or premises in the PRC, or if they have formed permanent establishment or premises in the PRC but there is no actual relationship between the
relevant income derived in the PRC and the established institutions or premises set up by them, enterprise income tax is set at the rate of 10% with
respect to their income sourced from inside the PRC.
Pursuant to the EIT Laws and relevant implementing regulations, a High and New Technology Enterprise, or HNTE, is subject to a reduced
enterprise income tax rate of 15%. Futu Network, one of our PRC subsidiaries, and Shenzhen Futu, the consolidated VIE, each obtained HNTE
status under the EIT Laws. Accordingly, Futu Network and Shenzhen Futu are subject to an enterprise income tax rate of 15% with a valid period
of three years starting from 2019 and 2020, respectively.
The Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the
basis of de facto management bodies, or the SAT Circular 82, issued by the SAT on April 22, 2009, and amended on December 29, 2017, provides
certain specific criteria for determining whether the “de facto management body” of a PRC-controlled enterprise that is incorporated offshore is
located in China. Although this circular only applies to offshore enterprises controlled by PRC enterprises or PRC enterprise groups, not those
controlled by PRC individuals or foreigners, the criteria set forth in the circular may reflect the SAT’s general position on how the “de facto
management body” text should be applied in determining the tax resident status of all offshore enterprises. According to SAT Circular 82, an
offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise group will be regarded as a PRC tax resident by virtue of
having its “de facto management body” in China and will be subject to PRC enterprise income tax on its global income only if all of the following
conditions are met: (i) the primary location of the day-to-day operational management is in the PRC; (ii) decisions relating to the enterprise’s
financial and human resource matters are made or are subject to approval by organizations or personnel in the PRC; (iii) the enterprise’s primary
assets, accounting books and records, company seals, and board and shareholder resolutions, are located or maintained in the PRC; and (iv) at least
50% of board members with voting rights or senior executives habitually reside in the PRC.
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Regulations on Value-added Tax
The Provisional Regulations of on Value-added Tax of the PRC were promulgated by the State Council on December 13, 1993 and came into
effect on January 1, 1994 which last amended on November 19, 2017. The Detailed Rules for the Implementation of Provisional Regulations of on
Value-added Tax of the PRC were promulgated by the Ministry of Finance on December 25, 1993 and subsequently amended on December 15,
2008 and October 28, 2011. Based on the Provisional Regulations of on Value-added Tax of the PRC and the Detailed Rules for the
Implementation of Provisional Regulations of on Value-added Tax of the PRC, the State Council promulgated the Order on Abolishing the
Provisional Regulations of the PRC on Business Tax and Amending the Provisional Regulations of on Value-added Tax of the PRC, pursuant to
which all enterprises and individuals engaged in the sale of goods, the provision of processing, repair and replacement services, sales of services,
intangible assets, real property and the importation of goods within the territory of the PRC are the taxpayers of Value-added Tax. The Value-added
Tax rates generally applicable are simplified as 17%, 11%, 6% and 0%, and the Value-added Tax rate applicable to the small-scale taxpayers is 3%.
On April 4, 2018, the Ministry of Finance and the SAT issued the Circular on Adjustment of Value-added Tax Rates. According to which
relevant Value-added Tax rates have been reduced from May 1, 2018 and April 1, 2019, such as the deduction rates of 17% and 11% applicable to
the taxpayers who have Value-Added taxable sales activities or imported goods have been adjusted to 16% and 10%, respectively.
As of the date of this annual report, our PRC subsidiaries and consolidated affiliated entities are generally subject to VAT rates of 6%.
Regulations on Dividend Withholding Tax
The EIT Laws provide that since January 1, 2008, an income tax rate of 10% will normally be applicable to dividends declared to non-PRC
resident investors which do not have an establishment or place of business in the PRC, or which have such establishment or place of business but
the relevant income is not effectively connected with the establishment or place of business, to the extent such dividends are derived from sources
within the PRC.
Pursuant to an Arrangement Between the China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and
the Prevention of Fiscal Evasion with Respect to Taxes on Incomes, or the Double Tax Avoidance Arrangement, and other applicable PRC laws, if
a Hong Kong resident enterprise is determined by the competent PRC tax authority to have satisfied the relevant conditions and requirements under
such Double Tax Avoidance Arrangement and other applicable laws, the 10% withholding tax on the dividends the Hong Kong resident enterprise
receives from a PRC resident enterprise may be reduced to 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement
of Dividend Provisions in Tax Treaties, or the SAT Circular 81, issued on February 20, 2009 by the SAT, if the relevant PRC tax authorities
determine, in their discretions, that a company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-
driven, such PRC tax authorities may adjust the preferential tax treatment. According to the Circular on Several Questions regarding the
“Beneficial Owner” in Tax Treaties, which was issued on February 3, 2018 by the SAT and effective on April 1, 2018, when determining the
applicant’s status of the “beneficial owner” regarding tax treatments in connection with dividends, interests or royalties in the tax treaties, several
factors apply, including without limitation: (i) whether the applicant is obligated to pay more than 50% of his or her income in twelve months to
residents in third country or region, (ii) whether the business operated by the applicant constitutes the actual business activities, and (iii) whether
the counterparty country or region to the tax treaties levies any tax or grant tax exemption on relevant incomes or levies tax at a very low rate, will
be taken into account, and it will be analyzed according to the actual circumstances of the specific cases. This circular further provides that
applicants who intend to prove his or her status of the “beneficial owner” shall submit the relevant documents to the relevant tax bureau according
to the Announcement on Issuing the Measures for the Administration of Non-Resident Taxpayers’ Enjoyment of the Treatment under Tax
Agreements, which was issued by the SAT on October 14, 2019 and became effective on January 1, 2020.
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Regulations on Tax regarding Indirect Transfer
On February 3, 2015, the SAT issued the Circular on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident
Enterprises, or Circular 7. Pursuant to Circular 7, an “indirect transfer” of assets, including equity interests in a PRC resident enterprise, by non-
PRC resident enterprises, may be re-characterized and treated as a direct transfer of PRC taxable assets, if such arrangement does not have a
reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived
from such indirect transfer may be subject to PRC enterprise income tax. When determining whether there is a “reasonable commercial purpose” of
the transaction arrangement, considerations include, inter alia, (i) whether the main value of the equity interest of the relevant offshore enterprise
derives directly or indirectly from PRC taxable assets; (ii) whether the assets of the relevant offshore enterprise mainly consists of direct or indirect
investment in China or if its income is mainly derived from China; and (iii) whether the offshore enterprise and its subsidiaries directly or
indirectly holding PRC taxable assets have real commercial nature evidenced by their actual function and risk exposure. According to the Circular
7, where the payer fails to withhold any or sufficient tax, the transferor shall declare and pay such tax to the tax authority by itself within the
statutory time limit. Late payment of applicable tax will subject the transferor to default interest. The Circular 7 does not apply to transactions of
sale of shares by investors through a public stock exchange where such shares were acquired on a public stock exchange. On October 17, 2017, the
SAT issued the Announcement of the State Administration of Taxation on Issues Concerning the Withholding of Non-resident Enterprise Income
Tax at Source, or the SAT Bulletin 37, last amended on June 15, 2018 and such amendment became effective on the same day, which further
elaborates the relevant implemental rules regarding the calculation, reporting and payment obligations of the withholding tax by the non-resident
enterprises. Nonetheless, there remain uncertainties as to the interpretation and application of the SAT Circular 7. The SAT Circular 7 may be
determined by the tax authorities to be applicable to our offshore transactions or sale of our shares or those of our offshore subsidiaries where non-
resident enterprises, being the transferors, were involved.
Regulations on Employment and Social Welfare
Regulations on Employment
The principle regulations that govern employment and labor matters in PRC include: (i) Labor Law of the PRC, which was promulgated by the
SCNPC on July 5, 1994, and became effective on January 1, 1995 and last amended on December 29, 2018; (ii) the Labor Contract Law of the
PRC which was promulgated by the SCNPC on June 29, 2007 and last amended on December 28, 2012, and (iii) the Implementing Regulations of
the Labor Contract Law of the PRC which was promulgated by the State Council on September 18, 2008;
According to the regulations above, labor relationships between employers and employees must be executed in written form, and wages shall
not be lower than local standards on minimum wages and shall be paid to employees timely. In addition, all employers are required to establish a
system for labor safety and sanitation, strictly comply with state rules and standards and provide employees with workplace safety training.
Violations of the PRC Labor Contract Law and the PRC Labor Law may result in the imposition of fines and other administrative penalties. For
serious violations, criminal liability may arise.
Regulations on Social Welfare
Employers in China are required by PRC laws and regulations to provide employees with welfare schemes covering pension insurance,
unemployment insurance, maternity insurance, work-related injury insurance, medical insurance and housing funds. According to the Social
Insurance Law of the PRC promulgated by the National People’s Congress on October 28, 2010, and became effective on July 1, 2011 and last
amended on December 29, 2018, together with other relevant laws and regulations, Any employer shall register with the local social insurance
agency within 30 days after its establishment and shall register for the employee with the local social insurance agency within 30 days after the
date of hiring. An employer shall declare and make social insurance contributions in full and on time. The occupational injury insurance and
maternity insurance shall be only paid by employers while the contributions of basic pension insurance, medical insurance and unemployment
insurance shall be paid by both employers and employees. Any employer that fails to make social insurance contributions may be ordered to pay
the required contributions within a stipulated deadline. If the employer still fails to rectify the noncompliance within the stipulated deadline, it may
be subject to a fine ranging from one to three times the amount overdue.
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According to the Regulations on Administration of Housing Fund promulgated by the State Council on April 3, 1999, and last amended on
March 24, 2019, an enterprise that fails to make housing fund contributions may be ordered to rectify the noncompliance and pay the required
contributions within a stipulated deadline; otherwise, a petition may be made to a local court for enforcement. In addition, the PRC Individual
Income Tax Law requires companies operating in China to withhold individual income tax on employees’ salaries based on the actual salary of
each employee upon payment. We have not made adequate contributions to employee benefit plans, as required by applicable PRC laws and
regulations.
Overview of the Laws and Regulations Relating to Our Business and Operations in the United States
As SEC-registered broker-dealers, Futu Inc. and Futu Clearing Inc. are subject to various laws and regulations in the United States. This
overview summarizes certain material aspects of those laws and regulations as they pertain to Futu Inc. and Futu Clearing Inc.
Licensing
Broker-dealers operating in the United States are, with limited exceptions, required to register with the SEC. Registration with the SEC is
conditioned upon the broker-dealer becoming a member in good standing of FINRA. There are not separate categories of broker-dealer registration
with the SEC. However, a broker-dealer’s membership agreement with FINRA will specify the nature of the business which may be conducted by
the broker-dealer. Any material changes in the broker-dealer’s business must be approved by FINRA. Futu Inc. is currently authorized to conduct
business as an introducing broker, engaging in transactions in equity securities, mutual funds and options. It is also authorized to act as an
underwriter or selling group participant in offerings of corporate securities other than mutual funds. Futu Clearing is currently authorized to
conduct business as a clearing broker in equity securities and options.
In addition to SEC and FINRA registration, broker-dealers in the United States are required to register with certain states, based upon the
location of their business facilities and the nature of their operations in any particular state. However, while state governments may require
registration and prosecute misconduct, they are generally prohibited from imposing additional regulatory requirements on broker-dealers.
The principals and employees of U.S. broker-dealers are also required to be licensed with FINRA and the applicable states unless their conduct
is limited to ministerial activities. There are a variety of individual license categories for both supervisors and other employees, each of which
requires the individual to pass a specific examination.
All broker-dealers in the United States are also required to become members of the Securities Investor Protection Corporation, or the SIPC,
which insures customer accounts against losses (subject to a cap) that result from the broker-dealer’s failure. SIPC does not insure against
investment losses.
Net Capital and Customer Protection
Broker-dealers in the United States are required to maintain minimum net capital in accordance with SEC Rule 15c3-1. The computation of net
capital is intended to determine the broker-dealer’s liquidity and requires various adjustments to GAAP net worth. The amount of required net
capital varies based upon the nature and scope of the broker-dealer’s business. Clearing brokers that carry customer accounts typically have
substantially higher net capital requirements that introducing brokers. Net capital must be computed on a weekly basis. Broker-dealers that fall out
of compliance with the net capital requirements must immediately correct the shortfall or suspend doing business until they are again in compliance
with the requirements.
Rule 15c3-3, the SEC’s customer protection rule, requires broker-dealers who have custody of client assets to establish a segregated bank
account for the exclusive benefit of its customers. The rule also requires broker-dealers to obtain possession or control of securities carried by the
broker-dealer for the account of clients, places limitations on the ability of a broker-dealer to access client funds or securities for use in the broker-
dealer’s business and delineates the requirements for directing free credit balances in a customer account to a bank pursuant to a sweep program.
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Margin Lending
Margin lending by broker-dealers is subject to the margin rules adopted by the Federal Reserve Board (“Regulation T”) and certain FINRA
rules. Futu customers in the U.S. generally trade through margin accounts. Regulation T provides that broker-dealers may only extend credit for the
purchase of “margin securities”; generally securities traded on a recognized stock exchange. The initial extension of credit may not exceed 50% of
the value of the securities to be purchased. Regulation T requires broker-dealers to impose trading restrictions on accounts that fail to make timely
payment for securities.
FINRA rules supplement Regulation T, particularly with respect to the maintenance margin required. In addition, broker-dealers are free to
impose their own margin requirements that are more restrictive than those required by Regulation T or FINRA.
Before a customer may trade on margin, the broker-dealer must provide the customer with extensive disclosure about the risks of margin
trading and the customer must agree in writing to the margin terms offered by the broker-dealer.
Know Your Customer; Anti-Money Laundering
Under the Bank Secrecy Act and related SEC and FINRA rules, broker-dealers are required to guard against money laundering and terrorist
financing. This requires broker-dealers to implement a customer identification program to verify a customer’s identity and to determine if a
proposed customer is on any lists of restricted persons with whom business is prohibited. In addition, broker-dealers must adopt and enforce a
written anti-money laundering compliance program, reasonably designed to achieve and monitor compliance with the requirements of the Bank
Secrecy Act and its implementing regulations. Such programs must include policies and procedures that: (i) can be reasonably expected to detect
and cause the reporting of suspicious transactions; (ii) provide for independent testing for compliance, (iii) designate and identify an individual or
individuals responsible for implementing and monitoring the day-to-day operations and internal controls of the program and (iv) provide ongoing
training for appropriate broker-dealer personnel.
Disclosures to Clients
All broker-dealers that provide any brokerage services to retail customers must provide the customers with certain disclosures in Form CRS.
Disclosures in the Form CRS include the nature of the services offered by the broker-dealer, fees and charges, conflicts of interest and whether or
not any of the broker-dealer’s personnel have been subjected to disciplinary proceedings. The Form CRS must also be filed with the SEC and made
available on the broker-dealer’s website.
Broker-dealers are also required to disclose to their clients in new account documentation and/or through their website various matters such as
the risks of investing in foreign securities, the risks of margin trading, the risks of investing in penny stocks, the risks of day trading, any
arrangements the broker-dealer may have for payment for order flow and the broker-dealer’s business continuity plan.
SEC and FINRA rules require broker-dealers to provide clients with trade confirmations that comply with the requirements of SEC Rule 10b-
10. In addition, clients must be provided with an account statement not less than once a quarter. Clients may consent to electronic delivery of
confirmations, statements and other communications from the broker-dealer.
Sales Practices
SEC and FINRA rules prohibit the use of false, deceptive and misleading sales practices. Although neither Futu Inc. nor Futu Clearing solicit
or recommend specific trading actions, Futu Inc. does employ limited digital engagement practices in its interactions with retail customers. Such
digital engagement practices include offering prizes (of nominal value) for trading activity, as well as “badges” that have no economic value, but
may be valued by users as a sign of their trading prowess. The SEC and FINRA are currently conducting an industry-wide review to determine if
certain digital engagement practices used by broker-dealers improperly incentivize customers to undertake excessive or risky trading. Following
this review, the SEC and/or FINRA might adopt new rules regulating digital engagement practices by broker-dealers.
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Because neither Futu Inc. nor Futu Clearing make investment recommendations or otherwise solicit specific trading actions, they are not
required to comply with the “best interest” provisions of SEC Regulation BI or FINRA’s suitability requirements.
Best Execution
The SEC and FINRA require broker-dealers that execute trades, like Futu Clearing, to use reasonable diligence to obtain for their clients the
most favorable terms available under prevailing market conditions. In determining how to best execute an order, the broker-dealer may consider the
size of the order, the availability of the security in various markets, liquidity, timing and any other requirements of the client. Broker-dealers that
receive third party payments for order flow must ensure that such arrangements do not compromise their duty of obtaining best execution for their
clients.
Participation in Underwritten Offerings
Broker-dealers that act as underwriters or selling group members in SEC-registered, underwritten offerings are required to comply with
various SEC rules governing such offerings. Such requirements include a prohibition on accepting customer orders prior the SEC declaring the
relevant registration statement effective, limitations on the timing and content of marketing materials that may be used in connection with the
offering, and restrictions on trading activity during the period immediately preceding and following a new issue or an underwritten offering for a
thinly traded stock.
Prevention of Insider Trading
All broker-dealers are required to adopt policies and procedures intended to prevent unlawful trading based on material, non-public
information. Neither broker-dealers nor their employees may use material non-public information obtained in the course of their business to trade
securities or to provide trading tips to other persons. Such policies and procedures should include a clear statement of the policy provided to all
personnel, on-going training, procedures to monitor trading by all personnel and, as appropriate, internal information barriers to prevent the sharing
of material non-public information with persons who do not need access to such information.
Protecting Privacy of Customer Data and Information
Regulation S-P requires broker-dealers to provide their customers with a copy of their privacy policy, which describes among other things
what non-public information about customers is collected by the broker-dealer, and what non-public information might be shared with affiliates or
third parties. With limited exceptions, customers must be provided with an opportunity to opt out of disclosures to third parties. Certain states such
as California have imposed additional privacy requirements.
Regulation S-P also requires broker-dealers to adopt policies and procedures designed to safeguard customer data and records from
unauthorized access. Broker-dealers are required to implement appropriate cybersecurity measures that include administrative, technical and
physical safeguards. The cybersecurity measures must be periodically tested for effectiveness.
Records and Reporting
SEC-registered broker-dealers are subject to extensive recordkeeping and reporting requirements. SEC Rule 17a-3 specifies a range of records
that must be maintained, including trading and customer account records, financial records and net capital computations, employee records and
copies of all advertisements and written communications with customers. In addition, broker-dealers must ensure that all of their email
communications relating to the broker-dealer’s business are transmitted using authorized systems and are archived for future access.
All required records must be preserved for various periods of time specified in SEC Rule 17a-4. Generally, records may be preserved
electronically, as long as the electronic system satisfies minimum standards to ensure the records are accessible and not subject to alteration.
Certain records may be maintained with third party providers, including cloud services, if the third party agrees to make the records available to the
SEC and other regulatory authorities upon request.
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Broker-dealers must file with the SEC annual reports that include audited financial systems, as well as quarterly financial reports. In addition,
net capital computations must be filed on a quarterly or monthly basis, depending upon the nature of the broker-dealer’s business. An additional
annual filing is required with FINRA to address the firm’s compliance with its regulatory obligations.
U.S. broker-dealers are also required to report to the SEC and FINRA any customer complaints and legal actions. The broker-dealer must
update the reporting to disclose how the matter was resolved.
Supervision
All SEC-registered broker-dealers must adopt written supervisory procedures and implement supervisory controls and procedures designed to
enable the broker-dealer to monitor and enforce compliance with applicable regulatory requirements. Such supervisory procedures are required not
only by FINRA rules, but also to protect the broker-dealer against customer claims or regulatory sanctions based on the misconduct of its
supervised personnel. Supervisory procedures should include, among other things, a designated chief compliance officer, internal inspections,
reviews of correspondence and emails, periodic monitoring of customer activity and reasonable investigations of new hires. The broker-dealer must
also prohibit its employees from engaging in outside business activities or from maintaining outside securities accounts unless such activity has
been disclosed to and approved by the broker-dealer. The broker-dealer must also ensure that it implements an appropriate training program for its
personnel that complies with specific requirements delineated by FINRA.
Regulatory Oversight
Broker-dealers conducting business in the United States may be examined at any time by officials from the SEC, FINRA or any state in which
the broker-dealer is licensed. Following an examination, the regulatory authority will usually issue a written report discussing any identified
deficiencies. The broker-dealer is provided an opportunity to respond to the report. While most deficiencies are resolved through mutually agreed
corrective actions, more serious violations may be referred for administrative or civil proceedings. Such proceedings may result in the imposition
of fines, cease and desist orders, disgorgement orders, the suspension of personnel or lines of business or the revocation of licenses to conduct
business. While broker-dealers have the right to contest proceedings brought against them by regulatory authorities, as a practical matter most such
proceedings are resolved through a negotiated settlement. The resolution is a public record, unless the sanction is a fine of US$2,500 or less. Under
the Exchange Act, a broker-dealer and its principals may be held responsible for misconduct committed by persons under their supervision. It is
fairly common in regulatory enforcement proceedings for a broker-dealer and its supervisory personnel to be sanctioned whenever there has been
serious misconduct by any of the broker-dealer’s personnel.
Overview of the Laws and Regulations Relating to Our Business and Operations in Singapore
As we provide online brokerage services in Singapore through our subsidiary, Futu Singapore Pte. Ltd., our business operations are subject to
the laws of Singapore. The key laws and regulations which relate to our business and operations in Singapore are summarized as follows:
Regulatory Requirements under the Securities and Futures Act
The Securities and Futures Act 2001, or the SFA, is the principal legislation regulating activities and institutions in the securities and
derivatives industry in Singapore.
The SFA is administered by the Monetary Authority of Singapore, or the MAS, which is Singapore’s central bank and integrated financial
regulator. As an integrated financial supervisor, the MAS has oversight of all financial institutions in Singapore, including banks, insurers, capital
market intermediaries (such as Futu Singapore), and financial advisors. To this end, the MAS also establishes rules for such financial institutions
which are implemented through legislation, regulations, directions and notices. MAS guidelines are also formulated and published to encourage
best practices among financial institutions in Singapore.
In particular, Part 4 of the SFA provides for the licensing and regulation of certain regulated activities typically carried out by capital markets
intermediaries (such as Futu Singapore).
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Types of Regulated Activities under Part 4 of the SFA
Part 4 of the SFA governs the conduct of regulated activities typically carried out by capital market intermediaries. Under Section 82(1) of the
SFA, a person carrying on business in a regulated activity is required to hold a Capital Markets Services License, or CMSL, issued by the MAS,
unless an exemption applies. The CMSL system is a modular licensing system, in that an entity will hold one single CMSL covering the different
types of regulated activities under the SFA which it engages or intends to engage in.
The categories of
activities regulated under the SFA are set out under Part 1 of the Second Schedule to the SFA as follows:
(1) dealing in capital markets products;
(2) advising on corporate finance;
(3) fund management;
(4) real estate investment trust management;
(5) product financing;
(6) providing credit rating services; and
(7) providing custodial services.
It is an offense for a person to carry on business, or hold himself out as carrying on business, in any regulated activity without the appropriate
license issued by the MAS.
In addition, where a CMSL has been granted by the MAS, the grant may be subject to such conditions and restrictions as the MAS thinks fit. It
is an offence for a person to contravene any such condition or restriction in the license.
Activities which Futu Singapore is Licensed to Conduct in Singapore
Futu Singapore holds a CMSL (License No. CMS101000) and is licensed under the SFA to conduct the following regulated activities:
(1) dealing in capital markets products;
(2) product financing; and
(3) providing custodial services.
Under the SFA, the term “capital markets products” is defined to include, amongst others, securities,(1) units in a collective investment scheme,
derivatives contracts, and spot foreign exchange contracts for the purposes of leveraged foreign exchange trading. The term “dealing in capital
markets products” in turn means (whether as principal or agent) making or offering to make with any person, or inducing or attempting to induce
any person to enter into or to offer to enter into any agreement for or with a view to acquiring, disposing of, entering into, effecting, arranging,
subscribing for, or underwriting any capital markets product. This definition thus captures both the role of executing transactions involving capital
markets products as well as the role of soliciting transactions involving capital markets products. Currently, under the CMSL granted to it, Futu
Singapore may carry on business in dealing in capital markets products only in respect of securities, units in a collective investment scheme and
exchange-traded derivatives contracts.
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Under the SFA, the term “Product financing” is defined as providing any credit facility, advance or loan to facilitate (directly or indirectly)
(a) the subscription or purchase of specified products(2) that are listed or to be listed on an organised market,(3) (b) the purchase of such other
specified products as MAS may prescribe, or (c) the continued holding of the specified products mentioned in (a) or (b) (whether or not the
specified products are pledged as security).
Notes:
(1) Under the SFA, the term “securities” generally refers to shares, debentures, and units in a business trust or any instrument conferring or
representing a legal or beneficial ownership interest in a corporation, partnership or limited liability partnership.
(2) Under the SFA, the term “specified products” refers to securities, specified securities-based derivatives contracts or units in a collective
investment scheme.
(3) Under the SFA, the term “organised market” typically refers to securities and derivative exchanges, and is defined under the SFA to mean, a
place at which, or a facility (whether electronic or otherwise) by means of which, offers or invitations to exchange, sell or purchase derivatives
contracts, securities or units in collective investment schemes, are regularly made on a centralised basis, being offers or invitations that are
intended or may reasonably be expected to result, whether directly or indirectly, in the acceptance or making, respectively, of offers to
exchange, sell or purchase derivatives contracts, securities or units in collective investment schemes (whether through that place or facility or
otherwise). The regulatory intention is that non-multilateral markets (i.e. those that operate on a one-to-many basis) are not to be captured with
the notion of an organized market. Thus, it is expressly provided that the term “organised market” does not include a place or facility used by
only one person to regularly make offers or invitations, or to regularly accept offers, to sell, purchase or exchange derivatives contracts,
securities or units in collective investment schemes.
Under the SFA, the term “providing custodial services” is defined as providing or agreeing to provide any service in relation to specified
products, where the person providing the service has, under an arrangement with another person (the customer), possession or control of the
specified products of the customer and carries out one or more of the following functions for the customer:
(a) settlement of transactions relating to the specified products;
(b) collecting or distributing dividends or other pecuniary benefits derived from ownership or possession of the specified products;
(c) paying tax or other costs associated with the specified products;
(d) exercising rights, including without limitation voting rights, attached to or derived from the specified products; and
(e) any other function necessary or incidental to the safeguarding or administration of the specified products.
The CMSL granted to Futu Singapore by the MAS is subject to certain conditions.(4)
Notes:
(4) The conditions are as follows:
1. Futu Singapore shall obtain the prior approval of the MAS for any change of its members or shareholdings of its members which will result in
any person, alone or acting together with any connected person, being in a position to control not less than 20% of the voting power in Futu
Singapore or to hold interest in not less than 20% of the issued shares of Futu Singapore Futu Singapore shall immediately notify the MAS of
any other changes of its members or shareholding of its members.
2. Futu Singapore shall inform MAS of (i) the resignation of its chief executive officer or any of its directors; (ii) any change in the nature of
appointment or country of residence of the chief executive officer or any of its directors; and (iii) any change in the business interests or
shareholdings of its chief executive officer or any of its directors provided to the MAS in the prescribed form.
3. Futu Singapore shall not acquire or hold, whether directly or indirectly, an interest of 20% or more of the share capital of any corporation, or
establish any branch (whether in Singapore or elsewhere), without first obtaining the prior approval of MAS.
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4. Futu Singapore shall immediately inform MAS of any matter which may adversely affect its financial position to a material extent.
5. Futu Singapore shall conduct its business in such a manner as to avoid conflicts of interests, and should such conflicts arise, shall ensure that
they are resolved fairly and equitably.
6. Prior to the cessation of its business in the regulated activities for which it is licensed, Futu Singapore shall ensure that its liabilities and
obligations to all customers have been fully discharged or provided for.
7. Futu Singapore shall immediately inform the MAS when it becomes aware of the occurrence of any of the following:
(i) where any offence is committed by or any disciplinary action is taken against Futu Singapore or any of its officers or representatives,
whether in Singapore or elsewhere;
(ii) where Futu Singapore or any of its officers or representatives is the subject of an investigation or when any civil or criminal proceedings
are instituted against Futu Singapore or any of its officers or representatives, whether in Singapore or elsewhere;
(iii) where there is any breach of any laws or regulations, business rules or codes of conduct, whether in Singapore or elsewhere; or
(iv) any other matter that would affect Futu Singapore or any of its officers’ or representatives’ ability to meet the criteria set out in the
Guidelines on Fit and Proper Criteria issued by MAS.
8. Futu Singapore shall produce its books to independent auditors to be selected by the MAS to conduct any audit on Futu Singapore All
expenses arising from such audit shall be borne by Futu Singapore.
9. Futu Singapore shall give written notice to MAS seven days prior to the execution of an agreement for the purchase, sale, merger or any other
business combination of all or any part of the business (where such part could operate as a viable business enterprise if it were a stand-alone
entity) in a regulated activity under the SFA for which its CMSL is granted. Where any transaction, as described in the foregoing, is not
documented in an agreement, Futu Singapore shall give written notice to MAS seven days prior to the execution of the transaction.
10. Futu Singapore shall ensure that any person it employs or appoints to act as its representative in respect of any regulated activity for which
Futu Singapore is licensed to provide is an appointed, temporary or provisional representative in respect of that regulated activity.
11. Futu Singapore shall not carry on any moneylending without the prior approval of the MAS.
12. Futu Singapore shall inform MAS promptly when it has fewer than 2 full-time appointed representatives in respect of each relevant regulated
activity under the SFA.
13. Futu Singapore shall provide MAS with a Letter of Responsibility, Letter of Undertaking, Banker’s Guarantee and/or Professional Indemnity
Insurance, as may be required by MAS and in such form as MAS may require. Futu Singapore shall ensure that such Letter of Responsibility,
Letter of Undertaking, Banker’s Guarantee and/or Professional Indemnity Insurance, as may be required by MAS, remain(s) in force as long as
the license remains valid.
14. Futu Singapore and its representatives shall at all times, comply with all foreign laws and regulations that apply to the activities that they
conduct.
15. Futu Singapore must ensure that each of its appointed, temporary or provisional representatives only carries on business in dealing in capital
markets products in the types of capital markets product that are indicated against the name of that representative within the public register of
representatives. For this purpose, the capital markets products are limited to the following classes:
(a) securities;
(b) units in a collective investment scheme;
(c) exchange-traded derivatives contracts;
(d) over-the-counter derivatives contracts; or
(e) spot foreign exchange contracts for the purposes of leveraged foreign exchange trading.
16. Futu Singapore must notify the MAS of any addition to the list of capital markets products indicated against its appointed representative’s
name in the public register of representatives, by lodging a notice in the prescribed form.
17. Futu Singapore shall, no later than the next business day after the day on which any of its appointed representatives, provisional
representatives or temporary representatives has ceased to carry on business in dealing in capital markets products in respect of any or all types
of capital markets products indicated against his name in the public register of representatives, notify the MAS by lodging a notice in the
prescribed form.
18. Futu Singapore must carry on business in dealing in capital markets products only in respect of capital markets products that are securities,
units in a collective investment scheme and exchange-traded derivatives contracts. Where Futu Singapore intends to carry on business in
dealing in capital markets products other than the aforesaid, it must seek MAS’ approval by lodging a notice in the prescribed form. The MAS
may require Futu Singapore to furnish it with such information or documents as the MAS considers necessary.
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19. Where Futu Singapore ceases to carry on business in dealing in capital markets products in respect of any particular type of capital markets
products, but has not ceased to carry on business in dealing in capital markets products in the remaining types of capital markets products, Futu
Singapore must notify MAS of such cessation by lodging a notice in the prescribed form not later than 14 days from the date of cessation.
20. Where Futu Singapore has commenced carrying on business in dealing in capital markets products in respect of some types of capital markets
products but not others for which it is allowed to deal in under its license by the end of the period of 6 months from the date on which its
license was granted (or such longer period as the MAS may allow in any particular case), Futu Singapore must immediately lodge with the
MAS a notice in the prescribed form.
21. Where the MAS varies the types of capital markets products in respect of which Futu Singapore carries on business in dealing after receiving
the request from Futu Singapore, the MAS may issue a new license to Futu Singapore which reflects the types of capital markets products in
respect of which it carries on business in dealing.
22. Futu Singapore shall satisfy itself of compliance with all relevant laws and requirements in the relevant foreign jurisdictions, before it starts
offering products and services to investors residing in that foreign jurisdiction.
Representatives, Directors, and CEO Requirements
Under Section 99B(1) of the SFA, individuals who are employed by or who are acting for a CMSL holder in Singapore to carry out the
regulated activities are required to be registered with MAS as appointed, provisional or temporary representatives under the SFA, unless otherwise
exempted.
In addition, pursuant to the MAS Guidelines SFA 04-G01 on Criteria for the Grant of a Capital Markets Services License Other than for Fund
Management and Real Estate Investment Trust Management (last revised on October 8, 2018), Futu Singapore is required, amongst other things, to
employ at least two full-time individuals as appointed representatives in respect of each of the regulated activities which it is being licensed to
conduct. Futu Singapore is also required to ensure that its board of directors comprise a minimum of two directors, at least one of whom is resident
in Singapore. The chief executive officer of Futu Singapore must also be resident in Singapore. The approval of the MAS is also required for the
appointment or change of the chief executive officer, all resident directors, and all directors who is directly responsible for Futu Singapore’s
business in Singapore.
“Fit and Proper” Requirement
Persons applying to the MAS for a CMSL under the SFA, as well as its directors, representatives, and shareholders, must satisfy the MAS Fit
and Proper Criteria, and continue to satisfy the said criteria after the grant of the CMSL by the MAS. Generally, a fit and proper person refers to a
person who is financially sound, competent, honest, and has not been in breach of relevant laws and regulations. MAS administers this regime
through a set of Fit and Proper Guidelines which apply to various classes of regulated entities (including CMSL holders).
Base Capital Requirements
A corporation granted a CMSL in respect of regulated activities shall at all times meet the base capital requirement thresholds under the
Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licenses) Regulations (“SF(FMR)R”), in
respect of the regulated activities for which it is licensed to conduct. The base capital requirement thresholds applicable to the regulated activities
carried on by Futu Singapore are set out under the First Schedule to the SF(FMR)R as follows:
Regulated activity
Dealing in capital markets products that are securities, units in a collective investment scheme or exchange-traded
derivatives contracts and the applicant is not a member of an approved exchange.(5)
Carrying out product financing.
Providing custodial services.
Base capital
requirement (SG$)
1,000,000
1,000,000
1,000,000
Notes:
(5) Under the SFA, an “approved exchange” means a corporation that is approved by the MAS under the SFA as an approved exchange. An
example of such an approved exchange is the Singapore Exchange Securities Trading Limited, or SGX.
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Generally, where more than one base capital requirement is applicable to a CMSL holder, the highest of such base capital requirements will
apply. Hence, the base capital requirement of Futu Singapore is S$1 million.
By Regulation 4 of the SF(FMR)R, a CMSL holder shall not cause or permit its base capital to fall below the base capital requirement
applicable to it. Where the base capital falls below the base capital requirement or where the CMSL holder becomes aware that the base capital will
fall below the base capital requirement, the MAS must be notified immediately. Failure to comply with base capital requirements entail serious
consequences and may jeopardise the CMSL itself. Hence, in view of this obligation, it is generally prudent for a CMSL holder to maintain an
additional capital buffer over and above the minimum base amount.
Risk Capital Requirements
Furthermore, a CMSL holder shall at all times meet the risk-based capital requirement in the SF(FMR)R upon obtaining its license. The
particular capital requirements are generally based on various risk factors faced by the CMSL holder, and the risk measurements are proxied from
various items of information within the CMSL holder’s financial statements. In this regard, under Regulations 6 and 7 of the SF(FMR)R, a CMSL
holder shall:
(a) not cause or permit its financial resources (as defined in the SF(FMR)R and by notices issued by MAS) to fall below the total risk
requirement (as defined in the SF(FMR)R and by notices issued by MAS); and
(b) immediately notify the MAS if its financial resources fall below 120% of its total risk requirements.
Continuing Obligations
A holder of a CMSL under Part IV of the SFA must comply with various ongoing operational obligations, set out in the SFA, in subsidiary
legislation made under the SFA, in other regulatory instruments issued by MAS as well as the specific conditions set out in the CMSL itself. The
ongoing business conduct compliance obligations would differ depending on the type of regulated activity carried on by the holder of the CMSL.
In respect of Futu Singapore, these include, but are not limited to, the following key requirements under the Securities and Futures (Licensing and
Conduct of Business) Regulations, or the SF(LCB)R:
(a) maintenance of a minimum security deposit in the sum of S$100,000 with the MAS (Regulation 7 of the SF(LCB)R);
(b) implementing, and ensuring compliance with, effective written policies on all operational areas, including financial policies, accounting
and internal controls, and internal auditing (Regulation 13(b)(i) of the SF(LCB)R);
(c)
identifying, addressing and monitoring risks associated with trading or business activities (Regulation 13(b)(iii) of the SF(LCB)R);
(d) ensuring that its business activities are subject to adequate internal audit (Regulation 13(b)(iv) of the SF(LCB)R);
(e) observing detailed book-keeping and record-keeping obligations (Regulation 39 of the SF(LCB)R);
(f) providing of statements to customers (Regulation 40 of the SF(LCB)R); and
(g) observing regulations on product advertisements (Regulation 46 of the SF(LCB)R).
Licensing Regime under the Financial Advisers Act
For completeness, the provision of financial advisory services is regulated in Singapore under the Financial Advisers Act 2001 (“FAA”), and
its related subsidiary legislation.
Under Section 6(1) of the FAA, a person is not to act as a financial adviser in Singapore in respect of any financial advisory services
unless he is authorised to do so in respect of that financial advisory service by a financial adviser’s license (“FAL”), or is an exempt financial
adviser. Further, under Section 6(4) of the FAA, a person who contravenes Section 6(1) will be liable on conviction to a maximum fine of S$75,000
or imprisonment for a term of up to 3 years or both.
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The term “financial adviser” generally refers to a person who carries on a business of providing any financial advisory service under the FAA.
There are currently 3 types of financial advisory services under the FAA:
a.
b.
advising others, either directly or through publications or writings, and whether in electronic, print or other form, concerning any
investment product;(6)
advising others by issuing or promulgating research analyses or research reports, whether in electronic, print or other form, concerning
any investment product; and
c.
arranging of any contract of insurance in respect of life policies (other than a contract of reinsurance).
As at the date of this annual report, Futu Singapore does not hold a FAL and is not an exempt financial adviser under the FAA. Accordingly, it
is important to note that Futu Singapore is not authorised in Singapore to engage in the activities licensable under the FAA.
Notes:
(6) Under the FAA, “investment product” includes any capital markets products, spot foreign exchange contracts other than for the purposes of
leveraged foreign exchange trading, and any life policy.
Anti-Money Laundering And Counter-Terrorist Financing (“AML/CTF”)
Sector-specific requirements applicable to capital markets intermediaries
In Singapore, financial institutions which are licensed by the MAS are generally required to comply with the applicable anti-money laundering
and counter-terrorist financing laws and regulations in Singapore as well as various notices and guidelines. In particular, Futu Singapore as a
CMSL holder will be required to comply with the Notice on Prevention of Money Laundering and Countering the Financing of Terrorism – Capital
Markets Intermediaries (“SFA 04-N02”) issued by the MAS, which should be read together with the Guidelines to MAS Notice SFA 04-N02
(collectively, the “AML/CTF Notices and Guidelines”).
The AML/CTF Notices and Guidelines establish a framework within which CMSL holders are to design and develop their own AML/CTF
policies, procedures and controls to help prevent money laundering and terrorism financing in Singapore. A CMSL holder should, among other
things:
(a)
take appropriate steps to identify, assess and update its money laundering and terrorism financing risks in relation to the launch or use of
new products, new business practices, new delivery mechanisms, or new or developing technologies, and to ensure that appropriate
measures and controls are implemented to mitigate and manage such risks;
(b) conduct anti-money laundering and customer due diligence (“CDD”) checks on all new customers (which checks must extend to the
beneficial owners, connected parties of the customer and persons appointed to act on the customer’s behalf), and update its CDD checks
on existing customers from time to time;
(c) perform such CDD checks where the licensed corporation first establishes business relations with any customer, where the licensed
corporation undertakes any transaction of a value exceeding S$20,000 for any customer who has not otherwise established business
relations with it, where there is a suspicion of money laundering or terrorism financing, or where the licensed corporation has doubts
about the veracity or adequacy of any information previously obtained;
(d) reserve the right to request for such information as deemed necessary to verify the identity, tax status and/or source of payment of a
customer in order to comply with any applicable law or regulation of any jurisdiction;
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(e)
implement internal risk management systems, policies, procedures and controls to determine if particular business relations with or
transactions for any customer presents a higher risk for money laundering or terrorism financing;
(f) conduct on-going monitoring of activities of its customers to ensure that they are consistent with the nature of business, the risk profile
and source of funds, as well as identify transactions that are complex, large or unusual, or patterns of transactions that have no apparent
economic or lawful purpose;
(g) conduct comprehensive on-going screening against the United Nations watch lists, other relevant money laundering and terrorism
financing sources and lists and information provided by the MAS or other relevant authorities in Singapore; and
(h) report transactions suspected to contain the proceeds of criminal conduct or that is connected in any way with money laundering, tax
evasion or terrorist financing to the Suspicious Transactions Reporting Office and the MAS, and document the basis for its assessment
and the decision to report the transaction.
Aside from the AML/CTF Notices and Guidelines, Singapore’s AML/CTF legal framework is governed by a patchwork of legal
instruments. We set out below the key legislations in Singapore applicable to Futu Singapore which concern money laundering and terrorist
financing.
Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act
The Corruption, Drug Trafficking and Other Serious Crimes (Confiscation of Benefits) Act 1992 (“CDSA”) criminalises money laundering
and organises money laundering offences into two main groups: drug-related offences and other criminal offences. In particular, Part 6 of the
CDSA criminalises the laundering of proceeds generated by drug trafficking and criminal conduct via the following principal offences:
(a)
the assistance of another person in retaining the benefit of drug dealing or criminal conduct (Sections 50 and 51 of the CDSA);
(b) the acquisition, possession, use, concealment or transfer of the benefits of drug dealing or criminal conduct(Sections 53 and 54 of the
CDSA); and
(c)
the possession or use of property reasonably suspected to be benefits of drug dealing or criminal conduct (Section 55 of the CDSA).
Upon conviction of an offence under Sections 50, 51, 53 or 54 of the CDSA, individuals will be liable to a maximum fine of S$500,000 or
imprisonment for a term of up to 10 years or both, while non-individuals will be liable to a maximum fine of S$1 million or twice the value of the
benefits of drug dealing or criminal conduct in respect of which the money laundering offence was committed, whichever is higher. If convicted
under Section 55 of the CDSA, individuals will be liable to a maximum fine of S$150,000 or imprisonment for a term of up to 3 years, or both,
while non-individuals will be liable to a maximum fine of S$300,000.
In addition to any criminal liability, Section 6 of the CDSA also allows for the confiscation of proceeds of crime. In particular, a confiscation,
restraint or charging order may be made by the court in respect of realisable property. A confiscation order under Section 6 is an order for the
defendant to pay an amount of money assessed to correspond to the value of the benefit he or she derived from drug dealing or criminal conduct, a
restraint order under Section 19 serves to prohibit any person from dealing with realisable property, and a charging order under Section 20
(applicable to immovable property and to capital markets products) serves to secure payment of any amount payable under a confiscation order.
In terms of reporting requirements, Section 45(1) of the CDSA provides for the mandatory reporting of suspicious transactions when a person,
in the course of his or her trade, profession, business or employment, knows or has reasonable grounds to suspect money laundering. Suspicious
transaction reports are to be made to the Commercial Affairs Department of the Singapore Police Force. A failure to report a suspicious transaction
would constitute an offence under Section 45(3) of the CDSA. Individuals will be liable on conviction to a fine not exceeding S$250,000 or to
imprisonment for a term not exceeding 3 years or to both, while non-individuals would be liable on conviction to a fine not exceeding S$500,000.
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The CDSA also provides for the offence of tipping-off. Section 57 of the CDSA provides that it is an offence if: (i) a person, who knows
or reasonably suspects that an authorised officer is acting or proposing to act in a money laundering investigation, discloses, to a second person,
any information that is likely to prejudice that investigation or proposed investigation; or (ii) a person, who knows or reasonably suspects that a
suspicious transaction report has been filed, discloses to a second person, any information that is likely to prejudice any investigation that might be
conducted following the suspicious transaction report. A contravention of Section 57 will lead to an offence, and a fine not exceeding S$250,000 or
to imprisonment for a term not exceeding 3 years or to both.
Terrorism (Suppression of Financing) Act
The Terrorism (Suppression of Financing) Act 2002 (“TSOFA”) implements within Singapore the provisions of the International Convention
for the Suppression of Financing of Terrorism, as well as resolutions of the United Nations (“UN”) Security Council concerning terrorism-related
sanctions. It broadly operates in parallel with the CDSA, and like the CDSA, it also provides for mandatory reporting of suspicious transactions.
Transactions reported under the TSOFA are also made to the Commercial Affairs Department of the Singapore Police Force.
The TSOFA sets out various actions which are deemed terrorist financing acts and constitute offence under the TSOFA. Broadly speaking, the
TSOFA criminalises the handling of terrorist property and the provision of services (including financial support) for terrorist activity. This
effectively prohibits any and all dealings with terrorists and terrorist property, including the provision of services supporting terrorism. As such,
financial institutions must ensure that they do not, inadvertently or otherwise, have dealings with persons or entities which have been designated as
terrorists under the TSOFA.
The TSOFA also has a designation regime, whereby certain individuals and entities may be designated as terrorists by the Singapore
government or by the UN Security Council.
Sanctions
Within the financial sector, the UN sanctions are given effect to via regulations issued by the MAS pursuant to Section 27A of the Monetary
Authority of Singapore Act 1970 (“MAS Act”). As at the date of this annual report, the MAS sanctions regulations which have been issued
pursuant to Section 27A of the MAS Act are as follows:
(a) MAS (Freezing of Assets of Persons – Democratic Republic of the Congo) Regulations 2006 (S155/2006);
(b) MAS (Freezing of Assets of Persons – South Sudan) Regulations 2015 (S776/2015);
(c) MAS (Freezing of Assets of Persons – Sudan) Regulations 2006 (S553/2006);
(d) MAS (Freezing of Assets of Persons – Yemen) Regulations 2015 (S109/2015);
(e) MAS (Sanctions and Freezing of Assets of Persons – Democratic People’s Republic of Korea) Regulations 2016 (S275/2016);
(f) MAS (Sanctions and Freezing of Assets of Persons – Iran) Regulations 2016 (S276/2016); and
(g) MAS (Sanctions and Freezing of Assets of Persons – Somalia) Regulations 2010 (S706/2010).
While specific provisions may differ, broadly speaking, these above regulations generally:
(i) prohibit financial institutions from entering into transactions with or relating to a sanctioned person;
(ii) prohibit financial institutions from entering into transactions that have a specific purpose which is being targeted by the sanctions
rule; or
(iii) require financial institutions to freeze assets that may be in their possession or control, where the assets belong to or are controlled by
a sanctioned person or where the assets are for the specific purpose that the sanctions rule is targeting, and to notify the authorities
accordingly.
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The failure to comply with any MAS sanctions regulation is an offence under Section 27A(5) of the MAS Act, for which the financial
institution will be liable on conviction to a fine of up to S$1 million.
Employees
The Employment Act 1968 (the “EA”) is regulated by the Ministry of Manpower (the “MOM”) and sets out the basic terms and conditions of
employment and the rights and responsibilities of employers as well as employees who are covered under the EA.
In particular, Section 35 of the Employment Act provides that Part 4 of the EA, which sets out requirements for rest days, hours of work and
other conditions of service, apply in respect of workmen who receive monthly basic salaries not exceeding S$4,500 and employees (other than
workmen) who receive monthly basic salaries not exceeding S$2,600.
Section 38(8) of the EA provides that an employee is not allowed to work for more than 12 hours in any one day except in specified
circumstances, such as where the work is essential to the life of the community, defence or security. In addition, Section 38(5) of the EA limits the
extent of overtime work that an employee can perform to 72 hours a month. An employer who breaches the above provisions shall be guilty of an
offence and shall be liable on conviction to a fine not exceeding S$5,000, and for a second or subsequent offence to a fine not exceeding S$10,000
or to imprisonment for a term not exceeding 12 months or to both, pursuant to Section 53 of the EA.
Employment of Foreign Manpower Act
The employment of foreign workers in Singapore is governed by the Employment of Foreign Manpower Act 1990 (the “EFMA”) and is
regulated by the MOM.
In Singapore, under Section 5(1) of the EFMA, no person shall employ a foreign employee unless he has obtained a valid work pass which
allows the foreign worker to work for him. Section 5(6) of the EFMA provides that any person who fails to comply with or contravenes
Section 5(1) of the EFMA shall be guilty of an offence and shall (a) be liable on conviction to a fine not less than S$5,000 and not more than
S$30,000 or to imprisonment for a term not exceeding 12 months or to both; and (b) on a second or subsequent conviction, (i) in the case of an
individual, be punished with a fine of not less than S$10,000 and not more than S$30,000 and with imprisonment for a term of not less than
one month and not more than 12 months; or (ii) in any other case, be punished with a fine not less than S$20,000 and not more than S$60,000.
An employer of foreign workers is also subject to, amongst others, the provisions set out in the EA, the EFMA, the Immigration Act 1959 (the
“Immigration Act”) and the regulations issued pursuant to the Immigration Act.
Central Provident Fund Act
The Central Provident Fund (the “CPF”) system is a mandatory social security savings scheme funded by contributions from employers and
employees. Pursuant to the Central Provident Fund Act 1953 (the “CPFA”), an employer is obliged to make CPF contributions for all employees
who are citizens or permanent residents of Singapore who are employed in Singapore under a contract of service and employed under a permanent,
part-time or casual basis (with the exception of a contract of service or other agreement entered into in Singapore as a master, a seaman or an
apprentice in any vessel where the owners have been exempted from the provisions of the CPFA).
CPF contributions are required for both ordinary wages and additional wages (subject to the respective CPF contribution ceilings) of
employees at the applicable prescribed rates which are dependent on, inter alia, the amount of monthly wages and the age of the employee.
Ordinary wages are wages due wholly or exclusively for an employee’s employment in a month and are payable before the due date of CPF
contributions for that month, whereas additional wages are wages which are not granted wholly and exclusively for the employment in a month,
such as annual bonus and leave pay.
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Under Section 7 of the CPFA, an employer shall pay both the employer’s and employee’s shares of the monthly CPF contribution. However,
pursuant to Section 7(2) of the CPFA, an employer is entitled to recover its employee’s share of the CPF contribution by deducting such a share
from the wages of the employee. An employer who fails to pay the CPF contributions in accordance with the CPFA shall be guilty of an offence
and may be liable on conviction to a fine not exceeding S$10,000 or to imprisonment for a term not exceeding 7 years or to both, pursuant to
Section 7(3) of the CPFA.
Personal Data Protection Act
The Personal Data Protection Act 2012 (“PDPA”) is the main legislation governing the protection and handling (collection, storage, use or
onward disclosure) of personal data in Singapore. The PDPA also established the Personal Data Protection Commission (“PDPC”) to administer
and enforce the PDPA.
Under Section 2 of the PDPA, “personal data” means any data, whether true or not, about an individual who can be identified from that data, or
from that data and some other information to which an organization has or is likely to have access.
Under the PDPA, an organisation will have to comply with the following general obligations when dealing with personal data:
(a) obtain the consent of the individual before collecting, using or disclosing his personal data for a purpose. Consent is not considered given
unless the purpose of the collection, use or disclosure is notified to the individual and his consent is obtained in relation to such notified
purpose;
(b) collect, use or disclose personal data about an individual only for purposes that a reasonable person would consider appropriate and, if
applicable, have been notified to the individual concerned;
(c) notify the individual of the purposes for which an individual’s personal data is intended to be collected, used or disclosed on or before
such collection, use or disclosure;
(d) give an individual reasonable access to his or her own personal data which the organization has in its possession or control (including
informing the individual of the ways in which his personal data has been used or disclosed over the past year);
(e) correct errors and omissions in the personal data of an individual if the individual so requests;
(f) make reasonable effort to ensure that personal data collected by it is accurate and complete;
(g) take reasonable security measures to protect the personal data from unauthorised access, collection, use, disclosure, tampering or disposal,
and the loss of any storage medium or device on which the personal data is stored;
(h) not retain personal data or to remove the means by which personal data can be associated with particular individuals, as soon as it is
reasonable to assume that the original purpose of the collection is no longer served by retention and that retention is also no longer needed
for legal or business purposes;
(i) ensure that when personal data is transferred out of Singapore to another country, a standard of protection comparable to that under
Singapore law is given to the transferred personal data;
(j) notify the PDPC of a data breach that results in or is likely to result in significant harm to an affected individual or that is or is likely to be
of a significant scale; and
(k) implement policies and procedures to comply with the PDPA and to make information about such policies and procedures publicly
available.
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In addition to the obligations above, the PDPA has also established a Do-Not-Call Registry (“DNC Registry”) under Part 9 of the PDPA, which
allows individuals to register their Singapore telephone numbers to opt out of receiving marketing phone calls, mobile text messages and faxes
from organisations. Under Section 43 of the PDPA, no person shall send a “specified message” addressed to a Singapore telephone number unless
it has been confirmed that the number is not listed on the relevant DNC Registry. A “specified message” is defined as one that, among others,
relates to offering, supplying, advertising or promoting any goods, service, land, interest in land, business opportunity or investment opportunity.
If the PDPC finds that an organisation has intentionally or negligently failed to comply with its obligations under the PDPA, it may require, by
written notice, the organisation to pay a financial penalty. In the case of organisations, the amount of financial penalty will be up to S$1 million (or
in due course, up to S$1 million or 10% of the organisation’s annual turnover in Singapore, whichever is higher).
In any case, whenever there is non-compliance, the PDPC has the power under Section 48I(2) of the PDPA to issue binding directions to
organisations to stop collecting, using or disclosing personal data in contravention of the PDPA, to destroy personal data collected in contravention
of the PDPA, or to comply with any direction of the PDPC to provide access to or to correct personal data.
Failure to comply with the requirements of the PDPA may also separately attract civil liability. A person who suffers loss or damage directly as
a result of a breach by an organization of various provisions of the PDPA is able under Section 48O to bring an action against the organisation in a
civil court for compensation.
Laws and Regulations Relating to Companies in Singapore
Our Singapore subsidiary, Futu Singapore, is incorporated and governed under the provisions of the Companies Act 1967 (the “Companies
Act”). The Companies Act generally governs, amongst others, matters relating to the status, power and capacity of a company, shares and share
capital of a company (which includes issue of new shares (including preference shares), treasury shares, share buybacks, redemption, share capital
reduction), declaration of dividends, financial assistance, directors and officers and shareholders of a company (including meetings and
proceedings of directors and shareholders, dealings between such persons and the company), protection of minority shareholders’ rights, accounts,
arrangements, reconstructions and amalgamations, winding up and dissolution. Members of a company are also subject to, and are bound by the
provisions in its constitution.
In addition, members of a company are subject to, and bound by, the provisions of the constitution of the company. The constitution of a
company contains, inter alia, provisions relating to some of the matters in the foregoing paragraph, transfers of shares as well as sets out the rights
and privileges attached to the different classes of shares of the company (if applicable).
Dividend Distributions
Our operations in Singapore are conducted via our Singapore subsidiary, Futu Singapore. Pursuant to Section 403 of the Companies Act,
dividends are only payable out of profits. Typically, the directors will recommend a particular rate of dividend and the company in general meeting
will declare the dividend subject to the maximum recommended by the directors.
Singapore adopts a one-tier corporate tax system under which the tax collected from corporate profits is a final tax and the after-tax profits of a
company resident in Singapore can be distributed to its shareholders as tax-exempt dividends. Such dividends are tax-exempt in the hands of the
shareholders, irrespective of whether the shareholder is a company or an individual and whether or not the shareholder is a Singapore tax resident.
Singapore does not currently impose withholding tax on dividends paid to resident or non-resident shareholders.
Singapore Taxation
The following summary of the laws and regulations relating to taxation in Singapore is based on laws, regulations and interpretations presently
in effect. The laws, regulations and interpretations, however, may change at any time, and any change could be retroactive. These laws and
regulations are also subject to various interpretations and the relevant tax authorities or the courts of Singapore may later disagree with the
explanations or conclusions set out below. This summary is not intended to constitute a complete or exhaustive description of all of the Singapore
tax considerations and do not purport to deal with the tax consequences applicable to all categories of investors of the notes. It is not intended to be
and does not constitute legal or tax advice.
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Corporate Income Tax
The prevailing corporate tax rate in Singapore is 17% with effect from Year of Assessment 2010. In addition, the partial tax exemption scheme
for Year of Assessment 2019 and before applies on the first S$300,000 of normal chargeable income; specifically 75% of up to the first S$10,000
of a company’s normal chargeable income, and 50% of up to the next S$290,000 is exempt from corporate tax. Starting from Year of Assessment
2020, the partial tax exemption scheme applies on the first S$200,000 of a company’s normal chargeable income; specifically 75% of up to the first
S$10,000 of a company’s normal chargeable income, and 50% of up to the next S$190,000 is exempt from corporate tax. The remaining chargeable
income (after the partial tax exemption) will be taxed at 17%. For the Years of Assessment 2019 and 2020, companies will be granted a corporate
income tax rebate of 20% and 25% respectively of the tax payable for the year of assessment, subject to a cap of S$10,000 and S$15,000
respectively per year of assessment. Singapore has a tax exemption scheme for new start-up companies to support entrepreneurship and help the
growth of local enterprises. Where any of the first three (3) years of assessment falls in or after Year of Assessment 2020, there will be 75%
exemption on the first S$100,000 of normal chargeable income, and a further 50% exemption on the next S$100,000 of normal chargeable income.
Futu Singapore is subject to Singapore corporate income tax at a rate of 17%.
Goods and Services Tax (“GST”)
GST in Singapore is a consumption tax that is levied on import of goods into Singapore, as well as nearly all supplies of goods and services in
Singapore at a prevailing rate of 7%.
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C. Organizational Structure
The following diagram illustrates our corporate structure, including our significant subsidiaries and the VIE, as of the date of this annual
report:
Note:
(1) Mr. Leaf Hua Li and Ms. Lei Li hold 85% and 15% equity interests in Shenzhen Futu, respectively. Mr. Li is the founder, chairman and chief
executive officer of our company and Ms. Li is Mr. Li’s spouse.
(2) Each of Futu Holdings Limited, Futu Financial Limited, Futu Lending Limited, Futu Network Technology Limited and Futu Securities (Hong
Kong) Limited owns 20% of the share capital in Futu Trustee Limited.
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Contractual Arrangements with the VIE and Its Shareholders
On September 30, 2021, a termination agreement was entered into among the WFOE, the VIE and its shareholders, pursuant to which the
parties agreed to terminate the prior contractual arrangements and replaced it with a new set of agreements containing substantially the same terms.
The following is a summary of the currently effective contractual arrangements by and among the WFOE, the VIE and its shareholders. These
contractual arrangements enable us to (i) exercise effective control over the VIE; (ii) receive substantially all of the economic benefits of the VIE;
and (iii) have an exclusive option to purchase all or part of the equity interests in and/or assets of the VIE when and to the extent permitted by PRC
laws.
Exclusive Business Cooperation Agreement. Pursuant to the exclusive business cooperation agreement entered into September 30, 2021 by
and among the WFOE, the VIE and its shareholders, the VIE engages the WFOE as the exclusive service provider of technical support, consulting
services and other services to the VIE. The VIE and its shareholders undertake that without the WFOE’s prior written consent, the VIE shall not
directly or indirectly obtain from any third party any services identical to or similar to those provided by the WFOE under the agreement, and shall
not enter into any similar partnership with any third party with respect to the matters described in the agreement. The VIE agrees to pay a service
fee at an amount equivalent to 100% of the consolidated gross profits of the VIE for any fiscal year after offsetting the accumulated losses of the
VIE and its subsidiaries in the previous fiscal years (if any) and after deducting working capital, expenditure, taxes and other statutory
contributions required in any fiscal year . Unless otherwise terminated in accordance with the terms of this agreement or otherwise agreed by the
WFOE, this agreement will remain effective. During the term of the agreement, each of the VIE and the WFOE shall renew its operation term prior
to the expiration thereof so as to enable this agreement to remain effective. This agreement shall be terminated upon the expiration of the operation
term of a party if the application for the renewal of its operation term is not approved by the relevant government departments.
Equity Interest Pledge Agreement. Pursuant to the equity interest pledge agreement entered into on September 30, 2021 by and among the
WFOE, the VIE and its shareholders, each shareholder of the VIE agrees that, during the term of this agreement, he or she will not dispose of the
pledged equity interests or create or allow any encumbrance on the pledged equity interests without the prior written consent of the WFOE. The
equity interest pledge agreement will remain effective until the latter of the full payment of all secured debt under the agreement and the VIE and
its shareholders discharge all their obligations under the contractual arrangements. As of the date of this annual report, each shareholder of the VIE
has completed registration of the pledge of his or her equity interest in the VIE to the WFOE.
Power of Attorney. Pursuant to the power of attorney entered into by and among the WFOE, the VIE and its shareholders on September 30,
2021, each shareholder of the VIE irrevocably authorized the WFOE to exercise such shareholder’s rights in the VIE, including without limitation,
the power to participate in and vote at the VIE’s shareholder’s meetings, the power to nominate and appoint the directors, senior management, and
other shareholders’ voting rights permitted by the VIE’s articles of association.
Exclusive Option Agreement. Pursuant to the exclusive option agreement entered into on September 30, 2021, by and among the WFOE, the
VIE and its shareholders, each shareholder of the VIE has irrevocably granted the WFOE an exclusive option, to the extent permitted by PRC laws
and exercisable at the WFOE’s discretion at any time, to purchase or designate another person to purchase all or part of such shareholder’s equity
interests in the VIE. Unless PRC laws and/or regulations require valuation of the VIE’s equity interests, the purchase price shall be the greater of (i)
the actual amount of capital paid by the VIE’s shareholders in respect of the equity to be purchased or (ii) the lowest price permitted by the
applicable PRC laws. Each shareholder of the VIE undertakes that, without the prior written consent of the WFOE, he or she will not, among other
things, (i) create any pledge or encumbrance on his or her equity interests in the VIE, (ii) transfer or otherwise dispose of his or her equity interests
in the VIE, (iii) change the VIE’s registered capital, (iv) amend the VIE’s articles of association, (v) liquidate or dissolve the VIE, or (vi) distribute
dividends to the shareholders of the VIE. In addition, the VIE undertakes that, without the prior written consent of the WFOE, it will not, among
other things, dispose of its material assets, provide any loans to any third parties, enter into any material contract (except for the contract concluded
in the normal course of business), or create any pledge or encumbrance on any of its assets, or transfer or otherwise dispose of its material assets.
This agreement shall be terminated upon and only upon the occurrence of any of the following circumstances: (i) the WFOE unilaterally terminates
this agreement in accordance with this agreement; (ii) all equity interests held by the shareholders of the VIE or their successors or permitted
transferees have been transferred to the WFOE and/or any other person designated by the WFOE in accordance with this agreement; and (iii) in
accordance with the requirements of the relevant PRC laws.
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Spousal Consent Letters. The spouses of the shareholders of the VIE have each signed a spousal consent letter. Under the spousal consent
letter, the signing spouse unconditionally and irrevocably approved the execution by his or her spouse of the above-mentioned equity interest
pledge agreement, exclusive option agreement and power of attorney, as applicable, and that his or her spouse may perform, amend or terminate
such agreements without his or her consent. Moreover, the spouse confirmed he or she has no rights, and will not assert in the future any right, over
the equity interests in the VIE held by his or her spouse. In addition, in the event that the spouse obtains any equity interest in the VIE held by his
or her spouse for any reason, he or she agrees to be bound by and sign any legal documents substantially similar to the contractual arrangements
entered into by his or her spouse, as may be amended from time to time.
As a result of these contractual agreements, we control and receive the economic benefits of the business operations of the VIE and its
subsidiaries, which is not equivalent to equity ownership in the VIE and its subsidiaries. Under U.S. GAAP, a company is deemed the primary
beneficiary of and can consolidate the results of a VIE when the company, or its subsidiary, through contractual arrangements, has the power to
direct the activities that most significantly impact the VIE’s economic performance, bears the risks of and enjoys the rewards normally associated
with ownership of the VIE. Accordingly, we are the primary beneficiary of the VIE for accounting purposes and consolidate the financial results of
the VIE and its subsidiaries in our consolidated financial statements in accordance with U.S. GAAP. Neither we nor our investors own any equity
ownership in, direct foreign investment in, or control of the VIE as a result of the WFOE’s contractual agreements with the VIE and its
shareholders and these agreements have not been tested in a court of law in the PRC.
These contractual arrangements may not be as effective as direct ownership in providing us with control over the VIE. If the VIE or its
shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by the VIE is indirect
and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC
law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in connection with
litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of record holder of equity interest in the VIE,
including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed
pursuant to the contractual arrangement or ownership by the record holder of the equity interest.
In the opinion of Han Kun Law Offices, our PRC legal counsel:
● the ownership structures of Shensi Beijing and the VIE will not result in any violation of applicable PRC laws or regulations currently in
effect; and
● the contractual arrangements as a whole and each of the agreements comprising the contractual arrangements are legal, valid and binding
on the parties under the PRC laws and regulations currently in effect.
However, we have been further advised by our PRC legal counsel that there are substantial uncertainties regarding the interpretation and
application of current and future PRC laws, regulations and rules. Accordingly, the PRC regulatory authorities may in the future take a view that is
contrary to or otherwise different from the above opinion of our PRC legal counsel, and there can be no assurance that the PRC government will
ultimately take a view that is consistent with the opinion of our PRC legal counsel. It is also uncertain whether any new PRC laws, regulations or
rules relating to the “variable interest entity” structure will be adopted and if adopted, what would be their impact on our contractual arrangements
with the VIE. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We depend on contractual
arrangements with the VIE and its shareholders to operate a limited part of our operations in China, which may not be as effective as direct
ownership in providing operational control” and “Item 3. Key Information—D. Risk Factors—Risks Related to Our Operations in China—If the
PRC government deems that the contractual arrangements in relation to the VIE do not comply with PRC regulatory restrictions on foreign
investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to
severe penalties or be forced to relinquish our interests in those operations.”
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D. Property, Plant and Equipment
Our principal executive offices are leased from independent third parties, and we plan to renew our lease from time to time as needed. A
summary of our leased office premises as of December 31, 2021 is included in the table below:
Location
Size (in square meters)
Hong Kong
Mainland China
United States
Singapore
Australia
1,732
32,549
767
488
180
Our servers are hosted in leased internet data centers in different geographic regions in Hong Kong, Mainland China, Singapore and the U.S.
We typically enter into leasing and hosting service agreements with these internet data center providers that are renewed periodically. We believe
that our existing facilities are sufficient for our current needs, and we will obtain additional facilities, principally through leasing, to accommodate
our future expansion plans.
Item 4A. Unresolved Staff Comments
None.
Item 5. Operating and Financial Review and Prospects
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated
financial statements and the related notes included elsewhere in this annual report. This discussion contains forward-looking statements that
involve risks and uncertainties about our business and operations. Our actual results and the timing of selected events may differ materially from
those anticipated in these forward-looking statements as a result of various factors, including those we describe under “Item 3. Key Information—
D. Risk Factors” and elsewhere in this annual report.
A. Operating Results
Key Factors Affecting Our Results of Operations
Our business and results of operations are influenced by general factors affecting the online retail brokerage industry in the regions we operate,
including the overall economic, regulatory and market conditions, level of per capita disposable income in these regions, and the growth of the
online brokerage and related services markets. In particular, as our securities brokerage business depends heavily on trading volume, our financial
performance is highly dependent on the market conditions in which our business operates. Changes in market conditions can have a significant
impact on investor sentiment and trading volume, resulting in fluctuation in brokerage commission and fee income. Our margin financing business
is subject to influences from market factors such as market liquidity, interest rate as well as investor sentiment.
In addition, our business and results of operations are also affected by factors driving online brokerage demand from Hong Kong, Mainland
China, Singapore and the U.S., such as the increasing number of affluent middle class residents, the growing number of retail investors having
interests and needs in investing securities in global capital markets, the usage and penetration rate of the internet and mobile internet, the changing
investor preferences with respect to trading and investment platforms and the competitive environment, governmental policies and regulatory
environment. Unfavorable changes in any of these general factors could negatively affect demand for our services and materially and adversely
affect our results of operations.
While our business is influenced by general factors affecting our industry, our results of operations are more directly affected by certain
company specific factors, including:
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Brand awareness and market position
We are now a market leader and a go-to brand for retail securities trading. Our ability to strengthen our brand recognition and maintain our
current market position is crucial for us to build and maintain relationships with our users and business partners and revenue growth. We have
proven to be a trustworthy and reliable platform for our clients, which enabled us to achieve consistent and high growth in key aspects of our
operation, and in turn further solidified our leadership. In order to strengthen our brand recognition and maintain market leadership, we strive to
increase the engagement and loyalty of our clients and enhance the competitiveness and attractiveness of our platform by offering superior
investing experience, insightful market intelligence and social connectivity. The number of our paying clients increased from 198,382 as of
December 31, 2019 to 516,721 as of December 31, 2020, and further to 1,244,222 as of December 31, 2021. Our total client asset balance
increased from HK$87.1 billion as of December 31, 2019 to HK$285.2 billion as of December 31, 2020, and further to HK$407.8 billion (US$52.3
billion) as of December 31, 2021. We will continue to promote our brand name among our target client groups and enhance our appeal across
different demographics.
Trading activities of our client and commission rate
Growth in the trading volume on our platforms is the key driver of our revenue growth, which is in turn driven by total client asset balance and
turnover of trading volume over client assets. The trading volume facilitated by our platforms was HK$872.7 billion, HK$3,463.6 billion and
HK$6,138.9 billion (US$787.1 billion) in 2019, 2020 and 2021, respectively. Our total client asset balance is affected by a number of factors,
including, primarily, the number of our paying clients and to a lesser extent, the level of per capita disposable income as well as the engagement
and loyalty of our clients. We plan to continue to grow our business organically by attracting new clients, retaining existing clients and increasing
our total client asset balance, and to improve the turnover of trading volume over client asset by introducing new products and services on our
platforms and providing high-quality, reliable and convenient online brokerage and ancillary services to investors at low costs. In addition to
trading volume, our brokerage commission and handling charge income is also affected by the commission rate we charge. During the years ended
December 31, 2019, 2020 and 2021, we offered competitive commission rates to drive our growth and profitability.
Margin financing and securities lending balance and interest spread
To provide our investors with comprehensive investment services, we offer margin financing and securities lending services on our platforms.
Since then, benefiting from our high-growth client base, increasingly attractive products and broader financing partners network, our margin
financing and securities lending businesses have grown rapidly. Our daily average margin financing and securities lending balance grew
significantly from HK$4.2 billion in 2019 to HK$9.3 billion in 2020, and further grew to HK$29.7 billion (US$3.8 billion) in 2021. The increase in
our daily average margin financing and securities lending balance has been primarily driven by the increase in the number of margin financing and
securities lending clients. In 2021, we provided margin financing services and securities lending services to 382,018 and 46,302 clients,
respectively. The margin financing and securities lending balance is also affected by factors including client asset balance, margin financing and
securities lending balance as a percentage of client assets, expansion of overseas markets and our ability to continue to secure funding and
securities from third parties. Interest income derived from our margin financing and securities lending businesses as a percentage of revenues was
24.4%, 17.3% and 29.8% in 2019, 2020 and 2021, respectively.
The net interest income from our margin financing and securities lending businesses is affected by our margin financing and securities lending
balance, as well as annualized interest rates and interest spread we earn from margin financing and securities lending. We have benefited from the
increase in client demand for margin financing and securities lending services, which in turn strengthened our bargaining power against third-party
funding and securities lenders and allowed us to optimize interest expenses. To continue to expand our margin financing and securities lending
businesses, we plan to deepen our cooperation with third-party funding and securities lenders as well as allocate our own capital to increase the
funds available. As a publicly listed company, we are perceived as a strong debtor by market and have received a “BBB-” credit rating from S&P
Global Ratings. The market condition may change from time to time and our ability to manage our capital effectively is crucial for our margin
financing and securities lending businesses. We have established liquidity policies to support the growth of our margin financing business while
ensuring sufficient capital reserve is maintained to meet operational needs and comply with applicable regulatory requirements.
We have also been developing and offering innovative solutions for our clients who wish to lend their securities, such as our stock yield
enhancement program. Our revenue growth will be affected by our ability to effectively execute these initiatives and increase our margin financing
and securities lending balance and interest spread.
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Ability to broaden service offerings and expand in various markets
Our results of operations are also affected by our ability to invest in and develop new service offerings and further penetrate our client base.
We currently derive a substantial portion of our revenues from our securities brokerage and margin financing and securities lending businesses, and
as a result, our profitability depends largely on the performance of these businesses. While we expect our brokerage commission and handling
charge income and interest income to increase and continue to be a major source of our revenues in the future, we also expect to increase the
revenue contribution from other businesses with relatively higher profit margins, such as our wealth management services and corporate services.
We also intend to further broaden our financial services footprint and launch new products and services, including more mutual funds, fixed
income products, and derivatives, as well as other value-added services including market data and information, social community.
Our great success in the Hong Kong market laid a solid foundation for our international expansion into various markets. We launched
moomoo, the international version of Futubull, in the U.S. and Singapore as our first steps. Further, our platforms are fully-licensed to conduct
securities brokerage, wealth management and other financial services across various markets. As of December 31, 2021, we held 44 licenses,
registrations and memberships across Hong Kong, Singapore, the U.S., Australia and Europe.
We believe that our comprehensive offering of financial products and services and our strong technology capability in developing new products
and services will allow us to capture new market opportunities. In addition, our ability to expand into various markets will enable us to respond to
changes in the different markets in terms of client demand and client preferences to remain competitive.
Investment in technology and talent
Our technology is critical for us to retain and attract clients. We have made significant investments into our one-stop financial technology
platforms, which have evolved into a highly-automated, multi-product, multi-market, closed-loop proprietary technology infrastructure that drives
every function of our business including trading, risk management, clearing, market data, news feeds and social functions. We will continue to
make significant investments in research and development and technology to enhance our platforms to address the diverse needs of our clients and
improve operating efficiency. Aiming to transform and improve the investing experience for the upcoming generation of investors, we intend to
focus on developing a comprehensive range of innovative applications, products and services aimed at providing more convenience to clients and
improving our user experience, service quality and system efficiency. In addition, there is a strong demand in online retail brokerage industry for
talented and experienced personnel. We must recruit, retain and motivate talented employees while controlling our personnel-related expenses,
including share-based compensation expenses.
Operating leverage and operating efficiency
Our results of operations depend on our ability to manage our costs and expenses. We expect our costs and expenses to continue to increase as
we grow our business and attract more clients to our platforms. However, we believe our platforms have significant operating leverage, which
enables us to realize cost savings structurally. We have built secure and scalable brokerage platforms that are fully digitalized and support the full
transaction lifecycle from the front-end to the back-office through our proprietary cloud-based technology, which in turn allows us to efficiently
manage our operating expenses. We believe our proprietary and modularized technology infrastructure has been fully funded, enabling us to bring
in new products and enter new markets with moderate investment and marginal cost. As a result, the costs associated with the operation of our
platforms as well as our operating expenses do not increase in line with our revenues as we do not require a proportional increase in the size of our
workforce to support our growth.
In addition, by leveraging the client insights we generate from our large client base, we are able to attract corporate clients to utilize our
distribution solution, public relations, brand promotion services, ESOP and other corporate services, which in turn generates strong demand for our
brokerage and margin financing services from retail clients. The provision of ESOP and other corporate services to our corporate clients is also an
innovative and efficient acquisition channel for our brand to reach quality retail investors, which indirectly allow us to tap into the onshore market
at a lower cost. The scale, demographics and depth of engagement of our client base also translate to high lifetime values. As our business further
grows in scale, we believe our massive scale, coupled with the network effects, will allow us to acquire clients more cost-effectively and benefit
from substantial economies of scale.
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Key Components of Results of Operations
Revenues
We generate revenues primarily from our online brokerage and margin financing services. The following table sets forth the components of our
revenues by amounts and percentages of our total revenues for the years presented:
2019
HK$
%
For the Year Ended December 31,
2020
HK$
%
(in thousands, except for percentages)
HK$
2021
US$
%
Revenues:
Brokerage commission and handling charge income
Interest income
Other income
Total revenues
Brokerage commission and handling charge income
511,365
464,903
85,287
1,061,555
48.2
43.8
8.0
100.0
1,990,138
965,627
355,057
3,310,822
60.1
29.2
10.7
100.0
3,913,027
2,518,198
684,095
7,115,320
501,696
322,862
87,709
912,267
55.0
35.4
9.6
100.0
Brokerage commission income primarily consists of commissions and execution fees from our clients for whom we act as executing and
clearing brokers. We generate commissions and execution fees on securities brokerage by trading equities and equity-linked derivatives on behalf
of our clients. Handling charge income primarily consists of fees from clearing and settlement services as well as subscription and dividend
collection handling services.
Interest income
Interest income primarily consists of interest income from (i) margin financing, (ii) bank deposit, (iii) IPO financing, namely arranging the
financing for our clients in connection with their subscriptions in initial public offerings, and (iv) securities lending services.
Other income
Other income primarily consists of (i) enterprise public relations service charge income, (ii) underwriting fee income, (iii) IPO subscription
service charge income, (iv) funds distribution service income, (v) currency exchange service income, (vi) market information and data income, and
(vii) ESOP management service income. We generate enterprise public relations service charge income by providing institutional clients with
public relations and investor relations services, including distributing company information and news and providing communication channels with
retail investors. We generate underwriting fee income in our investment banking business primarily by providing equity underwriting to corporate
issuers. We generate IPO subscription service charge income from provision of new share subscription services in relation to IPOs in the Hong
Kong capital market. We generate funds distribution service income from our wealth management business. We generate currency exchange
service income from providing currency exchange services to our paying clients. We generate market information and data income primarily by
providing fee-based market data services to users and clients. We generate ESOP management service income by providing ESOP administration
service.
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Costs
The following table sets forth the components of our costs by amounts and percentages of costs for the years presented:
Costs:
Brokerage commission and handling charge expenses
Interest expenses
Processing and servicing costs
Total costs
Brokerage commission and handling charge expenses
For the Year Ended December 31,
2019
2020
2021
HK$
%
HK$
%
HK$
US$
%
(in thousands, except for percentages)
100,550
89,238
91,916
281,704
35.7
31.7
32.6
100.0
361,486
185,090
149,378
695,954
51.9
26.6
21.5
100.0
572,159
376,902
257,003
1,206,064
73,357
48,323
32,951
154,631
47.4
31.3
21.3
100.0
Brokerage commission and handling charge expenses consist of fees charged by executing brokers in the U.S. as we transact with them,
expenses charged by stock exchanges or executing brokers for our use of their clearing and settlement systems and expenses charged by
commercial banks or stock exchanges for providing clearing and settlement services in connection with IPO subscriptions.
Interest expenses
Interest expenses primarily consist of interest expenses of borrowings from commercial banks, other licensed financial institutions and other
parties to fund our margin financing business, securities lending service and IPO financing businesses.
Processing and servicing costs
Processing and servicing costs consist of market information and data fees, data transmission fees, cloud service fees, system cost and SMS
service fees paid to stock exchanges and data and other service providers.
Operating expenses
The following table sets forth the components of our operating expenses by amounts and percentages of operating expenses for the years
presented:
2019
HK$
%
For the Year Ended December 31,
2020
HK$
%
(in thousands, except for percentages)
HK$
2021
US$
%
Operating expenses:
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Total operating expenses
262,345
164,701
164,850
591,896
44.3
27.8
27.9
100.0
513,283
385,320
248,404
1,147,007
44.7
33.6
21.7
100.0
805,325
1,392,070
529,048
2,726,443
103,252
178,480
67,830
349,562
29.5
51.1
19.4
100.0
Research and development expenses. Research and development expenses consist of expenses related to developing service platforms,
including website, mobile apps and other products, as well as payroll and welfare, rental expenses and other related expenses for our research and
development professionals.
Selling and marketing expenses. Selling and marketing expenses consist primarily of advertising and promotion costs, as well as payroll, rental
and related expenses for selling and marketing personnel. Advertising costs primarily consist of costs of online advertising and offline promotional
events.
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General and administrative expenses. General and administrative expenses consist of payroll, rental, and related expenses for employees
involved in general corporate functions, including senior management, finance, legal and human resources, expenses for third-party professional
agents, costs associated with use of facilities and equipment and other general corporate related expenses.
Taxation
Cayman Islands
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no
taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman
Islands except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the
Cayman Islands. In addition, the Cayman Islands does not impose withholding tax on dividend payments.
Hong Kong
Our subsidiaries incorporated in Hong Kong, such as Futu Securities (Hong Kong) Limited, Futu Financial Limited, Futu Lending Limited,
Futu Network Technology Limited and Futu Securities International (Hong Kong) Limited, are subject to Hong Kong profit tax on their profits
arising from their business operations carried out in Hong Kong. Hong Kong profits tax for a corporation from the year of assessment 2018/2019
onwards is generally 8.25% on assessable profits up to HK$2.0 million; and 16.5% on any part of assessable profits over HK$2.0 million. Under
the Hong Kong Inland Revenue Ordinance, profits that we derive from sources outside of Hong Kong are generally not subject to Hong Kong
profits tax. In addition, payments of dividends from our Hong Kong subsidiaries to us are not subject to any Hong Kong withholding tax.
The United States
The Tax Cuts and Jobs Act of 2017 significantly revised the U.S. corporate income tax law. Changes include a reduction in the federal
corporate tax, changes to operating loss carry-forwards and carrybacks, and a repeal of the corporate alternative minimum tax. This legislation
resulted in a reduction of the U.S. federal corporate income tax rates from a maximum of 35% to 21%, to which our subsidiaries incorporated in
the United States are subject.
Singapore
Our subsidiaries incorporated in Singapore are subject to an income tax rate of 17% for taxable income earned in Singapore. Singapore does
not impose a withholding tax on dividends for resident companies. In the years ended December 31, 2019 and 2020 and 2021, we did not incur any
Singapore income tax as there was no estimated assessable profit that was subject to Singapore income tax.
PRC
Generally, our PRC subsidiaries, VIE and its subsidiaries are subject to enterprise income tax on their taxable income in China at a statutory
rate of 25%. Our wholly-owned PRC subsidiary Futu Network Technology (Shenzhen) Co., Ltd. and the VIE Shenzhen Futu are recognized as
“High and New Technology Enterprises” and eligible for a preferential income tax rate of 15% with a valid period of three years starting from 2019
and 2020, respectively. The enterprise income tax is calculated based on the entity’s global income as determined under PRC tax laws and
accounting standards.
We are subject to value-added tax at a rate of 6% for the income arising from providing financial technology services to our clients in China.
We are also subject to surcharges on value-added tax payments in accordance with PRC law.
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Dividends paid by our wholly foreign-owned subsidiary in China to our intermediary holding company in Hong Kong will be subject to a
withholding tax rate of 10%, unless the relevant Hong Kong entity is determined by the competent PRC tax authority that it satisfies all the
requirements under the Arrangement between China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and
Prevention of Fiscal Evasion with respect to Taxes on Incomes. If our Hong Kong subsidiary is determined by the competent PRC tax authority
that it satisfies all the requirements under the tax arrangement, then the dividends paid to the Hong Kong subsidiary would be subject to
withholding tax at the standard rate of 5%. However, based on the Circular on Certain Issues with Respect to the Enforcement of Dividend
Provisions in Tax Treaties, or the SAT Circular 81, issued by the SAT, if the relevant PRC tax authorities determine, in their discretions, that a
company benefits from such reduced income tax rate due to a structure or arrangement that is primarily tax-driven, such PRC tax authorities may
adjust the preferential tax treatment. Moreover, a Hong Kong entity is required to file an application package with the relevant tax authority, and
settle the overdue taxes if the preferential tax rate of 5% is denied based on the subsequent review of the application package by the relevant tax
authority.
If our holding company in the Cayman Islands or any of our subsidiaries outside of China were deemed to be a “resident enterprise” under the
PRC Enterprise Income Tax Law, it would be subject to enterprise income tax on its worldwide income at a rate of 25%. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Operations in China—We may be treated as a resident enterprise for PRC tax purposes under
the PRC Enterprise Income Tax Law, and we may therefore be subject to PRC income tax on our global income.”
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Results of Operations
The following table sets forth a summary of our consolidated results of operations for the years presented, both in absolute amount and as a
percentage of our revenues for the years presented. This information should be read together with our consolidated financial statements and related
notes included elsewhere in this annual report. The results of operations in any year are not necessarily indicative of our future trends.
2019
HK$
%
For the Year Ended December 31,
2020
HK$
%
(in thousands, except for percentages)
HK$
2021
US$
%
Revenues
Brokerage commission and handling charge income
Interest income
Other income
Total revenues
Costs
Brokerage commission and handling charge expenses
Interest expenses
Processing and servicing costs
Total costs
Total gross profit
Operating expenses
Research and development expenses(1)
Selling and marketing expenses(1)
General and administrative expenses(1)
Total operating expenses
Others, net (2)
Income before income tax expense
Income tax expense
Share of loss from equity method investment
Net income
Notes:
511,365
464,903
85,287
1,061,555
48.2
43.8
8.0
100.0
1,990,138
965,627
355,057
3,310,822
60.1
29.2
10.7
100.0
3,913,027
2,518,198
684,095
7,115,320
501,696
322,862
87,709
912,267
55.0
35.4
9.6
100.0
(100,550)
(89,238)
(91,916)
(281,704)
779,851
(262,345)
(164,701)
(164,850)
(591,896)
(9,462)
178,493
(12,286)
(543)
165,664
(9.5)
(8.4)
(8.7)
(26.6)
73.4
(24.7)
(15.5)
(15.5)
(55.7)
(0.9)
16.8
(1.2)
(0.1)
15.5
(361,486)
(185,090)
(149,378)
(695,954)
2,614,868
(513,283)
(385,320)
(248,404)
(1,147,007)
(17,238)
1,450,623
(124,793)
(307)
1,325,523
(10.9)
(5.6)
(4.5)
(21.0)
79.0
(15.5)
(11.6)
(7.5)
(34.6)
(0.5)
43.8
(3.8)
(0.0)
40.0
(572,159)
(376,902)
(257,003)
(1,206,064)
5,909,256
(73,357)
(48,323)
(32,951)
(154,631)
757,636
(805,325)
(1,392,070)
(529,048)
(2,726,443)
2,478
3,185,291
(375,081)
—
2,810,210
(103,252)
(178,480)
(67,830)
(349,562)
318
408,392
(48,090)
—
360,302
(8.0)
(5.3)
(3.6)
(16.9)
83.1
(11.3)
(19.6)
(7.4)
(38.3)
(0.0)
44.8
(5.3)
—
39.5
(1) Share-based compensation expenses were allocated as follows:
2019
HK$
For the Year Ended December 31,
2021
2020
HK$
HK$
US$
Selling and marketing expenses
Research and development expenses
General and administrative expenses
(in thousands)
538
12,055
3,374
1,640
20,579
10,354
9,138
75,755
14,020
1,172
9,713
1,798
(2) Effective from January 1, 2020, we adopted FASB ASC Topic 326—“Financial Instruments—Credit Losses,” or ASC Topic 326 which
replaced the incurred loss methodology with the current expected credit loss methodology. We adopted ASC Topic 326 using the modified
retrospective approach for all in-scope assets. For the year ended December 31, 2020 and 2021, expected credit loss expenses of HK$9.1
million and HK$3.2 million (US$0.4 million) resulting from the assessment of credit losses for the loans and advances under ASC Topic 326
was recognized in Others, net.
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Year ended December 31, 2021 compared to year ended December 31, 2020
Revenues
Total revenues were HK$7,115.3 million (US$912.3 million) in 2021, an increase of 114.9% from HK$3,310.8 million in 2020.
Brokerage commission and handling charge income. Brokerage commission and handling charge income was HK$3,913.0 million (US$501.7
million) in 2021, an increase of 96.6% from HK$1,990.1 million in 2020. The increase was mainly due to the 77.2% year-over-year increase in
trading volume and higher blended commission rate. The increase in our trading volume from HK$3,463.6 billion in 2020 to HK$6,138.9 billion
(US$787.1 billion) in 2021 was primarily driven by the growth of our paying client base. The number of our paying clients was 1,244,222 as of
December 31, 2021, up 140.8% from 516,721 as of December 31, 2020. The blended commission rate increased from 5.7bps in 2020 to 6.4bps in
2021.
Interest income. Interest income was HK$2,518.2 million (US$322.9 million) in 2021, an increase of 160.8% from HK$965.6 million in 2020.
Interest income derived from margin financing increased by 245.5% from HK$498.0 million in 2020 to HK$1,720.5 million (US$220.6 million) in
2021, which was mainly attributable to the increase in daily average margin financing balance by 240.5% from HK$8.4 billion in 2020 to HK$28.6
billion (US$3.7 billion) in 2021. Interest income derived from securities lending increased by 438.6% from HK$73.8 million in 2020 to HK$397.5
million (US$51.0 million) in 2021, which was mainly attributable to higher contribution from our securities lending business with financial
institutions as a result of larger business scale. Interest income derived from IPO financing was up 8.9% from HK$184.2 million in 2020 to
HK$200.6 million (US$25.7 million) in 2021.
Other income. Other income was HK$684.1 million (US$87.7 million), an increase of 92.6% from HK$355.1 million in 2020. The growth was
primarily due to an increase in currency exchange service income, enterprise public relationship service charge income and underwriting fee
income.
Costs
Total costs were HK$1,206.1 million (US$154.6 million) in 2021, an increase of 73.3% from HK$696.0 million in 2020.
Brokerage commission and handling charge expenses. Brokerage commission and handling charge expenses were HK$572.2 million
(US$73.4 million) in 2021, an increase of 58.3% from HK$361.5 million in 2020. The rise was due to the growth of our trading volume. The
expenses did not grow in tandem with brokerage commission and handling charges income due to an upgraded service package with our U.S.
clearing house.
Interest expenses. Interest expenses were HK$376.9 million (US$48.3 million) in 2021, an increase of 103.6% from HK$185.1 million in
2020. The increase was primarily due to higher margin financing interest expenses and higher expenses associated with our securities lending
business. Interest expenses for margin financing did not rise in tandem with margin financing interest income due to lower funding costs.
Processing and servicing costs. Processing and servicing costs were HK$257.0 million (US$33.0 million) in 2021, an increase of 72.0% from
HK$149.4 million in 2020. The increase was primarily due to the increase in cloud service fee and data transmission fee to enhance our IT
infrastructure.
Gross profit
As a result of the foregoing, our total gross profit increased by 126.0% from HK$2,614.9 million in 2020 to HK$5,909.3 million (US$757.6
million) in 2021. Our gross profit margin increased from 79.0% in 2020 to 83.1% in 2021, primarily attributable to an upgraded service package
with our U.S. clearing house and higher operating leverage as a result of our larger business scale.
Operating expenses
Total operating expenses were HK$2,726.4 million (US$349.6 million) in 2021, an increase of 137.7% from HK$1,147.0 million in 2020. The
increase was primarily due to the increase in research and development expenses, selling and marketing expenses and general and administrative
expenses as a result of our business growth.
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Research and development expenses. Research and development expenses were HK$805.3 million (US$103.3 million) in 2021, an increase of
56.9% from HK$513.3 million in 2020. The increase was primarily due to an increase in research and development headcount to support new
product offerings, build U.S. clearing capabilities, and provide more customized product experiences in international markets.
Selling and marketing expenses. Selling and marketing expenses were HK$1,392.1 million (US$178.5 million) in 2021, an increase of 261.3%
from HK$385.3 million in 2020. The increase was primarily due to higher branding and marketing expenses in 2021, especially in international
markets.
General and administrative expenses. Our general and administrative expenses were HK$529.0 million (US$67.8 million) in 2021, an increase
of 113.0% from HK$248.4 million in 2020. The increase was primarily due to an increase in headcount for general and administrative personnel.
Income tax expense
We had income tax expense of HK$375.1 million (US$48.1 million) in 2021, compared to HK$124.8 million in 2020, primarily due to the
119.6% year-over-year increase in our income before income tax expense.
Net income
As a result of the foregoing, we had net income of HK$2,810.2 million (US$360.3 million) in 2021, compared to HK$1,325.5 million in 2020.
Year ended December 31, 2020 compared to year ended December 31, 2019
Revenues
Total revenues were HK$3,310.8 million (US$427.0 million) in 2020, an increase of 211.9% from HK$1,061.6 million in 2019.
Brokerage commission and handling charge income. Brokerage commission and handling charge income was HK$1,990.1 million (US$256.7
million) in 2020, an increase of 289.1% from HK$511.4 million in 2019. The increase was mainly attributable to the 296.9% year-over-year
growth of total trading volume from HK$872.7 billion in 2019 to HK$3,463.6 billion (US$446.7 billion) in 2020. The increase in our total trading
volume was primarily driven by the growth of our paying client base and their increased trading activities. The number of our paying clients was
516,721 as of December 31, 2020, up 160.5% from 198,382 as of December 31, 2019. On average, a client who traded in 2020 executed over 189
trades with a total trading volume of HK$7.6 million (US$1.0 million), compared to over 167 trades with a total trading volume of HK$5.6 million
in 2019.
Interest income. Interest income was HK$965.6 million (US$124.5 million) in 2020, an increase of 107.7% from HK$464.9 million in 2019.
Interest income derived from margin financing and securities lending increased by 120.9% from HK$258.9 million in 2019 to HK$571.8 million
(US$73.7 million) in 2020, which was mainly attributable to the increase in daily average margin financing and securities lending balance by
121.8% from HK$4,209.2 million in 2019 to HK$9,335.5 million (US$1,204.1 million) in 2020. Interest income derived from bank deposit
increased by 11.4% from HK$187.2 million in 2019 to HK$208.6 million (US$26.9 million) in 2020, which was mainly attributable to the increase
in daily average balance of client cash deposit by 158.7% from HK$12.6 billion in 2019 to HK$32.6 billion (US$4.2 billion) in 2020, partially
offset by the decrease of market interest rates. Interest income derived from IPO financing was up 13.5 times from HK$12.7 million in 2019 to
HK$184.2 million (US$23.8 million) in 2020, which was mainly attributable to an active Hong Kong IPO market.
Other income. Other income was HK$355.1 million (US$45.8 million), an increase of 316.3% from HK$85.3 million in 2019. The growth was
primarily due to an increase in our IPO subscription service charge income, currency exchange service income and funds distribution service
income.
Costs
Total costs were HK$696.0 million (US$89.8 million) in 2020, an increase of 147.1% from HK$281.7 million in 2019.
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Brokerage commission and handling charge expenses. Brokerage commission and handling charge expenses were HK$361.5 million
(US$46.6 million) in 2020, an increase of 259.3% from HK$100.6 million in 2019, in line with the increases in our total trading volume and
brokerage commission and handling charge income.
Interest expenses. Interest expenses were HK$185.1 million (US$23.9 million) in 2020, an increase of 107.5% from HK$89.2 million in 2019.
The increase in interest expenses was primarily due to the increase in interest expenses for IPO financing business, as well as the increase of our
interest bearing borrowings balances, partially offset by the decrease of market interest rates.
Processing and servicing costs. Processing and servicing costs were HK$149.4 million (US$19.3 million) in 2020, an increase of 62.6% from
HK$91.9 million in 2019. The increase was primarily due to the increase in cloud service fee, market information and data fee as well as data
transmission fee to support a larger business scale.
Gross profit
As a result of the foregoing, our total gross profit increased by 235.3% from HK$779.9 million in 2019 to HK$2,614.9 million (US$337.3
million) in 2020. Our gross profit margin increased from 73.5% in 2019 to 79.0% in 2020, primarily attributable to higher operating leverage as a
result of our larger business scale and improved operating efficiency, as well as higher net interest margin in 2020.
Operating expenses
Total operating expenses were HK$1,147.0 million (US$147.9 million) in 2020, an increase of 93.8% from HK$591.9 million in 2019. The
increase was primarily due to the increase in research and development expenses, selling and marketing expenses and general and administrative
expenses as a result of our business growth.
Research and development expenses. Research and development expenses were HK$513.3 million (US$66.2 million) in 2020, an increase of
95.7% from HK$262.3 million in 2019. The increase was primarily due to the continued increase in research and development headcount to
support our business growth.
Selling and marketing expenses. Selling and marketing expenses were HK$385.3 million (US$49.7 million) in 2020, an increase of 133.9%
from HK$164.7 million in 2019. The increase was primarily due to higher branding and marketing expenses in 2020.
General and administrative expenses. Our general and administrative expenses were HK$248.4 million (US$32.0 million) in 2020, an increase
of 50.6% from HK$164.9 million in 2019. The increase was primarily due to an increase in headcount for general and administrative personnel.
Income tax expense
We had income tax expense of HK$124.8 million (US$16.1 million) in 2020, compared to HK$12.3 million in 2019, primarily due to the
712.7% year-over-year increase in our income before income tax expense.
Net income
As a result of the foregoing, we had net income of HK$1,325.5 million (US$171.0 million) in 2020, compared to HK$165.7 million in 2019.
B. Liquidity and Capital Resources
To date, we have financed our operating and investing activities through net proceeds from our securities offerings, cash generated from
operating activities, historical equity financing activities and credit facilities provided by commercial banks, other licensed financial institutions
and other parties. As of December 31, 2019, 2020 and 2021, respectively, our cash and cash equivalents were HK$362.6 million, HK$1,034.7
million and HK$4,555.1 million (US$584.0 million). Our cash and cash equivalents primarily consist of cash on hand, demand deposits and time
deposits with initial terms of less than three months placed with banks or other financial institutions, which are unrestricted for withdrawal or use,
and which have original maturities of three months or less.
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We believe that our current cash and cash equivalents and our anticipated cash flows from operations will be sufficient to meet our anticipated
working capital requirements and material cash requirements for at least the next 12 months. In the future, we may decide to enhance our liquidity
position or increase our cash reserve for future investments through additional capital and finance funding. The issuance and sale of additional
equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations and could
result in operating covenants that would restrict our operations. We cannot assure you that financing will be available in amounts or on terms
acceptable to us, if at all.
As of December 31, 2021, our cash and cash equivalents were HK$4,555.1 million (US$584.0 million), out of which HK$121.2 million
(US$15.5 million) was held in Renminbi, HK$4,111.5 million (US$527.1 million) was held in U.S. dollars, HK$187.5 million (US$24.0 million)
was held in Hong Kong dollars, HK$121.5 million (US$15.6 million) was held in Singapore dollars, and HK$12.9 million (US$1.7 million) was
held in Australian dollars. We closely monitor our cash balance and future payments obligations by preparing monthly cash balance and fund
requirement reports to provide a timely overview of our overall cash position and liquidity and risk control measurements. Such reports will be
reviewed by our chief financial officer and our financial controller. For surplus funds, we have an internal process to determine how to deploy such
funds based on a variety of factors, such as our short-term payment obligations, fund safety, liquidity and profitability. In order to maintain
flexibility in anticipation of cash needs, we generally deploy our surplus funds either into short-term bank deposits or to purchase certain available-
for-sale financial securities, such as low-risk financial products issued by local commercial banks.
As of December 31, 2021, 1.4% of our cash and cash equivalents were held in China, and 0.1% were held by the VIE. Although we
consolidate the results of the VIE and its subsidiaries, we only have access to the assets or earnings of the VIE and its subsidiaries through our
contractual arrangements with the VIE and its shareholders. See “Item 4. Information on the Company—C. Organizational Structure—Contractual
Arrangements with the VIE and Its Shareholders.” For restrictions and limitations on liquidity and capital resources as a result of our corporate
structure, see “—Holding Company Structure.”
In utilizing the proceeds we received from our securities offerings, we may make additional capital contributions to our PRC subsidiaries,
establish new PRC subsidiaries and make capital contributions to these new PRC subsidiaries, make loans to our PRC subsidiaries, or acquire
offshore entities with operations in China in offshore transactions. However, most of these uses are subject to PRC regulations. See “Item 3. Key
Information—D. Risk Factors—Risks Related to Our Operations in China—PRC regulation of loans to and direct investment in PRC entities by
offshore holding companies and governmental control of currency conversion may delay or prevent us from using the proceeds of our securities
offerings to make loans or additional capital contributions to our PRC subsidiaries and the VIE and its subsidiaries”.
We expect that a limited portion of our future revenues will be denominated in Renminbi. Under existing PRC foreign exchange regulations,
payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions,
can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC
subsidiaries are allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural
requirements. However, approval from or registration with competent government authorities is required where the Renminbi is to be converted
into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The
PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future.
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Regulatory Capital Requirements
Our broker-dealer and insurance-broker subsidiaries, Futu Securities International (Hong Kong) Limited, Futu Inc., Futu Clearing Inc., Futu
Singapore Pte. Ltd., Futu Insurance Brokers (Hong Kong) Limited and Futu Securities (Australia) Ltd are subject to capital requirements
determined by their respective regulators. Futu Securities International (Hong Kong) Limited, our subsidiary located in Hong Kong, is subject to
the Securities and Futures (Financial Resources) Rules and the Securities and Futures Ordinance, and Futu Securities International (Hong Kong)
Limited is required to maintain minimum paid-up share capital and liquid capital. Futu Inc. and Futu Clearing Inc., our subsidiaries located in the
United States, are subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act, which requires the maintenance of minimum net
capital. Futu Singapore Pte. Ltd., our subsidiary located in Singapore, is subject to the base capital requirement applicable to Futu Singapore Pte.
Ltd. under the SF(FMR)R. Futu Insurance Brokers (Hong Kong) Limited, our subsidiary located in Hong Kong, is subject to the Insurance
(Financial and Other Requirements for Licensed Insurance Broker Companies) Rules, and is required to maintain minimum paid-up share capital
and net asset. Futu Securities (Australia) Ltd, our subsidiary located in Australia, is subject to Regulatory Guide 166 Licensing: Financial
requirements, which requires the maintenance of surplus liquid funds when licensees hold client money or property. As of December 31, 2021,
Futu Securities (Australia) Ltd has not held any client money and property.
The table below summarizes the net capital, the requirement and the excess capital for our broker-dealer and insurance broker subsidiaries as
of December 31, 2021:
Futu Securities International (Hong Kong) Limited
Futu Inc.
Futu Clearing Inc.
Futu Singapore Pte. Ltd.
Futu Insurance Brokers (Hong Kong) Limited
Net Capital/
Eligible Equity
As of December 31, 2021
Requirement
(HK$ in thousands)
6,666,092
149,871
3,308,395
345,424
1,718
1,631,080
22,560
97,565
156,646
500
Excess
5,035,012
127,311
3,210,830
188,778
1,218
Where the relevant operating subsidiaries do not meet regulatory capital requirements, such subsidiaries may be faced with certain operational
restrictions, including cessation of carrying on of business in any or all of the regulated activities permitted under their respective licenses.
As of December 31, 2019, 2020 and 2021, all of the regulated operating subsidiaries were in compliance with their respective regulatory
capital requirements.
Cash Flows
The following table sets forth a summary of our cash flows for the periods presented:
Summary Consolidated Cash Flow Data:
Net cash generated from operating activities
Net cash used in investing activities
Net cash generated from financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the year
Cash, cash equivalents and restricted cash at end of the year
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For the Year Ended December 31,
2019
HK$
2020
HK$
2021
HK$
US$
(in thousands)
1,969,434
(160,057)
1,151,622
(44,666)
2,916,333
11,987,104
14,903,437
20,456,717
(244,175)
8,406,896
(1,117)
28,618,321
14,903,437
43,521,758
6,011,971
(963,565)
10,554,218
167,130
15,769,754
43,521,758
59,291,512
770,803
(123,539)
1,353,174
21,428
2,021,866
5,579,999
7,601,865
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Operating activities
Net cash generated from operating activities in 2021 was HK$6.0 billion (US$0.8 billion), as compared to net income of HK$2.8 billion
(US$0.4 billion) in the same year. The difference was primarily due to net increases of HK$16.1 billion (US$2.1 billion) in accounts payable to
clients and brokers, partially offset by net increase of HK$1.8 billion (US$0.2 billion) in accounts receivable from clients and brokers and net
increase of HK$10.8 billion (US$1.4 billion) in loans and advances. The increase in accounts payable to clients and brokers was due to the increase
of cash deposits as a result of the expansion of our brokerage business. The increase of loans and advances was due to the expansion of our margin
financing business. The principal non-cash items affecting the difference between our net income and our net cash generated from operating
activities in 2021 were HK$98.9 million (US$12.7 million) in share-based compensation expenses and HK$138.2 million (US$17.7 million) in
foreign change gains.
Net cash generated from operating activities in 2020 was HK$20.5 billion (US$2.6 billion), as compared to net income of HK$1,325.5 million
(US$171.0 million) in the same year. The difference was primarily due to net increases of HK$33.7 billion (US$4.3 billion) in accounts payable to
clients and brokers and of HK$5.5 billion (US$0.7 billion) in securities sold under agreements to repurchase, partially offset by net increase of
HK$5.0 billion (US$0.7 billion) in accounts receivable from clients and brokers and net increase of HK$14.6 billion (US$1.9 billion) in loans and
advances. The increase in accounts payable to clients and brokers was due to the increase of cash deposits as a result of the expansion of our
brokerage business. The increase of loans and advances was due to the expansion of our margin financing business. The principal non-cash items
affecting the difference between our net income and our net cash generated from operating activities in 2020 were HK$32.6 million (US$4.2
million) in share-based compensation expenses and HK$27.2 million (US$3.5 million) in depreciation and amortization expenses.
Net cash generated from operating activities in 2019 was HK$2.0 billion, as compared to net income of HK$165.7 million in the same year.
The difference was primarily due to net increase of HK$3.7 billion in accounts payable to clients and brokers, partially offset by net increase of
HK$927.3 million in accounts receivable from clients and brokers and net increase of HK$1,101.8 million in loans and advances. The increase in
accounts payable to clients and brokers was due to the increase of cash deposits as a result of the expansion of our brokerage business. The increase
of loans and advances was due to the expansion of our margin financing business. The principal non-cash items affecting the difference between
our net income and our net cash generated from operating activities in 2019 were HK$16.0 million in share-based compensation expenses and
HK$16.5 million in depreciation and amortization.
Investing activities
Net cash used in investing activities in 2021 was HK$963.6 million (US$123.5 million), primarily due to purchase of short-term investments
of HK$1,169.7 million (US$150.0 million) and the purchase of property and equipment and intangible assets of HK$70.5 million (US$9.0
million), partially offset by the maturity of term deposits of HK$300.0 million (US$38.5 million).
Net cash used in investing activities in 2020 was HK$244.2 million (US$31.5 million), primarily due to the placement of term deposit of
HK$300.0 million (US$38.7 million) with initial terms of over three months and the purchase of available-for-sale financial securities of
HK$206.8 million (US$26.7 million), partially offset by the proceeds from disposal of available-for-sale financial securities of HK$306.6 million
(US$39.5 million).
Net cash used in investing activities in 2019 was HK$160.1 million, primarily due to the purchase of available-for-sale financial securities of
HK$285.8 million and the purchase of property, equipment and intangible assets of HK$118.3 million, partially offset by the proceeds from
disposal of available-for-sale financial securities of HK$250.1 million.
Financing activities
Net cash generated from financing activities in 2021 was HK$10.6 billion (US$1.4 billion), primarily attributable to proceeds of HK$53.5
billion (US$6.9 billion) from short-term borrowings and proceeds of HK$10.9 billion (US$1.4 billion) from our follow-on offering, partially offset
by repayment of short-term borrowings of HK$52.3 billion (US$6.7 billion).
Net cash generated from financing activities in 2020 was HK$8.4 billion (US$1.1 billion), primarily attributable to proceeds of HK$24.1
billion (US$3.1 billion) from short-term borrowings and proceeds of HK$4.4 billion (US$0.6 billion) from our securities offerings, including
issuance of pre-funded warrants, partially offset by repayment of short-term borrowings of HK$20.1 billion (US$2.6 billion).
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Net cash generated from financing activities in 2019 was HK$1,151.6 million, primarily attributable to proceeds of HK$6.8 billion from short-
term borrowings and proceeds of HK$1,259.3 million from our initial public offering and concurrent private placement, partially offset by
repayment of short-term borrowings of HK$6.9 billion.
Short-term Borrowings
Borrowings from:
Banks(1)
Other financial institutions
Total
Note:
As of December 31,
2019
HK$
2020
HK$
2021
HK$
US$
(in thousands)
1,467,586
—
1,467,586
5,182,620
300,198
5,482,818
6,357,405
—
6,357,405
815,094
—
815,094
(1) We have unused borrowing facilities of HK$3,326.6 million, HK$3,285.9 million and HK$14,695.1 million (US$1,884.1 million) from banks
as of December 31, 2019, 2020 and 2021, respectively, which are uncommitted. These bank borrowings were pledged by margin clients’
shares as the primary source of credit risk mitigation of the lenders, and bear floating interest rates based on various benchmarks including
Hong Kong Prime Rate, Hong Kong Interbank Offered Rate, or HIBOR, CNH HIBOR, etc.
We have entered into short-term borrowings primarily to support our margin financing business in Hong Kong. Our short-term borrowings
bear weighted average interest rates of 4.29%, 1.82% and 1.15% as of December 31, 2019, 2020 and 2021, respectively.
Other than the above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of December 31,
2021.
Operating Lease Commitments
The following table sets forth our operating lease commitments as of December 31, 2021:
Payment due by December 31,
Operating lease commitments(1)
Total
Note:
Total
2022
275,542
275,542
102,767
102,767
2023
2024
(HK$in thousands)
96,326
96,326
38,306
38,306
2025
2026
30,688
30,688
7,455
7,455
(1) Operating lease commitments consist of the commitments under the lease agreements for our office premises. We lease our office facilities
under non-cancellable operating leases with various expiration dates through June 19, 2026.
Capital Expenditures
Our capital expenditures are primarily incurred for purchase of property, equipment and intangible assets. Our capital expenditures were
HK$118.3 million in 2019, HK$44.6 million in 2020 and HK$70.5 million (US$9.0 million) in 2021. The capital expenditures in 2021 were
primarily due to the purchase of computers and equipment. We intend to fund our future capital expenditures with our existing cash balance and
proceeds from our securities offerings. We will continue to make capital expenditures to meet the expected growth of our business.
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Off-Balance Sheet Arrangements
We have entered into various off-balance sheet arrangements in the ordinary course of business, primarily to meet the needs of our clients.
These arrangements include the margin financing and securities lending agreements. The margin loans extended to the clients are collateralized by
the cash or securities pledged in clients’ accounts at a required margin level determined at our sole discretion. Securities lending transactions
require us to deposit cash collateral with the lender and receive the cash collateral from the borrower. The cash collateral is generally in excess of
the market value of the securities borrowed and lent. Increases in security prices may cause the fair value of the securities loaned to exceed the
amount of cash received as collateral. In the event the borrower of these transactions does not return the loaned securities or provide additional
cash collateral, we may be exposed to the risk of acquiring the securities at prevailing market prices in order to satisfy our obligations to return the
securities. We monitor required margin and collateral level on a daily basis in compliance with regulatory and internal guidelines and control our
risk exposure through risk management system. Under applicable agreements, clients are required to deposit additional collateral or reduce holding
positions, when necessary to avoid forced liquidation of their positions. For more information regarding the collateralized transactions, see Note 18
to our consolidated financial statements included in this annual report.
We have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected
in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated
entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that
provides liquidity, capital resources, market risk support or credit support to us or engages in leasing, hedging or product development services
with us.
Share Repurchase Program
In November 2021, our board of directors approved a share repurchase program to repurchase up to US$300 million worth of its ADSs until
December 31, 2022. As of the date of this annual report, we have repurchased US$300 million of ADSs in open market transactions in accordance
with the authorization under this share repurchase program. For additional information on the share repurchases, see “Part II—Item 16E—
Purchases of Equity Securities by the Issuer and Affiliated Purchasers.”
In March 2022, our board of directors authorized a new share repurchase program under which the company may repurchase up to US$500
million worth of its ADSs, until December 31, 2023. The company plans to fund the repurchases from its existing cash balance. Under the new
share repurchase program, the company may repurchase its ADSs from time to time in the open market at prevailing market prices, in privately
negotiated transactions, in block trades and/or through other legally permissible means, depending on market conditions and in accordance with
applicable rules and regulations. Our board of directors will review the share repurchase program periodically, and may modify, suspend or
terminate the share repurchase program at any time.
Capital Commitment
Our capital commitments are primarily related to capital contribution obligation for certain investment funds. As of December 31, 2021, total
commitments contracted but not yet reflected in the consolidated financial statements amounted to US$104 million.
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Holding Company Structure
Futu Holdings Limited is a holding company with no material operations of its own. We conduct our operations primarily through our
subsidiaries in Hong Kong, Singapore, the U.S. and the PRC, the VIE and its subsidiaries in China. As a result, Futu Holdings Limited’s ability to
pay dividends depends upon dividends paid by our subsidiaries in Hong Kong, Singapore, the U.S. and the PRC. If our existing Hong Kong,
Singapore, U.S. and PRC subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt
may restrict their ability to pay dividends to us. In addition, our wholly foreign-owned subsidiaries in China are permitted to pay dividends to us
only out of its retained earnings, if any, as determined in accordance with PRC accounting standards and regulations. Under PRC law, each of our
subsidiaries, the VIE and its subsidiaries in China is required to set aside at least 10% of its after-tax profits each year, if any, to fund certain
statutory reserve funds until such reserve funds reach 50% of their registered capital. In addition, our wholly foreign-owned subsidiaries in China
may allocate a portion of their after-tax profits based on PRC accounting standards to enterprise expansion funds and staff bonus and welfare funds
at their discretion, and the VIE may allocate a portion of its after-tax profits based on PRC accounting standards to a surplus fund at their
discretion. The statutory reserve funds and the discretionary funds are not distributable as cash dividends. Remittance of dividends by a wholly
foreign-owned company out of China is subject to examination by the banks designated by SAFE. Our PRC subsidiaries have not paid dividends
and will not be able to pay dividends until they generate accumulated profits and meet the requirements for statutory reserve funds.
C. Research and Development, Patents and Licenses, etc.
See “Item 4. Information on the Company—B. Business Overview—Technology” and “Item 4. Information on the Company—B. Business
Overview—Intellectual Property.”
D. Trend Information
Other than as disclosed elsewhere in this annual report, we are not aware of any trends, uncertainties, demands, commitments or events for the
year ended December 31, 2021 that are reasonably likely to have a material and adverse effect on our net revenues, income, profitability, liquidity
or capital resources, or that would cause the disclosed financial information not necessarily to be indicative of future results of operations or
financial conditions.
E. Critical Accounting Estimates
Our consolidated financial statements have been prepared in accordance with U.S. GAAP, which requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent liabilities in the
consolidated financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions we
believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and
liabilities. Changes in the economic environment, financial markets, and any other parameters used in determining such estimates could cause
actual results to differ. Our critical accounting estimates are described below. The critical accounting estimates should be read in conjunction with
our risk factors as disclosed in “Item 3. Key Information—D. Risk Factors.” See Note 2 to our consolidated financial statements for the year ended
December 31, 2021 for more information on our critical accounting policies.
Incentives offered in the customer loyalty program
We operate a customer loyalty program that offers to our customers a variety of incentives in the form of incentive points and coupons for
redemption of free or discounted goods or services. For the incentives generated from current sales transaction, a portion of commission income is
deferred with corresponding liability reflected as contract liability attributable to the incentives. As of December 31, 2020 and 2021, a total
contract liability of HK$8.2 million and HK$9.0 million, respectively, was recorded on the consolidated balance sheet in relation to the customer
loyalty program.
The contract liability is sensitive to expected usage and the estimated relative standalone selling price of the incentive points and coupons.
These assumptions are evaluated periodically considering historical actuals, customer redemption behavior and management judgment. Updates to
these assumptions will impact the contract liability.
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Valuation and recognition of share-based compensation arrangements
Compensation expense is recognized for all grants of share options and restricted share units. Determining the appropriate valuation model and
estimating the fair values of share option grants requires the input of subjective assumptions, including risk-free interest rate, expected stock price
volatility, dividend yields, expected term, and forfeiture rates. The expected volatility assumption is based partially upon the historical volatility of
our ordinary shares, which may or may not be a true indicator of future volatility. The assumptions used in calculating the fair values of share
option grants represent management’s best estimates, but these estimates involve inherent uncertainties and the application of judgment. As a
result, if factors change and different assumptions are used, share-based compensation expense could be significantly different from what we
recorded in the current period.
Provision of income tax and valuation allowance for deferred tax asset
Significant judgment is required in determining income tax expense based on tax laws in the various jurisdictions in which we operate. In
calculating our effective income tax rate, estimates are required regarding the timing and amount of taxable and deductible items which will adjust
the pre-tax income earned in various tax jurisdictions. Through our interpretation of local tax regulations, adjustments to pretax income for income
earned in various tax jurisdictions are reflected within various tax filings. Although we believe that our estimates and judgments discussed herein
are reasonable, actual results may be materially different than the estimated amounts.
We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. Significant
judgment is required in determining the valuation allowance. In assessing the need for a valuation allowance, we consider all sources of taxable
income, including projected future taxable income, reversing taxable temporary differences and ongoing tax planning strategies. If it is determined
that we are able to realize deferred tax assets in excess of the net carrying value or to the extent we are unable to realize a deferred tax asset, we
would adjust the valuation allowance in the period in which such a determination is made, with a corresponding increase or decrease to earnings.
Item 6. Directors, Senior Management and Employees
A. Directors and Senior Management
The following table sets forth information regarding our directors and executive officers as of the date of this annual report.
Directors and Executive Officers
Leaf Hua Li
Arthur Yu Chen
Nineway Jie Zhang
Shan Lu
Vic Haixiang Li
Brenda Pui Man Tam
Robin Li Xu
Age
45
46
47
47
49
51
39
Position/Title
Founder, Chairman of the Board of Directors and Chief Executive Officer
Chief Financial Officer
Director
Director
Independent Director
Independent Director
Senior Vice President
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Mr. Leaf Hua Li is our founder and has served as the chairman of our board of directors and our chief executive officer since our inception.
Mr. Li has rich experience and expertise in the technology and internet sectors in China. Before founding our company, Mr. Li had served in
several senior management roles at Tencent, including the head of Tencent’s multi-media business and its innovation center. Mr. Li joined Tencent
in 2000 and was the 18th founding employee of Tencent. He was an early and key research and development participant of Tencent QQ. Mr. Li was
also the founder of Tencent Video and led the product design and development of Tencent Video. Mr. Li invented over 10 international and
domestic patents while working at Tencent. In 2008, Mr. Li was presented the “Innovative Talent Award” by the municipal government of
Shenzhen, Guangdong. Mr. Li is currently an independent director of Boqii Holdings Limited (NYSE: BQ). Mr. Li received his bachelor’s degree
in computer science and technology from Hunan University in 2000.
Mr. Arthur Yu Chen has served as our chief financial officer since September 2017. Prior to joining our company, Mr. Chen served as a director
at Citigroup Global Markets Asia Limited from 2009 to 2016 in its equity business. Mr. Chen also served as a vice president at China International
Capital Corporation from 2005 to 2009. Mr. Chen received his bachelor’s degree in economics from Shanghai University of Finance & Economics
in 1998 and his master’s degree in business administration from China Europe International Business School in 2005.
Mr. Nineway Jie Zhang has served as our director since October 2014. Mr. Zhang has been working in internet securities trading business since
1997. Prior to joining our company, from 2002 to 2013, Mr. Zhang served as the head of the online trading center of the headquarters of Shenzhen
of China Galaxy Securities Co., Ltd. (HKEx: 6881) in Beijing in charge of business development and the head of the online retail trading business
of its Shenzhen branch. Mr. Zhang also served as the manager of its online transaction business at Essence Securities (previously known as
Guangdong Securities) from 2000 to 2002 and served in various roles at several internet-based companies prior to that. Mr. Zhang received an
associate’s degree in marketing from Nanjing University of Science and Technology in 1994, a master’s degree in business administration from
South China University of Technology in 2009 and an executive master’s degree in business administration from Cheung Kong Graduate School of
Business in 2013.
Mr. Shan Lu has served as our director since October 2014. Mr. Lu currently serves as the senior executive vice president of Tencent and the
president of Technology and Engineering Group. Prior to joining Tencent in 2000, Mr. Lu served as a research and development engineer for
Shenzhen Liming Network Systems from 1998 to 2000. Mr. Lu also serves on the board of China United Network Communications Group
Co., Ltd. (SHA: 600050). Mr. Lu received his bachelor’s degree in computer science from the University of Science and Technology of China in
1998.
Mr. Vic Haixiang Li has served as our independent director since March 2019. Mr. Li is an investor based in Hong Kong. As founder and
managing partner of VI Ventures, and the chairman of VI Asset Management, Mr. Li focuses on investing in new technology companies in
healthcare and FinTech. Mr. Li is also a co-founder of Tencent. Before founding VI Ventures and establishment of VI Asset Management, Mr. Li
was in charge of Tencent’s online search business from 2010 to 2012 and served as the senior executive vice president of Tencent from 1999. Mr.
Li was recognized as “China Top CIO” by the CEO and CIO magazine in 2008. Mr. Li has also served as independent non-executive director at
AVO Insurance Company Limited since October 2019. Mr. Li received his bachelor’s degree in computer software from South China University of
Technology in 1994 and his master’s degree in business administration from China Europe International Business School in 2007.
Ms. Brenda Pui Man Tam has served as our independent director since March 2019. Ms. Tam served as a partner at the Beijing office of
PricewaterhouseCoopers China and PricewaterhouseCoopers Hong Kong from 2007 to 2016 and a senior manager at the Beijing office of
PricewaterhouseCoopers China from 2006 to 2007. Prior to that, Ms. Tam served as an audit experienced manager and an audit senior manager at
the San Jose office of PricewaterhouseCoopers LLP from 2000 to 2006. Ms. Tam also served in multiple audit positions at
PricewaterhouseCoopers Hong Kong from 1995 to 2000 and at Ernst & Young Hong Kong from 1992 to 1995. Ms. Tam received her bachelor’s
degree in accountancy from City University of Hong Kong in 1992. Ms. Tam is qualified as a certified public accountant in the United States
(California), a fellow member of the Hong Kong Institute of Certified Public Accountants and the Association of Chartered Certified Accountants
in the United Kingdom.
Mr. Robin Li Xu has served as our senior vice president since September 2019 and is responsible for product development, operations,
marketing and business growth. Prior to that, Mr. Xu served as our vice president from August 2013 to September 2019. Mr. Xu has over ten years
of experience in the internet industry including seven years at Tencent where he was a senior product manager responsible for online payment
product development and operations for Tenpay. Mr. Xu received his bachelor’s degree in science from Heilongjiang University in 2006.
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B. Compensation
Compensation of Directors and Executive Officers
For the fiscal year ended December 31, 2021, we paid an aggregate of HK$25.7 million (US$3.3 million) in cash to our executive officers and
directors, and an aggregate of HK$350.0 thousands (US$44.9 thousands) in cash to our non-executive directors. For share incentive grants to our
directors and executive officers, see “—Amended and Restated 2014 Share Incentive Plan” and “—2019 Share Incentive Plan.” We have not set
aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our PRC subsidiaries
and VIE are required by law to make contributions equal to certain percentages of each employee’s salary for his or her medical insurance,
maternity insurance, workplace injury insurance, unemployment insurance, pension benefits through a PRC government-mandated multi-employer
defined contribution plan and other statutory benefits. Our Hong Kong subsidiaries are required by the Hong Kong Mandatory Provident Fund
Schemes Ordinance to make monthly contributions to the mandatory provident fund scheme in an amount equal to 5% of an employee’s salary
subject to the statutory maximum at HK$1,500.
Employment Agreements and Indemnification Agreements
We have entered into employment agreements with each of our executive officers. Under these agreements, each of our executive officers is
employed for a specified time period. We may terminate employment for cause, at any time, without advance notice or remuneration, for certain
acts of the executive officer, such as conviction or plea of guilty to a felony or any crime involving moral turpitude, negligent or dishonest acts to
our detriment, or misconduct or a failure to perform agreed duties. We may also terminate an executive officer’s employment without cause upon
three-month advance written notice. In such case of termination by us, we will provide severance payments to the executive officer as expressly
required by applicable law of the jurisdiction where the executive officer is based. The executive officer may resign at any time with a three-month
advance written notice.
Each executive officer has agreed to hold, both during and after the termination or expiry of his or her employment agreement, in strict
confidence and not to use, except as required in the performance of his or her duties in connection with the employment or pursuant to applicable
law, any of our confidential information or trade secrets, any confidential information or trade secrets of our clients or prospective clients, or the
confidential or proprietary information of any third party received by us and for which we have confidential obligations. The executive officers
have also agreed to disclose in confidence to us all inventions, designs and trade secrets which they conceive, develop or reduce to practice during
the executive officer’s employment with us and to assign all right, title and interest in them to us, and assist us in obtaining and enforcing patents,
copyrights and other legal rights for these inventions, designs and trade secrets.
In addition, each executive officer has agreed to be bound by non-competition and non-solicitation restrictions during the term of his or her
employment and typically for one year following the last date of employment. Specifically, each executive officer has agreed not to (i) approach
our suppliers, clients, customers or contacts or other persons or entities introduced to the executive officer in his or her capacity as a representative
of us for the purpose of doing business with such persons or entities that will harm our business relationships with these persons or entities;
(ii) assume employment with or provide services to any of our competitors, or engage, whether as principal, partner, licensor or otherwise, any of
our competitors, without our express consent; or (iii) seek directly or indirectly, to solicit the services of any of our employees who is employed by
us on or after the date of the executive officer’s termination, or in the year preceding such termination, without our express consent.
We have also entered into indemnification agreements with each of our directors and executive officers. Under these agreements, we agree to
indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by
reason of their being a director or officer of our company.
Amended and Restated 2014 Share Incentive Plan
In December 2018, our board of directors approved the Amended and Restated 2014 Share Incentive Plan, or the A&R 2014 Plan, to attract
and retain the best available personnel, provide additional incentives to employees, directors and consultants and promote the success of our
business. As of the date of this annual report, the maximum aggregate number of ordinary shares which may be issued pursuant to all awards under
the A&R 2014 Plan is 135,032,132 ordinary shares, subject to amendment.
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Types of awards. The A&R 2014 Plan permits the awards of options approved by the plan administrator.
Plan administration. Our board of directors or a committee of one or more members appointed by our board of directors or another committee
within its delegated authority by our board of directors will administer the A&R 2014 Plan. Subject to the terms of the A&R 2014 Plan and in the
case of the committee, the specific duties delegated by our board of directors to the committee, the plan administrator has the authority to
determine the participants to receive awards, the type and number of awards to be granted to each participant, and the terms and conditions of each
award, among others.
Award agreement. Awards granted under the A&R 2014 Plan are evidenced by an award agreement that sets forth terms, conditions and
limitations for each award, which may include the term of the award, the provisions applicable in the event that the grantee’s employment or
service terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to, among others, our officers, employees, directors and consultants of our company.
Vesting schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Exercise of options. The plan administrator determines the exercise price for each award, which is stated in the award agreement. The vested
portion of option will expire if not exercised prior to the time as the plan administrator determines at the time of its grant. However, the maximum
exercisable term is ten years from the date of a grant.
Transfer restrictions. Awards may not be transferred in any manner by the participant other than in accordance with the exceptions provided in
the A&R 2014 Plan, such as transfers by will or the laws of descent and distribution, or as provided in the relevant award agreement or otherwise
determined by the plan administrator.
Termination and amendment of the A&R 2014 Plan. Unless terminated earlier, the A&R 2014 Plan has a term of ten years. Our board of
directors has the authority to terminate, amend or modify the plan. No amendment, suspension or termination of the A&R 2014 Plan or amendment
of any outstanding award granted pursuant to the A&R 2014 Plan may affect, in any manner materially adverse to the participant, any rights or
benefits of the participant or the obligation of the company under the applicable awards previously granted pursuant to the A&R 2014 Plan unless
agreed by the participant in writing.
2019 Share Incentive Plan
In December 2018, our board of directors approved the 2019 Share Incentive Plan to attract and retain the best available personnel, provide
additional incentives to employees, directors and consultants and promote the success of our business. Under the 2019 Share Incentive Plan, or the
2019 Plan, the maximum aggregate number of shares which may be issued pursuant to all awards is a number of up to 2% of the total number of
shares issued and outstanding on September 29, 2019 as determined by our board, plus an annual increase on each September 30 during the term of
the 2019 Plan commencing on September 30, 2020, by an amount determined by our board; provided, however, that (i) the total number of shares
increased in each year shall not be more than 2% of the total number of shares issued and outstanding on September 29 of the same year and (ii)
the aggregate number of shares initially reserved and subsequently increased during the term of the 2019 Plan shall not be more than 8% of the
total number of shares issued and outstanding on September 29 immediately preceding the most recent increase.
The following paragraphs describe the principal terms of the 2019 Plan.
Types of Awards. The 2019 Plan permits the awards of options, restricted shares, restricted share units, or any other type of awards that the
committee decides.
Plan Administration. Our board of directors or a committee designated by the board of directors will act as the plan administrator. The plan
administrator will determine the participants who are to receive awards, the type or types of awards to be granted, the number of awards to be
granted, and the terms and conditions of each award grant.
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Award Agreement. Awards granted under the 2019 Plan are evidenced by an award agreement that sets forth terms, conditions and limitations
for each award, which may include the term of the award, the provisions applicable in the event that the grantee’s employment or service
terminates, and our authority to unilaterally or bilaterally amend, modify, suspend, cancel or rescind the award.
Eligibility. We may grant awards to our employees, directors and consultants of our company. However, we may grant options that are
intended to qualify as incentive share options only to our employees and employees of our parent companies and subsidiaries.
Vesting Schedule. In general, the plan administrator determines the vesting schedule, which is specified in the relevant award agreement.
Transfer Restrictions. Awards may not be transferred in any manner by the recipient other than in accordance with the exceptions provided in
the 2019 Plan, such as transfers by will or the laws of descent and distribution.
Termination and Amendment of the 2019 Plan. Unless terminated earlier, the 2019 Plan has a term of ten years. Our board of directors has the
authority to amend or terminate the 2019 Plan. However, no such action may adversely affect in any material way any awards previously granted
unless agreed by the relevant grantee.
As of February 28, 2022, 12,468,746 share options and 16,858,488 restricted share units have been granted and were outstanding under the
A&R 2014 Plan and the 2019 Plan, excluding awards that were forfeited or cancelled after the relevant grant dates.
The following table summarizes, as of February 28, 2022, the number of Class A ordinary shares underlying outstanding options, restricted
share units and other equity awards that we granted to our directors and executive officers.
Name
Leaf Hua Li
Arthur Yu Chen
Nineway Jie Zhang
Robin Li Xu
Ordinary Shares
Underlying
Equity Awards
Granted
Exercise Price
(US$/Share)
*(1)
—
Date of Grant
December 24,
2020
Date of Expiration
September 30,
2029
November 8,
2018,
October 5, 2020
and December 16,
*
*
*
Nominal
2021
Nominal November 1, 2014
November 1, 2014
and January 2,
Nominal
2020
October 30, 2024
and September 30,
2029
October 30, 2024
October 30, 2024
and January 1,
2030
*
Less than 1% of our total outstanding ordinary shares.
Note:
(1) In December 2020, our company granted Mr. Leaf Hua Li, our founder, chairman of the board of directors and chief executive officer,
restricted share units under the 2019 Share Incentive Plan to acquire 800 Class A ordinary shares for the purpose of testing and experiencing
our self-developed ESOP management system.
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Equity Incentive Trust
FUTU First Trust was established under a deed of declaration by Vistra Trust (Singapore) Pte. Limited, or Vistra Trust, as trustee, dated
November 30, 2018. Through FUTU First Trust, our Class A ordinary shares and other rights and interests under awards granted pursuant to our
A&R 2014 Plan may be provided to certain grant recipients. As of the date of this annual report, some of our grantees under the A&R 2014 Plan,
all of which are our employees, participated in the FUTU First Trust.
Participants in FUTU First Trust transfer their equity awards to Vistra Trust to be held for their benefit. Upon satisfaction of vesting conditions
and request by grant recipients, Vistra Trust will exercise the equity awards and transfer the relevant Class A ordinary shares and other rights and
interest under the equity awards to the underlying grant participants upon the written direction of the trust administrator. The deed provides that
Vistra Trust shall not exercise the voting rights attached to such Class A ordinary shares unless otherwise directed by the trust administrator, which
is an advisory committee consisting of authorized representatives of our company.
C. Board Practices
Board of Directors
Our board of directors consists of five directors. A director who is, directly or indirectly, interested in a contract or transaction or proposed
contract or transaction with our company shall declare the nature of his interest at a meeting of our directors. A director may vote in respect of any
contract or transaction or proposed contract or transaction notwithstanding that he may be interested therein and if he does so his vote shall be
counted and he may be counted in the quorum at any meeting of our directors at which any such contract or transaction or proposed contract or
transaction is considered. Our directors may exercise all the powers of our company to issue debentures, debenture stock, bonds and other
securities, whether outright or as collateral security for any debt, liability or obligation of our company or of any third party. None of our non-
executive directors has a service contract with us that provides for benefits upon termination of service.
Committees of the Board of Directors
We have established three committees under the board of directors: an audit committee, a compensation committee and a nominating and
corporate governance committee. We have adopted a charter for each of the three committees. Each committee’s members and functions are
described below.
Audit Committee. Our audit committee consists of Ms. Brenda Pui Man Tam and Mr. Vic Haixiang Li. Ms. Brenda Pui Man Tam is the
chairperson of our audit committee. We have determined that Ms. Brenda Pui Man Tam and Mr. Vic Haixiang Li each satisfies the “independence”
requirements of Rule 5605(c)(2) of the Nasdaq Stock Market Rules and meets the independence standards under Rule 10A-3 under the Exchange
Act, as amended. We have determined that Ms. Brenda Pui Man Tam qualifies as an “audit committee financial expert” within the meaning of the
SEC rules and possesses financial sophistication within the meaning of the Nasdaq Stock Market Rules. The audit committee oversees our
accounting and financial reporting processes and the audits of the financial statements of our company. The audit committee is responsible for,
among other things:
● appointing the independent auditors and pre-approving all auditing and non-auditing services permitted to be performed by the
independent auditors;
● reviewing with the independent auditors any audit problems or difficulties and management’s response;
● discussing the annual audited financial statements with management and the independent auditors;
● reviewing the adequacy and effectiveness of our accounting and internal control policies and procedures and any steps taken to monitor
and control major financial risk exposures;
● reviewing and approving all proposed related party transactions;
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● meeting separately and periodically with management and the independent auditors; and
● monitoring compliance with our code of business conduct and ethics, including reviewing the adequacy and effectiveness of our
procedures to ensure proper compliance.
Compensation Committee. Our compensation committee consists of Mr. Vic Haixiang Li, Ms. Brenda Pui Man Tam and Mr. Leaf Hua Li.
Mr. Vic Haixiang Li is the chairman of our compensation committee. We have determined that Mr. Vic Haixiang Li and Ms. Brenda Pui Man Tam
each satisfies the “independence” requirements of Rule 5605(a)(2) of the Nasdaq Stock Market Rules. The compensation committee assists the
board of directors in reviewing and approving the compensation structure, including all forms of compensation, relating to our directors and
executive officers. Our chief executive officer may not be present at any committee meeting during which his compensation is deliberated. The
compensation committee is responsible for, among other things:
● reviewing and approving, or recommending to the board for its approval, the compensation for our chief executive officer and other
executive officers;
● reviewing and recommending to the board for determination with respect to the compensation of our non-employee directors;
● reviewing periodically and approving any incentive compensation or equity plans, programs or similar arrangements; and
● selecting compensation consultant, legal counsel or other adviser only after taking into consideration all factors relevant to that person’s
independence from management.
Nominating and Corporate Governance Committee. Our nominating and corporate governance committee consists of Mr. Leaf Hua Li,
Mr. Vic Haixiang Li and Ms. Brenda Pui Man Tam. Mr. Leaf Hua Li is the chairman of our nominating and corporate governance committee.
Mr. Vic Haixiang Li and Ms. Brenda Pui Man Tam each satisfies the “independence” requirements of Rule 5605(a)(2) of the Nasdaq Stock Market
Rules. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors
and in determining the composition of the board and its committees. The nominating and corporate governance committee is responsible for,
among other things:
● selecting and recommending to the board nominees for election by the shareholders or appointment by the board;
● reviewing annually with the board the current composition of the board with regards to characteristics such as independence, knowledge,
skills, experience and diversity;
● making recommendations on the frequency and structure of board meetings and monitoring the functioning of the committees of the
board; and
● advising the board periodically with regards to significant developments in the law and practice of corporate governance as well as our
compliance with applicable laws and regulations, and making recommendations to the board on all matters of corporate governance and
on any remedial action to be taken.
Duties of Directors
Under Cayman Islands law, our directors owe fiduciary duties to our company, including a duty of loyalty, a duty to act honestly, and a duty to
act in what they consider in good faith to be in our best interests. Our directors must also exercise their powers only for a proper purpose. Our
directors also owe to our company a duty to act with skill and care. It was previously considered that a director need not exhibit in the performance
of his or her duties a greater degree of skill than may reasonably be expected from a person of his or her knowledge and experience. However,
English and Commonwealth courts have moved towards an objective standard with regard to the required skill and care and these authorities are
likely to be followed in the Cayman Islands. In fulfilling their duty of care to us, our directors must ensure compliance with our memorandum and
articles of association, as amended and restated from time to time, and the class rights vested thereunder in the holders of the shares. In certain
limited exceptional circumstances, a shareholder may have the right to seek damages in our name if a duty owed by our directors is breached.
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Our board of directors has all the powers necessary for managing, and for directing and supervising, our business affairs. The functions and
powers of our board of directors include, among others:
● convening shareholders’ annual and extraordinary general meetings and reporting its work to shareholders at such meetings;
● declaring dividends and distributions;
● appointing officers and determining the term of office of the officers;
● exercising the borrowing powers of our company and mortgaging the property of our company; and
● approving the transfer of shares in our company, including the registration of such shares in our register of members.
Terms of Directors and Officers
Our directors may be elected by a resolution of our board of directors, or by an ordinary resolution of our shareholders. Notwithstanding
anything in the Memorandum and Articles of Association, for as long as the Tencent Investors (as defined in the Memorandum and Articles of
Association) together hold at least 91,671,323 shares of our company (as may be adjusted by share splits, recapitalization, reorganization,
consolidation or other similar transaction), the Tencent Investors shall have the right to appoint one (1) director to our board of directors (the
“Tencent Director”) by sending a joint notice to our company’s registered office. The Tencent Director may only be removed as directed or
approved by the Tencent Investors, and any vacancies created by the resignation, removal or death of the Tencent Director shall be filled pursuant
to the terms described above. The term of the Tencent Director shall automatically end once the Tencent Investors together hold less than
91,671,323 shares of our company (as may be adjusted by share splits, recapitalization, reorganization, consolidation or other similar transaction).
Our directors are not subject to a term of office and hold office until such time as they are removed from office by ordinary resolution of our
shareholders. A director will cease to be a director automatically if, among other things, the director (i) becomes bankrupt or makes any
arrangement or composition with his creditors; (ii) dies or is found by our company to be or becomes of unsound mind; (iii) resigns his office by
notice in writing to our company; or (iv) without special leave of absence from the our board, is absent from meetings of our board for three
consecutive meetings and our board resolves that his office be vacated.
Our officers are elected by and serve at the discretion of our board of directors.
D. Employees
As of December 31, 2021, we had a total of 2,318 employees. Among these employees, 2,067 employees were located in China, 139
employees were located in Hong Kong, 67 employees were located in the United States, 40 employees were located in Singapore, and 5 employees
were located in Australia. Our employees who handle our online brokerage business are all based in Hong Kong, the United States, Singapore and
Australia. We had a total of 847 and 1,315 employees as of December 31, 2019 and 2020, respectively.
The following table sets forth the number of our employees as of December 31, 2021 by function:
Functions:
Research and development
Customer services and operations
General and administration
Marketing
Total
171
As of
December 31, 2021
Number
%
1,518
371
291
138
2,318
65.5 %
16.0 %
12.5 %
6.0 %
100.0 %
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We participate in various employee social security plans that are organized by municipal and provincial governments, including housing,
pension, medical insurance and unemployment insurance, as required by laws and regulations in China. We are required under Chinese law to
make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees, up to a
maximum amount specified by the local government from time to time. We also provide low-interest loans to qualified employees as an incentive
of their performance and loyalty. We also have a systematic performance evaluation system which provides the basis for human resource decisions
such as remuneration adjustments, career promotion and talent cultivation.
We enter into standard labor contracts with our employees. We also enter into standard confidentiality and non-compete agreements with our
senior management. The non-compete restricted period typically expires two years after the termination of employment, and we agree to
compensate the employee with a certain percentage of his or her pre-departure salary during the restricted period.
We believe that we maintain a good working relationship with our employees, and we have not experienced any major labor disputes.
E. Share Ownership
Except as specifically noted, the following table sets forth information with respect to the beneficial ownership of our ordinary shares as of
February 28, 2022 by:
● each of our directors and executive officers; and
● each person known to us to own beneficially 5% or more of our ordinary shares.
The calculations in the table below are based on 681,384,354 Class A ordinary shares and 494,552,051 Class B ordinary shares outstanding as
of February 28, 2022.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days,
including through the exercise of any option, warrant or other right or the conversion of any other security. These shares, however, are not included
in the computation of the percentage ownership of any other person.
Directors and Executive Officers**:
Leaf Hua Li(1)
Arthur Yu Chen(2)
Nineway Jie Zhang
Shan Lu(3)
Robin Li Xu
Vic Haixiang Li(4)
Brenda Pui Man Tam(5)
All Directors and Executive Officers as a Group
Principal Shareholders:
Entities affiliated with Leaf Hua Li(1)
Entities affiliated with Tencent(6)
Class A Ordinary
Shares
Class B
Ordinary Shares
% of Total
Ordinary Shares
% of Aggregate
Voting Power***
Ordinary Shares Beneficially Owned
50,086,568
*
*
*
*
—
—
60,102,136
353,750,000
—
—
—
—
—
—
353,750,000
50,086,568
106,616,617
353,750,000
140,802,051
34.3 %
*
*
*
*
—
—
35.2 %
34.3 %
21.0 %
67.4 %
*
*
*
*
—
—
67.5 %
67.4 %
27.6 %
Less than 1% of our total outstanding ordinary shares.
*
** Except as indicated otherwise below, the business address of our directors and executive officers is 28/F, Unit 1, Building D, Kexing Science
Park, 15 Keyuan Road, Technology Park, Nanshan District, Shenzhen, People’s Republic of China.
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*** For each person or group included in this column, percentage of total voting power represents voting power based on both Class A and Class B
ordinary shares held by such person or group with respect to all outstanding shares of our Class A and Class B ordinary shares as a single
class. Each holder of our Class A ordinary shares is entitled to one vote per share. Each holder of our Class B ordinary shares is entitled to
twenty votes per share. Our Class B ordinary shares are convertible at any time by the holder into Class A ordinary shares on a one-for-one
basis, while Class A ordinary shares are not convertible into Class B ordinary shares under any circumstances.
Notes:
(1) Represents 252,812,500 Class B ordinary shares and 50,000,000 Class A ordinary shares (in the form of ADSs) held by Lera Ultimate
Limited, a BVI business company, and 100,937,500 Class B ordinary shares held by Lera Infinity Limited, a BVI business company, and
86,568 Class A ordinary shares (in the form of ADSs) held by Leaf Hua Li, as reported on the Schedule 13G/A filed by Mr. Li, among others,
on February 8, 2022. Lera Ultimate Limited is ultimately owned by Lera Direction Plus Trust and Lera Infinity Limited is ultimately owned by
Lera Target Trust. Mr. Li has the sole power to direct the retention or disposal of, and the exercise of any voting and other rights attached to the
shares held by Lera Ultimate Limited and Lera Infinity Limited in our company. The registered address of each of Lera Ultimate Limited and
Lera Infinity Limited is Vistra Corporate Services Centre, Wickhams Cay II, Road Town, Tortola, VG1110, British Virgin Islands.
(2) The business address of Mr. Arthur Yu Chen is 11/F, Bangkok Bank Building, No. 18 Bonham Strand W, Sheung Wan, Hong Kong S.A.R.,
People’s Republic of China.
(3) The business address of Mr. Shan Lu is Building A, No.12, Shenzhenwan Science and Technology Ecological Garden, Yuehai Subdistrict,
Nanshan District, Shenzhen, People’s Republic of China.
(4) The business address of Mr. Vic Haixiang Li is Suite 7013, 70/F, Two International Finance Centre, 8 Finance Street, Central, Hong Kong
S.A.R., People’s Republic of China.
(5) The business address of Ms. Brenda Pui Man Tam is 932 Weldwood Ct, Los Gatos, CA 95032, the United States of America.
(6) Represents (i) 140,802,051 Class B ordinary shares and 28,840,949 Class A ordinary shares held of record by Qiantang River Investment
Limited, a wholly-owned subsidiary of Tencent Holdings Limited; (ii) 71,024,142 Class A Ordinary shares held of record by Image Frame
Investment (HK) Limited, a wholly-owned subsidiary of Tencent Holdings Limited; (iii) 5 Class A Ordinary shares held of record by TPP
Follow-on I Holding A Limited, an entity controlled by Tencent Holdings Limited; (iv) 1 Class A Ordinary Share held of record by TPP
Opportunity I Holding A Limited, an entity controlled by Tencent Holdings Limited; (v) 1,161,840 Class A Ordinary shares represented by
145,230 ADSs held of record by TPP Opportunity GP I, Ltd., an entity controlled by Tencent Holdings Limited; (vi) 5,412,888 Class A
Ordinary shares represented by 676,611 ADSs held of record by Tencent Mobility Limited, a wholly-owned subsidiary of Tencent Holdings
Limited; and (vii) 176,792 Class A Ordinary shares represented by 22,099 ADSs held of record by Distribution Pool Limited, a wholly-owned
subsidiary of Tencent Holdings Limited, as reported on Schedule 13G filed by Qiantang River Investment Limited, among others, on February
10, 2022. The registered address of each of Qiantang River Investment Limited, Image Frame Investment (HK) Limited and Tencent Holdings
Limited is 29/F, Three Pacific Place, No. 1, Queen’s Road East, Wanchai, Hong Kong.
To our knowledge, as of February 28, 2022, a total of 579,132,664 Class A ordinary shares are held by one record holder in the United States,
representing approximately 49.2% of our total outstanding shares. The holder is The Bank of New York Mellon, the depositary of the ADS
program. None of our outstanding Class B ordinary shares are held by record holders in the United States. The number of beneficial owners of the
ADSs in the United States is likely to be much larger than the number of record holders of our ordinary shares in the United States.
To our knowledge, except as disclosed above, we are not owned or controlled, directly or indirectly, by another corporation, by any foreign
government or by any other natural or legal person or persons, severally or jointly. We are not aware of any arrangement that may, at a subsequent
date, result in a change of control of our company.
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Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
Please refer to “Item 6. Directors, Senior Management and Employees—E. Share Ownership.”
B. Related Party Transactions
Contractual Arrangements with the VIE and Its Shareholders
See “Item 4. Information on the Company—C. Organizational Structure.”
Transactions and Strategic Cooperation with Tencent
Transactions with Tencent. Tencent has been a principal shareholder of us since October 2014. We purchased equipment, cloud services, SMS
channel services and other services from Tencent in the amount of HK$165.2 million (US$21.2 million) in 2021. As of December 31, 2021, we had
amounts due to Tencent of HK$87.5 million (US$11.2 million), primarily consisting of amounts due to Tencent of HK$85.9 million (US$11.0
million) in relation to purchase of cloud equipment and services.
Strategic Cooperation Framework Agreement. We work with our strategic investor, Tencent, across a number of cooperation areas in a
mutually beneficial relationship. Our collaboration is in part driven by our shared values of technological excellence and innovation. Collaborating
with Tencent creates meaningful advantages to us. In December 2019, Shenzhen Futu, one of our operating entities in China, entered into a
strategic cooperation framework agreement with Shenzhen Tencent Computer System Co., Ltd. (深圳市腾讯计算机系统有限公司), a subsidiary
of Tencent. Pursuant to the strategic cooperation framework agreement, subject to further definitive agreements to be entered into between the
parties, and to the extent in compliance with applicable laws and regulations, Tencent agreed to cooperate with us in traffic, content and cloud areas
through Tencent’s online platform. In addition, to the extent permitted by the applicable laws and regulations, we and Tencent agreed to further
explore and pursue additional opportunities for potential cooperation in the area of fintech-related products and services to expand both parties’
international operations. Tencent also agreed to cooperate with us in the areas of ESOP services, administration, talent recruiting and training. The
strategic cooperation framework agreement has a term of three years unless Tencent ultimately holds less than 15% of our outstanding shares
(including through convertible notes and/or other convertible rights that can be converted into ours shares), in which case the agreement will be
terminated. After the expiration of the agreement, if both parties intend to continue the cooperation under the agreement, a separate written
agreement will be executed upon negotiation of the parties. The agreement is governed by PRC law. For any dispute arising out of or relating to the
agreement, the parties should first strive to resolve the dispute through amicable consultation. In case no settlement can be reached through
consultation within thirty (30) days after either party has issued a notice to the other party on such dispute, either we or Tencent can bring the
dispute to a Nanshan district court in Shenzhen, China for resolution.
Transactions with Directors and Executive Officers
We provide brokerage services to our directors and officers and their spouses. Revenue earned from such services amounted to HK$1.4 million
(US$0.2 million) for the year ended December 31, 2021. Cash deposited by our directors and their spouses for trading purpose were recorded as
payables to clients in our consolidated balance sheets as of December 31, 2021 and amounted to HK$44.5 million (US$5.7 million).
Shareholders Agreement
We entered into a second amended and restated shareholders agreement on May 22, 2018 with our shareholders, which consist of holders of
our ordinary shares and preferred shares. Other than provisions with respect to registration rights, the description of which is set forth below, all
provisions and rights under our second amended and restated shareholders agreement terminated upon consummation of our initial public offering.
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Registration Rights
Our registrable securities will include (i) the ordinary shares issued or issuable upon conversion of the preferred shares, (ii) any ordinary shares
we issued or issuable as a dividend or other distribution with respect to, in exchange for, or in replacement of, the shares referenced in (i) herein,
and (iii) any ordinary shares owned or hereafter acquired by the holders of Series A preferred shares, Series A-1 preferred shares, Series B
preferred shares, Series C preferred shares and Series C-1 preferred shares.
We have entered into a subscription agreement with General Atlantic Singapore FT Pte. Ltd. in connection with a private placement concurrent
with our initial public offering, pursuant to which we have granted the investor registration rights on terms and conditions equivalent to and on a
pari passu basis as holders of the abovementioned registrable securities.
We have entered into a registration rights agreement with a leading global investment firm in connection with a private placement of our Class
A ordinary shares in the form of prepaid warrants in December 2020, pursuant to which we have granted the investor registration rights on terms
and conditions equivalent to and on a pari passu basis as holders of the abovementioned registrable securities.
Demand Registration Rights
Registration other than on Form F-3 or Form S-3. At any time or from time to time after the earlier of (i) May 27, 2023 or (ii) the date that is
six (6) months after the closing of our initial public offering, holder(s) holding ten percent (10%) or more of the voting power of the then
outstanding registrable securities held by all holders may request in writing that we effect a registration of the registrable securities. Upon receipt of
such a request, we shall promptly give written notice of the proposed registration to all other holders and as soon as practicable, use its best efforts
to cause the registrable securities specified in the request, together with any registrable securities of any holder who requests in writing to join such
registration within fifteen (15) business days after our delivery of written notice, to be registered and/or qualified for sale and distribution in such
jurisdiction as the initiating holders may request. We shall be obligated to effect no more than three (3) registrations that have been declared and
ordered effective; provided that if the sale of all of the registrable securities sought to be included is not consummated, such registration shall not
be deemed to constitute one of the registration rights.
Registration on Form F-3 or Form S-3. If we qualify for registration on Form F-3 or Form S-3 (or any comparable form for registration in a
jurisdiction other than the United States), holder(s) holding ten percent (10%) or more of the voting power of the then outstanding registrable
securities held by all holders has the right to request us to file, in any jurisdiction in which we have had a registered underwritten public offering, a
registration statement on Form F-3 or Form S-3 (or any comparable form for registration in a jurisdiction other than the United States). Upon
receipt of such a request, we shall (i) promptly give written notice of the proposed registration to all other holders and (ii) as soon as practicable,
use its best efforts to cause the registrable securities specified in the request, together with any registrable securities of any holder who requests in
writing to join such registration within fifteen (15) business days after our delivery of written notice, to be registered and qualified for sale and
distribution in such jurisdiction.
Piggyback Registration Rights
If we propose to register any of our securities for a public offering of such securities, or for the account of any holder (other than a holder) of
equity securities any of such holder’s equity securities (except for exempt registration), we shall promptly give each holder written notice of such
registration and, upon the written request of any holder given within fifteen (15) business days after delivery of such notice, we shall use our best
efforts to include in such registration any registrable securities thereby requested to be registered by such holder. If a holder decides not to include
all or any of its registrable securities in such registration, such holder will continue to have the right to include any registrable securities in any
subsequent registration statement as may be filed by us, subject to certain limitations.
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Expenses of Registration
We will pay all expenses, other than the underwriting discounts and selling commissions applicable to the sale of registrable securities
pursuant to the registration rights (which will be borne by the holders requesting registration on a pro rata basis in proportion to their respective
numbers of registrable securities sold in such registration), incurred in connection with registrations, filings or qualifications pursuant to the
registration rights, including (without limitation) all registration, filing and qualification fees, printers’ and accounting fees, fees charged by
depository banks, transfer agents, and share registrars, fees and disbursements of counsel for us and reasonable fees and disbursement of one
counsel for all selling holders. However, we are not obligated to pay any expenses of any registration proceeding if the registration request is
subsequently withdrawn at the request of the holders holding at least a majority of the voting power of the registrable securities requested to be
registered by all the holder in such registration (in which case all participating holders will bear such expenses pro rata based upon the number of
registrable securities that were to be thereby registered in the withdrawn registration).
Termination of Obligations
The registration rights set forth above will terminate on the earlier of (i) the date that is five (5) years from the date of closing of a qualified
initial public offering and (ii) with respect to any holder, the date on which such holder may sell all of such holder’s registrable securities under
Rule 144 of the Securities Act in any ninety (90)-day period.
Employment Agreements and Indemnification Agreements
See “Item 6. Directors, Senior Management and Employees—B. Compensation.”
Share Incentive Plan
See “Item 6. Directors, Senior Management and Employees—B. Compensation.”
C. Interests of Experts and Counsel
Not applicable.
Item 8. Financial Information
A. Consolidated Statements and Other Financial Information
We have appended consolidated financial statements filed as part of this annual report.
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Legal Proceedings
We may from time to time be subject to various legal, arbitration or administrative claims and proceedings arising in the ordinary course of
business involving our users, clients and third-party business partners in contract disputes and other matters. We are currently involved in certain
lawsuits, which we believe are immaterial to our company on an individual basis or a collective basis. However, litigation, arbitration or any other
legal or administrative proceeding, regardless of the outcome, could result in substantial costs and diversion of our resources, including our
management’s time and attention. See “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—If we fail to
protect our platforms or the confidential information of our users and clients, whether due to cyber-attacks, computer viruses, physical or electronic
break-in, breaches by third parties or other reasons, we may be subject to liabilities imposed by relevant laws and regulations, and our reputation
and business may be materially and adversely affected,” “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry
—We may be subject to intellectual property infringement claims, which may be expensive to defend and disruptive to our business and
operations,” “Item 3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We may be subject to litigation and
regulatory investigations and proceedings, and may not always be successful in defending ourselves against such claims or proceedings,” and “Item
3. Key Information—D. Risk Factors—Risks Related to Our Business and Industry—We are subject to extensive and evolving regulatory
requirements in the markets we operate in, non-compliance with which may result in penalties, limitations and prohibitions on our future business
activities or suspension or revocation of our licenses and trading rights, and consequently may materially and adversely affect our business,
financial condition, operations and prospects. In addition, we are involved in ongoing inquiries by relevant regulators.” See also “Item 4.
Information on the Company—B. Business Overview—Ongoing Regulatory Actions.”
Dividend Policy
Our board of directors has discretion on whether to distribute dividends. In addition, our shareholders may by ordinary resolution declare a
dividend, but no dividend may exceed the amount recommended by our board of directors. In either case, all dividends are subject to certain
restrictions under Cayman Islands law, namely that our company may only pay dividends out of profits or share premium, and provided always that
in no circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course
of business. Even if we decide dividends, the form, frequency and amount will depend upon our future operations and earnings, capital
requirements and surplus, general financial condition, contractual restrictions and other factors that our board of directors may deem relevant.
We do not have any present plan to pay any cash dividends on our ordinary shares in the foreseeable future. We currently intend to retain most,
if not all, of our available funds and any future earnings to operate and expand our business.
We are a holding company incorporated in the Cayman Islands. We may rely on dividends from our subsidiaries in Hong Kong, Singapore, the
U.S. and China for our cash requirements, including any payment of dividends to our shareholders. PRC regulations may restrict the ability of our
PRC subsidiaries to pay dividends to us. See “Item 4. Information on the Company—B. Business Overview—Regulation—Overview of the Laws
and Regulations Relating to Our Business and Operations in China—Regulations on Dividend Distribution.”
If we pay any dividends on our ordinary shares, we will pay those dividends which are payable in respect of the ordinary shares underlying the
ADSs to the depositary, as the registered holder of such ordinary shares, and the depositary then will pay such amounts to the ADS holders in
proportion to ordinary shares underlying the ADSs held by such ADS holders, subject to the terms of the deposit agreement, including the fees and
expenses payable thereunder. See “Item 12. Description of Securities Other than Equity Securities—D. American Depositary Shares.” Cash
dividends on our ordinary shares, if any, will be paid in U.S. dollars.
B. Significant Changes
Except as disclosed elsewhere in this annual report, we have not experienced any significant changes since the date of our audited consolidated
financial statements included in this annual report.
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Item 9. The Offer and Listing
A. Offering and Listing Details
The ADSs, each representing eight of our Class A ordinary shares, have been listed on Nasdaq since March 8, 2019. The ADSs trade under the
symbol “FUTU.”
B. Plan of Distribution
Not applicable.
C. Markets
The ADSs have been listed on Nasdaq since March 8, 2019 under the symbol “FUTU.”
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10. Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The following are summaries of material provisions of our current memorandum and articles of association, or Memorandum and Articles of
Association, insofar as they relate to the material terms of our ordinary shares.
Objects of Our Company. Under our Memorandum and Articles of Association, the objects of our company are unrestricted and we have the
full power and authority to carry out any object not prohibited by the law of the Cayman Islands.
Ordinary Shares. Our ordinary shares are divided into Class A ordinary shares and Class B ordinary shares. Holders of our Class A ordinary
shares and Class B ordinary shares will have the same rights except for voting and conversion rights. Each Class A ordinary share shall entitle the
holder thereof to one vote on all matters subject to vote at our general meetings, and each Class B ordinary share shall entitle the holder thereof to
twenty (20) votes on all matters subject to vote at our general meetings. Our ordinary shares are issued in registered form and are issued when
registered in our register of members. We may not issue shares to bearer. Our shareholders who are nonresidents of the Cayman Islands may freely
hold and vote their shares.
Conversion. Class B ordinary shares may be converted into the same number of Class A ordinary shares by the holders thereof at any time,
while Class A ordinary shares cannot be converted into Class B ordinary shares under any circumstances. Upon any sale, transfer, assignment or
disposition of any Class B ordinary shares by a holder thereof to any non-affiliate of such holder, each of such Class B ordinary shares will be
automatically and immediately converted into one Class A ordinary share.
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Dividends. The holders of our ordinary shares are entitled to such dividends as may be declared by our board of directors or declared by our
shareholders by ordinary resolution (provided that no dividend may be declared by our shareholders which exceeds the amount recommended by
our directors). Our Memorandum and Articles of Association provide that dividends may be declared and paid out of our profits, realized or
unrealized, or from any reserve set aside from profits which our board of directors determine is no longer needed. Dividends may also be declared
and paid out of share premium account or any other fund or account which can be authorized for this purpose in accordance with the Companies
Act. Under the laws of the Cayman Islands, our company may pay a dividend out of either profit or share premium account, provided that in no
circumstances may a dividend be paid if this would result in our company being unable to pay its debts as they fall due in the ordinary course of
business.
Voting Rights. Holders of Class A ordinary shares and Class B ordinary shares shall, at all times, vote together as one class on all matters
submitted to a vote by the members at any general meeting of the Company. Each Class A ordinary share shall be entitled to one vote on all matters
subject to the vote at general meetings of our company, and each Class B ordinary share shall be entitled to twenty (20) votes on all matters subject
to the vote at general meetings of our company. At any general meeting a resolution put to the vote at the meeting shall be decided on a show of
hands, unless a poll is (before or on the declaration of the result of the show of hands) demanded by the chairman of such meeting or any one
shareholder present in person or by proxy.
An ordinary resolution to be passed at a meeting by the shareholders requires the affirmative vote of a simple majority of the votes attaching to
the ordinary shares which are cast at the meeting, while a special resolution requires the affirmative vote of no less than two-thirds of the votes
attaching to the issued and outstanding ordinary shares which are cast at the meeting. Both ordinary resolutions and special resolutions may also be
passed by a unanimous written resolution signed by all the shareholders of our company, as permitted by the Companies Act and our Memorandum
and Articles of Association. A special resolution will be required for important matters such as a change of name or making changes to our
Memorandum and Articles of Association.
General Meetings of Shareholders. As a Cayman Islands exempted company, we are not obliged by the Companies Act to call shareholders’
annual general meetings. Our Memorandum and Articles of Association provide that we may (but are not obliged to) in each year hold a general
meeting as our annual general meeting in which case we shall specify the meeting as such in the notices calling it, and the annual general meeting
shall be held at such time and place as may be determined by our directors.
Shareholders’ general meetings may be convened by the chairman of our board or a majority of our board of directors. Advance notice of at
least ten (10) calendar days is required for the convening of our annual general shareholders’ meeting (if any) and any other general meeting of our
shareholders. A quorum required for any general meeting of shareholders consists of one or more shareholders present or by proxy, holding shares
which carry in aggregate not less than one-third of all votes attaching to all of our shares in issue and entitled to vote at such general meeting.
The Companies Act provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with
any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our
Memorandum and Articles of Association provide that upon the requisition of one or more shareholders holding shares which carry in aggregate
not less than one-third of the total number of votes attaching to all outstanding and issued shares of our company entitled to vote at general
meetings, our board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. However, our
Memorandum and Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings or
extraordinary general meetings not called by such shareholders.
Board of Directors. Unless otherwise determined by us in a general meeting, the number of directors shall not be less than three (3) directors,
the exact number of directors to be determined from time to time by the board of directors. We may appoint any person to be a director by ordinary
resolution, and the board may, by the affirmative vote of a simple majority of the remaining directors present and voting at a board meeting,
appoint any person as a director, to fill a casual vacancy on the board or as an addition to the existing board.
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Notwithstanding anything in the Memorandum and Articles of Association , for as long as the Tencent Investors (as defined in the
Memorandum and Articles of Association) together hold at least 91,671,323 shares of our company (as may be adjusted by share splits,
recapitalization, reorganization, consolidation or other similar transaction), the Tencent Investors shall have the right to appoint one (1) director to
our board of directors (“Tencent Director”) by sending a joint notice to our company’s registered office. The Tencent Director may only be
removed as directed or approved by both Tencent Investors, and any vacancies created by the resignation, removal or death of the Tencent Director
shall be filled pursuant to the terms described above. The term of the Tencent Director shall automatically end once the Tencent Investors together
hold less than 91,671,323 shares of our company (as may be adjusted by share splits, recapitalization, reorganization, consolidation or other similar
transaction).
Transfer of Ordinary Shares. Subject to the restrictions set out in our Memorandum and Articles of Association as set out below, any of our
shareholders may transfer all or any of his or her ordinary shares by an instrument of transfer in writing and in any usual or common form
approved by our board, and shall be executed by or on behalf of the transferor, and if in respect of any nil or partly paid up share or if so required
by our directors, shall also be executed by or on behalf of by the transferee.
Our board of directors may, in its absolute discretion, decline to register any transfer of any ordinary share which is not fully paid up or on
which we have a lien. Our board of directors may also decline to register any transfer of any ordinary share unless:
● the instrument of transfer is lodged with us, accompanied by the certificate for the ordinary shares to which it relates and such other
evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;
● the instrument of transfer is in respect of only one class of ordinary shares;
● the instrument of transfer is properly stamped, if required;
● in the case of a transfer to joint holders, the number of joint holders to whom the ordinary share is to be transferred does not exceed four;
and
● a fee of such maximum sum as the Nasdaq Global Market may determine to be payable or such lesser sum as our directors may from time
to time require is paid to us in respect thereof.
If our directors refuse to register a transfer they shall, within three months after the date on which the instrument of transfer was lodged, send
to each of the transferor and the transferee notice of such refusal.
The registration of transfers may, after compliance with any notice required of the Nasdaq Global Market, be suspended and the register of
members closed at such times and for such periods as our board of directors may from time to time determine, provided, however, that the
registration of transfers shall not be suspended nor the register of members closed for more than 30 days in any year as our board may determine.
Liquidation. On the winding up of our company, if the assets available for distribution amongst our shareholders shall be more than sufficient
to repay the whole of the share capital at the commencement of the winding up, the surplus shall be distributed amongst our shareholders in
proportion to the par value of the shares held by them at the commencement of the winding up, subject to a deduction from those shares in respect
of which there are monies due, of all monies payable to our company for unpaid calls or otherwise. If our assets available for distribution are
insufficient to repay all of the paid-up capital, the assets will be distributed so that the losses are borne by our shareholders in proportion to the par
value of the shares held by them.
Calls on Shares and Forfeiture of Shares. Our board of directors may from time to time make calls upon shareholders for any amounts unpaid
on their shares in a notice served to such shareholders at least 14 days prior to the specified time of payment. The shares that have been called upon
and remain unpaid are subject to forfeiture.
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Redemption, Repurchase and Surrender of Shares. We may issue shares on terms that such shares are subject to redemption, at our option or at
the option of the holders of these shares, on such terms and in such manner as may be determined by our board of directors, or by a special
resolution of our shareholders. Our Company may also repurchase any of our shares on such terms and in such manner as have been approved by
our board of directors or by an ordinary resolution of our shareholders. Under the Companies Act, the redemption or repurchase of any share may
be paid out of our Company’s profits or out of the proceeds of a new issue of shares made for the purpose of such redemption or repurchase, or out
of capital (including share premium account and capital redemption reserve) if our company can, immediately following such payment, pay its
debts as they fall due in the ordinary course of business. In addition, under the Companies Act no such share may be redeemed or repurchased
(a) unless it is fully paid up, (b) if such redemption or repurchase would result in there being no shares issued and outstanding or (c) if the company
has commenced liquidation. In addition, our company may accept the surrender of any fully paid share for no consideration.
Variations of Rights of Shares. If at any time, our share capital is divided into different classes of shares, the rights attached to any such class
may, subject to any rights or restrictions for the time being attached to any class, only be materially adversely varied with the consent in writing of
the holders of two-thirds of the issued shares of that class or with the sanction of a special resolution passed at a separate meeting of the holders of
the shares of that class. The rights conferred upon the holders of the shares of any class issued with preferred or other rights shall not, subject to
any rights or restrictions for the time being attached to the shares of that class, be deemed to be materially adversely varied by, inter alia, the
creation, allotment or issue of further shares ranking pari passu with or subsequent to them or the redemption or purchase of any shares of any
class by our company. The rights of the holders of shares shall not be deemed to be materially adversely varied by the creation or issue of shares
with preferred or other rights including, without limitation, the creation of shares with enhanced or weighted voting rights.
Issuance of Additional Shares. Our amended and restated memorandum of association authorizes our board of directors to issue additional
ordinary shares from time to time as our board of directors shall determine, to the extent of available authorized but unissued shares.
Our amended and restated memorandum of association also authorizes our board of directors to establish from time to time one or more series
of preference shares and to determine, with respect to any series of preference shares, the terms and rights of that series, including:
● the designation of the series;
● the number of shares of the series;
● the dividend rights, dividend rates, conversion rights, voting rights; and
● the rights and terms of redemption and liquidation preferences.
Our board of directors may issue preference shares without action by our shareholders to the extent authorized but unissued. Issuance of these
shares may dilute the voting power of holders of ordinary shares.
Inspection of Books and Records. Holders of our ordinary shares will have no general right under Cayman Islands law to inspect or obtain
copies of our list of shareholders or our corporate records (other than copies of our Memorandum and Articles of Association and any special
resolutions, and our register of mortgages and charge). However, we will provide our shareholders with annual audited financial statements. See
“Item 10. Additional Information—H. Documents on Display.”
Anti-Takeover Provisions. Some provisions of our Memorandum and Articles of Association may discourage, delay or prevent a change of
control of our company or management that shareholders may consider favorable, including provisions that:
● authorize our board of directors to issue preference shares in one or more series and to designate the price, rights, preferences, privileges
and restrictions of such preference shares without any further vote or action by our shareholders; and
● limit the ability of shareholders to requisition and convene general meetings of shareholders.
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However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Memorandum and
Articles of Association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Exempted Company. We are an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between
ordinary resident companies and exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside
of the Cayman Islands may apply to be registered as an exempted company. The requirements for an exempted company are essentially the same as
for an ordinary company except that an exempted company:
● does not have to file an annual return of its shareholders with the Registrar of Companies;
● is not required to open its register of members for inspection;
● does not have to hold an annual general meeting;
● may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first
instance);
● may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
● may register as a limited duration company; and
● may register as a segregated portfolio company.
“Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company
(except in exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or
other circumstances in which a court may be prepared to pierce or lift the corporate veil).
Registered Office and Objects
Our registered office in the Cayman Islands is located at the offices of Maples Corporate Services Limited at PO Box 309, Ugland House,
Grand Cayman, KY1-1104, Cayman Islands, or at such other location within the Cayman Islands as our directors may from time to time decide.
The objects for which our company is established are unrestricted and we have full power and authority to carry out any object not prohibited by
the Companies Act or any other law of the Cayman Islands.
Differences in Corporate Law
The Companies Act of the Cayman Islands is derived, to a large extent, from the older Companies Acts of England but does not follow recent
English statutory enactments, and accordingly there are significant differences between the Companies Act of the Cayman Islands and the current
Companies Act of England. In addition, the Companies Act of the Cayman Islands differs from laws applicable to United States corporations and
their shareholders. Set forth below is a summary of the significant differences between the provisions of the Companies Act applicable to us and
the comparable provisions of the laws applicable to companies incorporated in Delaware and their shareholders.
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Mergers and Similar Arrangements. The Companies Act permits mergers and consolidations between Cayman Islands companies and between
Cayman Islands companies and non-Cayman Islands companies. For these purposes, (a) “merger” means the merging of two or more constituent
companies and the vesting of their undertaking, property and liabilities in one of such companies as the surviving company and (b) a
“consolidation” means the combination of two or more constituent companies into a combined company and the vesting of the undertaking,
property and liabilities of such companies to the consolidated company. In order to effect such a merger or consolidation, the directors of each
constituent company must approve a written plan of merger or consolidation, which must then be authorized by (a) a special resolution of the
shareholders of each constituent company, and (b) such other authorization, if any, as may be specified in such constituent company’s articles of
association. The written plan of merger or consolidation must be filed with the Registrar of Companies together with a declaration as to the
solvency of the consolidated or surviving company, a list of the assets and liabilities of each constituent company and an undertaking that a copy of
the certificate of merger or consolidation will be given to the members and creditors of each constituent company and that notification of the
merger or consolidation will be published in the Cayman Islands Gazette. Dissenting shareholders have the right to be paid the fair value of their
shares (which, if not agreed between the parties, will be determined by the Cayman Islands court) if they follow the required procedures, subject to
certain exceptions. Court approval is not required for a merger or consolidation which is effected in compliance with these statutory procedures.
Separate from the statutory provisions relating to mergers and consolidations, the Companies Act also contains statutory provisions that
facilitate the reconstruction and amalgamation of companies by way of schemes of arrangement, provided that the arrangement is approved by a
majority in number of each class of shareholders or creditors (representing 75% by value) with whom the arrangement is to be made and who must,
in addition, represent three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in
person or by proxy at a meeting, or meetings, convened for that purpose. The convening of the meetings and subsequently the arrangement must be
sanctioned by the Grand Court of the Cayman Islands. While a dissenting shareholder or creditor has the right to express to the court the view that
the transaction ought not to be approved, the court would likely to approve the arrangement if it determines that:
● the statutory provisions as to the required majority vote have been met;
● the shareholders have been fairly represented at the meeting in question and the statutory majority are acting bona fide without coercion
of the minority to promote interests adverse to those of the class;
● the arrangement is such that may be reasonably approved by an intelligent and honest man of that class acting in respect of his interest;
and
● the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act.
The Companies Act also contains a statutory power of compulsory acquisition which may facilitate the “squeeze out” of dissentient minority
shareholders upon a tender offer. When a tender offer is made and accepted by holders of 90% of the shares affected within four months, the
offeror may, within a two-month period commencing on the expiration of such four-month period, require the holders of the remaining shares to
transfer such shares to the offeror on the terms of the offer. An objection can be made to the Grand Court of the Cayman Islands but this is unlikely
to succeed in the case of an offer which has been so approved unless there is evidence of fraud, bad faith or collusion.
If an arrangement and reconstruction by way of scheme of arrangement is thus approved and sanctioned, or if a tender offer is made and
accepted, in accordance with the foregoing statutory procedures, a dissenting shareholder would have no rights comparable to appraisal rights,
which would otherwise ordinarily be available to dissenting shareholders of Delaware corporations, providing rights to receive payment in cash for
the judicially determined value of the shares.
Shareholders’ Suits. In principle, we will normally be the proper plaintiff and as a general rule a derivative action may not be brought by a
minority shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority in the Cayman Islands, the
Cayman Islands court can be expected to apply and follow the common law principles (namely the rule in Foss v. Harbottle and the exceptions
thereto) which permit a minority shareholder to commence a class action against, or derivative actions in the name of, a company to challenge the
following:
● an act which is illegal or ultra vires;
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● an act which, although not ultra vires, could only be effected duly if authorized by a special or qualified majority vote that has not been
obtained; and
● an act which constitutes a fraud on the minority where the wrongdoers are themselves in control of the company.
Indemnification of Directors and Executive Officers and Limitation of Liability. Cayman Islands law does not limit the extent to which a
company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by
the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing
a crime. Our Memorandum and Articles of Association provide that our directors and officers shall be indemnified against all actions, proceedings,
costs, charges, expenses, losses, damages or liabilities incurred or sustained by such director or officer, other than by reason of such person’s own
dishonesty, willful default or fraud, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment)
or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any
costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil proceedings
concerning our company or its affairs in any court whether in the Cayman Islands or elsewhere. This standard of conduct is generally the same as
permitted under the Delaware General Corporation Law for a Delaware corporation. In addition, we have entered into indemnification agreements
with each of our directors and executive officers that will provide such persons with additional indemnification beyond that provided in our
Memorandum and Articles of Association.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers or persons controlling us
under the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is therefore unenforceable.
Anti-Takeover Provisions in the Memorandum and Articles of Association. Some provisions of our Memorandum and Articles of Association
may discourage, delay or prevent a change in control of our company or management that shareholders may consider favorable, including
provisions that authorize our board of directors to issue preferred shares in one or more series and to designate the price, rights, preferences,
privileges and restrictions of such preferred shares without any further vote or action by our shareholders.
However, under Cayman Islands law, our directors may only exercise the rights and powers granted to them under our Memorandum and
Articles of Association for a proper purpose and for what they believe in good faith to be in the best interests of our company.
Directors’ Fiduciary Duties. Under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and
its shareholders. This duty has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith,
with the care that an ordinarily prudent person would exercise under similar circumstances. Under this duty, a director must inform himself of and
disclose to shareholders, all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a
director act in a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate
position for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation and its
shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders
generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the honest belief that the
action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence of a breach of one of the fiduciary
duties. Should such evidence be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction
and that the transaction was of fair value to the corporation.
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company and
therefore he owes the following duties to the company—a duty to act in good faith in the best interests of the company, a duty not to make a
personal profit based on his or her position as director (unless the company permits him to do so), a duty not to put himself in a position where the
interests of the company conflict with his or her personal interest or his or her duty to a third party and a duty to exercise powers for the purpose for
which such powers were intended. A director of a Cayman Islands company owes to the company a duty to act with skill and care. It was
previously considered that a director need not exhibit in the performance of his or her duties a greater degree of skill than may reasonably be
expected from a person of his or her knowledge and experience. However, English and Commonwealth courts have moved towards an objective
standard with regard to the required skill and care and these authorities are likely to be followed in the Cayman Islands.
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Shareholder Proposals. Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual
meeting of shareholders, provided it complies with the notice provisions in the governing documents. The Delaware General Corporation Law does
not provide shareholders an express right to put any proposal before the annual meeting of shareholders, but in keeping with common law,
Delaware corporations generally afford shareholders an opportunity to make proposals and nominations provided that they comply with the notice
provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of directors or any other person authorized to
do so in the governing documents, but shareholders may be precluded from calling special meetings.
Cayman Islands law provides shareholders with only limited rights to requisition a general meeting, and does not provide shareholders with
any right to put any proposal before a general meeting. However, these rights may be provided in a company’s articles of association. Our
Memorandum and Articles of Association provides that, on the requisition of shareholders holding shares representing in aggregate not less than
one-third (1/3) of all votes attaching to all issued and outstanding shares of the Company that as at the date of the deposit of such requisition carry
the right to vote at general meetings of the Company, the board shall convene an extraordinary general meeting. However, our Memorandum and
Articles of Association do not provide our shareholders with any right to put any proposals before annual general meetings or extraordinary general
meetings not called by such shareholders. As a Cayman Islands exempted company, we are not obliged by law to call shareholders’ annual general
meetings.
Cumulative Voting. Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the
corporation’s certificate of incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority
shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single
director, which increases the shareholder’s voting power with respect to electing such director. Cayman Islands law does not prohibit cumulative
voting, but our Memorandum and Articles of Association do not provide for cumulative voting. As a result, our shareholders are not afforded any
less protections or rights on this issue than shareholders of a Delaware corporation.
Appointment of Directors. We may appoint any person to be a director by ordinary resolution, and the board may, by the affirmative vote of a
simple majority of the remaining directors present and voting at a board meeting, appoint any person as a director, to fill a casual vacancy on the
board or as an addition to the existing board.
Notwithstanding anything in our Memorandum and Articles of Association, for as long as the Tencent Investors (as defined in our
Memorandum and Articles of Association) together hold at least 91,671,323 shares of our company (as may be adjusted by share splits,
recapitalization, reorganization, consolidation or other similar transaction), the Tencent Investors shall have the right to appoint one (1) director to
our board of directors (the “Tencent Director”) by sending a joint notice to our company’s registered office. The Tencent Director may only be
removed as directed or approved by the Tencent Investors, and any vacancies created by the resignation, removal or death of the Tencent Director
shall be filled pursuant to the terms described above. The term of the Tencent Director shall automatically end once the Tencent Investors together
hold less than 91,671,323 shares of our company (as may be adjusted by share splits, recapitalization, reorganization, consolidation or other similar
transaction).
Each director whose term of office expires shall be eligible for re-election at a meeting of the Company’s shareholders or re-appointment by
the board of directors.
Removal of Directors. Under the Delaware General Corporation Law, a director of a corporation with a classified board may be removed only
for cause with the approval of a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under
our Memorandum and Articles of Association, directors not appointed by the Tencent Investors may be removed by ordinary resolution of our
shareholders.
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Transactions with Interested Shareholders. The Delaware General Corporation Law contains a business combination statute applicable to
Delaware public corporations whereby, unless the corporation has specifically elected not to be governed by such statute by amendment to its
certificate of incorporation or bylaws that is approved by its shareholders, it is prohibited from engaging in certain business combinations with an
“interested shareholder” for three years following the date that such person becomes an interested shareholder. An interested shareholder generally
is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting stock or who or which is an affiliate or
associate of the corporation and owned 15% or more of the corporation’s outstanding voting stock within the past three years. This has the effect of
limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated equally. The statute
does not apply if, among other things, prior to the date on which such shareholder becomes an interested shareholder, the board of directors
approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any
potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, we cannot avail ourselves of the types of protections afforded by the Delaware
business combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant
shareholders, it does provide that such transactions must be entered into bona fide in the best interests of the company and for a proper corporate
purpose and not with the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up. Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve,
dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. Only if the dissolution is initiated by the
board of directors may it be approved by a simple majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to
include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions initiated by the board.
Under Cayman Islands law, a company may be wound up by either an order of the courts of the Cayman Islands or by a special resolution of
its members or, if the company is unable to pay its debts as they fall due, by an ordinary resolution of its members. The court has authority to order
winding up in a number of specified circumstances including where it is, in the opinion of the court, just and equitable to do so.
Variation of Rights of Shares. Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the
approval of a majority of the outstanding shares of such class, unless the certificate of incorporation provides otherwise. Under our Memorandum
and Articles of Association, we may only materially adversely vary the rights attached to any class of shares (subject to any rights or restrictions
for the time being attached to any class of share) with the consent in writing of the holders of two-thirds of the issued shares of that class or with
the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be
amended only if adopted and declared advisable by the board of directors and approved by a majority of the outstanding shares entitled to vote and
the bylaws may be amended with the approval of a majority of the outstanding shares entitled to vote and may, if so provided in the certificate of
incorporation, also be amended by the board of directors. Under the Companies Act and our Memorandum and Articles of Association, our
Memorandum and Articles of Association may only be amended by special resolution of our shareholders; provided that Article 88(f) and (h) of
our Memorandum and Articles of Association may not be amended without the prior written consent of the Tencent Investors (as defined in our
Memorandum and Articles of Association).
Rights of Non-Resident or Foreign Shareholders. There are no limitations imposed by our Memorandum and Articles of Association on the
rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions in our
Memorandum and Articles of Association that require our company to disclose shareholder ownership above any particular ownership threshold.
Directors’ Power to Issue Shares. Under our Memorandum and Articles of Association, our board of directors is empowered to issue or allot
shares or grant options and warrants with or without preferred, deferred, qualified or other special rights or restrictions.
See “Exhibit 2.5—Description of Securities” attached to this form 20-F for more descriptions of our securities.
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C. Material Contracts
Other than in the ordinary course of business and other than those described in “Item 4. Information on the Company” or “Item 7. Major
Shareholders and Related Party Transactions—B. Related Party Transactions” or elsewhere in this annual report, we have not entered into any
material contract during the two years immediately preceding the date of this annual report.
D. Exchange Controls
See “Item 4. Information on the Company—B. Business Overview—Regulation—Regulations Relating to Foreign Exchange.”
E. Taxation
The following summary of the material Cayman Islands, PRC and U.S. federal income tax consequences of an investment in the ADSs or our
Class A ordinary shares is based upon laws and relevant interpretations thereof in effect as of the date of this annual report, all of which are
subject to change. This summary does not deal with all possible tax consequences relating to an investment in the ADSs or our Class A ordinary
shares, such as the tax consequences under U.S. state and local tax laws or under the tax laws of jurisdictions other than the Cayman Islands,
China and the United States. To the extent that the discussion relates to matters of Cayman Islands tax law, it represents the opinion of Maples and
Calder (Hong Kong) LLP, our counsel as to Cayman Islands law, and to the extent it relates to summary or description of PRC tax law, it
represents the opinion of Han Kun Law Offices, our counsel as to PRC law.
Cayman Islands Taxation
The Cayman Islands currently levies no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no
taxation in the nature of inheritance tax or estate duty. There are no other taxes likely to be material to us levied by the government of the Cayman
Islands except for stamp duties which may be applicable on instruments executed in, or, after execution, brought within the jurisdiction of the
Cayman Islands. The Cayman Islands is not party to any double tax treaties that are applicable to any payments made to or by our company. There
are no exchange control regulations or currency restrictions in the Cayman Islands.
Our company has been incorporated under the laws of the Cayman Islands as an exempted company with limited liability and, as such, has
obtained an undertaking from the Financial Secretary of the Cayman Islands as to tax concessions under the Tax Concessions Act (As Revised). In
accordance with the provision of Section 6 of the Tax Concessions Act (As Revised), the Financial Secretary has undertaken with our company:
● that no law which is hereafter enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall
apply to our company or its operations; and
● in addition, that no tax to be levied on profits, income, gains or appreciations or which is in the nature of estate duty or inheritance tax
shall be payable:
(i) on or in respect of the shares, debentures or other obligations of our company; or
(ii) by way of the withholding, in whole or part, of any relevant payment as defined in the Tax Concessions Act (As Revised).
These concessions shall be for a period of 20 years from February 20, 2019.
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PRC Taxation
Under the PRC Enterprise Income Tax Law and its implementation rules, an enterprise established outside China with “de facto management
body” within China is considered a resident enterprise. The implementation rules define the term “de facto management body” as the body that
exercises full and substantial control and overall management over the business, productions, personnel, accounts and properties of an enterprise.
In April 22, 2009, the SAT issued a circular, known as Circular 82, which provides certain specific criteria for determining whether the “de facto
management body” of a PRC-controlled enterprise that is incorporated offshore is located in China. Although this circular only applies to offshore
enterprises controlled by PRC enterprises or PRC enterprise groups, not those controlled by PRC individuals or foreigners, the criteria set forth in
the circular may reflect the SAT’s general position on how the “de facto management body” text should be applied in determining the tax resident
status of all offshore enterprises. According to Circular 82, an offshore incorporated enterprise controlled by a PRC enterprise or a PRC enterprise
group will be regarded as a PRC tax resident by virtue of having its “de facto management body” in China only if all of the following conditions
are met: (i) the primary location of the day-to-day operational management is in China; (ii) decisions relating to the enterprise’s financial and
human resource matters are made or are subject to approval by organizations or personnel in China; (iii) the enterprise’s primary assets, accounting
books and records, company seals, and board and shareholder resolutions, are located or maintained in China; and (iv) at least 50% of voting board
members or senior executives habitually reside in China.
We believe that Futu Holdings Limited is not a PRC resident enterprise for PRC tax purposes. Futu Holdings Limited is not controlled by a
PRC enterprise or PRC enterprise group and we do not believe that Futu Holdings Limited meets all of the conditions above. Futu Holdings
Limited is a company incorporated outside China. As a holding company, Futu Holdings Limited’s key assets are its ownership interests in its
subsidiaries, and its key assets are located, and its records (including the resolutions of its board of directors and the resolutions of its shareholders)
are maintained, outside China. In addition, we are not aware of any offshore holding companies with a similar corporate structure as ours ever
having been deemed a PRC “resident enterprise” by the PRC tax authorities. However, the tax resident status of an enterprise is subject to
determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”
If the PRC tax authorities determine that Futu Holdings Limited is a PRC resident enterprise for enterprise income tax purposes, we may be
required to withhold a 10% withholding tax from dividends we pay to our shareholders that are non-resident enterprises, including the holders of
the ADSs. In addition, non-resident enterprise shareholders (including the ADS holders) may be subject to a 10% PRC tax on gains realized on the
sale or other disposition of ADSs or ordinary shares, if such income is treated as sourced from within China. It is unclear whether our non-PRC
individual shareholders (including the ADS holders) would be subject to any PRC tax on dividends or gains obtained by such non-PRC individual
shareholders in the event we are determined to be a PRC resident enterprise. If any PRC tax were to apply to such dividends or gains, it would
generally apply at a rate of 20% unless a reduced rate is available under an applicable tax treaty. However, it is also unclear whether non-PRC
shareholders of Futu Holdings Limited would be able to claim the benefits of any tax treaties between their country of tax residence and China in
the event that Futu Holdings Limited is treated as a PRC resident enterprise. See “Item 3. Key Information—D. Risk Factors—Risks Related to
Our Operations in China—We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we
may therefore be subject to PRC income tax on our global income.”
United States Federal Income Tax Considerations
The following discussion is a summary of U.S. federal income tax considerations generally applicable to the ownership and disposition of the
ADSs or our ordinary shares by a U.S. Holder (as defined below) that holds the ADSs or our ordinary shares as “capital assets” (generally, property
held for investment) under the U.S. Internal Revenue Code of 1986, as amended (the “Code”). This discussion is based upon existing U.S. federal
tax law, which is subject to differing interpretations or change, possibly with retroactive effect. No ruling has been sought from the Internal
Revenue Service (the “IRS”) with respect to any U.S. federal income tax consequences described below, and there can be no assurance that the IRS
or a court will not take a contrary position. This discussion, moreover, does not address any state, local and non-U.S. tax considerations, such as
estate or gift tax considerations, alternative minimum tax considerations, the potential application of the Medicare contribution tax on net
investment income, the special tax accounting rules under Section 451(b) of the Code, relating to the ownership or disposition of the ADSs or our
ordinary shares. The following summary does not address all aspects of U.S. federal income taxation that may be important to particular investors
in light of their individual circumstances or to persons in special tax situations such as:
● banks and other financial institutions;
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● insurance companies;
● pension plans;
● cooperatives;
● regulated investment companies;
● real estate investment trusts;
● broker-dealers;
● traders that elect to use a mark-to-market method of accounting;
● certain former U.S. citizens or long-term residents;
● tax-exempt entities (including private foundations);
● individual retirement accounts or other tax-deferred accounts;
● persons who acquire their ADSs or ordinary shares pursuant to any employee share option or otherwise as compensation;
● investors that will hold their ADSs or ordinary shares as part of a straddle, hedge, conversion, constructive sale or other integrated
transaction for U.S. federal income tax purposes;
● investors that have a functional currency other than the U.S. dollar;
● persons that actually or constructively own 10% or more of the ADSs or our ordinary shares (by vote or value);
● persons required to accelerate the recognition of any item of gross income with respect to their ADSs or ordinary shares as a result of such
income being recognized on an applicable financial statement; or
● partnerships or other entities taxable as partnerships for U.S. federal income tax purposes, or persons holding ADSs or ordinary shares
through such entities;
all of whom may be subject to tax rules that differ significantly from those discussed below.
Each U.S. Holder is urged to consult its tax advisor regarding the application of U.S. federal taxation to its particular circumstances, and the
state, local, non-U.S. and other tax considerations of the ownership and disposition of the ADSs or our ordinary shares.
General
For purposes of this discussion, a “U.S. Holder” is a beneficial owner of the ADSs or our ordinary shares that is, for U.S. federal income tax
purposes:
● an individual who is a citizen or resident of the United States;
● a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created in, or organized under the laws of the
United States or any state thereof or the District of Columbia;
● an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source; or
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● a trust (A) the administration of which is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who
have the authority to control all substantial decisions of the trust or (B) that has otherwise validly elected to be treated as a U.S. person
under the Code.
If a partnership (or other entity treated as a partnership for U.S. federal income tax purposes) is a beneficial owner of the ADSs or our ordinary
shares, the tax treatment of a partner in the partnership will generally depend upon the status of the partner and the activities of the partnership.
Partnerships holding the ADSs or our ordinary shares and their partners are urged to consult their tax advisors regarding an investment in the ADSs
or our ordinary shares.
For U.S. federal income tax purposes, a U.S. Holder of ADSs will generally be treated as the beneficial owner of the underlying shares
represented by the ADSs. The remainder of this discussion assumes that a U.S. Holder of the ADSs will be treated in this manner. Accordingly,
deposits or withdrawals of ordinary shares for ADSs will generally not be subject to U.S. federal income tax.
Passive Foreign Investment Company Considerations
A non-U.S. corporation, such as our company, will be classified as a PFIC for U.S. federal income tax purposes for any taxable year if either
(i) 75% or more of its gross income for such year consists of certain types of “passive” income or (ii) 50% or more of the value of its assets
(generally determined on the basis of a quarterly average) during such year is attributable to assets that produce or are held for the production of
passive income (the “asset test”). For this purpose, cash and assets readily convertible into cash are categorized as passive assets and the company’s
goodwill and other unbooked intangibles are taken into account. Passive income generally includes, among other things, dividends, interest, rents,
royalties, and gains from the disposition of passive assets. We will be treated as owning a proportionate share of the assets and earning a
proportionate share of the income of any other corporation in which we own, directly or indirectly, 25% or more (by value) of the stock.
Although the law in this regard is not entirely clear, we treat the VIE (and its subsidiaries) as being owned by us for U.S. federal income tax
purposes because we control their management decisions and are entitled to substantially all of the economic benefits associated with them, and, as
a result, we consolidate their results of operations in our consolidated U.S. GAAP financial statements. If it were determined, however, that we are
not the owner of the VIE (and its subsidiaries) for U.S. federal income tax purposes, we may be treated as a PFIC for the current taxable year and
any subsequent taxable year.
Based on our current estimates of the composition of our income and valuation of our assets, including goodwill, we believe that we may be
treated as a PFIC for our taxable year ended December 31, 2021. However, no assurances regarding our PFIC status can be provided for any past,
current or future taxable years.
U.S. Holders should consult with their tax advisors regarding the implications of owning stock in a PFIC. The determination of whether we are
or will become a PFIC is a factual determination made annually that will depend, in part, upon the composition and classification of our income
and assets. Because there are uncertainties in the application of the relevant rules, it is possible that the IRS may challenge our classification of
certain income and assets as non-passive which may result in our being or becoming a PFIC in the current or subsequent years. Furthermore,
fluctuations in the market price of the ADSs may cause us to be classified as a PFIC for the current or future taxable years because the value of our
assets for purposes of the asset test, including the value of our goodwill and unbooked intangibles, may be determined by reference to the market
price of the ADSs from time to time (which may be volatile). Among other matters, if our market capitalization declines, we may be or become a
PFIC for the current or future taxable years. The composition of our income and assets may also be affected by how, and how quickly, we use our
liquid assets. Under circumstances where our revenue from activities that produce passive income significantly increases relative to our revenue
from activities that produce non-passive income, or where we determine not to deploy significant amounts of cash for active purposes, our risk of
becoming classified as a PFIC may substantially increase. Because of the uncertainties involved in establishing our PFIC status, our U.S. tax
counsel expresses no opinion regarding our PFIC status.
If we are a PFIC for any year during which a U.S. Holder holds the ADSs or our ordinary shares, we generally will continue to be treated as a
PFIC for all succeeding years during which such U.S. Holder holds the ADSs or our ordinary shares.
The discussion below under “—Dividends” and “—Sale or Other Disposition” is written on the basis that we are not, will not be or become
classified as a PFIC for U.S. federal income tax purposes. The U.S. federal income tax rules that apply generally if we are treated as a PFIC are
discussed below under “—Passive Foreign Investment Company Rules.”
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Dividends
Any cash distributions paid on the ADSs or our ordinary shares (including the amount of any PRC tax withheld) out of our current or
accumulated earnings and profits, as determined under U.S. federal income tax principles, will generally be includible in the gross income of a U.S.
Holder as dividend income on the day actually or constructively received by the U.S. Holder, in the case of ordinary shares, or by the depositary, in
the case of ADSs. Because we do not intend to determine our earnings and profits on the basis of U.S. federal income tax principles, any
distribution we pay will generally be treated as a “dividend” for U.S. federal income tax purposes. Dividends received on the ADSs or our ordinary
shares will not be eligible for the dividends received deduction allowed to corporations in respect of dividends received from U.S. corporations.
Individuals and other non-corporate U.S. Holders will be subject to tax on any such dividends at the lower capital gain tax rate applicable to
“qualified dividend income,” provided that certain conditions are satisfied, including that (1) the ADSs or our ordinary shares on which the
dividends are paid are readily tradable on an established securities market in the United States, or, in the event that we are deemed to be a PRC
resident enterprise under the PRC tax law, we are eligible for the benefit of the U.S.-PRC income tax treaty (the “Treaty”), (2) we are neither a
PFIC nor treated as such with respect to a U.S. Holder (as discussed below) for the taxable year in which the dividend is paid and the preceding
taxable year, and (3) certain holding period requirements are met. For this purpose, ADSs listed on the Nasdaq Stock Market will generally be
considered to be readily tradable on an established securities market in the United States. U.S. Holders are urged to consult their tax advisors
regarding the availability of the lower rate for dividends paid with respect to the ADSs or our ordinary shares. In the event that we are deemed to
be a PRC resident enterprise under the PRC Enterprise Income Tax Law (see “Item 10. Additional Information—E. Taxation—PRC Taxation”), we
may be eligible for the benefits of the Treaty. If we are eligible for such benefits, dividends we pay on our ordinary shares, regardless of whether
such shares are represented by the ADSs, and regardless of whether the ADSs are readily tradable on an established securities market in the United
States, would be eligible for the reduced rate of taxation described in this paragraph.
For U.S. foreign tax credit purposes, dividends paid on the ADSs or our ordinary shares generally will be treated as income from foreign
sources and generally will constitute passive category income. In the event that we are deemed to be a PRC resident enterprise under the PRC
Enterprise Income Tax Law, a U.S. Holder may be subject to PRC withholding taxes on dividends paid on the ADSs or our ordinary shares (see
“Item 10. Additional Information—E. Taxation—PRC Taxation”). Depending on the U.S. Holder’s particular facts and circumstances and subject
to a number of complex conditions and limitations, PRC withholding taxes on dividends that are non-refundable under the Treaty may be treated as
foreign taxes eligible for credit against a U.S. Holder’s U.S. federal income tax liability. A U.S. Holder who does not elect to claim a foreign tax
credit for foreign tax withheld may instead claim a deduction for U.S. federal income tax purposes, in respect of such withholding, but only for
a year in which such holder elects to do so for all creditable foreign income taxes. The rules governing the foreign tax credit are complex and U.S.
Holders are urged to consult their tax advisors regarding the availability of the foreign tax credit under their particular circumstances.
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Sale or Other Disposition
A U.S. Holder will generally recognize gain or loss upon the sale or other disposition of ADSs or ordinary shares in an amount equal to the
difference between the amount realized upon the disposition and the holder’s adjusted tax basis in such ADSs or ordinary shares. The gain or loss
will generally be capital gain or loss. Any capital gain or loss will be long term if the ADSs or ordinary shares have been held for more than
one year. Non-corporate U.S. Holders (including individuals) generally will be subject to United States federal income tax on long-term capital
gain at preferential rates. The deductibility of a capital loss may be subject to limitations. Any such gain or loss that the U.S. Holder recognizes will
generally be treated as U.S. source income or loss for foreign tax credit limitation purposes, which will generally limit the availability of foreign
tax credits. However, in the event we are deemed to be a PRC resident enterprise under the PRC Enterprise Income Tax Law, we may be eligible
for the benefits of the Treaty. In such event, if PRC tax were to be imposed on any gain from the disposition of the ADSs or ordinary shares, a U.S.
Holder that is eligible for the benefits of the Treaty may elect to treat such gain as PRC source income. If a U.S. Holder is not eligible for the
benefits of the Treaty or fails to make the election to treat any gain as foreign source, then such U.S. Holder may not be able to use the foreign tax
credit arising from any PRC tax imposed on the disposition of the ADSs or ordinary shares unless such credit can be applied (subject to applicable
limitations) against United States federal income tax due on other income derived from foreign sources in the same income category (generally, the
passive category). Each U.S. Holder is advised to consult its tax advisor regarding the tax consequences if a foreign tax is imposed on a disposition
of the ADSs or our ordinary shares, including the availability of the foreign tax credit under its particular circumstances.
Passive Foreign Investment Company Rules
If we are classified as a PFIC for any taxable year during which a U.S. Holder holds the ADSs or our ordinary shares, and unless the U.S.
Holder makes a mark-to-market election (as described below), the U.S. Holder will generally be subject to special tax rules, regardless of whether
we remain a PFIC, on (i) any excess distribution that we make to the U.S. Holder (which generally means any distribution paid during a
taxable year to a U.S. Holder that is greater than 125 percent of the average annual distributions paid in the three preceding taxable years or, if
shorter, the U.S. Holder’s holding period for the ADSs or ordinary shares), and (ii) any gain realized on the sale or other disposition of ADSs or
ordinary shares. Under the PFIC rules:
● the excess distribution or gain will be allocated ratably over the U.S. Holder’s holding period for the ADSs or ordinary shares;
● the amount allocated to the taxable year of the distribution or gain and any taxable years in the U.S. Holder’s holding period prior to the first
taxable year in which we are classified as a PFIC (each, a “pre-PFIC year”), will be taxable as ordinary income; and
● the amount allocated to each prior taxable year, other than a pre-PFIC year, will be subject to tax at the highest income tax rate in effect for
individuals or corporations, as appropriate, for that year, increased by an additional tax equal to the interest charge on the resulting tax
deemed deferred with respect to each such taxable year.
If we are a PFIC for any taxable year during which a U.S. Holder holds the ADSs or our ordinary shares and any of our subsidiaries, the VIE
or any of the subsidiaries of the VIE is also a PFIC, such U.S. Holder would be treated as owning a proportionate amount (by value) of the shares
of the lower-tier PFIC for purposes of the application of these rules. U.S. Holders are urged to consult their tax advisors regarding the application
of the PFIC rules to any of our subsidiaries, the VIE or any of the subsidiaries of the VIE.
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As an alternative to the foregoing rules, a U.S. Holder of “marketable stock” (as defined below) in a PFIC may make a mark-to-market
election with respect to such stock. If a U.S. Holder makes this election with respect to the ADSs, the holder will generally (i) include as ordinary
income for each taxable year that we are a PFIC the excess, if any, of the fair market value of ADSs held at the end of the taxable year over the
adjusted tax basis of such ADSs and (ii) deduct as an ordinary loss the excess, if any, of the adjusted tax basis of the ADSs over the fair market
value of such ADSs held at the end of the taxable year, but such deduction will only be allowed to the extent of the net amount previously included
in income as a result of the mark-to-market election. The U.S. Holder’s adjusted tax basis in the ADSs would be adjusted to reflect any income or
loss resulting from the mark-to-market election. If a U.S. Holder makes a mark-to-market election in respect of the ADSs and we cease to be
classified as a PFIC, the holder will not be required to take into account the gain or loss described above during any period that we are not
classified as a PFIC. If a U.S. Holder makes a mark-to-market election, any gain such U.S. Holder recognizes upon the sale or other disposition of
the ADSs in a year when we are a PFIC will be treated as ordinary income and any loss will be treated as ordinary loss, but such loss will only be
treated as ordinary loss to the extent of the net amount previously included in income as a result of the mark-to-market election.
The mark-to-market election is available only for “marketable stock,” which is stock that is regularly traded on a qualified exchange or other
market, as defined in applicable United States Treasury regulations. The ADSs, but not our ordinary shares, are traded on a qualified exchange or
other market upon their listing on the Nasdaq Global Market. We anticipate that the ADSs should qualify as being regularly traded, but no
assurances may be given in this regard.
Because a mark-to-market election cannot technically be made for any lower-tier PFICs that we may own, a U.S. Holder who made a mark-to-
market election with respect to our ADSs may continue to be subject to the PFIC rules with respect to such U.S. Holder’s indirect interest in any
investments held by us that are treated as an equity interest in a PFIC for U.S. federal income tax purposes.
We do not intend to provide information necessary for U.S. Holders to make qualified electing fund elections which, if available, would result
in tax treatment different from (and generally less adverse than) the general tax treatment for PFICs described above.
If a U.S. Holder owns the ADSs or our ordinary shares during any taxable year that we are a PFIC, the holder must generally file an annual
IRS Form 8621 whether or not a mark-to-market election is or has been made. You should consult your tax advisor regarding the U.S. federal
income tax consequences of owning and disposing of the ADSs or our ordinary shares if we are or become a PFIC.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers, and are
required to file reports and other information with the SEC. Specifically, we are required to file annually an annual report on Form 20-F within
four months after the end of each fiscal year, which is December 31. All information filed with the SEC can be obtained over the internet at the
SEC’s website at www.sec.gov or inspected and copied at the public reference facilities maintained by the SEC at 100 F Street, N.E., Washington,
D.C. 20549. You can request copies of documents, upon payment of a duplicating fee, by writing to the SEC. As a foreign private issuer, we are
exempt from the rules under the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and officers,
directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the
Exchange Act.
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We will furnish the Bank of New York Mellon, the depositary of the ADSs, with our annual reports, which will include a review of operations
and annual audited consolidated financial statements prepared in conformity with U.S. GAAP, and all notices of shareholders’ meetings and other
reports and communications that are made generally available to our shareholders. The depositary will make such notices, reports and
communications available to holders of ADSs and, upon our request, will mail to all record holders of ADSs the information contained in any
notice of a shareholders’ meeting received by the depositary from us.
In accordance with Nasdaq Stock Market Rule 5250(d), we will post this annual report on Form 20-F on our website at ir.futuholdings.com. In
addition, we will provide hardcopies of our annual report free of charge to shareholders and ADS holders upon request.
I. Subsidiary Information
Not applicable.
Item 11. Quantitative and Qualitative Disclosures about Market Risk
Foreign exchange risk
Most of our revenues are denominated in Hong Kong dollar and a significant portion of our expenses are denominated in Renminbi. The value
of your investment in the ADSs will be affected by the exchange rate between U.S. dollar and Hong Kong dollar because the value of our business
is effectively denominated in Hong Kong dollars, while the ADSs are traded in U.S. dollars.
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the financial instruments. Futu Securities is not
exposed to significant transactional foreign currency risk since almost all of its transactions, assets and liability are denominated in Hong Kong
dollars and U.S. dollars and Hong Kong dollars are pegged against U.S. dollars. The impact of foreign currency fluctuations in our earnings is
included in “Others, net” in the consolidated statements of comprehensive (loss)/income. At the same time, we are exposed to translational foreign
currency risk since some of our major subsidiaries have RMB as their functional currency. Therefore, RMB depreciation against Hong Kong
dollars could have a material adverse impact on the foreign currency translation adjustment in the consolidated statements of comprehensive
(loss)/income.
As of December 31, 2019, 2020 and 2021, we had RMB-denominated net liabilities of HK$94.3 million, and net assets of HK$262.9 million
and HK$2,374.8 million (US$304.5 million), respectively. We estimate that a 10% depreciation of Renminbi against the U.S. dollar based on the
foreign exchange rate on December 31, 2019, 2020 and December 30, 2021 would result in a decrease of US$1.2 million in our pre-tax profit for
the year ended December 31, 2019, and an increase of US$3.4 million and a decrease of US$30.5 million, respectively, in our pre-tax profit for the
year ended December 31, 2020 and 2021, and a 10% appreciation of Renminbi against the U.S. dollar based on the foreign exchange rate on
December 31, 2019, 2020 and 2021 would result in an increase of US$1.2 million in our pre-tax profit for the year ended December 31, 2019 and a
decrease of US$3.4 million and an increase of US$30.5 million, respectively, in our pre-tax profit for the year ended December 31, 2020 and 2021.
Credit risk
Cash held on behalf of clients are segregated and deposited in financial institutions as required by the Securities and Futures Ordinance and the
Uniform Net Capital Rule (Rule 15c3-1). These financial institutions are of sound credit ratings; therefore management believes that there is no
significant credit risk related to cash held on behalf of clients.
Our securities activities are transacted on either a cash or margin basis. Our credit risk is limited in that substantially all of the contracts
entered into are settled directly at securities clearing houses.
In margin transactions, we extend credit to the clients, subject to various regulatory and internal margin requirements, collateralized by cash
and securities in the client’s account. IPO loans are exposed to credit risk from clients who fail to repay the loans upon IPO stock allotment. We
monitor our clients’ collateral level and have the right to dispose the newly allotted stocks once the stocks start trading. Bridge loans to enterprise
pledged by shares are exposed to credit risk from counterparties who fails to repay the loans. We monitor the collateral level of bridge loans in real
time, and have the right to dispose of the pledged shares once the collateral level falls under the minimal level required to get the loans repaid.
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Liabilities to other brokers and dealers related to unsettled transactions are recorded at the amount for which the securities were purchased, and
are paid upon receipt of the securities from other brokers or dealers.
In connection with its clearing activities, Futu International Hong Kong is obligated to settle transactions with brokers and other financial
institutions even if its clients fail to meet their obligations to us. Clients are required to complete their transactions by the settlement date, generally
two business days after the trade date. If clients do not fulfill their contractual obligations, we may incur losses. We have established procedures to
reduce this risk by generally requiring that clients deposit sufficient cash and/or securities into their account prior to placing an order.
Our exposure to credit risk associated with its trading and other activities is measured on an individual counterparty basis, as well as by groups
of counterparties that share similar attributes. There was no revenue from clients which individually represented greater than 10% of the total
revenues for the years ended December 31, 2019, 2020 and 2021, respectively. Concentrations of credit risk can be affected by changes in political,
industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in light of
changing counterparty and market conditions. As of December 31, 2019, 2020 and 2021, we did not have any material concentrations of credit risk
within or outside the ordinary course of business.
Interest rate risk
Fluctuations in market interest rates may negatively affect our financial condition and results of operations. We are exposed to floating interest
rate risk on cash deposit and floating rate borrowings. We use net interest simulation modeling techniques to evaluate the effect that changes in
interest rates might have on pre-tax income. The model includes all interest-sensitive assets and liabilities. The simulations involve assumptions
that are inherently uncertain and, as a result, cannot precisely predict the impact that changes in interest rates will have on pre-tax income. Actual
results may differ from simulated results due to differences in timing and frequency of rate changes, changes in market conditions and changes in
management strategy that lead to changes in the mix of interest-sensitive assets and liabilities.
The simulations assume that the asset and liability structure of the consolidated balance sheets would not be changed as a result of a simulated
change in interest rates. The results of the simulations based on our financial position as of December 31, 2021 indicate that a gradual 1% (100
basis points) increase in interest rates over a 12-month period would result in approximately HK$246.4 million (US$31.6 million) net income and a
gradual 1% (100 basis points) decrease in interest rates over a 12-month period would result in approximately HK$246.4 million (US$31.6 million)
net loss, depending largely on the extent and timing of possible changes in floating rates.
Inflation
To date, our results of operations have not been materially affected by inflation. According to the Census and Statistics Department of Hong
Kong, the year-over-year percent changes in the consumer price index for December 2019, 2020 and 2021 were increases of 2.9%, 0.7% and 2.4%,
respectively. According to the National Bureau of Statistics of China, the year-over-year percent changes in the consumer price index for December
2019, 2020 and 2021 were increases of 4.5%, 0.2% and 1.5%, respectively. Although we have not been materially affected by inflation in the past,
we may be affected if any country or region where we have operations experiences higher rates of inflation in the future.
Item 12. Description of Securities Other than Equity Securities
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
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D. American Depositary Shares
Fees and Charges ADS holders May Have to Pay
An ADS holder will be required to pay the following service fees to the depositary bank and certain taxes and governmental charges (in
addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of the
ADSs):
Persons depositing or withdrawing Class A ordinary
shares or ADS holders must pay:
$5.00 (or less) per 100 ADSs (or portion of 100 ADSs)
For:
● Issuance of ADSs, including issuances resulting from a
distribution of Class A ordinary shares or rights or other
property
● Cancellation of ADSs for the purpose of withdrawal,
including if the deposit agreement terminates
$0.05 (or less) per ADS
● Any cash distribution to ADS holders
A fee equivalent to the fee that would be payable if securities
distributed to you had been Class A ordinary shares and the
Class A ordinary shares had been deposited for issuance of
ADSs
● Distribution of securities distributed to holders of deposited
securities (including rights) that are distributed by the
depositary to ADS holders
$0.05 (or less) per ADS per calendar year
● Depositary services
Registration or transfer fees
● Transfer and registration of Class A ordinary shares on our
share register to or from the name of the depositary or its
agent when you deposit or withdraw Class A ordinary
shares
Expenses of the depositary
● Cable and facsimile transmissions (when expressly provided
Taxes and other governmental charges the depositary or the
custodian has to pay on any ADSs or Class A ordinary shares
underlying ADSs, such as stock transfer taxes, stamp duty or
withholding taxes
in the deposit agreement)
● Converting foreign currency to U.S. dollars
● As necessary
Any charges incurred by the depositary or its agents for
servicing the deposited securities
● As necessary
The depositary collects its fees for delivery and surrender of ADSs directly from investors depositing Class A ordinary shares or surrendering
ADSs for the purpose of withdrawal or from intermediaries acting for them. The depositary collects fees for making distributions to investors by
deducting those fees from the amounts distributed or by selling a portion of distributable property to pay the fees. The depositary may collect its
annual fee for depositary services by deduction from cash distributions or by directly billing investors or by charging the book-entry system
accounts of participants acting for them. The depositary may collect any of its fees by deduction from any cash distribution payable (or by selling a
portion of securities or other property distributable) to ADS holders that are obligated to pay those fees. The depositary may generally refuse to
provide fee-attracting services until its fees for those services are paid.
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The depositary may convert currency itself or through any of its affiliates and, in those cases, acts as principal for its own account and not as
agent, advisor, broker or fiduciary on behalf of any other person and earns revenue, including, without limitation, transaction spreads, that it will
retain for its own account. The revenue is based on, among other things, the difference between the exchange rate assigned to the currency
conversion made under the deposit agreement and the rate that the depositary or its affiliate receives when buying or selling foreign currency for its
own account. The depositary makes no representation that the exchange rate used or obtained in any currency conversion under the deposit
agreement will be the most favorable rate that could be obtained at the time or that the method by which that rate will be determined will be the
most favorable to ADS holders, subject to the depositary’s obligations under the deposit agreement. The methodology used to determine exchange
rates used in currency conversions is available upon request.
Fees and Other Payments Made by the Depositary to Us
From time to time, the depositary may make payments to us to reimburse us for costs and expenses generally arising out of establishment and
maintenance of the ADS program, waive fees and expenses for services provided to us by the depositary or share revenue from the fees collected
from ADS holders. In performing its duties under the deposit agreement, the depositary may use brokers, dealers, foreign currency dealers or other
service providers that are owned by or affiliated with the depositary and that may earn or share fees, spreads or commissions. For the year ended
December 31, 2021, we received nil in reimbursement from the depositary for our expenses incurred in connection with the establishment and
maintenance of the ADS program.
Payment of Taxes
ADS holders will be responsible for any taxes or other governmental charges payable on the ADSs or on the deposited securities represented
by any of the ADSs. The depositary may refuse to register any transfer of ADSs or allow holders thereof to withdraw the deposited securities
represented by the ADSs until those taxes or other charges are paid. It may apply payments owed to ADS holders or sell deposited securities
represented by the ADSs to pay any taxes owed and the ADS holders will remain liable for any deficiency. If the depositary sells deposited
securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to ADS holders any proceeds, or send to ADS holders any
property, remaining after it has paid the taxes.
Item 13. Defaults, Dividend Arrearages and Delinquencies
None.
PART II
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
Material Modifications to the Rights of Security Holders
None.
Use of Proceeds
The following “Use of Proceeds” information relates to the automatic shelf registration statement on Form F-3 (File No. 333-248076) (the
“Form F-3 Registration Statement”) filed with the SEC on August 17, 2020.
On August 19, 2020, we filed a prospectus supplement under the Form F-3 Registration Statement in relation to our public offering of
9,500,000 ADSs, representing 76,000,000 Class A ordinary shares, at a public offering price of US$33.00 per ADS (the “2020 Follow-on
Offering”). Goldman Sachs (Asia) L.L.C., Credit Suisse Securities (USA) LLC, UBS Securities LLC and Haitong International Securities
Company Limited were the representatives of the underwriters for the 2020 Follow-on Offering. The 2020 Follow-on Offering closed in August
2020. We raised from US$301.8 million in net proceeds after deducting underwriting commissions and discounts and the offering expenses payable
by us.
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On April 21, 2021, we filed a prospectus supplement under Form F-3 Registration Statement in relation to our public offering of 10,925,000
ADSs (including the sale of an aggregate of 1,425,000 ADSs to the underwriters pursuant to their full exercise of the over-allotment option),
representing 87,400,000 Class A ordinary shares, at a public offering price of US$130.00 per ADS (the “2021 Follow-on Offering”). BofA
Securities, Inc. and Haitong International Securities Company Limited were the representatives of the underwriters for the 2021 Follow-on
Offering. The 2021 Follow-on Offering closed in April 2021. We raised US$1,397.5 million in net proceeds after deducting underwriting
commissions and discounts and the offering expenses payable by us.
For the period from August 17, 2020, the date that the Form F-3 Registration Statement became effective upon filing with the SEC, to
December 31, 2021, we used (i) the entire amount of the net proceeds from the 2020 Follow-on Offering for margin financing business and general
corporate purposes, including research and development, working capital needs, and increased regulatory capital requirements of the HK SFC and
regulatory authorities in other jurisdictions as a result of our business expansion and (ii) the entire amount of the net proceeds from the 2021
Follow-on Offering for our margin financing business, international expansion, new license applications, potential investment and acquisition
opportunities and other general corporate purposes. None of the proceeds from the public offering were paid, directly or indirectly, to any of our
directors or officers or their associates, persons owning 10% or more of our equity securities or our affiliates. There is no material change in the use
of proceeds as described in the Form F-3 Registration Statement.
Item 15. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, under the supervision and with the participation of our chief executive officer and chief financial officer, carried out an
evaluation of the effectiveness of our disclosure controls and procedures, which is defined in Rules 13a-15(e) of the Exchange Act, as of December
31, 2021. Based upon that evaluation, our management, with the participation of our chief executive officer and chief financial officer, concluded
that, our disclosure controls and procedures were effective in ensuring that information required to be disclosed by us in the reports that we file or
submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rule and forms and
that such information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated
to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to
allow timely decisions regarding required disclosures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-
15(f) under the Securities Exchange Act of 1934, as amended). Our management evaluated the effectiveness of our internal control over financial
reporting based on criteria established in the framework in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, our management has concluded that our internal control over financial
reporting was effective as of December 31, 2021.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. In addition, projections of
any evaluation of effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
Attestation Report of the Independent Registered Public Accounting Firm
PricewaterhouseCoopers Zhong Tian LLP has audited the effectiveness of our internal control over financial reporting as of December 31,
2021 as stated in its report, which appears on page F-2 of this annual report on Form 20-F.
Changes in Internal Control over Financial Reporting
Other than as described above, there were no changes in our internal controls over financial reporting that occurred during the period covered
by this annual report on Form 20-F that have materially affected, or are reasonably likely to materially affect, our internal control over financial
reporting.
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Item 16A. Audit Committee Financial Expert
Our board of directors has determined that Ms. Brenda Pui Man Tam, an independent director (under the standards set forth in Nasdaq Stock
Market Rule 5605(a)(2) and Rule 10A-3 under the Exchange Act) and member of our audit committee, is an audit committee financial expert.
Item 16B. Code of Ethics
Our board of directors adopted a code of business conduct and ethics that applies to our directors, officers and employees in December 2018.
We have posted a copy of our code of business conduct and ethics on our website at http://ir.futuholdings.com/.
Item 16C. Principal Accountant Fees and Services
The following table sets forth the aggregate fees by categories specified below in connection with certain professional services rendered by
PricewaterhouseCoopers Zhong Tian LLP, our principal external auditors, for the periods indicated.
Audit fees(1)
Tax fees(2)
All other fees(3)
Notes:
For the Year ended December 31,
2020
US$ 1,455,865
34,116
US$
67,090
US$
2021
US$ 2,072,186
5,404
US$
290,204
US$
(1) “Audit fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors for the audit of our
annual financial statements and assistance with and review of documents filed with the SEC. In 2020 and 2021, the audit refers to financial audit.
(2) “Tax fees” means the aggregate fees billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning.
(3) “All other fees” means the aggregate fees billed in each of the fiscal years listed for professional services rendered by our principal auditors associated with
certain permissible services to review and comment on internal control design over financial reporting and other advisory services.
The policy of our audit committee is to pre-approve all audit and non-audit services provided by PricewaterhouseCoopers Zhong Tian LLP,
including audit services, audit-related services, tax services and other services as described above, other than those for de minimis services which
are approved by the audit committee prior to the completion of the audit.
Item 16D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
On November 3, 2021, our board of directors approved a share repurchase program to repurchase up to US$300 million worth of our ADSs,
representing Class A ordinary shares, until December 31, 2022. The share repurchase program was announced on November 3, 2021.
On March 11, 2022, we announced a new share repurchase program approved by our board of directors, under which the company may
repurchase up to US$500 million worth of its ADSs, until December 31, 2023.
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The table below is a summary of the shares repurchased by us as of the date of February 28, 2022. All shares were repurchased in the open
market pursuant to the share repurchase program announced on November 3, 2021.
Average
Price Paid
Per
ADS
Total
Number of
ADSs
Purchased
3,682,845 US$41.04
3,467,155 US$42.93
7,150,000 US$41.96
Total Number
of ADSs
Purchased as
Part of the
Publicly
Announced
Plan
Approximate
Dollar Value of
ADSs that May
Yet Be
Purchased
Under the Plan
3,682,845 US$148,840,788
3,467,155
7,150,000
US$1,011
US$1,011
Period
December 1 – December 31, 2021
January 1 – January 31, 2022
Total
Item 16F. Change in Registrant’s Certifying Accountant
Not applicable.
Item 16G. Corporate Governance
As a Cayman Islands exempted company listed on Nasdaq Stock Market, we are subject to the Nasdaq corporate governance listing standards.
However, Nasdaq rules permit a foreign private issuer like us to follow the corporate governance practices of its home country. Certain corporate
governance practices in the Cayman Islands, which is our home country, may differ significantly from the Nasdaq corporate governance listing
standards. Currently, we rely on home country practice as our audit committee consists of two independent directors. We also rely on home country
practice exemption with respect to the requirement for annual shareholders meeting and did not hold an annual shareholders meeting in 2021. As a
result, our shareholders are afforded less protection than they would otherwise enjoy under the Nasdaq Stock Market corporate governance listing
standards applicable to U.S. domestic issuers. See “Item 3. Key Information—D. Risk Factors—Risks Related to the ADSs—As a company
incorporated in the Cayman Islands, we are permitted to adopt certain home country practices in relation to corporate governance matters that
differ significantly from the Nasdaq listing standards; these practices may afford less protection to shareholders than they would enjoy if we
complied fully with the Nasdaq listing standards.”
In addition, as a “controlled company” as defined under the Nasdaq Stock Market Rules, we are permitted to elect to rely, and are currently
relying, on certain exemptions from corporate governance rules. Currently, the majority of our board of directors are not independent directors. In
addition, the compensation of our executive officers is not determined or recommended solely by independent directors, and our director nominees
are not selected or recommended solely by independent directors. As a result, you do not have the same protection afforded to shareholders of
companies that are subject to these corporate governance requirements. See “Item 3. Key Information—D. Risk Factors—Risks Related to the
ADSs—We are a “controlled company” within the meaning of the Nasdaq Stock Market Rules and, as a result, can rely on exemptions from certain
corporate governance requirements that provide protection to shareholders of other United States domestic companies.”
Item 16H. Mine Safety Disclosure
Not applicable.
Item 16I.
Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 17. Financial Statements
We have elected to provide financial statements pursuant to Item 18.
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Item 18. Financial Statements
The consolidated financial statements of Futu Holdings Limited, its subsidiaries and its consolidated variable interest entity are included at the
end of this annual report.
Item 19. Exhibits
Exhibit
Number
Description of Document
1.1
2.1
2.2
2.3
2.4
2.5
4.1
4.2
4.3
4.4
4.5*
4.6*
4.7*
Form of Fourth Amended and Restated Memorandum and Articles of Association of the Registrant (incorporated herein by
reference to Exhibit 3.2 to the registration statement on Form F-1 filed with the Securities and Exchange Commission on
December 28, 2018 (File No. 333-229094))
Registrant’s Specimen American Depositary Receipt (included in Exhibit 2.3)
Registrant’s Specimen Certificate for Ordinary Shares (incorporated herein by reference to Exhibit 4.2 to the registration
statement on Form F-1/A filed with the Securities and Exchange Commission on February 19, 2019 (File No. 333-229094))
Deposit Agreement, among the Registrant, the depositary and holder and beneficial owners of the American Depositary
Receipts issued thereunder, dated March 7, 2019 (incorporated herein by reference to Exhibit 4.3 to the registration statement
on Form S-8 filed with the Securities and Exchange Commission on September 12, 2019 (File No. 333- 233721))
Second Amended and Restated Shareholders Agreement between the Registrant and other parties thereto dated May 22, 2017
(incorporated herein by reference to Exhibit 4.4 to the registration statement on Form F-1/A filed with the Securities and
Exchange Commission on December 28, 2018 (File No. 333-229094))
Description of Securities (incorporated herein by reference to Exhibit 2.5 of our Annual Report on Form 20-F filed with the
Securities and Exchange Commission on April 27, 2020 (File No. 001-38820))
Amended and Restated 2014 Share Incentive Plan (incorporated herein by reference to Exhibit 10.1 to the registration statement
on Form F-1 filed with the Securities and Exchange Commission on December 28, 2018 (File No. 333-229094))
2019 Share Incentive Plan (incorporated herein by reference to Exhibit 10.2 to the registration statement on Form S-8 filed with
the Securities and Exchange Commission on September 12, 2019 (File No. 333- 233721))
Form of Indemnification Agreement between the Registrant and its directors and executive officers (incorporated herein by
reference to Exhibit 10.2 to the registration statement on Form F-1 filed with the Securities and Exchange Commission on
December 28, 2018 (File No. 333-229094))
Form of Employment Agreement between the Registrant and its executive officer (incorporated herein by reference to
Exhibit 10.3 to the registration statement on Form F-1 filed with the Securities and Exchange Commission on December 28,
2018 (File No. 333-229094))
English translation of the exclusive business cooperation agreement among Shensi Beijing, Shenzhen Futu and the shareholders
of Shenzhen Futu dated September 30, 2021
English translation of the equity interest pledge agreement among Shensi Beijing, Shenzhen Futu and each of Shenzhen Futu’s
shareholders dated September 30, 2021
English translation of the power of attorney among Shensi Beijing, Shenzhen Futu and shareholders of Shenzhen Futu dated
September 30, 2021
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4.8*
4.9*
4.10
4.11
4.12
8.1*
11.1
12.1*
12.2*
13.1**
13.2**
15.1*
15.2*
15.3*
English translation of the exclusive option agreement among Shensi Beijing, Shenzhen Futu and the shareholders of Shenzhen
Futu dated September 30, 2021
English translation of the spousal consent letters granted by the spouse of each individual shareholder of Shenzhen Futu, as
currently in effect
Subscription Agreement by and between the Registrant and General Atlantic Singapore FT Pte. Ltd., dated March 5, 2019
(incorporated herein by reference to Exhibit 10.11 to the registration statement on Form F-1/A filed with the Securities and
Exchange Commission on March 5, 2019 (File No. 333-229094))
Purchase Agreement by and between the Registrant and a leading global investment firm, dated December 8, 2020
(incorporated herein by reference to Exhibit 4.12 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 26, 2021 (File No. 001-38820)
Registration Rights Agreement by and between the Registrant and a leading global investment firm, dated December 14, 2020
(incorporated herein by reference to Exhibit 4.13 of our Annual Report on Form 20-F filed with the Securities and Exchange
Commission on March 26, 2021 (File No. 001-38820)
List of significant subsidiaries and consolidated affiliated entity of the Registrant
Code of Business Conduct and Ethics of the Registrant (incorporated herein by reference to Exhibit 99.1 to the registration
statement on Form F-1 filed with the Securities and Exchange Commission on December 28, 2018 (File No. 333-229094))
Certification by Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Certification by Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Certification by Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Consent of PricewaterhouseCoopers Zhong Tian LLP, an independent Registered Public Accounting Firm
Consent of Han Kun Law Offices
Consent of Maples and Calder (Hong Kong) LLP
101.INS* XBRL Instance Document
101.SCH* XBRL Taxonomy Extension Schema Document
101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF* XBRL Taxonomy Extension Definition Linkbase Document
101.LAB* XBRL Taxonomy Extension Labels Linkbase Document
101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document
104* Cover Page Interactive Data File (embedded within the Inline XBRL document)
*
Filed with this Annual Report on Form 20-F.
** Furnished with this Annual Report on Form 20-F.
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The registrant hereby certifies that it meets all of the requirements for filing its annual report on Form 20-F and that it has duly caused and
authorized the undersigned to sign this annual report on its behalf.
SIGNATURES
Futu Holdings Limited
By:
/s/ Leaf Hua Li
Name: Leaf Hua Li
Title: Chairman of the Board of Directors and Chief Executive
Officer
Date: March 18, 2022
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Contents
FUTU HOLDINGS LIMITED
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm (PCAOB ID 1424)
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 2020 and 2021
Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2019, 2020 and 2021
Consolidated Statements of Changes in Shareholders’ Equity for the Years Ended December 31, 2019, 2020 and 2021
Consolidated Statements of Cash Flows for the Years Ended December 31, 2019, 2020 and 2021
Notes to Consolidated Financial Statements
Page
F-2
F-4
F-6
F-7
F-9
F-11
F-1
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of Futu Holdings Limited
Opinions on the Financial Statements and Internal Control over Financial Reporting
We have audited the accompanying consolidated balance sheets of Futu Holdings Limited and its subsidiaries (the “Company”) as of December 31,
2021 and 2020, and the related consolidated statements of comprehensive income, of changes in shareholders’ equity and of cash flows for each of
the three years in the period ended December 31, 2021, including the related notes (collectively referred to as the “consolidated financial
statements”). We also have audited the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31,
2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control
- Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for credit losses on
financial instruments in 2020.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Annual Report on
Internal Control over Financial Reporting appearing under Item 15. Our responsibility is to express opinions on the Company’s consolidated
financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on
a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe
that our audits provide a reasonable basis for our opinions.
F-2
Table of Contents
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles,
and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the
consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating
the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Incentives offered in the customer loyalty program
As described in Note 2 to the consolidated financial statements, the Company operates a customer loyalty program that offers its customers
incentive points and coupons for free or discounted goods or services. In relation to the customer loyalty program, a total contract liability of
HK$8,968 thousand was recorded on the consolidated balance sheet as of December 31, 2021. The contract liability is determined by management
based on the expected usage of the incentive points and coupons, and their estimated relative standalone selling price based on the related goods
and services. Significant judgment was made by management in determining the expected usage and estimated relative standalone selling price of
the incentive points and coupons derived from historical trading volume, commission rates and redemption patterns, and an evaluation as to
whether historical results are representative of the expected future activities.
The principal considerations for our determination that performing procedures relating to the incentives offered in the customer loyalty program is
a critical audit matter are the significant judgments by management in developing estimates relating to the expected usage and relative standalone
selling price of the incentive points and coupons. This in turn led to significant audit effort in performing audit procedures relating to
management’s estimates of expected usage and relative standalone selling price of the incentive points and coupons, and a high degree of auditor
judgment and subjectivity in evaluating audit evidence relating to the estimates.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the
consolidated financial statements. These procedures included testing the effectiveness of controls relating to the incentives offered in the customer
loyalty program, including information technology general and automated controls over the Company’s systems. These procedures also included,
among others, (i) testing the integrity of the underlying data used in developing the estimates; (ii) evaluating the reasonableness of management’s
significant assumptions in determining the expected usage and estimated relative standalone selling price, including trading volume, commission
rates and redemption patterns; and (iii) evaluating the reasonableness of the estimates by comparing to historical results, and considering whether
historical results are representative of the expected future activities.
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shenzhen, the People’s Republic of China
March 18, 2022
We have served as the Company’s auditor since 2018.
F-3
Table of Contents
FUTU HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share data)
ASSETS
Cash and cash equivalents
Cash held on behalf of clients
Restricted cash
Term deposit
Short-term investments
Securities purchased under agreements to resell
Loans and advances (net of allowance of HK$9,075 thousand and HK$12,258
thousand as of December 31, 2020 and 2021, respectively)
Receivables:
Clients
Brokers
Clearing organizations
Fund management companies and fund distributors
Interest
Prepaid assets
Other current assets
Total current assets
Operating lease right-of-use assets
Long-term investments
Other non-current assets
Total non-current assets
Total assets
LIABILITIES
Amounts due to related parties
Payables:
Clients
Brokers
Clearing organizations
Fund management companies and fund distributors
Interest
Borrowings
Securities sold under agreements to repurchase
Lease liabilities - current
Accrued expenses and other current liabilities
Total current liabilities
F-4
Note
2020
HK$
As of December 31,
2021
HK$
2021
US$
1,034,668
42,487,090
4,555,096
54,734,351
—
300,000
2,065
—
—
—
1,169,741
106,203
584,016
7,017,584
265
—
149,974
13,616
18,825,366
29,587,306
3,793,439
735,145
5,780,461
1,243,928
297,622
19,876
11,422
106,887
70,842,465
208,863
—
286,439
495,302
71,337,767
469,577
7,893,927
1,961,121
72,340
50,829
18,306
81,594
100,702,456
243,859
23,394
568,805
836,058
101,538,514
60,205
1,012,094
251,439
9,275
6,517
2,347
10,461
12,911,232
31,266
2,999
72,928
107,193
13,018,425
4
6
10
5
9
10
30(b)
87,169
87,459
11,213
46,062,842
4,533,581
324,266
127,442
5,493
5,482,818
5,453,037
66,333
717,183
62,860,164
59,127,439
7,599,233
393,782
56,690
15,359
6,357,405
4,467,861
96,860
2,176,213
80,378,301
7,580,830
974,311
50,487
7,268
1,969
815,094
572,832
12,419
279,015
10,305,438
11
5
12
Table of Contents
FUTU HOLDINGS LIMITED
CONSOLIDATED BALANCE SHEETS (Continued)
(In thousands, except for share and per share data)
Lease liabilities - non-current
Other non-current liabilities
Total non-current liabilities
Total liabilities
Commitments and Contingencies (Note 29)
SHAREHOLDERS’ EQUITY
Class A ordinary shares(US$0.00001 par value; 48,700,000,000 and 48,700,000,000
shares authorized as of December 31, 2020 and 2021, respectively; 590,139,760
and 737,944,914 shares issued and outstanding as of December 31, 2020 and 2021,
respectively)
Class B ordinary shares (US$0.00001 par value; 800,000,000 and 800,000,000
shares authorized as of December 31, 2020 and 2021, respectively; 494,552,051
and 494,552,051 shares issued and outstanding as of December 31, 2020 and 2021,
respectively)
Additional paid-in capital
Treasury stock (nil and 29,462,760 shares as of December 31, 2020 and 2021,
respectively)
Accumulated other comprehensive income
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
Note
5
12
13
13
13
2020
HK$
As of December 31,
2021
HK$
2021
US$
155,898
14,015
169,913
63,030,077
163,719
10,935
174,654
80,552,955
20,990
1,404
22,394
10,327,832
47
58
7
38
6,960,369
38
17,935,752
5
2,299,573
—
4,974
1,342,262
8,307,690
71,337,767
(1,178,755)
75,994
4,152,472
20,985,559
101,538,514
(151,130)
9,742
532,396
2,690,593
13,018,425
The accompanying notes are an integral part of these consolidated financial statements.
F-5
Table of Contents
FUTU HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands, except for share and per share data)
Revenues
Brokerage commission and handling charge income
Interest income
Other income
Total revenues
Costs
Brokerage commission and handling charge expenses
Interest expenses
Processing and servicing costs
Total costs
Total gross profit
Operating expenses
Research and development expenses
Selling and marketing expenses
General and administrative expenses
Total operating expenses
Others, net
Income before income tax expenses
Income tax expenses
Share of loss from equity method investments
Net income
Preferred shares redemption value accretion
Income allocation to participating preferred shareholders
Net income attributable to ordinary shareholders of the Company
Net income
Other comprehensive (loss)/income, net of tax
Foreign currency translation adjustment
Total comprehensive income
Net income per share attributable to ordinary shareholders of the Company
Basic
Diluted
Net income per ADS
Basic
Diluted
Weighted average number of ordinary shares used in computing net income per share
Basic
Diluted
Note
19
20
21
22,25
23
24,25
25
25
25
26
17
17
2019
HK$
511,365
464,903
85,287
1,061,555
(100,550)
(89,238)
(91,916)
(281,704)
779,851
(262,345)
(164,701)
(164,850)
(591,896)
Year ended December 31,
2020
HK$
2021
HK$
2021
US$
1,990,138
965,627
355,057
3,310,822
(361,486)
(185,090)
(149,378)
(695,954)
2,614,868
(513,283)
(385,320)
(248,404)
(1,147,007)
3,913,027
2,518,198
684,095
7,115,320
(572,159)
(376,902)
(257,003)
(1,206,064)
5,909,256
(805,325)
(1,392,070)
(529,048)
(2,726,443)
501,696
322,862
87,709
912,267
(73,357)
(48,323)
(32,951)
(154,631)
757,636
(103,252)
(178,480)
(67,830)
(349,562)
(9,462)
(17,238)
2,478
318
178,493
1,450,623
3,185,291
408,392
(12,286)
(543)
(124,793)
(307)
(375,081)
—
165,664
1,325,523
2,810,210
(12,309)
(10,196)
143,159
—
—
1,325,523
—
—
2,810,210
165,664
1,325,523
2,810,210
(3,147)
162,517
9,420
1,334,943
71,020
2,881,230
0.17
0.16
1.38
1.25
1.28
1.26
10.23
10.10
2.34
2.30
18.72
18.43
(48,090)
—
360,302
—
—
360,302
360,302
9,104
369,406
0.30
0.30
2.40
2.36
832,790,329
917,897,426
1,036,865,727
1,050,143,014
1,200,912,670
1,219,672,508
1,200,912,670
1,219,672,508
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
FUTU HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands, except for share and per share data)
Ordinary shares
Class A
ordinary shares
Class B
ordinary shares
Note
Number of
Shares
Amount
HK$
Number of
Shares
Amount
HK$
Number of
Shares
Amount
HK$
Additional
paid in
capital
HK$
Accumulated
other
(Accumulated
comprehensive deficit)/Retained
loss
HK$
earnings
HK$
Total equity
HK$
As of January
1, 2019
Profit for the
year
Share-based
403,750,000
31
—
—
—
—
—
—
—
—
—
—
—
—
compensation 16
—
—
—
—
—
—
15,967
(1,299)
(148,925)
(150,193)
—
—
165,664
165,664
—
15,967
Preferred
shares
redemption
value
accretion
Conversion and
redesignation
of preferred
shares into
ordinary
shares
Issuance of
ordinary
shares upon
Initial Public
Offering
(“IPO”)
Redesignation
of ordinary
shares into
Class B
ordinary
shares
Shares issued
—
—
—
—
—
—
(12,309)
—
—
(12,309)
—
— 237,129,043
19 140,802,051
11 1,262,751
—
— 1,262,781
—
— 115,666,666
9
—
— 1,259,308
—
— 1,259,317
(403,750,000)
(31)
—
— 403,750,000
31
—
—
—
upon exercise
of employee
share options 16
Foreign
currency
translation
adjustment,
net of tax
Balance at
December
31, 2019
—
— 106,295,232
8
—
—
10,465
—
—
10,473
—
—
—
—
—
—
—
(3,147)
—
(3,147)
—
— 459,090,941
36 544,552,051
42 2,536,182
(4,446)
16,739 2,548,553
F-7
Table of Contents
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Continued)
FUTU HOLDINGS LIMITED
(In thousands, except for share and per share data)
Ordinary shares
Class A
ordinary shares
Class B
ordinary shares
Treasury stock purchases
Number of
Note Shares
Amount
HK$
Number of
Shares
Amount
HK$
Number of
Shares
Amount
HK$
Number of
Shares
Amount
HK$
Accumulated
other
comprehensive
Additional
paid in
capital
HK$
As of January 1, 2020
Profit for the year
Share-based compensation
Shares issued upon exercise of employee share options
Issuance of ordinary shares upon follow-on public offering
Surrendered and cancellation of Class A ordinary shares
Share conversion from Class B to Class A
Issuance of Pre-Funded warrants
Foreign currency translation adjustment, net of tax
Balance at December 31, 2020
16
16
13
13
13
As of January 1, 2021
Profit for the year
Share-based compensation
Shares issued upon exercise of employee share options/
restricted share units (“RSUs”)
Issuance of ordinary shares
Treasury stock purchases
Exercise of Pre-Funded warrants
Foreign currency translation adjustment, net of tax
Balance at December 31, 2021
16
16
13
13
13
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 459,090,941
—
—
—
—
—
5,048,824
— 76,000,000
(5)
—
— 50,000,000
—
—
—
—
— 590,139,760
36 544,552,051
—
—
—
—
—
—
—
7
—
—
(50,000,000)
4
—
—
—
—
47 494,552,051
— 590,139,760
—
—
—
—
47 494,552,051
—
—
—
—
42
—
—
—
—
—
(4)
—
—
38
38
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 2,536,182
—
—
32,573
—
—
16,799
— 2,339,711
—
—
—
—
— 2,035,104
—
—
— 6,960,369
— 6,960,369
—
—
98,913
—
—
6,805,264
— 87,400,000
—
—
— 53,599,890
—
—
— 737,944,914
—
—
—
7
—
—
—
4
—
—
58 494,552,051
—
—
—
—
— (29,462,760)
—
—
—
—
(29,462,760)
38
—
19,957
— 10,856,517
—
(4)
—
(1,178,755) 17,935,752
(1,178,755)
—
—
The accompanying notes are an integral part of these consolidated financial statements.
F-8
(loss)/income Retained earnings Total equity
HK$
(4,446)
—
—
—
—
—
—
—
9,420
4,974
4,974
—
—
—
—
—
—
71,020
75,994
HK$
HK$
2,548,553
16,739
1,325,523
1,325,523
32,573
—
—
16,799
— 2,339,718
—
—
—
—
— 2,035,104
9,420
—
8,307,690
1,342,262
1,342,262
2,810,210
—
8,307,690
2,810,210
98,913
—
19,957
— 10,856,524
— (1,178,755
—
—
71,020
—
4,152,472 20,985,559
FUTU HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Table of Contents
Cash flows from operating activities
Net income
Adjustments for:
Depreciation and amortization
Expected credit loss expenses
Share of loss from equity method investments
Impairment from equity method investments
Foreign exchange losses/(gains)
Share-based compensation
Realized gain from short-term investments
Fair value gain from short-term investments
Deferred income tax benefit
Amortisation of right-of-use assets
Changes in operating assets:
Net increase in securities purchased under agreements to resell
Net increase in loans and advances
Net increase in accounts receivable from clients and brokers
Net increase in accounts receivable from clearing organizations
Net (increase)/decrease in accounts receivable from fund management companies and fund distributors
Net decrease/(increase) in interest receivable
Net (increase)/decrease in prepaid assets
Net decrease/(increase) in other assets
Changes in operating liabilities:
Net increase/(decrease) in amounts due to related parties
Net increase in accounts payable to clients and brokers
Net increase in accounts payable to clearing organizations
Net increase/(decrease) in accounts payable to fund management companies and fund distributors
Net increase in payroll and welfare payable
Net (decrease)/increase in interest payable
Net decrease in operating lease liabilities
Net increase/(decrease) in securities sold under agreements to repurchase
Net increase in other liabilities
Net cash generated from operating activities
F-9
Year Ended December 31,
Note
2019
HK$
2020
HK$
2021
HK$
2021
US$
165,664
1,325,523
2,810,210
360,302
16,547
—
543
—
7,539
15,967
(707)
—
(1,576)
49,553
27,231
9,075
307
5,888
11,493
32,573
(665)
—
(13,146)
52,548
36,436
3,200
—
—
(138,234)
98,913
—
(26)
(21,431)
83,695
16
4
26
—
(1,101,785)
(927,260)
(128,125)
—
32,535
(3,660)
20,860
—
(14,645,752)
(5,042,241)
(939,848)
(297,622)
(2,984)
1,048
(156,222)
(106,203)
(10,765,123)
(1,847,898)
(717,193)
225,282
(30,953)
(6,653)
(105,145)
25,037
3,697,534
—
26,381
33,990
(1,886)
(38,704)
1,590
79,397
1,969,434
83,429
33,673,301
324,266
101,061
217,200
4,974
(38,077)
5,451,447
271,910
20,456,717
(37,983)
16,130,249
69,516
(70,752)
213,981
9,866
(79,544)
(985,176)
1,242,937
6,011,971
4,672
410
—
—
(17,723)
12,682
—
(3)
(2,748)
10,731
(13,616)
(1,380,215)
(236,922)
(91,953)
28,884
(3,969)
(853)
(13,484)
(4,870)
2,068,087
8,913
(9,071)
27,435
1,265
(10,199)
(126,311)
159,359
770,803
Table of Contents
FUTU HOLDINGS LIMITED
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Cash flows from investing activities
Proceeds from disposal of property and equipment and intangible assets
Purchase of property and equipment and intangible assets
Purchase of short-term investments
Proceeds from disposal of short-term investments
Realized gain received from short-term investments
Acquisition of long-term investments
Placement of term deposit
Maturity of term deposit
Net cash used in investing activities
Cash flows from financing activities
Proceeds from public offering, net of issuance costs
Proceeds from exercise of employee share options
Proceeds from issuance of Pre-Funded warrants
Purchase of treasury stock
IPO loan borrowings (net)
Proceeds from other borrowings
Repayment of other borrowings
Payment of other financing expenses
Net cash generated from financing activities
(In thousands)
Note
2019
HK$
9
(118,341)
(285,784)
250,061
707
(6,709)
—
—
(160,057)
Year Ended December 31,
2020
HK$
—
(44,649)
(206,793)
306,602
665
—
(300,000)
—
(244,175)
2021
HK$
—
(70,456)
(1,169,715)
—
—
(23,394)
—
300,000
(963,565)
1,259,317
969
—
—
6,764,524
(6,873,188)
—
1,151,622
2,339,718
16,842
2,035,104
—
300,199
23,808,006
(20,092,973)
—
8,406,896
10,856,524
23,492
—
(1,178,755)
(300,199)
53,483,435
(52,313,417)
(16,862)
10,554,218
2021
US$
—
(9,033)
(149,971)
—
—
(2,999)
—
38,464
(123,539)
1,391,933
3,012
—
(151,130)
(38,489)
6,857,202
(6,707,192)
(2,162)
1,353,174
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(44,666)
(1,117)
167,130
21,428
Net increase in cash, cash equivalents and restricted cash
Cash, cash equivalents, and restricted cash at beginning of the year
2,916,333
11,987,104
28,618,321
14,903,437
15,769,754
43,521,758
2,021,866
5,579,999
Cash, cash equivalents and restricted cash at end of the year
14,903,437
43,521,758
59,291,512
7,601,865
Cash, cash equivalents and restricted cash
Cash and cash equivalents
Cash held on behalf of clients
Restricted Cash
Cash, cash equivalents, and restricted cash at end of the year
Non-cash financing activities
Accretion to preferred shares redemption value
Supplemental disclosure
Interest paid
Income tax paid
Cash paid for amounts include in operating lease liabilities
362,574
14,540,863
—
14,903,437
1,034,668
42,487,090
—
43,521,758
4,555,096
54,734,351
2,065
59,291,512
584,016
7,017,584
265
7,601,865
12,309
—
—
—
(89,238)
(15,117)
(50,629)
(181,706)
(16,250)
(58,686)
(367,036)
(102,890)
(89,427)
(47,058)
(13,192)
(11,466)
The accompanying notes are an integral part of these consolidated financial statements.
F-10
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. GENERAL INFORMATION, ORGANIZATION AND PRINCIPAL ACTIVITIES
Futu Holdings Limited (the “Company”) is an investment holding company incorporated in the Cayman Islands with limited liability and
conducts its business mainly through its subsidiaries, variable interest entities (“VIEs”) and subsidiaries of the VIEs (collectively referred to as the
“Group”). The Group principally engages in online financial services including securities and derivative trades brokerage, margin financing and
fund distribution services based on internally developed software and digital platform “Futubull” and “Moomoo”. The Group also provides
financial information and online community services, etc. The Company completed its IPO on March 8, 2019 on the Nasdaq Global Market. Each
American Depositary Shares (“ADSs”) of the Company represents eight Class A ordinary shares.
As of December 31, 2021, the Company’s principal subsidiaries and consolidated VIE are as follows:
Subsidiaries
Futu Securities International (Hong Kong)
Limited (“Futu Securities”)
Futu Inc.
Futu Clearing Inc.
Futu Singapore Pte. Ltd
Futu Securities (Australia) Ltd.
Futu Securities (Hong Kong) Limited
Futu Network Technology Limited
Futu Network Technology (Shenzhen) Co.,
Ltd.
Shen Si Network Technology (Beijing)
Date of Incorporation/
Establishment/
Place of
Incorporation/
Establishment
Percentage of
Direct or Indirect
Economic Interest
Principal Activities
April 17, 2012
December 17, 2015
August 13, 2018
December 17, 2019
February 15, 2001
Hong Kong
Delaware, USA
Delaware, USA
Singapore
New South Wales, AUS
May 2, 2014
Hong Kong
May 17, 2015
Hong Kong
October 14, 2015
Shenzhen, PRC
100 %
100 %
100 %
100 %
100 %
100 %
100 %
100 %
Financial services
Financial services
Financial services
Financial services
Financial services
Investment holding
Research and development
and technology services
Research and development
and technology services
Co., Ltd. (“Shen Si”)
September 15, 2014
Beijing, PRC
100 % No substantial business
VIE
Shenzhen Futu Network Technology Co.,
Ltd.(1) (“Shenzhen Futu”)
Note:
December 18, 2007
Shenzhen, PRC
Research and development
and technology services
100 %
(1) Mr. Leaf Hua Li and Ms. Lei Li are beneficiary owners of the Company and held 85% and 15% equity interest in Shenzhen Futu, respectively. Mr. Leaf Hua Li is the founder,
chairman and chief executive officer of the Company, and Ms. Lei Li is Mr. Leaf Hua Li’s spouse.
F-11
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The consolidated financial statements of the Group have been prepared in accordance with the accounting principles generally accepted in the
United States of America (“U.S. GAAP”). Significant accounting policies followed by the Group in the preparation of the accompanying
consolidated financial statements are summarized below. The Group continuously evaluates the reliability and relevance of the disclosure of
financial information, and to keep comparable to the presentation of balance sheets of other companies in the same industry, certain
reclassifications were made to the prior years to conform to the current-year presentation, which included reclassification of “Other assets” into
“Other current assets” and “Other non-current assets”, reclassification of “Accured expenses and other liabilities” into “Accrued expenses and
other current liabilities” and “Other non-current liabilities”, and reclassification of “Operating lease liabilities” into “Operating lease liabilities -
current” and “Operating lease liabilities - non-current”.
Basis of Consolidation
The consolidated financial statements include the financial statements of the Company, its subsidiaries, the VIEs and subsidiary of the VIEs
for which the Company or its subsidiary is the primary beneficiary.
A subsidiary is an entity in which the Company, directly or indirectly, controls more than one half of the voting power; or has the power to
appoint or remove the majority of the members of the Board of Directors; or to cast a majority of votes at the meeting of directors; or has the power
to govern the financial and operating policies of the investee under a statute or agreement among the shareholders or equity holders.
A consolidated VIE is an entity in which the Company, or its subsidiary, through contractual arrangements, has the power to direct the
activities that most significantly impact the entity’s economic performance, bears the risks of and enjoys the rewards normally associated with
ownership of the entity, and therefore the Company or its subsidiary is the primary beneficiary of the entity.
All transactions and balances among the Company, its subsidiaries, the VIEs and subsidiaries of the VIEs have been eliminated upon
consolidation.
VIE Companies
1) Contractual Agreements with VIEs
The following is a summary of the contractual agreements (collectively, “Contractual Agreements”) between the Company’s PRC subsidiary,
Shen Si, and the VIEs. Through the Contractual Agreements, the VIEs are effectively controlled by the Company.
Shareholders’ Voting Rights Proxy Agreements. Pursuant to the Shareholders’ Voting Rights Proxy Agreements, each shareholder of VIEs
irrevocably authorized Shen Si or any person(s) designated by Shen Si to exercise such shareholder’s rights in VIEs, including without limitation,
the power to participate in and vote at shareholder’s meetings, the power to nominate and appoint the directors, senior management, and other
shareholders’ voting right permitted by the articles of association of VIEs. The shareholders’ voting rights proxy agreements remain irrevocable
and continuously valid from the date of execution until the expiration of the business term of Shen Si and can be renewed upon request by Shen Si.
Business Operation Agreements. Pursuant to the Business Operation Agreements, VIEs and their shareholders undertake that without Shen
Si’s prior written consent, VIEs shall not enter into any transactions that may have a material effect on VIEs’ assets, business, personnel,
obligations, rights or business operations. VIEs and their shareholders shall elect directors nominated by Shen Si and such directors shall nominate
officers designated by Shen Si. The business operation agreements will remain effective until the end of Shen Si’s business term, which will be
extended if Shen Si’s business term is extended or as required by Shen Si.
F-12
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
VIE Companies (Continued)
1) Contractual Agreements with VIEs (Continued)
Equity Interest Pledge Agreements. Pursuant to the Equity Interest Pledge Agreements, each shareholder of VIEs agrees that, during the term
of the Equity Interest Pledge Agreements, he or she will not dispose of the pledged equity interests or create or allow any encumbrance on the
pledged equity interests without the prior written consent of Shen Si. The Equity Interest Pledge Agreements remain effective until the latter of the
full payment of all secured debt under the equity interest pledge agreements and VIEs and their shareholders discharge all their obligations under
the contractual arrangements.
Exclusive Technology Consulting and Services Agreements. Under the Exclusive Technology Consulting and Services Agreements between
Shen Si and the VIEs, Shen Si has the exclusive right to provide VIEs with technology consulting and services related to, among other things,
technology research and development, technology application and implementation, maintenance of software and hardware. Without Shen Si’s
written consent, VIEs shall not accept any technology consulting and services covered by these agreements from any third party. VIEs agree to pay
a service fee at an amount equivalent to all of its net profit to Shen Si. Unless otherwise terminated in accordance with the terms of these
agreements or otherwise agreed with Shen Si, these agreements will remain effective until the expiration of Shen Si’s business term, and will be
renewed if Shen Si’s business term is extended.
Exclusive Option Agreements. Pursuant to the Exclusive Option Agreements, each shareholder of VIEs has irrevocably granted Shen Si an
exclusive option, to the extent permitted by PRC laws, to purchase, or have its designated person or persons to purchase, at its discretion, all or part
of the shareholder’s equity interests in VIEs. Unless PRC laws and/or regulations require valuation of the equity interests, the purchase price shall
be RMB1.00 or the lowest price permitted by the applicable PRC laws, whoever is higher. Each shareholder of VIEs undertakes that, without the
prior written consent of Shen Si, he or she will not, among other things, (i) create any pledge or encumbrance on his or her equity interests in VIEs,
(ii) transfer or otherwise dispose of his or her equity interests in VIEs, (iii) change VIEs’ registered capital, (iv) amend VIEs’ articles of
association, (v) liquidate or dissolve VIEs, or (vi) distribute dividends to the shareholders of VIEs. In addition, VIEs undertake that, without the
prior written consent of Shen Si, they will not, among other things, dispose of VIEs’ material assets, provide any loans to any third parties, enter
into any material contract with a value of more than RMB500,000, or create any pledge or encumbrance on any of their assets, or transfer or
otherwise dispose of their material assets. Unless otherwise terminated by Shen Si, these agreements will remain effective until the expiration of
Shen Si’s business term, and will be renewed if Shen Si’s business term is extended.
F-13
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
VIE Companies (Continued)
2) Risks in relation to the VIE structure
The following table sets forth the assets, liabilities, results of operations and changes in cash and cash equivalents of the VIEs and their
subsidiary taken as a whole, which were included in the Group’s consolidated financial statements with intercompany balances and transactions
eliminated between the VIEs and their subsidiary:
Total assets
Total liabilities
Total operating revenue
Net income
Net cash (used in)/generated from operating activities
Net cash generated from/(used in) investing activities
Net (decrease)/increase in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of the year
Cash, cash equivalents and restricted cash at end of the year
Transactions between the VIE and other entities in the consolidated group
As of December 31,
2020
2021
(HK$ in thousands)
162,897
145,693
254,602
176,204
2019
Year ended December 31,
2020
(HK$ in thousands)
65,681
8,807
103,433
20,727
2021
210,161
52,741
2019
Year ended December 31,
2020
(HK$ in thousands)
2021
(2,502)
2,233
(269)
1,750
1,481
(14,847)
17,104
2,257
1,481
3,738
2,340
(3,327)
(987)
3,738
2,751
Total assets for 2020 and 2021 include amounts due from internal companies in the consolidated group in the amount of HK $117,085
thousand and HK$190,424 thousand, respectively. Total liabilities include amounts due to the internal companies in the amount of HK$72,506
thousand and HK$80,435 thousand, respectively. During 2019, 2020 and 2021, the VIE earned inter-company revenues in the amounts of HK$
63,742 thousand, HK$ 94,500 thousand and HK$ 187,774 thousand, respectively. In addition, the repayment of advances to Group companies by
the VIE in 2019, 2020 and 2021 are in the amount of HK$32,740 thousand, nil, and nil, respectively. All of these balances and transactions have
been eliminated in consolidation.
Under the Contractual Agreements with the VIEs, the Company has the power to direct activities of the VIEs and VIEs’ subsidiaries, and can
have assets transferred out of the VIEs and VIEs’ subsidiaries. Therefore, the Company considers itself the ultimate primary beneficiary of the
VIEs and there is no asset of the VIEs that can only be used to settle obligations of the VIEs and VIEs’ subsidiaries, except for registered capital of
the VIEs and their subsidiary amounting to RMB10 million as of December 31, 2019, 2020 and 2021, respectively. Since the VIEs are incorporated
as limited liability companies under the PRC Company Law, creditors of the VIEs do not have recourse to the general credit of the Company.
There is currently no contractual arrangement that would require the Company to provide additional financial support to the VIEs. However, as the
Company is conducting certain businesses through its VIEs and VIEs’ subsidiary, the Company may provide such support on a discretionary basis
in the future, which could expose the Company to a loss.
F-14
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
VIE Companies (Continued)
2) Risks in relation to the VIE structure (Continued)
In the opinion of the Company’s management, the contractual arrangements among its subsidiary, the VIEs and their respective Nominee
Shareholders are in compliance with current PRC laws and are legally binding and enforceable. However, uncertainties in the interpretation and
enforcement of the PRC laws, regulations and policies could limit the Company’s ability to enforce these contractual arrangements. As a result, the
Company may be unable to consolidate the VIEs and VIEs’ subsidiaries in the consolidated financial statements.
On March 15, 2019, the Foreign Investment Law was formally passed by the thirteenth National People’s Congress and it was taken effect on
January 1, 2020. The Foreign Investment Law replaces the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Cooperative Joint
Ventures and the Law on Foreign-Capital Enterprises to become the legal foundation for foreign investment in the PRC.
The Foreign Investment Law stipulates certain forms of foreign investment. However, the Foreign Investment Law does not explicitly stipulate
contractual arrangements such as those we rely on as a form of foreign investment. Notwithstanding the above, the Foreign Investment Law
stipulates that foreign investment includes “foreign investors investing through any other methods under laws, administrative regulations or
provisions prescribed by the State Council.” Future laws, administrative regulations or provisions prescribed by the State Council may possibly
regard Contractual Arrangements as a form of foreign investment. In the event that the State Council in the future promulgates laws and regulations
that deem investments made by foreign investors through contractual arrangements as “foreign investment”, the Group’s ability to use the
contractual arrangements with its VIEs and the Group’s ability to conduct business through the VIEs could be severely limited.
The Company’s ability to control the VIEs also depends on the power of attorney Shen Si has to vote on all matters requiring shareholders’
approvals in the VIEs. As noted above, the Company believes these power of attorney are legally binding and enforceable but may not be as
effective as direct equity ownership. In addition, if the Group’s corporate structure or the contractual arrangements with the VIEs were found to be
in violation of any existing PRC laws and regulations, the PRC regulatory authorities could, within their respective jurisdictions:
● revoke the Group’s business and operating licenses;
● require the Group to discontinue or restrict its operations;
● restrict the Group’s right to collect revenues;
● block the Group’s websites;
● require the Group to restructure its operations, re-apply for the necessary licenses or relocate the Group’s businesses, staff and assets;
● impose additional conditions or requirements with which the Group may not be able to comply; or
● take other regulatory or enforcement actions against the Group that could be harmful to the Group’s business.
F-15
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
The imposition of any of these restrictions or actions may result in a material adverse effect on the Group’s ability to conduct its business. In
addition, if the imposition of any of these restrictions causes the Group to lose the right to direct the activities of the VIEs or the right to receive
their economic benefits, the Group would no longer be able to consolidate the financial statements of the VIEs. In the opinion of management, the
likelihood of losing the benefits in respect of the Group’s current ownership structure or the contractual arrangements with its VIEs is remote.
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, related disclosures of contingent assets and liabilities at the balance sheet
date, and the reported revenues, costs and expenses during the reported period in the consolidated financial statements and accompanying notes.
These accounting estimates reflected in the Group’s consolidated financial statements mainly include, but are not limited to, the estimation of the
expected usage and the estimated relative standalone selling price of the incentive points and coupons, the valuation and recognition of share-based
compensation arrangements, depreciable lives of property and equipment, useful life of intangible assets, expected credit losses on financial
instruments, assessment for impairment of long-term investments, present value for expected future leasing payment, contingency reserve,
provision of income tax and valuation allowance for deferred tax asset, and valuation of financial instruments measured at fair value. Actual results
could differ from those estimates.
Comprehensive Income and Foreign Currency Translation
The Group’s operating results are reported in the consolidated statements of comprehensive income pursuant to FASB ASC Topic 220,
“Comprehensive Income”. Comprehensive income consists of two components: net income and other comprehensive income (“OCI”). The
Group’s OCI is comprised of gains and losses resulting from translating foreign currency financial statements of entities, of which functional
currency is other than Hong Kong dollar which is the presentational currency of the Group, net of related income taxes, where applicable. Such
subsidiaries’ assets and liabilities are translated into Hong Kong dollars at period-end exchange rates, and revenues and expenses are translated at
average exchange rates prevailing during the period. Adjustments that result from translating amounts from a subsidiary’s functional currency to
the Hong Kong dollar (as described above) are reported net of tax, where applicable, in accumulated OCI in the consolidated balance sheets.
Convenience Translation
Translations of balances in the consolidated balance sheets, consolidated statements of comprehensive income and consolidated statements of
cash flows from HK$ into US$ as of and for the year ended December 31, 2021 are solely for the convenience of the readers and were calculated at
the rate of US$1.00=HK$7.7996, representing the noon buying rate set forth in the H.10 statistical release of the U.S. Federal Reserve Board on
December 30, 2021. No representation is made that the HK$ amounts could have been, or could be, converted, realized or settled into US$ at that
rate on December 30, 2021, or at any other rate.
Current Expected Credit Losses
Prior to January 1, 2020, the Group applied incurred loss methodology for recognizing credit losses that delays recognition until it is probable
a loss has been incurred. The identified impairment loss was immaterial prior to January 1, 2020.
On January 1, 2020, the Group adopted FASB ASC Topic 326 – “Financial Instruments – Credit Losses” (“ASC Topic 326”) which replaces
the incurred loss methodology with the current expected credit loss (“CECL”) methodology. The new guidance applies to financial assets measured
at amortized cost, held-to-maturity debt securities and off-balance sheet credit exposures. For on-balance sheet assets, an allowance must be
recognized at the origination or purchase of in-scope assets and represents the expected credit losses over the contractual life of those assets.
F-16
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Current Expected Credit Losses (Continued)
The Group adopted ASC Topic 326 using the modified retrospective approach for all in-scope assets. The adoption of ASC Topic 326 has no
material impact on the Group’s retained earnings as of January 1, 2020. Results for reporting periods beginning after January 1, 2020 are presented
under ASC Topic 326 while prior periods continue to be reported in accordance with previously applicable U.S. GAAP. The Group’s in-scope
assets are primarily loans and advances that are collateralized by client securities and the collateral is required to be maintained at specified
minimum levels at all times. The Group monitors margin levels and requires clients to provide additional collateral, or reduce margin positions, to
meet minimum collateral requirements if the fair value of the collateral changes. The Group applies the practical expedient based on collateral
maintenance provisions in estimating an allowance for credit losses for the loans and advances. In accordance with the practical expedient, when
the Group reasonably expects that borrowers (or counterparties, as applicable) will replenish the collateral as required, there is no expectation of
credit losses when the collateral’s fair value is greater than the amortized cost of the financial assets. If the amortized cost exceeds the fair value of
collateral, then credit losses are estimated only on the unsecured portion. For the year ended December 31, 2020 and 2021, expected credit loss
expenses of HK$9,075 thousand and HK$3,200 thousand resulting from the assessment of credit losses for the loans and advances under ASC
Topic 326 at period-end were recognized in “Others, net” in the consolidated statements of comprehensive income respectively.
An allowance for credit losses on other financial assets, including receivables from clients, brokers, clearing organizations and fund
management companies and fund distributors, is estimated based on the aging of these financial receivables. Since most of the financial receivables
are short-term in nature, the allowance for credit losses for other financial assets were immaterial for all periods presented.
Cash and Cash Equivalents
Cash and cash equivalents represent cash on hand, demand deposits and time deposits placed with banks or other financial institutions, which
are unrestricted to withdrawal or use, and which have original maturities of three months or less.
Cash Held on Behalf of Clients
The Group has classified the clients’ monies as cash held on behalf of clients under the assets section in the consolidated balance sheets and
recognized the corresponding accounts payables to the respective clients under the liabilities section.
Term Deposit
Term deposit consists of bank deposits with an original maturity of greater than three months.
Restricted Cash
The Group is required to maintain restricted cash deposits for certain property leases. These funds are restricted and have been classified as
such on our consolidated balance sheets due to the nature of restriction.
F-17
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Short-term Investments
The Group classifies certain financial assets with highly liquidity and original maturities less than twelve months as short-term investments.
The Group’s short-term investments consist of investments in money market funds. The Group values its money market funds using quoted prices
in active markets for these investments, and accordingly, the Group classifies the valuation techniques that use these inputs as Level 1.
Securities Purchased Under Agreements to Resell and Securities Sold Under Agreements to Repurchase
Transactions involving purchases of securities under agreements to resell (resell agreements) and transactions involving sales of securities
under agreements to repurchase (repurchase agreements) are treated as collateralized financing transactions.
Under resell agreements, the Group pays cash to counterparties and receives securities as collateral. These agreements are carried at amounts
at which the securities will subsequently be resold, and the interest income received by the Group is recorded as interest income in the consolidated
statements of comprehensive income.
Under repurchase agreements, the Group receives cash from counterparties and provides securities as collateral. These agreements are carried
at amounts at which the securities will subsequently be repurchased, and the interest expense incurred by the Group is recorded as interest expenses
in the consolidated statements of comprehensive income.
Loans and advances
Loans and advances include margin loans, IPO loans extended to clients and other advances, collateralized by securities and are carried at the
amortized cost, net of an allowance for credit losses. Revenues earned from the loans and advances are included in interest income.
Margin loans are extended to clients on a demand basis and are not committed facilities. Securities owned by the customers, which are not
recorded in the consolidated balance sheets, are held as collateral for amounts due on the margin loans.
IPO loans for subscription of new shares are normally settled within one week from the drawdown date. Once IPO stocks are allotted, the
Group requires clients to repay the IPO loans. Force liquidation action would be taken if the clients fail to settle their shortfall after the IPO
allotment result is announced.
Other advances consist of bridge loans to enterprises which pledged unlisted or listed shares they hold as collateral.
Loans and advances are initially recorded net of directly attributable transaction costs and are measured at subsequent reporting dates at
amortized cost. Finance charges, premiums payable on settlement or redemption and direct costs are accounted for on an accrual basis to the
surplus or deficit using the effective interest method and are added to the carrying amount of the instrument to the extent that they are not settled in
the period in which they arise.
The balances will be written off to the extent that there is no realistic prospect of recovery. This is generally the case when the Group
determines that the debtor does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the
write-off.
F-18
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Trading Receivables from and Payables to Clients
Trading receivables from and payables to clients include amounts due on brokerage transactions on a trade-date basis.
Receivables from and Payables to Brokers, Clearing Organizations and Fund Management Companies and Fund Distributors
Receivables from and payables to brokers, clearing organizations and fund management companies and fund distributors include receivables
and payables from unsettled trades on a trade-date basis, including amounts receivable for securities, derivatives or funds trades not delivered by
the Group to the purchaser by the settlement date and cash deposits, and amounts payable for securities, derivatives or funds trades not received by
the Group from a seller by the settlement date.
Clearing settlement fund deposited in the clearing organizations for the clearing purpose is recognized in receivables from clearing
organizations.
The Group borrowed margin loans from executing brokers, with the benchmark interest rate plus premium differentiated depending on the
amount borrowed, and immediately lent to margin financing clients. Margin loans borrowed is recognized in the payables to brokers.
The Group’s policy is to net the receivables from and payables to clearing organizations according to ASC Topic 210-20, when all of the
following conditions are met:
a) Each of two parties owes the other determinable amounts.
b) The reporting party has the right to set off the amount owed with the amount owed by the other party.
c) The reporting party intends to set off.
d) The right of setoff is enforceable at law.
Interest Receivable and Payable
Interest receivable is calculated based on the contractual interest rate of bank deposit, loans and advances, securities loaned and receivables on
an accrual basis, and is recorded as interest income as earned.
Interest payable is calculated based on the contractual interest rates of payables, borrowings, securities borrowed and securities sold under
agreements to repurchase on an accrual basis.
Securities Borrowed and Securities Loaned
Securities borrowed and securities loaned are recorded at the amount of the cash collateral advanced or received. Securities borrowed
transactions require the Group to provide counterparties with collateral, which may be in the form of cash, or other securities. With respect to
securities loaned, the Group receives collateral, which may be in the form of cash or other securities in an amount generally in excess of the fair
value of the securities loaned. The Group monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral
obtained or refunded as permitted contractually.
Receivables and payables related to securities borrowed and securities loaned are included at receivables from and payables to brokers or
clients in the consolidated balance sheets. Securities lending fees received and securities borrowing fees paid by the Group are included in interest
income and interest expense, respectively, in the consolidated statements of comprehensive income.
F-19
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Leases
The Group accounts for leases in accordance with ASC 842, Leases (“ASC 842”), which requires lessees to recognize leases on the balance
sheet and disclose key information about leasing arrangements. The Group determines if a contract contains a lease based on whether the contract
conveys to the Group the right to control the use of an underlying asset for a period of time in exchange for consideration. If the Group determines
that a contract contains a lease, it recognizes, in the consolidated balance sheets, a lease liability and a corresponding right-of-use asset on the
commencement date of the lease. The lease liability is initially measured at the present value of the future lease payments over the lease term using
the rate implicit in the lease or, if not readily determinable, the Group’s secured incremental borrowing rate. An operating lease right-of-use asset is
initially measured at the value of the lease liability minus any lease incentives and initial direct costs incurred plus any prepaid rent. The group
recognizes operating lease right-of-use assets and corresponding operating lease liabilities in the financial statement on the date when the lessor
makes the underlying asset available for use.
Each lease liability is measured using the Group’s secured incremental borrowing rate, which is based on an internally developed yield curve
using interest rates of debt issued with a similar risk profile as the Group and a duration similar to the lease term. The Group’s leases have
remaining terms of one to five years, and some of which include options to terminate the lease upon notice. The Group considers these options
when determining the lease term used to calculate the right-of-use asset and the lease liability when the Group is reasonably certain it will exercise
such option.
The Group’s operating leases contain both lease components and non-lease components. Non-lease components are distinct elements of a
contract that are not related to securing the use of the underlying assets, such as common area maintenance and other management costs. The
Company elected to measure the lease liability by combining the lease and non-lease components as a single lease component. As such, the
Company includes the fixed payments and any payments that depend on a rate or index that relate to the lease and non-lease components in the
measurement of the lease liability. Some of the non-lease components are variable in nature and not based on an index or rate, and as a result, are
not included in the measurement of the operating lease right-of-use assets or operating lease liability.
Operating lease expense is recognized on a straight-line basis over the lease term and is included in rental and other related expenses in the
Group’s consolidated statements of comprehensive income.
All of the Group’s leases are classified as operating leases and primarily consist of real estate leases for corporate offices, data centers, and
other facilities. As of December 31, 2020 and 2021, the weighted-average remaining lease term on these leases is approximately four years and
three years, respectively, and the weighted-average discount rate used to measure the lease liabilities was approximately 4.75% and 4.71%,
respectively.
For the year ended December 31, 2020 and 2021, right-of-use assets obtained under operating leases was HK$85,827 thousand and
HK$108,949 thousand, respectively. The Group’s lease agreements do not contain any residual value guarantees, restrictions or covenants.
Refundable Deposit
Refundable deposit is included in other assets in the consolidated balance sheets. As a clearing member firm of securities and derivatives
clearing organizations in Hong Kong and the U.S., the Group is also exposed to clearing member credit risk. These clearing organizations require
member firms to deposit cash to a clearing fund. If a clearing member defaults in its obligations to the clearing organizations in an amount larger
than its own margin and clearing fund deposits, the shortfall is absorbed pro rata from the deposits of the other clearing members. Many clearing
organizations of which the Group is member have the authority to assess their members for additional funds if the clearing fund is depleted. A large
clearing member default could result in a substantial cost if the Group is required to pay such additional funds.
F-20
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Property and Equipment, net
Property and equipment, which are included in other assets in the consolidated balance sheets are stated at historical cost less accumulated
depreciation and impairment, if any. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Residual
rate is determined based on the economic value of the property and equipment at the end of the estimated useful lives as a percentage of the
original cost.
Category
Computers equipment
Furniture and fixtures
Office equipment
Vehicle
Office building
Expenditures for maintenance and repairs are expensed as incurred.
Intangible Assets
Estimated useful lives
Residual rate
3 - 5 years
3 - 5 years
3 - 5 years
5 years
30 years
5 %
5 %
5 %
5 %
5 %
Intangible assets which are included in other assets in the consolidated balance sheets mainly consist of computer software and other intangible
assets. Identifiable intangible assets are carried at acquisition cost less accumulated amortization and impairment loss, if any. Finite-lived intangible
assets are tested for impairment if impairment indicators arise. Amortization of finite-lived intangible assets is computed using the straight-line
method over their estimated useful lives, mainly including:
Category
Computer software
Estimated useful lives
5 years
Infinite-lived intangible assets mainly consist of the trading right and licenses. The Group had held a futures trading right as a clearing member
firm of HKEx in order to trade futures through the trading facilities of the Stock Exchange, and has recognized it as intangible assets. The licences
recognised as intangible assets consist of an insurance broker license and a financial services license. The Group obtained an insurance broker
license through acquiring a member of the Hong Kong Professional Insurance Brokers Association. The Group acquired an Australian subsidiary
that holds an Australian Financial Services License (AFSL) granted and regulated by the Australian Securities and Investments Commission
(ASIC). The future trading right and licenses have an indefinite useful life and are carried at cost less accumulated impairment losses. The Group
will not amortize the future trading right and licenses until its useful life is determined to be finite.
Long-term investments
The Group’s long-term investments primarily consist of equity method investments and equity investments without readily determinable fair
values.
In accordance with ASC 323 Investment—Equity Method and Joint Ventures, the Group accounts for equity method investments over which
the Group has significant influence but does not own a majority of the equity interest or otherwise controls and the investments are either common
stock or in substance common stock using the equity method. The Group’s share of the investee’s profit and loss is recognized in the consolidated
statements of comprehensive income of the period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Long-term investments (Continued)
The carrying amount of equity method investments is tested for impairment whenever there is an indication that the carrying amount may be
impaired in accordance with the policy described in “Impairment of long-lived assets”.
In January 2019, the Group invested in a private company. The Group acquired 20% ordinary equity interest with a total consideration of
HK$6,709 thousand. The Group exercises significant influence in the investee and therefore accounts for this as an equity method investment.
Based on the Group’s assessment on the recoverable amounts of the equity method investment, as of December 31, 2020 and 2021, the impairment
provision on the equity method investment was HK$5,888 thousand.
In December 2021, the Group invested in a private equity fund. The Group acquired approximately 10% ordinary equity interest with a total
consideration of HK$7,798 thousand. The Group exercises significant influence in the equity fund and therefore accounts for this as an equity
method investment. Based on the Group’s assessment on the recoverable amounts of the equity method investment, impairment provision of nil on
the equity method investment was recognized as of December 31, 2021.
In accordance with ASC 321 Investment—Equity Securities, for those equity investments without readily determinable fair values, the Group
elects to record these investments at cost, less impairment, and plus or minus subsequent adjustments for observable price changes. Under this
measurement alternative, changes in the carrying value of the equity investment are required to be made whenever there are observable price
changes in orderly transactions for the identical or similar investment of the same issuer.
Pursuant to ASC 321, for those equity investments that the Group elects to use the measurement alternative, the Group makes a qualitative
assessment of whether the investment is impaired at each reporting date. If a qualitative assessment indicates that the investment is impaired, the
Group estimates the investment’s fair value in accordance with the principles of ASC 820. If the fair value is less than the investment’s carrying
value, the Group recognizes an impairment loss equal to the difference between the carrying value and fair value.
In December 2021, the Group invested in a private equity fund. The Group acquired approximately 2.75% ordinary equity interest with a total
consideration of HK$15,596 thousand. Based on the Group’s impairment assessment of the investment, no impairment provision was made as of
December 31, 2021.
Impairment of Long-lived Assets
Long-lived assets are evaluated for impairment whenever events or changes in circumstances (such as a significant adverse change to market
conditions that will impact the future use of the assets) indicate that the carrying amount may not be fully recoverable or that the useful life is
shorter than the Group had originally estimated. When these events occur, the Group evaluates the impairment by comparing carrying value of the
assets to an estimate of future undiscounted cash flows expected to be generated from the use of the assets and their eventual disposition. If the sum
of the expected future undiscounted cash flows is less than the carrying value of the assets, the Group recognizes an impairment loss based on the
excess of the carrying value of the assets over the fair value of the assets. Impairment charge recognized for the years ended December 31, 2019,
2020 and 2021 was nil, HK$ 5,888 thousand and nil, respectively.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Treasury stock
The Group accounted for those shares repurchased as treasury stock at cost, Treasury stock, and is shown separately in the shareholders’ equity
as the Group has not yet decided on the ultimate disposition of those shares acquired. When the Group decides to cancel the treasury stock, the
difference between the original issuance price and the repurchase price is debited into additional paid-in capital. Refer to Note 13 for details.
Fair Value Measurements
Accounting guidance defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required
or permitted to be recorded at fair value, the Group considers the principal or most advantageous market in which it would transact and it considers
assumptions that market participants would use when pricing the asset or liability.
Accounting guidance establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of
unobservable inputs when measuring fair value. A financial instrument’s categorization within the fair value hierarchy is based upon the lowest
level of input that is significant to the fair value measurement. Accounting guidance establishes three levels of inputs that may be used to measure
fair value:
Level 1 — Valuation techniques in which all significant inputs are unadjusted quoted prices from active markets for assets or liabilities that are
identical to the assets or liabilities being measured.
Level 2 — Valuation techniques in which significant inputs include quoted prices from active markets for assets or liabilities that are similar to
the assets or liabilities being measured and/or quoted prices for assets or liabilities that are identical or similar to the assets or liabilities being
measured from markets that are not active. Also, model-derived valuations in which all significant inputs and significant value drivers are
observable in active markets are Level 2 valuation techniques.
Level 3 — Valuation techniques in which one or more significant inputs or significant value drivers are unobservable. Unobservable inputs are
valuation technique inputs that reflect the Group’s own assumptions about the assumptions that market participants would use in pricing an asset or
liability.
When available, the Group uses quoted market prices to determine the fair value of an asset or liability. If quoted market prices are not
available, the Group will measure fair value using valuation techniques that use, when possible, current market-based or independently sourced
market parameters, such as interest rates and currency rates.
The carrying amount of cash and cash equivalents, cash held on behalf of clients, restricted cash, receivables from and payables to clients,
brokers, clearing organizations and fund management companies and fund distributors, accrued interest receivable, accrued interest payable,
amounts due to related parties, other financial assets and liabilities approximates fair value because of their short-term nature. Term deposit, loans
and advances, borrowings, securities purchased under agreements to resell, securities sold under agreements to repurchase and operating lease
liabilities are carried at amortized cost. The carrying amount of term deposit, loans and advances, borrowings and operating lease liabilities
approximate their respective fair value as the interest rates applied reflect the current quoted market yield for comparable financial instruments.
Short-term investments are measured at fair value.
The Group’s non-financial assets, such as operating lease right-of-use assets, long-term investments, property and equipment and intangible
assets, would be measured at fair value only if they were determined to be impaired.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition
1) Brokerage commission and handling charge income
Brokerage commission income earned for executing transactions is accrued on a trade-date basis.
Handling charge income arise from the services such as clearing and settlement services, subscription and dividend collection handling
services, etc., are accrued on a trade-date basis.
Brokerage commission and handling charge income are recognised at a point in time when the service has been passed to the customer.
2)
Interest income
The Group earns interest income primarily in connection with its margin financing and securities lending services, IPO financing, bridge loan
and deposits with banks, which are recorded on an accrual basis and are included in interest income in the consolidated statements of
comprehensive income. Interest income is recognized as it is accrued over time using the effective interest method.
3) Other income
Other income consists of enterprise public relations service charge income provided to corporate clients, underwriting fee income, IPO
subscription service charge income, currency exchange service income from clients, income from market data service and funds distribution
service income from fund management companies, employee share option plan (“ESOP”) management service income, etc.
Enterprise public relations service charge income is charged to corporate clients by providing platform to post their detailed stock information
and latest news in Futubull app, as well as providing a lively, interactive community among their potential investors to exchange investment views,
share trading experience and socialize with each other. Unearned enterprise public relations service income of which the Group had received the
consideration is recorded as contract liabilities (deferred revenue).
IPO subscription service charge income is derived from provision of new share subscription services in relation to IPOs in the Hong Kong
capital market.
Underwriting fee income is generated from investment banking business primarily by providing equity sub-underwriting to corporate issuers.
Funds distribution service income is charged to fund management companies for providing fund products distribution service to Futu’s
individual clients.The Group, as an intermediary would receive subscription fees from fund management companies as agreed in the service
contracts.
Market information and data income is charged to Futubull and Moomoo app users for market data service.
Currency exchange service income is charged to the Group’s paying clients for providing currency exchange service.
ESOP management service income is derived from establishing and administrating the platforms for corporate clients’ ESOP. This includes all
workflow and administration surrounding ESOP fulfillment, including employee communications, records management, data protection, users and
administrators education, and other upgrading and customizing services on the ESOP platforms as agreed.
For enterprise public relations service charge income, funds distribution service income, market information and data income and ESOP
management service income, the service revenues are recognized ratably over the term of the service contracts.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Revenue Recognition (Continued)
3) Other income (Continued)
For IPO subscription service charge income, underwriting fee income and currency exchange service income, the Group recognizes the
revenues upon the time when the services are rendered to customers.
Customer Loyalty Program
The Group operates a customer loyalty program to its customers that offer various incentives in the form of incentive points and coupons for
redemption of free or discounted goods or services.
For the incentives generated from current sales transaction, the Group defers a portion of commission income with corresponding liability
reflected as contract liability attributable to the incentives. The contract liability is determined by management based on the expected usage of the
incentive points and coupons, and their estimated relative standalone selling price based on the related goods and services. Significant judgment
was made by management in determining the expected usage and estimated relative standalone selling price of the incentive points and coupons,
derived from historical trading volume, commission rates and redemption patterns, and an evaluation as to whether historical activities are
representative of the expected future activities.
For the incentives offered for future sales transaction, the Group nets a portion of brokerage commission income attributable to the incentives
when points or coupons are actually redeemed.
For the incentives not offered for future sales transaction, the Group considers them as a payment of other distinct goods that would be granted
to clients. Such incentives are accounted for as selling and marketing expense with corresponding liability reflected as other liability in the
consolidated balance sheet.
The table below presents the deferred or netted brokerage commission income related to the customer loyalty program for the years ended
December 31, 2019, 2020 and 2021.
Brokerage commission income, gross
Less: revenue netted or deferred
Brokerage commission income, net
2019
441,669
(89,044)
352,625
Year ended December 31,
2020
(HK$ in thousands)
1,807,203
(276,155)
1,531,048
2021
3,640,845
(493,235)
3,147,610
As of December 31, 2020 and 2021, related contract liabilities recorded were HK $8,249 thousand and HK $8,968 thousand, respectively.
Refer to Note 12 for details.
Brokerage Commission and Handling Charge Expenses
Commission expenses for executing and/or clearing transactions are accrued on a trade-date basis. The commission expenses are charged by
executing brokers for securities and derivative trades in the United States stock and derivative markets as the Group makes securities and derivative
trades with these brokers as principal.
Handling and settlement fee is charged by HKEx or executing brokers for clearing and settlement services, are accrued on a trade-date basis.
IPO subscription service charge expenses are charged by commercial banks in connection with new share subscription services in relation to
IPOs in the Hong Kong capital market.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest Expenses
Interest expenses primarily consist of interest expenses of borrowings from banks, other licensed financial institutions and other parties paid to
fund the Group’s margin financing business and IPO financing business.
Processing and Servicing Costs
Processing and servicing costs consist of market information and data fee, data transmission fee, cloud service fee, system cost, and SMS
service fee, etc. The nature of market information and data fee mainly represents for information and data fee paid to stock exchanges like HKEx,
NASDAQ, and New York stock exchange, etc. Data transmission fee is the fee of data transmission among cloud server and data centers located in
Shenzhen, PRC and Hong Kong, etc. Cloud service fee and SMS service fee mainly represent the data storage and computing service and the SMS
channel service fee. The nature of system cost mainly represents for the fee to access and use the systems paid to software providers.
Research and Development Expenses
Research and development expenses consist of expenses related to developing transaction platform and website like Futubull app and other
products, including payroll and welfare, rental expenses and other related expenses for personnel engaged in research and development activities.
All research and development costs have been expensed as incurred as the costs qualifying for capitalization have been insignificant.
Selling and Marketing Expenses
Selling and marketing expenses consist primarily of advertising and promotion costs, payroll, rental and related expenses for personnel
engaged in marketing and business development activities. Advertising and promotion costs are expensed as incurred and are included within
selling and marketing expenses in the consolidated statements of comprehensive income.
General and Administrative Expenses
General and administrative expenses consist of payroll, rental, related expenses for employees involved in general corporate functions,
including finance, legal and human resources, costs associated with use of facilities and equipment, such as depreciation expenses, rental and other
general corporate related expenses.
Others, net
Others, net, mainly consist of non-operating income and expenses, foreign currency gains or losses, expected credit loss expenses and
impairment from long-term investments for all periods presented. Non-operating expenses mainly consist of accrued social security underpayment
surcharge.
Foreign Currency Gains and Losses
Foreign currency transactions denominated in currencies other than the functional currency are translated into the functional currency using the
exchange rates prevailing at the dates of the transactions. Monetary assets and liabilities denominated in foreign currencies at the balance sheet date
are remeasured at the applicable rates of exchange in effect at that date. Foreign currency gain or loss resulting from the settlement of such
transactions and from remeasurement at period-end is recognized in “Others, net” in the consolidated statements of comprehensive income.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Share-Based Compensation
The Company follows ASC 718 to determine whether a share option and a restricted share units should be classified and accounted for as a
liability award or equity award. All share-based awards to employees and directors classified as equity awards , such as stock options and restricted
share units, are measured at the grant date based on the fair value of the awards. Share-based compensation, net of estimated forfeitures, is
recognized as expenses on a straight-line method over the requisite service period, which is the vesting period. Options granted generally vest over
four or five years.
The modification of the terms or conditions of the existing shared-based award is treated as an exchange of the original award for a new
award. The incremental compensation expenses are equal to the excess of the fair value of the modified award immediately after the modification
over the fair value of the original award immediately before the modification. For stock options already vested as of the modification date, the
Group immediately recognized the incremental value as compensation expenses. For stock options still unvested as of the modification date, the
incremental compensation expenses are recognized over the remaining service period of these stock options.
The Company determined the fair value of the restricted share units with reference to the fair value of the underlying shares as of the grant
date. The Company utilizes the binomial option pricing model to estimate the fair value of stock options granted, with the assistance of an
independent valuation firm.
Forfeitures are estimated at the time of grant and revised in subsequent periods if actual forfeitures differ from those estimates. The Group uses
historical data to estimate pre-vesting options and records share-based compensation expenses only for those awards that are expected to vest. See
Note 16 for further discussion on share-based compensation.
Fair Value of Preferred Shares and Pre-IPO Ordinary Shares
Shares of the Company, which did not have quoted market prices, were valued based on the income approach. The income approach involves
applying the discounted cash flow analysis based on projected cash flow using the Group’s best estimate as of the valuation dates. Estimating
future cash flow requires the Group to analyze projected revenue growth, gross margins, effective tax rates, capital expenditures and working
capital requirements. In determining an appropriate discount rate, the Group considered the cost of equity and the rate of return expected by
venture capitalists. The Group also applied a discount for lack of marketability given that the shares underlying the award were not publicly traded
at the time of grant. Determination of estimated fair value of the Group requires complex and subjective judgments due to its limited financial and
operating history, unique business risks and limited public information on companies in China similar to the Group.
Option-pricing method was used to allocate enterprise value to preferred shares and pre-IPO ordinary shares. The method treats preferred
shares and pre-IPO ordinary shares as call options on the enterprise’s value, with exercise prices based on the liquidation preference of the
preferred shares. The strike prices of the “options” based on the characteristics of the Group’s capital structure, including number of shares of each
class of pre-IPO ordinary shares, seniority levels, liquidation preferences, and conversion values for the preferred shares. The option-pricing
method also involves making estimates of the anticipated timing of a potential liquidity event, such as a sale of the Group or an IPO, and estimates
of the volatility of the Group’s equity securities. The anticipated timing is based on the plans of board of directors and management of the Group.
Estimating the volatility of the share price of a privately held company is complex because there is no readily available market for the shares.
Volatility is estimated based on annualized standard deviation of daily stock price return of comparable companies.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Taxation
1)
Income tax
Current income taxes are provided on the basis of net income for financial reporting purposes, adjusted for income and expense items which
are not assessable or deductible for income tax purposes, in accordance with the regulations of the relevant tax jurisdictions. Deferred income taxes
are accounted for using an asset and liability method. Under this method, deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying
amounts and the tax bases of existing assets and liabilities. The tax base of an asset or liability is the amount attributed to that asset or liability for
tax purpose. The effect on deferred taxes of a change in tax rates is recognized in the consolidated statements of comprehensive income in the
period of change. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some
portion of, or all of the deferred tax assets will not be realized.
2) Uncertain tax positions
The Group did not recognize any interest and penalties associated with uncertain tax positions for the years ended December 31, 2019, 2020
and 2021. The Group continues to assess the uncertain tax positions in accordance with applicable income tax guidance and based on changes in
facts and circumstances.
Net income per share
Basic net income per share is computed by dividing net income attributable to ordinary shareholder, considering the accretion of redemption
feature and cumulative dividend related to the Company’s redeemable convertible preferred shares, and undistributed earnings allocated to
redeemable convertible preferred shares by the weighted average number of ordinary shares outstanding during the period using the two-class
method. Under the two-class method, net income is allocated between ordinary shares and other participating securities based on their participating
rights. Net loss is not allocated to other participating securities if based on their contractual terms they are not obligated to share the losses.
Diluted net income per share is calculated by dividing net income attributable to ordinary shareholder, as adjusted for the effect of dilutive
ordinary equivalent shares, if any, by the weighted average number of ordinary and dilutive ordinary equivalent shares outstanding during the
period. Ordinary equivalent shares consist of ordinary shares issuable upon the conversion of the redeemable convertible preferred shares, using the
if-converted method, and shares issuable upon the exercise of share options and vesting of restricted share units using the treasury stock method.
Ordinary equivalent shares are not included in the denominator of the diluted net income per share calculation when inclusion of such share would
be anti-dilutive.
Segment Reporting
Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker. The chief
operating decision-maker has been identified as the Chief Executive Officer who allocates resources to and assesses the performance of the
operating segments of an entity. The Group’s reporting segments are decided based on its operating segments while taking full consideration of
various factors such as products and services, geographic location and regulatory environment related to administration of the management.
Operating segments meeting the same qualifications are allocated as one reporting segment, providing independent disclosures.
The Group engages primarily in online brokerage services and margin financing services. The Group does not distinguish between markets or
segments for the purpose of internal reports. The Group does not distinguish revenues, costs and expenses between segments in its internal
reporting, and reports costs and expenses by nature as a whole. Hence, the Group has only one reportable segment.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Significant Risks and Uncertainties
1) Currency risk
Currency risk arises from the possibility that fluctuations in foreign exchange rates will impact the financial instruments. The Group is not
exposed to significant transactional foreign currency risk since almost all of its transactions, assets and liability are denominated in Hong Kong
dollars and U.S. dollars and Hong Kong dollars are pegged against U.S. dollars. The impact of foreign currency fluctuations in the Group’s
earnings is included in “Others, net” in the consolidated statements of comprehensive income. At the same time, the Group is exposed to
translational foreign currency risk since some of the Company’s major subsidiaries have RMB as their functional currency. Therefore, RMB
depreciation against Hong Kong dollars could have a material adverse impact on the foreign currency translation adjustment in the consolidated
statements of comprehensive income. The Group enters into currency futures contracts to manage currency exposure associated with anticipated
receipts and disbursements occurring in a currency other than the functional currency of the entity. The overall impact of the currency risk of other
foreign currency assets held by the Group other than U.S. dollars and Renminbi is not significant.
As of December 31, 2020 and 2021, the Group had RMB-denominated net liabilities of HK$262.9 million and net assets of HK$2,374.8
million, respectively. We estimate that a 10% depreciation of RMB against the U.S. dollar based on the foreign exchange rate on December 31,
2020 and 2021, would result in an increase of an increase of US$3.4 million and a decrease of US$30.5 million, respectively, in the Group’s pre-tax
profit for the years ended December 31, 2020 and 2021. We estimate that a 10% appreciation of RMB against the U.S. dollar based on the foreign
exchange rate on December 31, 2020 and 2021 would result in a decrease of US$3.4 million and an increase of US$30.5 million, respectively, in
the Group’s pre-tax profit for the years ended December 31, 2020 and 2021.
2) Credit risk
Cash held on behalf of clients are segregated and deposited in financial institutions as required by rules mandated by the Group’s primary
regulators. These financial institutions are of sound credit ratings, therefore management believes that there is no significant credit risk related to
cash held on behalf of clients.
The Group’s securities and derivative trades activities are transacted on either a cash or margin basis. The Group’s credit risk is limited in that
substantially all of the contracts entered into are settled directly at securities and derivatives clearing organizations. In margin transactions, the
Group extends credit to the client, subject to various regulatory and internal margin requirements, collateralized by cash and securities in the
client’s account. IPO loans are exposed to credit risk from clients who fails to repay the loans upon IPO stock allotment. The Group monitors the
clients’ collateral level and has the right to dispose the newly allotted stocks once the stocks first start trading. Bridge loans to enterprise pledged
by shares are exposed to credit risk from counterparties who fail to repay the loans, the Group monitors on the collateral level of bridge loans in
real time, and has the right to dispose of the pledged shares once the collateral level falls under the minimal level required to get the loans repaid.
Liabilities to other brokers and dealers related to unsettled transactions are recorded at the amount for which the securities were purchased, and
are paid upon receipt of the securities from other brokers or dealers.
In connection with its clearing activities, the Group is obligated to settle transactions with brokers and other financial institutions even if its
clients fail to meet their obligations to the Group. Clients are required to complete their transactions by the settlement date, generally two
business days after the trade date. If clients do not fulfill their contractual obligations, the Group may incur losses. The Group has established
procedures to reduce this risk by generally requiring that clients deposit sufficient cash and/or securities into their account prior to placing an order.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Significant Risks and Uncertainties (Continued)
2) Credit risk (Continued)
For cash management purposes, the Group enters into short-term securities sold under agreements to repurchase transactions (“repos”) in
addition to securities borrowing and lending arrangements, all of which may result in credit exposure in the event the counterparty to a transaction
is unable to fulfill its contractual obligations. Repos are collateralized by securities with a market value in excess of the obligation under the
contract. Similarly, securities lending agreements are collateralized by deposits of cash or securities. The Group attempts to minimize credit risk
associated with these activities by monitoring collateral values on a daily basis and requiring additional collateral to be deposited with or returned
to the Group as permitted under contractual provisions.
Concentrations of Credit Risk
The Group’s exposure to credit risk associated with its brokerage and other activities is measured on an individual counterparty basis, as well
as by groups of counterparties that share similar attributes. There was no revenue from clients which individually represented greater than 10% of
the total revenues for the years ended December 31, 2019, 2020 and 2021, respectively. Concentrations of credit risk can be affected by changes in
political, industry, or economic factors. To reduce the potential for risk concentration, credit limits are established and exposure is monitored in
light of changing counterparty and market conditions. As of December 31, 2020 and 2021, the Group did not have any material concentrations of
credit risk within or outside the ordinary course of business.
3)
Interest rate risk
Fluctuations in market interest rates may negatively affect the Group’s financial condition and results of operations. The Group are exposed to
floating interest rate risk on cash deposit and floating rate borrowings. We use net interest simulation modeling techniques to evaluate the effect
that changes in interest rates might have on pre-tax profit or loss. The model includes all interest-sensitive assets and liabilities. The simulations
involve assumptions that are inherently uncertain and, as a result, cannot precisely predict the impact that changes in interest rates will have on pre-
tax profit or loss. Actual results may differ from simulated results due to differences in timing and frequency of rate changes, changes in market
conditions and changes in management strategy that lead to changes in the mix of interest-sensitive assets and liabilities.
The simulations assume that the asset and liability structure of the consolidated balance sheets would not be changed as a result of a simulated
change in interest rates. The results of the simulations based on the Group’s financial position as of December 31, 2021 indicate that a gradual 1%
(100 basis points) increase in interest rates over a 12-month period would result in approximately HK$246.4 million (US$31.6 million) pre-tax
profit or loss and a gradual 1% (100 basis points) decrease in interest rates over a 12-month period would result in approximately HK$246.4
million (US$31.6 million) pre-tax profit or loss, depending largely on the extent and timing of possible changes in floating rates.
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements
In June 2016, the FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments—
Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which is effective on January 1, 2020. The guidance replaces
the incurred loss impairment methodology with an expected credit loss model for which the group is required to recognize an allowance based on
its estimate of expected credit loss. In November 2018, FASB issued ASU No, 2018-19, Codification Improvements to Topic 326, further clarified
the scope of the guidance in the amendments in ASU 2016-13. In May 2019, FASB issued ASU No.2019-05, Financial instrument—Credit Losses
(Topic 326), Targeted Transition Relief, which provides an irrevocably fair value option to elect for eligible instruments. In November 2019, FASB
issued ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarified and improved various aspects
of ASU 2016-13. In March 2020, FASB issued ASU 2020-03, Codification Improvements to Financial Instruments, which improves and clarifies
various financial instruments topics, including the current expected credit losses standard. As of January 1, 2020, the Group adopted ASC Topic
326 using the modified retrospective approach for all in-scope assets. The adoption of ASC Topic 326 has no impact on the Group’s retained
earnings as of January 1, 2020. Results for reporting periods beginning after January 1, 2020 are presented under ASC Topic 326 while prior
periods continue to be reported in accordance with previously applicable U.S. GAAP.
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework—Changes to the Disclosure Requirements for Fair Value
Measurement. The amendments in this standard will remove, modify and add certain disclosures under ASC Topic 820, Fair Value Measurement,
with the objective of improving disclosure effectiveness. ASU 2018-13 is effective for the Group’s fiscal year beginning January 1, 2020, with
early adoption permitted. The update eliminates the requirement to disclose: (a) the amount and reasons for transfers between Level 1 and Level 2
of the fair value hierarchy; (b) an entity’s policy for timing of transfers between levels; (c) and an entity’s valuation processes for Level 3 fair value
measurements. The Group adopted ASU 2018-13 on January 1, 2020, and the adoption had no material impact on the Group’s consolidated
financial statements.
In December 2019, the FASB issued ASU 2019-12, Income taxes (Topic 740)-Simplifying the accounting for income taxes, which simplifies
the accounting for income taxes by removing certain exceptions to the general principles in Topic 740, Income Taxes. The ASU will be effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The Group adopted the ASU on January 1, 2021,
which did not have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides
optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on
financial reporting if certain criteria are met. The amendments in ASU 2020-04 provide optional expedients and exceptions for applying GAAP to
contracts, hedging relationships and other transactions that reference LIBOR or another reference rate expected to be discontinued because of
reference rate reform. This guidance is effective immediately and the amendments may be applied prospectively through December 31, 2022. The
adoption did not have a material accounting impact on the Group’s consolidated financial position or results of operations.
F-31
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FINANCIAL ASSETS AND FINANCIAL LIABILITIES
Financial Assets and Liabilities Measured at Fair Value
The following tables set forth, by level within the fair value hierarchy (see Note 2), financial assets measured at fair value as of December 31,
2020 and 2021. As required by ASC Topic 820, financial assets and financial liabilities are classified in their entirety based on the lowest level of
input that is significant to the respective fair value measurement.
Financial assets, measured at fair value
Short-term investments
Other financial assets (1)
Total financial assets, measured at fair value
Financial Assets At Fair Value as of
December 31, 2021
Level 1
Level 2
Level 3
Total
(HK$ in thousands)
1,169,741
—
1,169,741
—
598
598
1,169,741
—
—
598
— 1,170,339
(3) The Group enters into currency futures contracts to manage currency exposure associated with anticipated receipts and disbursements
occurring in a currency other than the functional currency of the entity. The currency futures contracts are valued using broadly distributed
bank and broker prices, and are classified as Level 2 of the fair value hierarchy since inputs to their valuation can be generally corroborated by
market data.
The Group did not hold any financial assets measured at fair value as of December 31, 2020.
Transfers Between Level 1 and Level 2
Transfers of financial assets and financial liabilities at fair value to or from Levels 1 and 2 arise where the market for a specific financial
instrument has become active or inactive during the period. The fair values transferred are ascribed as if the financial assets or financial liabilities
had been transferred as of the end of the period. During the years ended December 31, 2021 and 2020, there were no transfers between levels for
financial assets and liabilities, at fair value.
F-32
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (Continued)
Financial Assets and Liabilities Not Measured at Fair Value
The following financial instruments are not measured at fair value in the Group’s consolidated balance sheets at December 31, 2020 and 2021,
but require disclosure of their fair values. The estimated fair value of such instruments at December 31, 2020 and 2021 approximates their carrying
value due to their generally short maturities. If measured at fair value in the financial statements, these financial instruments would be classified
based on the lowest level of any input that is significant to the fair value measurement.
Financial assets, not measured at fair value
Cash and cash equivalents
Cash held on behalf of clients
Restricted Cash
Securities purchased under resale agreements
Loans and advances
Receivables:
Clients
Brokers
Clearing organizations
Fund management companies and fund distributors
Interest
Other financial assets
Total financial assets, not measured at fair value
Financial liabilities, not measured at fair value
Amounts due to related parties
Payables:
Clients
Brokers
Clearing organizations
Fund management companies and fund distributors
Interest
Borrowings
Securities sold under agreements to repurchase
Operating lease liabilities
Other financial liabilities
Total financial liabilities, not measured at fair value
F-33
As of December 31, 2021
Fair
Value
Carrying
Value
(HK$ in thousands)
4,555,096
54,734,351
2,065
106,203
29,587,306
469,577
7,893,927
1,961,121
72,340
50,829
387,072
99,819,887
4,555,096
54,734,351
2,065
106,203
29,587,306
469,577
7,893,927
1,961,121
72,340
50,829
387,072
99,819,887
As of December 31, 2021
Fair
Value
Carrying
Value
(HK$ in thousands)
87,459
87,459
59,127,439
7,599,233
393,782
56,690
15,359
6,357,405
4,467,861
260,579
937,970
79,303,777
59,127,439
7,599,233
393,782
56,690
15,359
6,357,405
4,467,861
260,579
937,970
79,303,777
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (Continued)
Financial Assets and Liabilities Not Measured at Fair Value (Continued)
Financial assets, not measured at fair value
Cash and cash equivalents
Cash held on behalf of clients
Term deposit
Loans and advances
Receivables:
Clients
Brokers
Clearing organizations
Fund management companies and fund distributors
Interest
Other financial assets
Total financial assets, not measured at fair value
Financial liabilities, not measured at fair value
Amounts due to related parties
Payables:
Clients
Brokers
Clearing organizations
Fund management companies and fund distributors
Interest
Borrowings
Securities sold under agreements to repurchase
Operating lease liabilities
Other financial liabilities
Total financial liabilities, not measured at fair value
F-34
As of December 31, 2020
Fair
Value
Carrying
Value
(HK$ in thousands)
1,034,668
42,487,090
300,000
18,825,366
735,145
5,780,461
1,243,928
297,622
19,876
251,672
70,975,828
1,034,668
42,487,090
300,000
18,825,366
735,145
5,780,461
1,243,928
297,622
19,876
251,672
70,975,828
As of December 31, 2020
Fair
Value
Carrying
Value
(HK$ in thousands)
87,169
87,169
46,062,842
4,533,581
324,266
127,442
5,493
5,482,818
5,453,037
222,231
96,800
62,395,679
46,062,842
4,533,581
324,266
127,442
5,493
5,482,818
5,453,037
222,231
96,800
62,395,679
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. FINANCIAL ASSETS AND FINANCIAL LIABILITIES (Continued)
Financial Assets and Liabilities Not Measured at Fair Value (Continued)
Netting of Financial Assets and Financial Liabilities
The Group’s policy is to net the receivables from and payables to clearing organizations that meet the offsetting requirements prescribed in
ASC Topic 210-20. The following tables represents the amounts of financial instruments that are offset in the consolidated balance sheets as of
December 31, 2021 and 2020.
As of December 31, 2021
Financial Assets
Amounts due from clearing organizations
Financial liabilities
Amounts due to clearing organizations
As of December 31, 2020
Financial Assets
Amounts due from clearing organizations
Financial liabilities
Amounts due to clearing organizations
4. SHORT-TERM INVESTMENTS
The following is a summary of short-term investments:
Money market funds
Total
Effects of offsetting on the balance sheet
Gross
amounts
set off in the
balance
sheet
Net amounts
Presented in
the balance
sheet
Gross
amount
Related amounts not offset
Amounts
subject to
master
netting
Financial
instrument
arrangements collateral
Net
amount
7,596,090
(5,634,969)
1,961,121
—
—
1,961,121
HK$in thousands
6,028,751
(5,634,969)
393,782
—
—
393,782
Effects of offsetting on the balance sheet
Gross
amounts
set off in the
balance
sheet
Gross
amount
Amounts
subject to
master
netting
arrangements
Net amounts
presented in
the balance
sheet
HK$ in thousands
Related amounts not offset
Financial
instrument
collateral
Net
amount
12,614,684
(11,370,756)
1,243,928
11,695,022
(11,370,756)
324,266
—
—
— 1,243,928
—
324,266
As of December 31,
2020
2021
(HK$ in thousands)
—
—
1,169,741
1,169,741
For the years ended December 31, 2019, 2020 and 2021, the Group recorded realized gain of HK$707 thousand, HK$665 thousand and nil
related to short-term investments in the consolidated statements of comprehensive income, respectively.
F-35
Table of Contents
5. LEASE
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents balances reported in the consolidated balance sheets related to the Group’s leases:
Operating lease right-of-use assets
Operating lease liabilities
As of December 31,
2020
2021
(HK$ in thousands)
208,863
222,231
243,859
260,579
The following table presents operating lease cost reported in the consolidated statements of comprehensive income related to the Group’s
leases:
Operating lease cost
2019
Year ended December 31,
2020
(HK$ in thousands)
2021
64,756
64,594
106,459
The following table reconciles the undiscounted cash flows of the Group’s leases as of December 31, 2021 to the present value of its operating
lease payments:
2022
2023
2024
2025
2026 and thereafter
Total undiscounted operating lease payments
Less: imputed interest
Present value of operating lease liabilities
6. LOANS AND ADVANCES
Margin loans
IPO loans
Other advances
Total
F-36
December 31, 2021
(HK$ in thousands)
102,767
96,326
38,306
30,688
7,455
275,542
(14,963)
260,579
As of December 31,
2020
2021
(HK$ in thousands)
18,424,972
400,394
—
18,825,366
29,084,958
34,348
468,000
29,587,306
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. PROPERTY AND EQUIPMENT, NET
Gross carrying amount
Computers and equipment
Furniture and fixtures
Office equipment
Office building
Vehicle
Total of gross carrying amount
Less: accumulated depreciation
Computers and equipment
Furniture and fixtures
Office equipment
Office building
Vehicle
Total of accumulated depreciation
Property and equipment, net
As of December 31,
2020
2021
(HK$ in thousands)
60,039
34,704
42,276
27,983
632
165,634
(17,295)
(13,738)
(24,282)
(1,403)
(600)
(57,318)
108,316
109,989
64,507
64,822
28,239
635
268,192
(29,852)
(23,828)
(35,860)
(2,291)
(604)
(92,435)
175,757
Depreciation expenses on property and equipment which are included in research and development expenses, selling and marketing expenses
and general and administrative expenses in the consolidated statements of comprehensive income for the years ended December 31, 2019, 2020
and 2021 were HK$15,647 thousand, HK$25,792 thousand and HK$34,118 thousand, respectively.
8. INTANGIBLE ASSETS, NET
Gross carrying amount
Computer software
License
Others
Total of gross carrying amount
Less: accumulated amortization
Computer software
Others
Total of accumulated amortization
Intangible assets, net
As of December 31,
2020
2021
(HK$ in thousands)
8,525
2,000
3,563
14,088
(3,041)
(831)
(3,872)
10,216
15,596
4,261
3,638
23,495
(5,172)
(1,105)
(6,277)
17,218
Amortization expenses on intangible assets which are included in research and development expenses, selling and marketing expenses and
general and administrative expenses in the consolidated statements of comprehensive income for the years ended December 31, 2019, 2020 and
2021 were HK$900 thousand, HK$1,439 thousand and HK$2,317 thousand, respectively.
F-37
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. LONG-TERM INVESTMENTS
The Group’s long-term investments primarily consist of equity method investments and equity investments without readily determinable fair
values.
Equity method investments (1)
Equity investments without readily determinable fair values (2)
Total
(1) Equity method investments
As of December 31,
2020
2021
(HK$ in thousands)
—
—
—
7,798
15,596
23,394
As of December 31, 2020 and 2021, the Group’s investments accounted for under the equity method totaled nil and HK$7,798 thousand,
respectively. The Group applies the equity method of accounting to account for its equity method investments over which it has significant
influence but does not own a majority equity interest or otherwise control.
In January 2019, the Group invested in a private company by acquiring 20% ordinary equity interest with a total consideration of HK$6,709
thousand. Based on the Group’s assessment on the recoverable amounts of the equity method investment, as of December 31, 2020 and 2021, the
impairment provision on the equity method investment was HK$5,888 thousand.
In December 2021, the Group invested in a private equity fund by acquiring approximately 10% ordinary equity interest with a total
consideration of HK$7,798 thousand. Based on the Group’s assessment on the recoverable amounts of this equity method investment, as of
December 31, 2021, no impairment provision on the equity method investment was recognized.
(2) Equity investments without readily determinable fair values
As of December 31, 2020 and 2021, the Group’s equity investments without readily determinable fair values totaled nil and HK$15,596
thousand, respectively. In December 2021, the Group invested in a private equity fund by acquiring 2.75% ordinary equity interest with a total
consideration of HK$15,596 thousand. Equity securities without determinable fair values of the Group represent investments in privately held
companies with no readily determinable fair value. The Group elected measurement alternative and recorded these investments at cost, less
impairment, adjusted for subsequent observable price changes. No impairment provision of the equity investments without readily determinable
fair values were recognized as of December 31, 2021.
10. OTHER ASSETS
Current:
Staff advances
Others
Total
Non-current:
Refundable deposit
Property and equipment, net (Note 7)
Deferred tax assets (Note 26)
Intangible assets, net (Note 8)
Total
F-38
As of December 31,
2020
2021
(HK$ in thousands)
36,468
70,419
106,887
150,733
108,316
17,174
10,216
286,439
26,527
55,067
81,594
337,513
175,757
38,317
17,218
568,805
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Table of Contents
11. BORROWINGS
Borrowings from:
Banks (1)
Other financial institutions
Total
As of December 31,
2020
2021
(HK$ in thousands)
5,182,620
300,198
5,482,818
6,357,405
—
6,357,405
The Group obtained borrowings mainly to support its margin financing business. Those borrowings bear weighted average interest rates of
1.82% and 1.15% as of December 31, 2020 and 2021, respectively.
(1) The Group has unused borrowing facilities of HK$3,285,909 thousand and HK$14,695,095 thousand from banks as of December 31, 2020 and
2021, respectively, which are uncommitted. These bank borrowings were pledged by margin clients’ shares as the primary source of credit risk
mitigation of the lenders, and bear floating interest rates based on various benchmarks including Hong Kong Prime Rate, Hong Kong
Interbank Offered Rate (“HIBOR”), CNH HIBOR, etc.
12. ACCRUED EXPENSES AND OTHER LIABILITIES
Current:
Payables to corporate clients in relation to ESOP management services
Accrued payroll and welfare expenses
Tax payables
Accrued advertising and promotion fee
Temporary payables in relation to fund distribution services
Accrued professional fee
Stamp duty, trading levy and trading fee payables
Accrued market information and data fee
Contract liabilities - current
Refund from depositary bank - current
Others
Total
Non-current:
Contract liabilities - non-current
Refund from depositary bank - non-current
Deferred tax liabilities (Note 26)
Total
F-39
As of December 31,
2020
2021
(HK$ in thousands)
17,801
317,428
173,911
37,652
70,793
6,952
26,007
13,143
2,958
2,756
47,782
717,183
5,291
7,120
1,604
14,015
870,283
531,409
494,744
152,305
48,240
22,066
19,447
12,832
3,058
2,773
19,056
2,176,213
5,910
4,389
636
10,935
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. ORDINARY SHARES AND TREASURY STOCK
Ordinary shares
The Company’s original Memorandum and articles of association authorized the Company to issue 807,500 ordinary shares with a par value of
US$0.0050 per share. After a share split effective on September 22, 2016, the Company’s amended Memorandum and articles of association
authorized the Company to issue 403,750,000 ordinary shares with a par value of US$0.00001 per share. Each ordinary share is entitled to one
vote. Immediately prior to the completion of the initial public offering on March 8, 2019, the Company was approved by the board of directors of
the Company to adopt a dual class share structure, consisting of 48,700,000,000 Class A ordinary shares with a par value of US$0.00001 each,
800,000,000 Class B ordinary shares with a par value of US$0.00001 each and 500,000,000 shares undesignated with a par value of US$0.00001
each. In respect of all matters subject to shareholders’ vote, each holder of Class A ordinary share is entitled to one and each holder of Class B
ordinary share is entitled to twenty votes.
On August 22, 2020, the Company completed a public offering, issued 76,000,000 Class A ordinary shares for a total consideration of
US$301.8 million (HK$2,339.7 million) after deducting the underwriting discounts and commissions and offering expenses.
Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A ordinary shares are
not convertible into Class B ordinary shares under any circumstances. On December 3, 2020, 50,000,000 shares of Class B ordinary shares were
converted to the same number of Class A ordinary shares.
In December, 2020, the Company entered into a securities purchase agreement with a leading global investment firm for a private placement
of Pre-Funded warrants (the “Offering” or the “Pre-Funded Warrants”). The net proceeds to the Company from the Offering were approximately
US$262.5 million (HK $2,035 million). In the Offering, the Company issued Pre-Funded warrants to purchase 53,600,000 shares of Class A
ordinary shares that were immediately exercisable and had a termination date in June 2022, at a price of US$4.89751 less a norminal exercise price
of US$0.00001 per Pre-Funded warrant. The Pre-Funded Warrants were equity classified because they were immediately exercisable, did not
embody an obligation for the Company to repurchase its shares, and permitted the holders to receive a fixed number of common shares upon
exercise. In addition, such warrants did not provide any guarantee of value or return. On June 11, 2021, the investment firm exercised these Pre-
Funded warrants which increased 53,599,890 shares of Class A ordinary shares, and 110 shares were retrieved as the consideration of share
purchase.
On April 24, 2021, the Company completed a public offering, issued 87,400,000 Class A ordinary shares for a total consideration of US$1,398
million (HK$10,857 million) after deducting the underwriting discounts and commissions and offering expenses.
During the year ended December 31, 2020 and 2021, 5,048,824 and 5,875,592 shares of Class A Ordinary Shares were issued upon exercise of
outstanding stock options. During the year ended December 31, 2020 and 2021, nil and 929,672 shares of Class A Ordinary Shares were issued
upon vest of outstanding restricted shares units under the Group’s share-based incentive plans (Note 16).
Treasury stock
On November 3, 2021, the Group’s Board of Directors approved a share repurchase program to repurchase up to US$300.0 million worth of
its own American depositary shares (“ADSs”), representing its Class A ordinary shares, until December 31, 2022. As of December 31, 2021, the
Group had repurchased an aggregate of 29,462,760 ordinary shares under the Share Repurchase Program in the open market, at an average price of
US$41.04 per ADS, or US$5.13 per share for a total consideration of US$151.2 million (HK$1,178.8 million).
As of December 31, 2021, 29,462,760 Class A ordinary shares were repurchased and recorded at historical purchase cost of US$151.2
million (HK$1,178.8 million).
F-40
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. RESTRICTED NET ASSETS
In accordance with the PRC laws and regulations, the Group’s PRC subsidiaries and VIEs are required to make appropriation to certain reserve
funds, namely general reserve fund, enterprise expansion fund, and staff bonus and welfare fund, all of which are appropriated from the
subsidiaries’ annual after-tax profits as reported under PRC GAAP. The appropriation must be at least 10% of the annual after-tax profits to the
general reserve fund until such reserve fund has reached 50% of the subsidiaries’ registered capital.
The domestic companies are also required to provide discretionary surplus fund, at the discretion of the Board of Directors, from its annual
after-tax profits as reported under PRC accounting standards. The aforementioned reserve funds can only be used for specific purposes and are not
distributable as cash dividends.
As a result of the PRC laws and regulations and the requirement that distributions by the PRC entity can only be paid out of distributable
profits computed in accordance with PRC accounting standards, the PRC entity is restricted from transferring a portion of its net assets to the
Group. Amounts restricted include paid-in capital and statutory reserves of the Group’s PRC subsidiaries and VIEs.
Furthermore, cash transfers from the Group’s PRC subsidiaries to their parent companies outside of China are subject to PRC government
control of currency conversion. Shortages in the availability of foreign currency at the time of requesting such conversion may temporarily delay
the ability of the PRC subsidiaries and consolidated affiliated entities to remit sufficient foreign currency to pay dividends or other payments to the
Group, or otherwise satisfy their foreign currency denominated obligations.
As of December 31, 2020 and 2021, the restricted net assets of the Group’s relevant PRC entities amounted to HK$229,035 thousand and
HK$304,377 thousand, respectively.
For the year ended December 31, 2021, the Group performed a test on the restricted net assets of subsidiaries and VIEs in accordance with
Securities and Exchange Commission Regulation S-X Rule 4-08 (e) (3), “General Notes to Financial Statements” and concluded that the restricted
net assets do not exceed 25% of the consolidated net assets of the Group as of December 31, 2021 and the condensed financial information of the
Group are not required to be presented.
15. REDEEMABLE CONVERTIBLE PREFERRED SHARES
From 2014 to 2017, the Group issued several rounds of Preferred Shares to certain investors. All series of Preferred Shares had the same par
value of US$0.00001 per share. Upon the completion of the Company’s IPO in March 2019, all of the issued and outstanding Preferred Shares
were automatically converted and redesignated into Class A or Class B Ordinary Shares on a one-for-one basis.
Accounting of the Preferred Shares
The Company classified the Preferred Shares as mezzanine equity in the consolidated balance sheets because they were redeemable at the
holders’ option any time after a certain date and were contingently redeemable upon the occurrence of certain liquidation events outside of the
Company’s control. The Preferred Shares are recorded initially at fair value, net of issuance costs.
The Group determined that the embedded conversion features and the redemption features do not require bifurcation as they either are clearly
and closely related to the Preferred Shares or do not meet the definition of a derivative.
The Group has determined that there was no embedded beneficial conversion feature attributable to the Preferred Shares. In making this
determination, the Group compared the initial effective conversion prices of the Preferred Shares and the fair values of the Group’s ordinary shares
determined by the Group at the issuance dates. The initial effective conversion prices were greater than the fair values of the ordinary shares to
which the Preferred Shares are convertible into at the issuance dates.
In March 2019, 237,129,043 issued and outstanding preferred shares were converted into Class A ordinary shares and 140,802,051 issued and
outstanding preferred shares were converted into Class B ordinary shares upon the completion of the IPO.
F-41
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. SHARE-BASED COMPENSATION
Share-based compensation was recognized in operating expenses for the years ended December 31, 2019, 2020 and 2021 as follows:
Research and development expenses
General and administrative expenses
Selling and marketing expenses
Total share-based compensation expenses
Share Options
2019
Year ended December 31,
2020
(HK$ in thousands)
20,579
10,354
1,640
32,573
12,055
3,374
538
15,967
2021
75,755
14,020
9,138
98,913
In October 2014, the Board of Directors of the Company approved the establishment of 2014 Share Incentive Plan, the purpose of which is to
provide an incentive for employees contributing to the Group. The 2014 Share Incentive Plan shall be valid and effective until October 30, 2024.
The maximum number of shares that may be issued pursuant to all awards (including incentive share options) under 2014 Share Incentive Plan
shall be 135,032,132 shares. Option awards are granted with an exercise price determined by the Board of Directors. Those option awards
generally vest over a period of four or five years and expire in ten years.
In December 2018, the Board of Directors of the Company approved the 2019 Share Incentive Plan, pursuant to which the maximum number
of shares of the Company available for issuance shall be a number of up to 2% of the total number of shares issued and outstanding on September
29, 2019 as determined by the Board, plus an annual increase on each September 30 during the term of this 2019 Share Incentive Plan commencing
on September 30, 2020, by an amount determined by the Board; provided, however, that (i) the number of shares increased in each year shall not
be more than 2% of the total number of shares issued and outstanding on September 29 of the same year and (ii) the aggregate number of shares
initially reserved and subsequently increased during the term of this 2019 Share Incentive Plan shall not be more than 8% of the total number of
shares issued and outstanding on September 29, 2019 immediately preceding the most recent increase.
On December 31, 2019, the Company modified the exercise price of 8,113,145 stock options granted under 2014 Share Incentive Plan to
US$0.60. The incremental compensation expenses of HK$3,008 thousand (US$386 thousand) was equal to the excess of the fair value of the
modified award immediately after the modification over the fair value of the original award immediately before the modification.
For the years ended December 31, 2019, 2020 and 2021, the Group granted 9,791,200, 2,489,832 and 1,080,000 stock options to employees
pursuant to the 2014 Share Incentive Plan and 2019 Share Incentive Plan.
F-42
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. SHARE-BASED COMPENSATION (Continued)
Share Options (Continued)
A summary of the stock option activity under the 2014 and 2019 Share Incentive Plan for the years ended December 31, 2019, 2020 and 2021
is included in the table below.
Outstanding at December 31, 2019
Exercised
Granted
Forfeited
Outstanding at December 31, 2020
Exercised
Granted
Forfeited
Outstanding at December 31, 2021
Options granted
share number
23,718,626
(5,048,824)
2,489,832
(2,117,298)
19,042,336
Weighted average
exercise price per option (US$)
0.5161
0.4293
0.6810
0.5588
0.5628
(5,875,592)
1,080,000
(905,278)
13,341,466
0.4365
0.0444
0.6539
0.5703
The following table summarizes information regarding the share options outstanding as of December 31, 2021 and exercise prices and
aggregate intrinsic value have been adjusted according to the modification of exercise price in December 2019:
Options
Outstanding
Exercisable
Expected to vest
As of December 31, 2021
Weighted-
average
remaining
exercise
contractual life
(years)
Weighted-
average
exercise price
per option
US$
Options
number
Aggregate
intrinsic value
US$ in thousand
13,341,466
2,825,014
10,516,452
0.5703
0.5729
0.5696
3.42
2.85
3.57
165,157
34,964
130,193
The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the fair value of the
underlying stock at December 31, 2021.
The weighted average grant date fair value of options granted for the years ended December 31, 2019, 2020 and 2021 were US$0.7345,
US$1.5239 and US$18.9219 per option, respectively.
Options exercised for the years ended December 31, 2019, 2020 and 2021 were 106,295,232, 5,048,824 and 5,875,592, respectively. The total
intrinsic value of options exercised during year ended December 31, 2021 was approximately HK$614,738 thousand (US$79,093 thousand).
F-43
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. SHARE-BASED COMPENSATION (Continued)
Share Options (Continued)
The fair value of each option granted during 2019, 2020 and 2021 was estimated on the date of each grant using the binomial option pricing
model with the assumptions (or ranges thereof) in the following table:
Risk-free interest rate
Expected term (in years)
Expected dividend yield
Expected volatility
Expected forfeiture rate (post-vesting)
2019
2020
2021
1.67 % 0.27%-0.36 % 0.09%-0.89 %
5.00
5.00
5.00
0 %
45 %
15 %
0 %
40 %
15 %
0 %
40 %
15 %
Risk-free interest rate is estimated based on the yield curve of US Sovereign Bond as of the option valuation date. The expected volatility at
the grant date and each option valuation date is estimated based on annualized standard deviation of daily stock price return of comparable
companies with a time horizon close to the expected expiry of the term of the options. The Company has never declared or paid any cash dividends
on its capital stock, and the Group does not anticipate any dividend payments in the foreseeable future. Expected term is the contract life of the
options.
As of December 31, 2021, there was HK$201,948 thousand (US$25,897 thousand) of unrecognized compensation expenses related to the
options, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 3.96 years, respectively, and may
be adjusted for future changes in estimated forfeitures.
Restricted Shares Units Plan
In December 2018, the Board of Directors of the Company approved the 2019 Share Incentive Plan. The fair value of restricted share units
granted with service conditions is estimated based on the fair market value of the underlying ordinary shares of the Company on the date of grant.
The following table summarizes activities of the Company’s restricted share units granted to employees under the plan:
Outstanding at December 31, 2020
Vested
Granted
Forfeited
Outstanding at December 31, 2021
Shares awarded number
6,067,400
(929,672)
12,105,712
(281,576)
16,961,864
Weighted -
average grant date
fair value per share(US$)
4.6827
4.6827
5.7371
5.4426
5.6793
For the years ended December 31, 2019, 2020 and 2021, the Group granted nil, 6,067,400 and 12,105,712 restricted shares units to employees
pursuant to the 2019 Share Incentive Plan, respectively.
As of December 31, 2021, there was HK$694,749 thousand (US$89,092 thousand) of unrecognized compensation expenses related to the
restricted shares units, adjusted for estimated forfeitures, which is expected to be recognized over a weighted-average period of 4.64 years and may
be adjusted for future changes in estimated forfeitures.
F-44
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
17. NET INCOME PER SHARE
For the years ended December 31, 2019, the Group has determined that its all classes of convertible redeemable preferred shares are
participating securities as they participate in undistributed earnings on an as-if-converted basis. The holders of the Preferred Shares are entitled to
receive dividends on a pro rata basis, as if their shares had been converted into ordinary shares. Accordingly, the Group uses the two-class method
of computing net income per share, for ordinary shares and preferred shares according to the participation rights in undistributed earnings. For the
years ended December 31, 2020, the Company issued Pre-Funded warrants to purchase 53,600,000 shares of Class A ordinary shares with an
exercise price of US$0.00001 that are included in our computation of basic earnings per share. For the years ended December 31, 2021, the
investment firm exercised these Pre-Funded warrants which increased 53,599,890 shares of Class A ordinary shares, and 110 shares were retrieved
as the consideration of share purchase.
Basic net income per share and diluted net income per share have been calculated in accordance with ASC 260 on computation of earnings per
share for the years ended December 31, 2019,2020 and 2021 as follows:
Basic net income per share calculation:
Numerator:
Net income attributable to ordinary shareholders of the Company
Denominator:
Weighted average number of ordinary shares outstanding - basic
Net income per share attributable to ordinary shareholders of the Company - basic
Diluted net income per share calculation:
Numerator:
Net income attributable to ordinary Shareholders of the Company
Denominator:
Weighted average number of ordinary shares outstanding - basic
Dilutive effect of share options and restricted shares units
Weighted average number of ordinary shares outstanding - diluted
Net income per share attributable to ordinary shareholders of the Company - diluted
Year ended December 31,
2019
2020
2021
(HK$ in thousands, except for share and per share data)
143,159
1,325,523
2,810,210
832,790,329
0.17
1,036,865,727
1.28
1,200,912,670
2.34
143,159
1,325,523
2,810,210
832,790,329
85,107,097
917,897,426
0.16
1,036,865,727
13,277,287
1,050,143,014
1.26
1,200,912,670
18,759,838
1,219,672,508
2.30
For the years ended December 31, 2019, 2020 and 2021, options to purchase ordinary shares and restricted share units that were anti-dilutive
and excluded from the calculation of diluted net income per share were 3,747,975, 4,800,584 and 357,978 shares on a weighted average basis,
respectively.
18. COLLATERALIZED TRANSACTIONS
The Group engages in margin financing transactions with its clients. Margin loans generated from margin lending activity are collateralized by
cash and/or client-owned securities held by the Group. The Group monitors the required margin and collateral level on a daily basis in compliance
with regulatory and internal guidelines and controls its risk exposure through risk management system. Under applicable agreements, clients are
required to deposit additional collateral or reduce holding positions, when necessary to avoid forced liquidation of their positions.
Pursuant to the authorization obtained from margin clients, the Group further repledges the collaterals to commercial banks or other financial
institutions to obtain the funding for the margin or other businesses.
F-45
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FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. COLLATERALIZED TRANSACTIONS (Continued)
The following table summarizes the amounts of margin loans and clients’ collaterals received and repledged by the Group as of December 31,
2020 and 2021:
Margin loan extended to margin clients
Securities purchased under agreements to resell transactions
Collateral received from margin clients
Collateral received from brokers
Collateral repledged to commercial banks and other financial institutions
As of December 31,
2020
2021
(HK$ in thousands)
18,424,972
—
89,404,131
—
58,255,907
29,084,958
106,203
119,745,500
144,156
20,953,603
The Group also engaged in securities borrowing and lending transactions which require it to deposit cash collateral with the securities lenders
and receive the cash collateral from the borrowers. The cash collateral is generally in excess of the market value of the securities borrowed and
lent. The Group monitors the market value of securities borrowed and loaned on a daily basis, with additional collateral obtained or refunded as
permitted contractually.
The following table summarizes the amounts of market value of securities borrowed and lent and cash collateral received and deposited as of
December 31, 2020 and 2021:
Securities borrowed and lent
Cash collateral received from borrowers
Cash collateral deposited with lenders
19. BROKERAGE COMMISSION AND HANDLING CHARGE INCOME
2019
As of December 31,
2020
2021
(HK$ in thousands)
4,307,346
5,067,828
3,645,214
8,436,638
9,737,786
3,120,123
Year ended December 31,
2020
(HK$ in thousands)
1,531,048
459,090
1,990,138
352,625
158,740
511,365
2021
3,147,610
765,417
3,913,027
Brokerage commission income
Handling charge income
Total
20. INTEREST INCOME
Interest income from:
Margin financing
Securities lending
IPO financing
Bank deposits
Bridge loan
Other financing
Total
2019
Year ended December 31,
2020
(HK$ in thousands)
2021
221,648
37,202
12,658
187,223
6,172
—
464,903
497,975
73,792
184,226
208,556
1,078
—
965,627
1,720,473
397,505
200,567
197,390
1,872
391
2,518,198
F-46
Table of Contents
21. OTHER INCOME
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2019
Year ended December 31,
2020
(HK$ in thousands)
2021
Currency exchange service income
IPO subscription service charge income
Enterprise public relations service charge income
Underwriting fee income
Funds distribution service income
Market information and data income
Others
Total
4,670
26,537
16,156
19,579
10,447
2,692
5,206
85,287
67,000
159,682
29,988
30,797
42,658
18,463
6,469
355,057
22. BROKERAGE COMMISSION AND HANDLING CHARGE EXPENSES
2019
Year ended December 31,
2020
(HK$ in thousands)
302,800
58,686
361,486
95,064
5,486
100,550
201,030
169,336
96,327
86,880
68,856
43,921
17,745
684,095
2021
524,470
47,689
572,159
Commission, handling and settlement expenses
IPO subscription service charge expenses
Total
23. INTEREST EXPENSES
Interest expenses for margin financing
Due to banks
Due to other licensed financial institutions
Due to other parties
Interest expenses for securities borrowed
Due to clients
Due to brokers
Interest expenses for IPO financing
Due to banks
Due to other parties
Total
2019
Year ended December 31,
2020
(HK$ in thousands)
2021
36,206
28,636
3,930
1,298
9,077
10,091
—
89,238
45,545
38,246
—
7,984
13,853
79,337
125
185,090
125,002
51,179
—
132,034
18,624
50,063
—
376,902
F-47
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
24. PROCESSING AND SERVICING COSTS
Cloud service fee
Market information and data fee
Data transmission fee
System cost
SMS service fee
Others
Total
25. NON-INTEREST COST AND EXPENSES BY NATURE
Employee compensation and benefits
Marketing and branding
Brokerage commission and handling charge expenses (Note 22)
Processing and servicing costs (Note 24)
Rental and other related expenses
Depreciation and amortization
Professional services
Others
Total
26. TAXATION
Income Tax
1) Cayman Islands
2019
Year ended December 31,
2020
(HK$ in thousands)
2021
16,729
54,282
13,890
4,334
1,523
1,158
91,916
48,940
68,274
23,072
4,476
2,511
2,105
149,378
2019
Year ended December 31,
2020
(HK$ in thousands)
327,441
130,528
100,550
91,916
64,756
16,547
28,757
23,867
784,362
682,068
297,170
361,486
149,378
64,594
27,231
32,988
42,956
1,657,871
122,269
70,387
46,289
12,160
1,197
4,701
257,003
2021
1,248,682
1,163,495
572,159
257,003
106,459
36,435
59,697
111,675
3,555,605
The Group was incorporated in the Cayman Islands. Under the current laws of the Cayman Islands, the Company is not subject to tax on either
income or capital gain. Additionally, the Cayman Islands does not impose a withholding tax on payments of dividends to shareholders.
2) The United States (“US”)
The Company’s subsidiaries, incorporated in the United States are subject to statutory income tax at a rate up to 35% for taxable income
earned in the United States. On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted, significantly revising the U.S
corporate income tax law. Changes include a reduction in the federal corporate tax, changes to operating loss carry-forwards and carrybacks, and a
repeal of the corporate alternative minimum tax. This legislation resulted in a reduction of the U.S. federal corporate income tax rates from a
maximum of 35% to 21%, to which the subsidiaries incorporated in the United States are subject.
F-48
Table of Contents
26. TAXATION (Continued)
Income Tax (Continued)
3) Hong Kong
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s subsidiaries in Hong Kong were subject to Hong Kong profits tax at a rate of 16.5% on their taxable income generated from
operations in Hong Kong before April 1, 2018. Starting from the financial year commencing on April 1, 2018, the two-tiered profits tax regime
took effect, under which the tax rate is 8.25% for assessable profits on the first HK$2 million and 16.5% for any assessable profits in excess of
HK$2 million. Additionally, payments of dividends by the subsidiaries incorporated in Hong Kong to the Company are not subject to any Hong
Kong withholding tax.
4) Singapore
The Company’s subsidiaries incorporated in Singapore are subject to an income tax rate of 17% for taxable income earned in Singapore.
Singapore does not impose a withholding tax on dividends for resident companies. In the years ended December 31, 2019, 2020 and 2021, we did
not incur any income tax as there was no estimated assessable profit that was subject to Singapore income tax.
5) China
The Company’s subsidiaries, consolidated VIEs and subsidiary of the VIEs established in the PRC are subject to statutory income tax at a rate
of 25%, unless preferential tax rates were applicable.
The Enterprise Income Tax (“EIT”) Law and its implementing rules permit High and New Technology Enterprise (“HNTE”) to enjoy a
reduced 15% EIT rate. Futu Network Technology (Shenzhen) Co., Ltd., one of the Company’s subsidiary, and Shenzhen Futu, the Group’s
consolidated VIE, obtained the qualification certificate of HNTE under the EIT Law, subject to the tax rate of 15% with a valid period of three
years starting from 2019 and 2020, respectively.
According to the relevant EIT Laws jointly promulgated by the Ministry of Finance of the PRC, State Tax Bureau of the PRC, and Ministry of
Science of the PRC that became effective from 2018 onwards, enterprises engaging in research and development activities are entitled to claim
175% of their research and development expenses so incurred as tax deductible expenses when determining their assessable profits for that year
(“Super Deduction”).
Under the EIT Law enacted by the National People’s Congress of PRC on March 16, 2007 and its implementation rules which became
effective on January 1, 2008, dividends generated after January 1, 2008 and payable by FIEs in the PRC to its foreign investors who are non-
resident enterprises are subject to a 10% withholding tax, unless any such foreign investor’s jurisdiction of incorporation has a tax treaty with the
PRC that provides for a different withholding arrangement. Under the taxation arrangement between the PRC and Hong Kong, a qualified Hong
Kong tax resident which is the “beneficial owner” and directly holds 25% or more of the equity interest in a PRC resident enterprise is entitled to a
reduced withholding tax rate of 5%. The Cayman Islands, where the Company was incorporated, does not have a tax treaty with PRC.
The EIT Law includes a provision specifying that legal entities organized outside of the PRC will be considered resident enterprises for the
PRC income tax purposes if the place of effective management or control is within the PRC. The implementation rules to the EIT Law provide that
non-resident legal entities will be considered as PRC resident enterprises if substantial and overall management and control over the manufacturing
and business operations, personnel, accounting, properties, etc., occurs within the PRC. Despite the present uncertainties resulting from the limited
PRC tax guidance on the issue, the Group does not believe that the Group’s entities organized outside of the PRC should be treated as resident
enterprises for the PRC income tax purposes. If the PRC tax authorities subsequently determine that the Company and its subsidiary registered
outside the PRC should be deemed resident enterprises, the Company and its subsidiary registered outside the PRC will be subject to the PRC
income tax, at a rate of 25%.
F-49
Table of Contents
26. TAXATION (Continued)
Income Tax (Continued)
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Dividends paid by the Group’s wholly foreign-owned subsidiaries in China to non-PRC-resident enterprises which do not have an
establishment or place of business in the PRC, or which have such establishment or place of business but the relevant income is not effectively
connected with the establishment or place of business, will be subject to a withholding tax rate of 10%, unless the relevant Hong Kong entity
satisfies all the requirements under the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the
Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income and receives approval from the relevant tax
authority. The undistributed earnings that are subject to dividend tax are expected to be indefinitely reinvested for the foreseeable future. The
Group did not record any withholding tax for its PRC earnings and considered determination of such withholding tax amount not practicable.
Composition of income tax expenses
The following table sets forth current and deferred portion of income tax expenses:
2019
Current income tax expenses
Deferred income tax benefit
Income tax expenses
Year ended December 31,
2020
(HK$ in thousands)
137,939
(13,146)
124,793
13,858
(1,572)
12,286
2021
396,512
(21,431)
375,081
Reconciliation between the income tax expenses computed by applying the Hong Kong enterprise tax rate to income before income taxes and
actual provision were as follows:
Income before income tax
Tax expenses at Hong Kong profit tax rate of 16.5%
Changes of valuation allowance
Tax effect of permanent differences
Effect of income tax in jurisdictions other than Hong Kong
Super deduction of research and development expenses
Final settlement differences
Income not subject to tax (1)
Income tax expenses
2019
Year ended December 31,
2020
(HK$ in thousands)
1,450,623
239,353
14,348
9,029
(4,386)
(29,081)
—
(104,470)
124,793
178,493
29,451
30,172
5,486
(4,143)
(19,277)
(18,038)
(11,365)
12,286
2021
3,185,291
524,907
101,653
22,047
(32,182)
(62,966)
(602)
(177,776)
375,081
(1) This amount mainly represents tax exemption relating to the offshore income of Futu Securities. The brokerage commission income derived
from executing the clients’ orders of US listed securities was treated as offshore-sourced and non-taxable on the basis that these transactions
were executed outside Hong Kong.
F-50
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
26. TAXATION (Continued)
Deferred Tax Assets and Liabilities
Deferred income tax expenses reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes. The components of the deferred tax assets and liabilities are as follows:
As of December 31,
2020
2021
(HK$ in thousands)
Deferred tax assets
Net operating loss carryforwards
Accrued expenses and others
Less: valuation allowance
Total deferred tax assets
Set-off of deferred tax liabilities pursuant to set-off provisions
Net deferred tax assets
Total deferred tax liabilities
Set-off of deferred tax assets pursuant to set-off provisions
Net deferred tax liabilities
Movement of Valuation Allowance
Balance at beginning of the year
Additions
Reversals
Balance at end of the year
64,092
22,348
(67,769)
18,671
(1,497)
17,174
3,101
(1,497)
1,604
2019
Year ended December 31,
2020
(HK$ in thousands)
53,421
30,935
(16,587)
67,769
23,249
30,188
(16)
53,421
158,826
50,408
(169,422)
39,812
(1,495)
38,317
2,131
(1,495)
636
2021
67,769
108,347
(6,694)
169,422
Valuation allowance is provided against deferred tax assets when the Group determines that it is more-likely-than-not that the deferred tax
assets will not be utilized in the future. The Group considers positive and negative evidence to determine whether some portion or all of the
deferred tax assets will be more-likely-than-not realized. This assessment considers, among other matters, the nature, frequency and severity of
recent losses and forecasts of future profitability. These assumptions require significant judgment and the forecasts of future taxable income are
consistent with the plans and estimates the Group is using to manage the underlying businesses. The statutory rate of 25%, 27.98%, 27.87%,
16.5%, 17% or the preferential tax rate of 15%, depending on which entity, was applied when calculating deferred tax assets.
As of December 31, 2020 and 2021, the Group had net operating loss carryforwards of approximately HK$315,287 thousand and HK$764,251
thousand, respectively, which arose from the subsidiaries, VIEs and the VIEs’ subsidiaries established in Hong Kong, the U.S and PRC. As of
December 31, 2020 and 2021, of the net operating loss carryforwards, HK$315,287 thousand and HK$761,417 thousand was provided for
valuation allowance against deferred tax assets in entities where it was determined it was more likely than not that the benefits of the deferred tax
assets of accrued expenses and others will not be realized. While the remaining nil and HK $2,834 thousand is expected to be utilized prior to
expiration considering future taxable income for respective entities.
F-51
Table of Contents
26. TAXATION (Continued)
Uncertain Tax Position
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Group evaluates the level of authority for each uncertain tax position (including the potential application of interest and penalties) based
on the technical merits, and measures the unrecognized benefits associated with the tax positions. The Group continues to assess the uncertain tax
positions in accordance with applicable income tax guidance and based on changes in facts and circumstances.
27. DEFINED CONTRIBUTION PLAN
Full-time employees of the Group in the PRC are entitled to welfare benefits including pension insurance, medical insurance, unemployment
insurance, maternity insurance, on-the-job injury insurance, and housing fund plans through a PRC government-mandated defined contribution
plan. Chinese labor regulations require that the Group makes contributions to the government for these benefits based on certain percentages of the
employees’ salaries, up to a maximum amount specified by the local government. The Group has no legal obligation for the benefits beyond the
contributions. Total contributions by the Group for such employee benefits were RMB49,778 thousand and RMB110,997 thousand for the years
ended December 31, 2020 and 2021, respectively.
For the employees in Hong Kong, the Group pays contributions to publicly or privately administered pension insurance plans on a mandatory,
contractual basis. The Group has no further payment obligations once the contributions have been paid. The contributions are recognized as
employee benefit expense when they are due. Prepaid contributions are recognized as an asset to the extent that a cash refund or a reduction in the
future payments is available. Included in employee compensation and benefits expenses in the consolidated statements of comprehensive income
were HK$1,414 thousand and HK$2,197 thousand of plan contributions for the years ended December 31, 2020 and 2021, respectively.
For the employees in Singapore, the Group makes monthly contributions to the mandatory social security savings scheme which serves to
meet retirement, housing and healthcare needs. The Group was required to make contributions to the scheme based on certain percentages of the
employees’ salaries. The Group has no legal obligation for the scheme beyond the contributions. Total contributions by the Group for such
employee benefits were SGD5 thousand and SGD294 thousand for the years ended December 31, 2020 and 2021, respectively.
28. REGULATORY REQUIREMENTS
The Company’s broker-dealer and insurance-broker subsidiaries, Futu Securities, Futu Inc., Futu Clearing Inc., Futu Singapore pte Ltd. and
Futu Insurance Brokers (Hong Kong) Limited are subject to capital requirements determined by its respective regulators. Futu Securities, the
Company’s subsidiary located in Hong Kong, was subject to the Securities and Futures (Financial Resources) Rules and the Securities and Futures
Ordinance, Futu Securities is required to maintain minimum paid-up share capital and liquid capital. Futu Inc. and Futu clearing Inc., the
Company’s subsidiaries located in the United States, were subject to the Uniform Net Capital Rule (Rule 15c3-1) under the Exchange Act, which
requires the maintenance of minimum net capital. Futu Singapore pte Ltd., the Company’s subsidiary located in Singapore, was subject to the
Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services Licenses) Regulations, which requires the
maintenance of financial resource over its total risk requirement. Futu Insurance Brokers (Hong Kong) Limited, was subject to Insurance (Financial
and Other Requirements for Licensed Insurance Broker Companies) Rules, which requires minimum net assets. Futu Securities (Australia) Ltd.,
the Company’s subsidiary located in Australia, was subject to Regulatory Guide 166 Licensing: Financial requirements, which requires the
maintenance of surplus liquid funds when licensees hold client money or property. As of December 31, 2021, Futu Securities (Australia) Ltd. has
not hold any client money and property.
F-52
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
28. REGULATORY REQUIREMENTS (Continued)
The tables below summaries the net capital, the requirement and the excess capital for the Group’s broker-dealer subsidiaries as of December
31, 2021:
Futu Securities
Futu Inc.
Futu Clearing Inc.
Futu Singapore pte Ltd.
Futu Insurance Brokers (Hong Kong) Limited
As of December 31, 2021
Net Capital/
Eligible Equity
6,666,092
149,871
3,308,395
345,424
1,718
Requirement
(HK$ in thousands)
1,631,080
22,560
97,565
156,646
500
Excess
5,035,012
127,311
3,210,830
188,778
1,218
Regulatory capital requirements could restrict the operating subsidiaries from expanding their business and declaring dividends if their net
capital does not meet regulatory requirements.
As of December 31, 2020 and 2021, all of the regulated operating subsidiaries were in compliance with their respective regulatory capital
requirements.
29. COMMITMENTS AND CONTINGENCIES
Commitments
The Group’s commitments primarily related to capital contribution obligation for certain investment funds. Total commitments contracted
but not yet reflected in the consolidated financial statements amounted to nil and US$104 million as of December 31, 2020 and 2021, respectively.
Contingencies
The financial services industry is highly regulated. From time to time, the licensed companies in the financial industry may be required to
assist in and/or are subject to inquiries and/or examination by the regulatory authorities of the jurisdiction in which they operate. As of the date of
approval of the consolidated financial statements, the Group reviews its regulatory inquiries and other legal proceedings on an ongoing basis and
evaluates whether potential regulatory fines are probable, estimable and material and for updating its contingency reserves and disclosures
accordingly. As of December 31, 2020 and 2021, the Group did not make any provision for the aforementioned loss contingency.
F-53
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
30. RELATED PARTY BALANCES AND TRANSACTIONS
The table below sets forth major related parties of the Group and their relationships with the Group:
Name of Entity or Individual
Mr. Leaf Hua Li and his spouse
Tencent Holdings Limited and its subsidiaries(“Tencent Group”)
Individual directors and officers and their spouses
Relationship with the Group
Principal shareholder and member of his immediate
families
Principal shareholder
Directors or officers of the Group and members of their
immediate families
(a) Cash and cash equivalent
Cash and cash equivalent
As of December 31,
2020
2021
(HK$ in thousands)
149
372
The balance represents the cash deposited by the Group in various payment channels of Tencent Group for funding marketing campaigns, of
which could be withdrawn on demand.
(b) Amounts Due to Related Parties
Payables to Tencent Group in relation to ESOP management services
Payables in relation to cloud equipment and services from Tencent Group
SMS channel services from Tencent Group
(c) Transactions with Related Parties
Equipment purchased
Software purchased
Cloud service fee
SMS channel service fee
Advertising expenses
Human resource services
ESOP management service income
As of December 31,
2020
2021
(HK$ in thousands)
70,750
16,062
357
87,169
1,307
85,887
265
87,459
2019
Year ended December 31,
2020
(HK$ in thousands)
2021
40,218
—
16,729
1,523
682
—
550
59,702
4,496
508
48,940
2,511
159
—
595
57,209
45,658
3,869
114,386
1,197
—
135
640
165,885
The Group utilizes the cloud services, equipment and software provided by Tencent Group to process large amount of complicated data in-
house, which reduces the risks involved in data storage and transmission. SMS channel services is provided by Tencent Group, including
verification code, notification and marketing message services for the Group to reach its end users. Tencent Group provides advertising services to
the Group via Tencent Group’s social media. The Group also earns revenue from Tencent Group by providing ESOP management service. Tencent
Group also provides human resources services to the Group.
F-54
Table of Contents
FUTU HOLDINGS LIMITED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
30. RELATED PARTY BALANCES AND TRANSACTIONS (Continued)
(d) Trade related transactions with Related Parties
Included in payables to clients in the consolidated balance sheets as of December 31, 2020 and 2021, were payables to directors and officers of
HK$42,019 thousand and HK$44,480 thousand, respectively. Revenue earned by providing brokerage services and margin loans to directors and
officers and their spouses amounts to HK$2,211 thousand, HK$1,642 thousand and HK$1,430 thousand for the years ended December 31, 2019,
2020 and 2021, respectively.
31. SUBSEQUENT EVENTS
The Group evaluated event subsequent to the balance sheet date of December 31, 2021 through the date of issuance of the consolidated
financial statements. No material recordable or disclosable events or transactions occurred.
F-55
Exclusive Business Cooperation Agreement
Exhibit 4.5
This Exclusive Business Cooperation Agreement (the “Agreement”) is made and entered into on September 30, 2021 in the People’s Republic of
China (the “PRC”, for the purposes of this Agreement, excluding the Hong Kong Special Administrative Region, the Macao Special
Administrative Region and Taiwan of the PRC) by and between the following parties.
Party A:
Shensi Network Technology (Beijing) Co., Ltd., a foreign-invested enterprise established and validly existing under the laws of
the PRC
Registered Address:
2104-A073, No. 9 West North Fourth Ring Road, Haidian District, Beijing
Party B:
Shenzhen Futu Network Technology Co., Ltd., a limited liability company established and validly existing under the laws of the
PRC
Registered Address:
Yuehai Street, Nanshan District, Shenzhen
25th floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and Technology Park,
(Party A or Party B shall be hereafter individually referred to as a “Party”, and collectively referred to as the “Parties”.)
Whereas:
(1)
(2)
(3)
Party A is a foreign-invested enterprise established in the PRC, with advanced technologies and rich experience in developing, operating
and managing software and technologies, which is willing to become the exclusive provider of Party B with technical, business and
relevant consulting support;
Party B is a domestic company established in the PRC, which engages in the businesses including technology development and sales of
Internet software products and other relevant services (all the business activities conducted and developed by Party B currently and any
time during the term of this Agreement are collectively referred to as the “Principal Business”); and
During the term of this Agreement, Party A is willing to provide Party B with technical support, consulting services and other services on
an exclusive basis in connection with the Principal Business, utilizing its advantages in technology, human resources and information.
And Party B is willing to accept such services provided by Party A or its designees, each on the terms set forth herein.
Now, therefore, Party A and Party B have reached the following agreements through negotiations:
Article 1 Services Provided
1.1
In accordance with the terms and conditions of this Agreement, Party B hereby appoints Party A as its exclusive service provider to
provide Party B with comprehensive technical support, consulting services and other services during the term of this Agreement,
including but not limited to the following:
(1) Licensing Party B to use the relevant software, trademarks and know-how legally owned by Party A;
(2) Development, maintenance and update of relevant application software required by Party B’s business;
1
(3) Design, installation, daily management and maintenance, and update of computer network systems, hardware equipment and
databases;
(4) Providing technical support and specialized training to the personnel of Party B;
(5) Assisting Party B in consultancy and research on relevant technology; and
1.2
1.3
1.4
(6) Other relevant services based on Party B’s actual business needs and Party A’s capacity for providing services and as specified upon
negotiation from time to time at the request of Party B, to the extent permitted under the PRC laws.
Party B accepts the services provided by Party A. Party B further agrees that unless with Party A's prior written consent, for the services
and other matters as agreed in this Agreement, during the term of this Agreement, Party B shall not directly or indirectly accept the same
services with, or any similar services to, those stated herein provided by any third party and shall not establish similar corporation
relationships with any third party regarding the matters contemplated in this Agreement. Upon mutual agreement, Party A may appoint
other parties, who may enter into certain agreements described in Article 1.5 herein with Party B, to provide Party B with the services
under this Agreement.
Party A shall have the right to examine the accounts of Party B periodically and at any time. Party B shall keep its accounts accurately in
due course and provide them to Party A upon its request. During the term of this Agreement and to the extent permitted by applicable
laws, Party B agrees to cooperate with Party A and Party A’s shareholders (whether directly or indirectly) on audits (including but not
limited to the audits of the related party transactions and other audits), deliver information and materials in relation to the operations,
business, clients, finance, staff and other matters of Party B and Party B’s subsidiaries to Party A, its shareholders and/or auditors engaged
by it, and allow Party A’s shareholders to disclose such information and materials to comply with the regulatory requirements for public
listing of Party A’s shares.
When Party B will be liquidated or dissolved for various reasons, it shall appoint the personnel recommended by Party A to form a
liquidation team to manage the assets of Party B and its subsidiaries, to the extent permitted under the PRC laws. Party B confirms that,
when Party B is subject to liquidation or dissolution, it agrees to deliver all the remaining properties obtained during the liquidation of
Party B under the PRC laws and regulations to Party A, regardless whether the agreements in this Agreement are enforced or not.
1.5
Service Providing Methodology
1.5.1
1.5.2
Party A and Party B agree that during the term of this Agreement, as the case may be, Party B may enter into further service
agreements with Party A or any other party designated by Party A, to reach agreement on specific contents, methods, personnel
and fees for each service.
To ensure Party B complies with the cash flow requirements in ordinary operations and/or to offset any loss incurred during such
operations, Party A shall, only to the extent and in the manner permitted by the laws of the PRC, provide financing support to
Party B, as the case may be. Party A may take the form of bank entrusted loans or other proper forms of borrowings to provide
financing support to Party B, and shall enter into necessary agreements separately.
2
1.5.3
1.5.4
To better perform this Agreement, Party A and Party B agree that during the term of this Agreement, as the case may be, Party B
may enter into lease agreements on equipment or assets with Party A or any other party designated by Party A based on the
business needs at any time, pursuant to which, Party A shall provide relevant equipment or assets for Party B’s use.
Party B hereby grants Party A an irrevocable and exclusive option, pursuant to which, Party A can, at Party A’s sole discretion,
purchase any or all of the assets and business from Party B, to the extent permitted under the PRC laws and regulations, at the
lowest price permitted by the PRC laws, regulations and rules. The Parties shall then enter into a separate assets or business
transfer agreement, specifying the terms and conditions of the transfer of the assets.
Article 2 Calculation and Payment of Service Fees
2.1
2.2
2.3
The service fees under this Agreement shall be the reasonable prices fixed based on the content and nature of the services, and shall
represent approximately one hundred percent (100%) of Party B’s consolidated gross profits in any fiscal year, after offsetting the
accumulated losses (if any) of Party B and its subsidiaries in the preceding fiscal year, and deducting the working capital, expenses, taxes
and other statutory contributions required in any fiscal year. Notwithstanding the forgoing, Party A may adjust the range and amount of
the service fees at its discretion, in accordance with the PRC tax laws and practices and by referring to Party B’s needs for working
capital, and Party B and its subsidiaries shall accept such adjustment.
Party A calculates the service fees monthly and issues the corresponding VAT invoice (Special) to Party B at the tax rate stipulated by the
current VAT law. Party B shall pay the service fees to the bank account designated by Party A within ten (10) working days upon receipt
of such invoice, and shall send a copy of payment certificate to Party A by email within ten (10) working days after making the payment.
Party A shall send the receipt within ten (10) working days after receiving the service fees. Notwithstanding the forgoing, Party A may
adjust the time and method for payment of the service fees at its discretion. Party B shall accept such adjustment.
The Parties agree that, the payment of the service fees above shall not cause any Parties’ operational difficulties in principle. For the
purposes above, and within the reasonable limits of the principles above, the schedule for payment of service fees from Party B to Party A
under Article 2.1 and Article 2.2 may be adjusted in writing upon negotiations between the Parties.
2.4
The Parties to this Agreement shall bear all taxes incurred in preforming this Agreement respectively.
Article 3 Intellectual Property Rights and Confidentiality Clauses
3.1
Party A shall have proprietary and exclusive ownership, rights and interests in any and all intellectual properties arising out of or created
during the performance of this Agreement, including but not limited to copyrights, patents, patent applications, software, technical secrets,
trade secrets and others. Party B shall execute all appropriate documents, take all appropriate actions, submit all filings and/or
applications, render all appropriate assistance and conduct whatever is necessary as deemed by Party A at its sole discretion for the
purposes of vesting any ownership, right and interest of such intellectual properties in Party A, and/or perfecting the protection for such
intellectual property rights of Party A.
3
3.2
The Parties acknowledge and confirm that any oral or written information in relation to this Agreement or the contents hereof and
exchanged between the Parties in connection with the preparation and performance of this Agreement shall be regarded as confidential
information. Each Party shall maintain confidentiality of all such confidential information, and without obtaining the written consent of
the other Party, it shall not disclose any confidential information to any third parties, except for the information that: (a) is or will be in the
public domain (other than through the receiving Party’s unauthorized disclosure to the Public); (b) is required to be disclosed pursuant to
the applicable laws and regulations, rules of any stock exchange, or orders of government authorities or courts; or (c) is required to be
disclosed by any Party to its shareholders, directors, supervisors (if any), employees, legal counsels or financial advisors regarding the
transaction contemplated hereunder, provided that such shareholders, directors, supervisors (if any), employees, legal counsels, or
financial advisors shall be bound by the confidentiality obligations similar to those set forth in this Article. Disclosure of any confidential
information by the shareholders, director, supervisors (if any), employees of, or agencies engaged by any Party shall be deemed disclosure
by such Party, and such Party shall be held liable for breach of this Agreement.
3.3
The Parties agree that Article 3 to this Agreement shall survive changes to, and rescission or termination of, this Agreement.
4.1
Party A hereby represents, warrants and covenants as follows:
Article 4 Representations and Warranties
4.1.1
4.1.2
Party A is a foreign-invested enterprise legally established and validly existing in accordance with the PRC laws; Party A or the
service providers designated by Party A will obtain all government permits and licenses for providing any service under this
Agreement before providing such services.
Party A has taken necessary corporate actions, and obtained necessary authorizations as well as consents and approvals from
third parties and government authorities (if required) for the execution, delivery and performance of this Agreement. Party A’s
execution, delivery and performance of this Agreement does not violate any explicit requirements under laws and regulations.
4.1.3
This Agreement constitutes Party A’s legal, valid and binding obligations, enforceable against it in accordance with the terms
herein.
4.2
Party B hereby represents, warrants and covenants as follows:
4.2.1
4.2.2
Party B is a limited liability company legally established and validly existing in accordance with the PRC laws, and has obtained
and will maintain all government permits and licenses for engaging in the Principal Business.
Party B has taken necessary corporate actions, and obtained necessary authorizations as well as consents and approvals from
third parties and government authorities (if required) for the execution, delivery and performance of this Agreement. Party B’s
execution, delivery and performance of this Agreement will not (i) violate any explicit requirements under the PRC laws and
regulations; (ii) conflict with any contracts to which Party B is a party or cause the violation of any contracts to which Party B is
a party; or (iii) cause
4
any violation of any condition of the necessary licenses or permits for Party B to operate its business.
4.2.3
Party B shall inform Party A of its involving in proceedings or other unfavourable circumstances in a timely manner and make
the greatest efforts to prevent furthur losses.
4.2.4 Without the prior written consent of Party A, Party B shall not be involved in any transactions which may affect its assets,
liabilities, rights or operation in any form.
4.2.5 Without the prior written consent of Party A, Party B shall not merge, consolidate or be combined as a consolidated entity with
any third party, or acquire any third party or be acquired or controlled by any third party, or increase or decrease its registered
capital, or change its structure of registered capital in other manners.
4.2.6
4.2.7
Party B will not, in accordance with the requirements of this Agreement, require Party A to share Party B’s losses and/or to
provide financial support for Party B.
This Agreement constitutes Party B’s legal, valid and binding obligations, enforceable against it in accordance with the terms
herein.
Article 5 Effectiveness, Amendment and Termination of the Agreement
5.1
5.2
5.3
5.4
The Parties agree that this Agreement shall become effective upon execution by the Parties. Unless terminated in accordance with the
explicit terms of this Agreement or terminated in writing by Party A, this Agreement shall remain effective.
Any amendment and supplement to this Agreement shall be made in writing. Party A shall have the right to amendand supplement any
terms herein at its discretion as per the requirements of relevant regulatory authorities or other considerations. Once Party A gives a
written notice of amending and supplementing this Agreement, Party B shall sign the amended and supplemented agreement at Party A’s
request.
If regulatory authorities propose any amendments to this Agreement, the Parties shall revise this Agreement accordingly.
Unless otherwise provided herein, this Agreement shall be and only be terminated under one of the following circumstances:
5.4.1
All the equity interests in or assets of Party B held by Party B’s shareholders have been transferred to Party A in accordance with
laws;
5.4.2
It shall be terminated pursuant to the requirements under the applicable PRC laws; or
5.4.3
Party B is bankrupted or liquidated in accordance with laws.
5.5
During the term of this Agreement, any Party shall renew its operation term prior to the expiration thereof in a timely manner to enable
this Agreement to continue to be effective and implemented. This Agreement shall be terminated upon the expiration of the operation term
of a Party if the application for the renewal of its operation term is not approved or agreed by the competent government authorities.
5
5.6
The rights and obligations of the Parties under Articles 3, 6, 7 and 9 shall survive the termination of this Agreement.
Article 6 Governing Laws and Resolution of Disputes
6.1
6.2
6.3
7.1
7.2
7.3
8.1
The excution, validity, interpretation and performance of this Agreement and the resolution of disputes shall be governed and interpreted
in accordance with the PRC laws.
For all disputes arising from the performance of or in connection with this Agreement, either Party shall be entitled to submit the relevant
dispute to the China International Economic and Trade Arbitration Commission (the “CIETAC”) for arbitration in Beijing in accordance
with the arbitration proceedings and rules then being in force. The arbitral tribunal shall consist of three (3) arbitrators appointed in
accordance with the arbitration rules. The applicant and the respondent shall appoint one (1) arbitrator respectively, and the third arbitrator
shall be appointed by the two arbitrators above through negotiations. The arbitration proceedings shall be confidential and conducted in
Chinese. The arbitration awards shall be final and legally binding upon the Parties. Subject to the PRC laws, the arbitral tribunal or the
arbitrators shall make the ruling on remedial measures with respect to the equity interests in or assets of Party B under the terms of
resolution of disputes and/or applicable PRC laws, including restricting business operations, restricting or prohibiting transfers or sales of
the equity interests or assets, or proposing liquidation of Party B. In addition, during the formation of arbitral tribunal, Party A is entitled
to apply to any court of competent jurisdiction (including courts in the PRC, Hong Kong and the Cayman Islands) for granting interim
remedial measures.
During the arbitration, except for the part in dispute and under arbitration, the Parties shall continue to have the other rights and perform
corresponding obligations hereunder.
Article 7 Default Liabilities and Indemnification
If Party B conducts any material breach of any term of this Agreement, Party A shall have the right to terminate this Agreement and/or
require Party B to indemnify for damages; this Article 7.1 shall not prejudice any other rights of Party A herein.
Unless otherwise required by the laws, Party B shall not have any right to terminate or cancel this Agreement in any event.
Party B shall indemnify and hold harmless Party A from any losses, damages, obligations or expenses caused by any lawsuit, claim or
other demand against Party A arising from or caused by the services provided by Party A to Party B pursuant this Agreement, except
where such losses, damages, obligations or expenses arise from gross negligence or wilful misconduct of Party A.
Article 8 Force Majeure
In case of any force majeure events (“Force Majeure”) such as earthquakes, typhoons, floods, fires, epidemics, wars, strikes and any
other events that cannot be predicted and are unpreventable and unavoidable by the affected Party, which directly cause the failure of any
Party to perform or completely perform this Agreement, the Party affected by such Force Majeure shall not assume responsibilities for
such failure of or partial performance. However, such affected Party shall give the other Party a written notice without any delay, and shall
provide details of Force Majeure events
6
8.2
8.3
9.1
within fifteen (15) days after sending out such notice, explaining the reasons for such failure of, partial, or delay of performance.
If the Party claiming Force Majeure fails to notify the other Party and furnish it with appropriate proof pursuant to the above provision,
such Party shall not be excused from the non-performance of its obligations hereunder. The Party so affected by the Force Majeure shall
make reasonable efforts to minimize the consequences of such Force Majeure and resume performance of all the relevant obligations after
the cessation of the Force Majeure as soon as possible. Should the Party so affected by the Force Majeure fail to resume performance of
the relevant obligations when the causes of such excuse are cured, such Party shall be liable to the other Party.
In the event of Force Majeure, the Parties shall immediately consult with each other to find an equitable solution, and shall make all
reasonable efforts to minimize the consequences of such Force Majeure.
Article 9 Notices
All notices and other communications required or permitted to be given to a Party pursuant to this Agreement shall be delivered
personally or sent by registered mail, postage prepaid, commercial courier service or email to the address of such Party set forth below.
The dates on which notices shall be deemed to have been effectively given shall be determined as follows:
9.1.1
If the notice is given by personal delivery (including express mail), the date of receipt shall be the effective date of service;
9.1.2
9.1.3
If the notice is sent by registered mail, postage prepaid, the fifteenth (15) day after the date on the receipt of registered mail shall
be the effective date of service;
If the notice is sent by email, when the sender receives the system message indicating that the email was sent successfully, or the
sender did not receive the system message within twenty-four (24) hours indicating that the email was not delivered or was
returned, the date of successful transmission of the email shall be the effective date of service. However, if this email was
delivered later than 5:00 P.M. or on a non-working date at the place of service, the date of service shall be the next working day
shown on the date record.
9.2
For the purpose of notices under this Article, the addresses of the Parties to receive notices are as follows:
Party A: Shensi Network Technology (Beijing) Co., Ltd.
Address: 28th floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and Technology Park, Yuehai
Street, Nanshan District, Shenzhen
Attn: Legal Center
Party B: Shenzhen Futu Network Technology Co., Ltd.
Address: 28th floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and Technology Park, Yuehai
Street, Nanshan District, Shenzhen
Attn: Legal Center
7
9.3
Any Party may at any time change its address to receive notices by a notice delivered to the other Party in accordance with this Article.
Article 10 Assignment of the Agreement
10.1 Without Party A's prior written consent, Party B shall not assign its rights and obligations under this Agreement to a third party.
10.2
Party B hereby agrees that Party A may assign its rights and obligations under this Agreement to a third party and in case of such
assignment, Party A is only required to give a written notice to Party B and does not need any consent from Party B for such assignment.
Article 11 Miscellaneous
11.1
Unless specifically agreed, the agreements in the terms in this Agreement on the rights and obligations of Party B also apply to Party B’s
subsidiaries.
11.2
This Agreement shall be binding on the respective legal successors of the Parties.
11.3
11.4
11.5
The headings of this Agreement are for convenience only, and shall not be used to interpret, explain or otherwise affect the meanings of
the provisions of this Agreement.
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any aspect in
accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this Agreement shall not be
affected or compromised in any aspect. The Parties shall strive in good faith to replace such invalid, illegal or unenforceable provisions
with provisions that are effective to the greatest extent permitted by law and the intentions of the Parties, and the economic effect of such
effective provisions shall be as close as possible to that of those invalid, illegal or unenforceable provisions.
Any amendments and supplements to this Agreement shall be in writing. The amended agreements and supplemented agreements in
relation to this Agreement that have been signed by the Parties shall be an integral part of this Agreement and shall have the same legal
validity as this Agreement.
11.6
This Agreement is executed in two (2) copies. Each of Party A and Party B shall have one (1) copy.
(Remainder of page intentionally left blank. Signature page to follow)
8
IN WITNESS WHEREOF, the Parties have caused their authorized representatives to execute this Exclusive Business Cooperation Agreement as
of the date first above written.
Party A:
Shensi Network Technology (Beijing) Co., Ltd. (Seal)
/s/ Li Hua
By:
Name: Li Hua
Title: Legal Representative
Party B:
Shenzhen Futu Network Technology Co., Ltd. (Seal)
/s/ Li Hua
By:
Name: Li Hua
Title: Legal Representative
Signature page of the Exclusive Business Cooperation Agreement
Equity Interest Pledge Agreement
Exhibit 4.6
This Equity Interest Pledge Agreement (this “Agreement”) is made and entered into on September 30, 2021 in the People’s Republic of China
(“China” or the “PRC”, for the purpose of this Agreement, excluding the Hong Kong Special Administrative Region, the Macau Special
Administrative Region and Taiwan of the PRC) by and among the following parties:
Party A: Shensi Network Technology (Beijing) Co., Ltd. (“Party A” or the “Pledgee”), a foreign-invested enterprise established and validly
existing under the laws of the PRC Registered Address: 2104-A073, No. 9 West North Fourth Ring Road, Haidian District, Beijing
Party B: LI Hua / LI Lei (“Party B” or the “Pledgor”) ID card No.:
Party C: Shenzhen Futu Network Technology Co., Ltd. (the “Domestic Company”), a limited liability company established and validly
existing under the laws of the PRC Registered Address: 25th floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of
Science and Technology Park, Yuehai Street, Nanshan District, Shenzhen
(Each of the Pledgee, the Pledgor or the Domestic Company shall be hereinafter individually referred to as a “Party” and collectively referred to as
the “Parties”.)
Whereas:
(1) The Pledgor is a natural person with Chinese nationality and holds RMB8,500,000 / 1,500,000 in the registered capital of the Domestic
Company on the date of this Agreement. The Domestic Company is a limited liability company incorporated in Shenzhen, the PRC, and is
engaged in the technical development and sale of internet software products and the other related services. The Domestic Company is intended
hereby to confirm the rights and obligations of the Pledgor and the Pledgee under this Agreement, and offer necessary assistance to register the
pledge right or change the registration thereof;
(2) The Pledgee is a foreign-invested company registered in the PRC. The Pledgee entered into the Exclusive Business Cooperation Agreement
(as defined below) with the Domestic Company held by the Pledgor; the Pledgee entered into the Exclusive Option Agreement (as defined
below) with the Pledgor and the Domestic Company; the Pledgor signed the Powers of Attorney (as defined below) to grant rights to the
Pledgee;
(3) To ensure the Domestic Company and the Pledgor perform their obligations under the Exclusive Business Cooperation Agreement, the
Exclusive Option Agreement and the Powers of Attorney, the Pledgor uses the whole equity interests it owns in the Domestic Company as
security to the Pledgee for the performance of the obligations under the Exclusive Business Cooperation Agreement, the Exclusive Option
Agreement and the Powers of Attorney by the Domestic Company and the Pledgor.
To exercise the articles in the Transaction Documents (as defined below), the Parties agree to enter into this Agreement with the following Articles.
Article 1 Definitions
Unless otherwise provided herein, the terms below shall have the following meanings:
1
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
Pledge: shall refer to the security interest granted by the Pledgor to the Pledgee pursuant to Article 2 of this Agreement, i.e., the right of
the Pledgee to be compensated on a preferential basis with the conversion or auction price of the pledged equity interests by the Pledgor
to the Pledgee, or sales price of the same.
Pledged Equity Interest: shall refer to the Domestic Company’s registered capital of RMB8,500,000 / 1,500,000 currently held by the
Pledgor and all the equity interests to be held by the Pledgor in the Domestic Company.
Term of Pledge: shall refer to the term set forth in Article 3 of this Agreement.
Transaction Documents: shall refer to the Exclusive Business Cooperation Agreement made by and between the Domestic Company
and the Pledgee on September 30, 2021 (the “Exclusive Business Cooperation Agreement”), the Exclusive Option Agreement made
by and among the Domestic Company, the Pledgor and the Pledgee on September 30, 2021 (the “Exclusive Option Agreement”), the
Power of Attorney executed on September 30, 2021 by the Pledgor (the “Power of Attorney”) and any modification, amendment
and/or restatement to the documents as mentioned above.
Contract Obligations: shall refer to all the obligations of the Pledgor under the Exclusive Option Agreement, the Power of Attorney and
this Agreement; all the obligations of the Domestic Company under the Exclusive Business Cooperation Agreement, the Exclusive
Option Agreement, and this Agreement.
Secured Indebtedness: shall refer to RMB8,500,000 / 1,500,000 and all the direct, indirect and derivative losses and loss of anticipated
profits, suffered by the Pledgee as a result of any Event of Default of the Pledgor and/or the Domestic Company. The amount of such
losses shall be calculated in accordance with, including but not limited to, the reasonable business plan and profit forecast of the
Pledgee, the service fees payable by the Domestic Company under the Exclusive Business Cooperation Agreement, and all expenses
occurred in connection with enforcement by the Pledgee of the Pledgor’s and/or the Domestic Company’s Contract Obligations.
Event of Default: shall refer to any of the circumstances set forth in Article 7 of this Agreement.
Notice of Default: shall refer to the notice issued by the Pledgee in accordance with this Agreement declaring an Event of Default.
Article 2 The Pledge
2.1
2.2
The Pledgor hereby agrees to pledge all the Pledged Equity Interest to the Pledgee, as security for performance of the Contract
Obligations and payment of the Secured Indebtedness under this Agreement. The Domestic Company hereby agrees on the Pledgor ’s
pledge of the Pledged Equity Interest to the Pledgee pursuant to this Agreement.
During the term of the Pledge, the Pledgee is entitled to receive the bonus or dividends distributed on the Pledged Equity Interest. The
Pledgor may receive dividends or bonus distributed on the Pledged Equity Interest only with prior written consent of the Pledgee.
Dividends or bonus received by the Pledgor on the Pledged Equity Interest shall be, as required by the Pledgee, (1) deposited into an
account designated and supervised by the Pledgee and used to secure the Contract
2
Obligations and pay the Secured Indebtedness prior and in preference to making any other payment; or (2) unconditionally donated to
the Pledgee or any other person designated by the Pledgee to the extent permitted under the PRC laws.
2.3
2.4
The Pledgor may subscribe for capital increase in the Domestic Company only with prior written consent of the Pledgee. Any capital
contribution to the registered capital of the Company obtained by the Pledgor as a result of the capital increase shall also be deemed as
Pledged Equity Interest.
In the event that the Domestic Company is required by the PRC laws to be liquidated or dissolved, any interest distributed from the
Domestic Company to the Pledgor upon the Domestic Company’s dissolution or liquidation by law shall, upon the request of the
Pledgee, be (1) deposited into an account designated and supervised by the Pledgee and used to secure the Contract Obligations and pay
the Secured Indebtedness prior and in preference to make any other payment; or (2) unconditionally donated to the Pledgee or any other
person designated by the Pledgee to the extent permitted under the PRC laws.
Article 3 Term of Pledge
3.1
The Pledge shall become effective on the date when the registration of the Pledged Equity Interest contemplated herein is established or
changed with a relevant Administration for Market Regulation. The Pledge shall remain effective until all Contract Obligations have
been fully performed and all Secured Indebtedness has been fully paid. The Pledgor and the Domestic Company shall (1) register the
Pledge herein in the shareholders’ register of the Domestic Company within three (3) business days following the execution of this
Agreement, and (2) submit an application to the relevant Administration for Market Regulation for establishing or changing the
registration of the Pledged Equity Interest contemplated herein within thirty (30) business days following the execution of this
Agreement. The Parties confirm that for the purpose of establishing or changing the registration of the Pledge with the relevant
Administration for Market Regulation, the Parties and all other shareholders of the Domestic Company shall submit this Agreement, or
an equity interest pledge contract in the form required by the Administration for Market Regulation at the place where the Domestic
Company is located (which shall truly reflect the information of the Pledge hereunder) (the “AMR Pledge Registration
Establishing/Changing Contract”), to the competent Administration for Market Regulation. For matters not specified in the AMR
Pledge Registration Establishing/Changing Contract, the Parties shall be bound by the provisions of this Agreement. The Pledgor and
the Domestic Company shall submit all necessary documents and complete all necessary procedures, as required by the PRC laws and
regulations and the competent Administration for Market Regulation, to ensure that the registration of the Pledge can be established or
changed as soon as possible after submission of the application.
3.2
During the Term of Pledge, in the event that the Pledgor and/or the Domestic Company fails to perform the Contract Obligations or pay
the Secured Indebtedness, the Pledgee shall have the right, but not the obligation, to exercise the Pledge in accordance with the
provisions of this Agreement.
Article 4 Custody of Records for the Pledged Equity Interest
4.1
During the Term of Pledge set forth in this Agreement, the Pledgor shall deliver the capital contribution certificate for its equity interest
in the Domestic Company and the shareholders’ register containing the Pledge to the Pledgee for custody within
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three (3) business days from the execution of this Agreement. The Pledgee shall have custody of such documents during the entire
Term of Pledge as set forth in this Agreement.
Article 5 Representations and Warranties of the Pledgor and the Domestic Company
As of the execution date of this Agreement, the Pledgor and the Domestic Company hereby jointly and severally represent and warrant to
Party A that:
5.1
The Pledgor is the only legal owner of the Pledged Equity Interest;
5.2
The Pledgee shall have the right to dispose of and transfer the Pledged Equity Interest in the manner as set forth in this Agreement;
5.3
Except for the Pledge, the Pledgor has not placed any other pledge right or other security interest on the Pledged Equity Interest;
5.4
5.5
The Pledgor and the Domestic Company have obtained consents and approvals from government authorities and third parties (if
required) for execution, delivery and performance of this Agreement;
The execution, delivery and performance of this Agreement will not: (i) violate any relevant PRC laws; (ii) conflict with Domestic
Company’s articles of association or other constitutional documents; (iii) result in any breach of or constitute any default under any
contract or instrument to which it is a party or by which it is otherwise bound; (iv) result in any violation of any condition for the grant
and (or) maintenance of effectiveness of any permit or approval granted to any Party; or (v) cause any permit or approval granted to any
Party to be suspended, cancelled or attached with additional conditions.
Article 6 Covenants of the Pledgor and the Domestic Company
6.1
During the term of this Agreement, the Pledgor and the Domestic Company jointly and severally covenant to the Pledgee:
6.1.1
6.1.2
The Pledgor shall not transfer the Pledged Equity Interest or any portion thereof, or place, or permit the existence of, any
security or other debt on the Pledged Equity Interest, without the prior written consent of the Pledgee, except for the
performance of the Transaction Documents;
The Pledgor and the Domestic Company shall comply with and implement the provisions of all laws and regulations
applicable to the pledge of rights, and shall, within five (5) days of receipt of any notice, order or recommendation issued or
prepared by relevant competent authorities regarding the Pledge, present the aforementioned notice, order or recommendation
to the Pledgee, and shall comply with the aforementioned notice, order or recommendation or submit objections and
representations with respect to the aforementioned matters upon the Pledgee’s reasonable request or upon consent of the
Pledgee;
6.1.3
The Pledgor and the Domestic Company shall promptly notify the Pledgee of any event or notice received that may have an
impact on the right on the Pledged Equity Interest or any portion thereof, as well as any event or notice
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received that may change any guarantee or obligation of the Pledgor herein, or may have an impact on the performance of
obligations of Pledgor herein;
6.1.4
The Domestic Company shall complete the registration procedures for extension of the term of operation within three (3)
months prior to the expiration of such term to maintain the validity of this Agreement.
6.2
6.3
The Pledgor agrees that the rights acquired by the Pledgee in accordance with this Agreement with respect to the Pledge shall not be
interrupted or harmed by the Pledgor or any inheritors or principals of Pledgor or any other persons through any legal proceedings.
To protect or perfect the security granted under this Agreement for the Contract Obligations and the Secured Indebtedness, the Pledgor
hereby undertakes to execute in good faith, and cause other parties who have an interest in the Pledge to execute, all certificates and
deeds required by the Pledgee, and/or perform, and cause other parties who have an interest in the Pledge to perform, actions required
by the Pledgee, to facilitate the exercise by the Pledgee of its rights and authority granted thereto under this Agreement, and to enter
into all relevant documents regarding the ownership of the Pledged Equity Interest with the Pledgee or its designee(s) (natural
persons/legal persons). The Pledgor also undertakes to provide the Pledgee within a reasonable time with all notices, orders and
decisions regarding the Pledge that are required by the Pledgee.
6.4
The Pledgor undertakes to the Pledgee that, the Pledgor will comply with and perform all guarantees, promises, agreements,
representations and conditions under this Agreement. In the event of failure of or partial performance of its guarantees, promises,
agreements, representations and conditions, the Pledgor shall indemnify the Pledgee for all losses resulting therefrom.
Article 7 Event of Default
7.1
The following circumstances shall be deemed as Events of Default:
7.1.1
The Pledgor’s any breach of any obligations under the Transaction Documents and/or this Agreement;
7.1.2
The Domestic Company’s any breach of any obligations under the Transaction Documents and/or this Agreement.
7.2
7.3
Upon notice or discovery of the occurrence of any circumstance or event that may lead to the aforementioned circumstances described
in Article 7.1, the Pledgor and the Domestic Company shall immediately notify the Pledgee in writing accordingly.
Unless an Event of Default set forth in this Article 7.1 has been remedied to the Pledgee’s satisfaction within twenty (20) days after the
Pledge delivers a notice to the Pledgor and/or the Domestic Company requesting rectification of such Event of Default, the Pledgee
may issue a Notice of Default to the Pledgor in writing at any time thereafter, demanding to exercise the Pledge in accordance with
Article 8.
Article 8 Exercise of Pledge
8.1
The Pledgee shall issue a written Notice of Default to the Pledgor when it exercises the Pledge.
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8.2
8.3
8.4
8.5
8.6
Subject to the provisions of Article 7.3, the Pledgee may exercise the right to enforce the Pledge at any time after the issuance of the
Notice of Default in accordance with Article 8.1. Once the Pledgee decides to exercise the right to dispose of the Pledge, the Pledgor
shall cease to be entitled to any right or interest in relation to the Pledged Equity Interest.
After the Pledgee issues a Notice of Default in accordance with Article 8.1, the Pledgee may exercise any remedial measure under the
PRC laws, the Transaction Documents and this Article, including but not limited to being paid in priority with the Pledged Equity
Interest based on the monetary valuation that such Equity Interest is converted into or from the proceeds from auction or sale of the
Pledged Equity Interest. The Pledgee shall not be liable for any loss incurred by its due exercise of such rights and powers.
The proceeds from exercise of the Pledge by Pledgee shall be used to pay the tax and expenses incurred as result of disposing of the
Pledged Equity Interest and to perform the Contract Obligations and pay the Secured Indebtedness to the Pledgee prior and in
preference to any other payment. After the payment of the aforementioned amounts, the remaining balance shall be returned to the
Pledgor or any other person who has rights to such balance under applicable laws and regulations or be deposited with the local notary
public office in the place where the Pledgor resides, with all expense incurred being borne by the Pledgor. To the extent permitted under
the PRC laws, the Pledgor shall unconditionally donate such proceeds to the Pledgee or any other person designated by the Pledgee.
The Pledgee is entitled to take remedies available simultaneously or in any order. The Pledgee is entitled to the right of being paid in
priority with the Pledged Equity Interest based on the monetary valuation that such Equity Interest is converted into or from the
proceeds from auction or sale of the Equity Interest under this Agreement, without taking any other remedies first.
The Pledgee is entitled to designate an attorney or other representatives in writing to exercise the Pledge on its behalf, and the Pledgor
or the Domestic Company shall not raise any objection to such exercise.
8.7 When the Pledgee disposes of the Pledge in accordance with this Agreement, the Pledgor and the Domestic Company shall provide
necessary assistance to enable the Pledgee to enforce the Pledge.
8.8
Any costs incurred by the Pledgee in disposing of the Pledge in accordance with this Agreement (including the appointment of its
attorney or other agent to exercise its Pledge) shall be borne entirely by the Domestic Company.
Article 9 Default Liabilities
9.1
9.2
If the Pledgor or the Domestic Company materially breaches any provsisions under this Agreement, the Pledgee shall have the right to
terminate this Agreement and/or request the Pledgor or the Domestic Company to pay damages. This Article 9 shall not preclude any
other rights of the Pledgee under this Agreement;
Unless otherwise provided by the laws, neither the Pledgor or the Domestic Company has any right to terminate or rescind this
Agreement under any circumstances.
Article 10 Assignment
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10.1 Without the Pledgee’s prior consent, the Pledgor and the Domestic Company shall not give free of charge or assign their rights and
obligations under this Agreement.
10.2 This Agreement shall be binding on the Pledgor and his/her successors and permitted assignees and shall be valid with respect to the
Pledgee and each of its successors and assignees.
10.3 The Pledgee may, at any time, assign all or any of its rights and obligations under the Transaction Documents and this Agreement to its
designee(s), in which case the assignees shall have the rights and obligations of the Pledgee under the Transaction Documents and this
Agreement, as if it were the original party to this Agreement.
10.4
In the event of a change in the Pledgee due to an assignment, at the request of the Pledgee, the Pledgor and/or the Domestic Company
shall enter into a new pledge agreement with the new Pledgee with the same content as this Agreement and register it with the
appropriate Administration for Market Regulation.
10.5 The Pledgor and the Domestic Company shall strictly comply with the provisions of this Agreement and other relevant agreements
entered into by the Parties individually or jointly, including the Transaction Documents, perform their obligations under the Transaction
Documents and refrain from any act/omission sufficient to affect the validity and enforceability of the Agreement. The Pledgor shall not
exercise its remaining right to the Pledged Equity Interest except in accordance with the written instructions of the Pledgee.
Article 11 Termination
11.1 Upon full and complete performance of all Contractual Obligations and full clearance of the Secured Indebtedness by the Pledgor and
the Domestic Company, the Pledgee shall, at the request of the Pledgor and within the earliest reasonably practicable time, release the
Pledge on the Pledged Equity Interest under this Agreement and cooperate with the Pledgor in the deregistration of the pledge of the
equity interest in the register of shareholders of the Domestic Company, as well as the cancellation of the registration of the pledge with
the relevant Administration for Market Regulation.
11.2 The provisions of Articles 9, 13, 14 and this Article 11.2 of this Agreement shall survive upon the termination of this Agreement.
Article 12 Handling Fees and Other Expenses
Unless otherwise agreed in this Agreement, all fees and actual expenses relating to this Agreement, including but not limited to legal costs,
costs of production, stamp tax and any other taxes and fees, shall be borne by the Domestic Company.
Article 13 Duty of Confidentiality
The Parties acknowledge and confirm that any oral or written information in relation to this Agreement or the contents hereof and exchanged
between the Parties in connection with the preparation or performance of this Agreement shall be regarded as confidential information. Each
Party shall maintain the confidentiality of all such confidential information and, without the written consent of other Parties, shall not disclose
any confidential information to any third party , except for the information that: (a) is or will be in the public domain (other than through the
receiving Party’s unauthorized disclosure to the public); (b) is required to be disclosed pursuant to the applicable laws and
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regulations, rules of any stock exchange, or orders of government authorities or courts; or (c) is required to be disclosed by any Party to its
shareholders, directors, employees, legal counsels or financial advisors regarding the transaction contemplated hereunder, provided that such
shareholders, directors, employees, legal counsels or financial advisors shall be bound by the confidential obligations similar to those set forth
in this Article. Disclosure of any confidential information by the shareholders, director, employees of, or agencies engaged by any Party shall
be deemed disclosure by such Party and such Party shall be held liable for breach of this Agreement.
Article 14 Governing Law and Resolution of Disputes
14.1 The execution, validity, interpretation, performance, modification and termination of this Agreement and the resolution of disputes shall
be governed by the PRC laws.
14.2 For all disputes arising from the performance of or in connection with this Agreement, either Party shall be entitled to submit the
relevant dispute to the China International Economic and Trade Arbitration Commission (the “CIETAC”) for arbitration in Beijing in
accordance with the arbitration proceedings and rules then being in force. The arbitral tribunal shall consist of three (3) arbitrators
appointed in accordance with the arbitration rules. The applicant and the respondent shall appoint one (1) arbitrator respectively, and the
third arbitrator shall be appointed by the two arbitrators above through negotiations. The arbitration proceedings shall be confidential
and conducted in Chinese. The arbitration awards shall be final and legally binding upon the Parties. Under appropriate circumstance,
the arbitral tribunal or the arbitrators shall make a ruling on remedial measures with respect to the equity interests in or assets of the
Domestic Company or assets of the Pledgor under the terms of resolution of disputes and/or applicable PRC laws, including restricting
business operations, restricting or prohibiting transfers or sales of the equity interests or assets, or proposing liquidation of the Domestic
Company. In addition, during the formation of arbitral tribunal, the Pledgee is entitled to apply to any court of competent jurisdiction
(including court in the PRC, Hong Kong and the Cayman Islands) for granting interim remedial measures.
14.3 During the arbitration, except for the part in dispute and under arbitration, the Parties shall continue to enjoy and perform the other
rights and corresponding obligations hereunder.
Article 15 Notices
15.1 All notices and other communications required or given to a Party pursuant to this Agreement shall be delivered personally or sent by
registered mail, postage prepaid, commercial courier services, or email to the address of such Party set forth below. The dates on which
notices shall be deemed to have been effectively given shall be determined as follows:
15.1.1
If the notice is given by personal delivery (including express mail), the date of receipt shall be the effective date of service;
15.1.2
15.1.3
If the notice is sent by registered mail, postage prepaid, the fifteenth (15) day after the date on the receipt of registered mail
shall be the effective date of service;
If the notice is sent by email, when the sender receives the system message indicating that the email was sent successfully or
the sender did not to receive the system message within twenty-four (24) hours indicating that
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the email was not delivered or was returned, the date of successful transmission of the email shall be the effective date of service.
But if this email was delivered later than 5:00 P.M. or on a non-working date at the place of service, the date of service shall be
the next working day shown on the date record.
15.2 For the purpose of notices under this Article, the addresses of the Parties to receive notices are as follows:
Party A: Shensi Network Technology (Beijing) Co., Ltd.
Address: 28th Floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and Technology Park, Yuehai
Street, Nanshan District, Shenzhen
Attn: Legal Center
Party B: LI Hua / LI Lei
Address:
Attn:
Email:
Party C: Shenzhen Futu Network Technology Co., Ltd.
Address: 28th Floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and Technology Park, Yuehai
Street, Nanshan District, Shenzhen
Attn: Legal Center
15.3 Any Party may at any time change its address for notices by a notice delivered to the other Parties in accordance with the terms hereof.
Article 16 Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in any aspect in
accordance with any laws or regulations, the validity, legality or enforceability of the remaining provisions of this Agreement shall not be
affected or compromised in any aspect. The Parties shall strive in good faith to replace such invalid, illegal or unenforceable provisions with
provisions that are effective to the greatest extent permitted by law and the intentions of the Parties, and the economic effect of such effective
provisions shall be as close as possible to that of those invalid, illegal or unenforceable provisions.
Article 17 Annexes
The annexes listed in this Agreement are an integral part of this Agreement and are not severable.
Article 18 Effectiveness
18.1 The Parties acknowledge that this Agreement shall take effect from the date of signing and all matters of the Parties relating to the
Pledge of equity interest shall be executed in accordance with this Agreement.
18.2 Any amendment, supplement or change to this Agreement shall be in writing and shall become effective upon signature or seal of the
Parties.
Article 19 Miscellaneous
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This Agreement shall be executed in quadruplicate (4), with each Party (the Pledgee, the Pledgor and the Domestic Company)
19.1
holding one (1) copy, and the remaining one (1) shall be used for the establishment or change of registration.
19.2
This Agreement shall be binding on the legal successors of each Party.
19.3 Any amendment or supplement to this Agreement must be made in writing. Party A shall have the right to decide on its own to make
any amendment or supplement to any provision of this Agreement in accordance with the requirements of relevant regulatory authorities or
other considerations, and once Party A issues a written notice to amend or supplement this Agreement, Party B shall sign the amended or
supplemented Agreement at Party A’s request.
19.4
If regulatory authorities propose any amendments to this Agreement, the Parties shall revise this Agreement accordingly.
(Remainder of page intentionally left blank. Signature page to follow)
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IN WITNESS WHEREOF, the Parties have executed, or caused their authorized representatives to execute, this Equity Interest Pledge Agreement
on the date first above written.
Party A:
Shensi Network Technology (Beijing) Co., Ltd. (Seal)
/s/ LI Hua
By:
Name: LI Hua
Title: Legal Representative
Party B:
LI Hua / LI Lei
By:
/s/ LI Hua / /s/ LI Lei
Party C:
Shenzhen Futu Network Technology Co., Ltd. (Seal)
/s/ LI Hua
By:
Name: LI Hua
Title: Legal Representative
Signature Page of the Equity Interest Pledge Agreement
Annexes:
1.
2.
3.
4.
5.
Register of Shareholders of the Domestic Company;
Capital Contribution Certificate of the Domestic Company;
Exclusive Business Cooperation Agreements;
Exclusive Option Agreements;
Powers of Attorney.
Signature Page of the Equity Interest Pledge Agreement
One or more persons signed the second amended and restated equity interest pledge agreement using this form. Pursuant to Instruction ii to Item
601 of Regulation S-K, the Registrant may only file this form as an exhibit with a schedule setting forth the material details in which the executed
agreements differ from this form:
Schedule of Material Differences
No. Name of Shareholder
1.
2.
LI Hua
LI Lei
Amount of Contribution
(ten thousand yuan)
850
150
Date
September 30, 2021
September 30, 2021
Signature Page of the Equity Interest Pledge Agreement
Power of Attorney
Exhibit 4.7
I, Li Hua / Li Lei (collectively referred to as the “Existing Shareholders”) (ID Card Number: ), hold RMB8,500,000 / 1,500,000 in the
registered capital of Shenzhen Futu Network Technology Co., Ltd. (the “Domestic Company”) on the date of the execution of this
Power of Attorney. For all the equity interests in the Domestic Company that are held by me now and will be held by me in the future
(“My Shareholding”), I hereby irrevocably authorize Shensi Network Technology (Beijing) Co., Ltd. (the “Wholly-owned
Company”) to exercise the following rights during the term of this Power of Attorney:
The Wholly-owned Company or the person(s) designated by the Wholly-owned Company (including but not limited to the directors
of Futu Holdings Limited, a foreign holding company of the Wholly-owned Company, and their successors, and any liquidators in
replacement of the directors of Futu Holdings Limited, but excluding anyone who is non-independent or may give rise to conflict of
interest) (the “Designee”) is hereby authorized to act on my behalf as my sole exclusive agent and attorney to exercise the following
rights with respect to all matters concerning My Shareholding, including without limitation to: 1) attending the shareholders’ meeting
of the Domestic Company and execute meeting minutes; 2) filing required documents with the relevant company registry; 3)
exercising all the shareholders’ rights and shareholders’ voting rights I am entitled to under the law and the articles of association of
the Domestic Company, including but not limited to selling, transferring, pledging or disposing of My Shareholding in part or in
whole; and 4) designating and appointing on my behalf the legal representative, directors, supervisors, general manager and other
senior management members of the Domestic Company.
I hereby confirm that, without prior written consent of the Wholly-owned Company, I will not directly or indirectly participate in,
engage in, be involved in or own, or use information acquired from the Wholly-owned Company to participate in, engage in, be
involved in or own any business in competition with the Wholly-owned Company or its affiliates or the principal business, nor will I
hold any interest in or benefit from any business in competition with the Wholly-owned Company or its affiliates or the principal
business. For the avoidance of doubt, this Power of Attorney shall not be considered an authorization for me or other non-independent
persons or persons that may cause conflicts of interest to exercise the rights conferred by this Power of Attorney.
If I become a person without or with limited capacity for civil conduct for any reason, my agent or successor shall continue to
perform his/her duties and rights under the premise of committing to continue to abide by the provisions of this Power of Attorney.
The Designee shall have the rights to execute, on my behalf, the Exclusive Option Agreement entered into by and among me, the
Wholly-owned Company, and the Domestic Company on September 30, 2021, and the Equity Interest Pledge Agreement entered into
by and among me, the Wholly-owned Company, and the Domestic Company on September 30, 2021 (including any modification,
amendment and restatement thereto, collectively, the
1
“Transaction Documents”), and all the documents I shall sign as stipulated in the Transaction Documents, and perform the terms of
the Transaction Documents. The exercise of these rights shall not constitute any restriction on the granting of rights hereunder.
All the actions associated with My Shareholding conducted by the Designee shall be deemed to be conducted by me, and all the
documents related to My Shareholding executed by the Designee shall be deemed to be executed by me, all of which I hereby
acknowledge and ratify.
The Designee has the rights to re-authorize or assign its rights related to the aforesaid matters to any other person or entity at its own
discretion and without giving prior notice to me or obtaining my consent. If required by the PRC laws, the Designee shall designate a
PRC citizen to exercise the aforementioned rights.
Unless otherwise stipulated in this Power of Attorney, the Designee has the rights to allocate, use or otherwise dispose of cash
dividends and other non-cash income arising from My Shareholding in accordance with my oral or written instructions.
In the event of any dispute arising out of or in connection with the execution of this Power of Attorney, either I or the Designee has
the rights to submit such dispute to the China International Economic and Trade Arbitration Commission for arbitration in Beijing in
accordance with the arbitration proceedings and rules then being in force. The arbitral tribunal shall consist of three (3) arbitrators
designated in accordance with the arbitration rules. The applicant and the respondent shall appoint one (1) arbitrator respectively, and
the third arbitrator shall be appointed by the two arbitrators abovementioned through negotiations. The arbitration proceedings shall
be confidential and conducted in Chinese. The arbitral awards shall be final and binding on all parties. Under appropriate
circumstance, the arbitral tribunal or the arbitrators may make a ruling on remedial measures in respect of My Shareholding or assets
under the applicable PRC laws, including restricting business operations, and restricting or prohibiting transfers or sales of equity
interests or assets. In addition, during the formation of arbitral tribunal, the Designee and I have the rights to apply to any court of
competent jurisdiction (including courts in the PRC, Hong Kong and the Cayman Islands) for the grant of interim remedial measures.
During arbitration, except for the part in dispute and under arbitration in relation to me or the Designee, this Power of Attorney shall
remain effective.
This Power of Attorney remains effective during the period when I hold the equity interests in the Domestic Company.
During the term of this Power of Attorney (i.e., the period when I hold the equity interests in the Domestic Company), I hereby waive
all the rights associated with My Shareholding, which have been authorized to the Designee through this Power of Attorney, and shall
not exercise such rights by myself.
(Remainder of page intentionally left blank)
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IN WITNESS WHEREOF, I have executed this Power of Attorney as of September 30, 2021.
Attorney:
Li Hua / Li Lei
By:
/s/ Li Hua / /s/ Li Lei
Signature page of this Power of Attorney
Appendix 1: Existing Shareholders
No.
1.
2.
Name
Li Hua
Li Lei
Date
September 30, 2021
September 30, 2021
Signature page of this Power of Attorney
Exclusive Option Agreement
Exhibit 4.8
This Exclusive Option Agreement (the “Agreement”) is made and entered into on September 30, 2021 in the People’s Republic of
China (the “PRC”, for the purposes of this Agreement, excluding the Hong Kong Special Administrative Region, the Macau Special
Administrative Region and Taiwan Region of the PRC) by and among the following parties:
Party A: Shensi Network Technology (Beijing) Co., Ltd. (hereafter referred to as “Party A” or the “Foreign-invested
Enterprise”), a Foreign-invested Enterprise established and validly existing under the laws of the PRC
Registered Address: 2104-A073, No. 9 West North Fourth Ring Road, Haidian District, Beijing
Party B: Li Hua / Li Lei (collectively referred to as the “Existing Shareholders”); and
Party C: Shenzhen Futu Network Technology Co., Ltd. (hereinafter referred to as “Party C” or the “Domestic Company”), a
limited liability company established and validly existing under the laws of the PRC
Registered Address: 25th floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and Technology
Park, Yuehai Street, Nanshan District, Shenzhen
(Each of the Foreign-invested Enterprise, the Existing Shareholders or the Domestic Company shall be hereafter individually
referred to as a “Party”, and collectively referred to as the “Parties”.)
Whereas:
Party B holds RMB8,500,000 / 1,500,000 in the registered capital of the Domestic Company.
Now, therefore, the Parties have reached the following agreements through negotiations:
Article 1
Sale and Purchase of Equity Interests
1.1
Option Granted
During the term of this Agreement, the Existing Shareholders hereby irrevocably grant the Foreign-invested
Enterprise an irrevocable and exclusive right to purchase, or designate one or more persons (hereafter referred to
as the “Designee”) to purchase, all or part of the equity interests in the Domestic Company then held by the
Existing Shareholders at one or multiple times at any time at the Foreign-invested Enterprise’s sole and absolute
discretion to the extent permitted by the laws of the PRC and at the price described in Article 1.3 herein (the
“Equity Interest Purchase Option”). Except for the Foreign-invested Enterprise and the Designee, no other
person shall be entitled to the
Equity Interest Purchase Option or other rights with respect to the equity interests of the Existing Shareholders.
The Domestic Company hereby agrees to the grant by the Existing Shareholders of the Equity Interest Purchase
Option to the Foreign-invested Enterprise. The term “person” as used herein shall refer to individuals,
corporations, partnerships, partners, enterprises, trusts or non-corporate organizations.
1.2
Steps for Exercise
Subject to the provisions of the laws and regulations of the PRC, the Foreign-invested Enterprise may exercise the
Equity Interest Purchase Option by issuing a written notice to the Existing Shareholders (the “Equity Interest
Purchase Notice”), specifying: (a) the Foreign-invested Enterprise’s or the Designee’s decision to exercise the
Equity Interest Purchase Option; (b) the portion of equity interests to be purchased by the Foreign-invested
Enterprise or the Designee from the Existing Shareholders (the “Purchased Equity Interests”); and (c) the date
for purchase/transfer of the Purchased Equity Interests.
1.3
Equity Interest Purchase Price
The total purchase price of all equity interests held by the Existing Shareholders in the Domestic Company
purchased by the Foreign-invested Enterprise by exercising the Equity Interest Purchase Option shall be the actual
amount of capital contribution paid by the Existing Shareholders for the Purchased Equity Interests; if the
Foreign-invested Enterprise exercises the Equity Interest Purchase Option to purchase part of the equity interests
held by the Existing Shareholders in the Domestic Company, the purchase price shall be calculated on a pro-rata
basis. If the PRC laws require a minimum price higher than the price mentioned above when the Foreign-invested
Enterprise exercises the Equity Interest Purchase Option, the minimum price regulated by the PRC laws,
regulations, and relevant rules shall be the transfer price (collectively, the “Equity Interest Purchase Price”).
The total transfer price and any other related proceeds received by the Existing Shareholders as result of the
transfer of the equity interests held by them in the Domestic Company shall be given to the Foreign-invested
Enterprise or the entity designated by the Foreign-invested Enterprise without compensation immediately after
acquisition.
1.4
Transfer of the Purchased Equity Interests
For each exercise of the Equity Interest Purchase Option by the Foreign-invested Enterprise:
1.4.1
1.4.2
1.4.3
1.4.4
The Existing Shareholders shall cause the Domestic Company to promptly convene a shareholders’ meeting, at
which a resolution shall be adopted approving the Existing Shareholders’ transfer of the Purchased Equity
Interests to the Foreign-invested Enterprise and/or the Designee;
The Existing Shareholders shall obtain written statements from other shareholders of the Domestic Company (if
applicable) giving consent to the transfer of the Purchased Equity Interests to the Foreign-invested Enterprise
and/or the Designee and waiving the right of first refusal related thereto; other shareholders of the Domestic
Company (if applicable) shall agree in writing to the transfer of the Purchased Equity Interests by the
shareholders to the Foreign-invested Enterprise and/or the Designee and waiving the right of first refusal related
thereto;
The Existing Shareholders shall execute an equity interest transfer contract and other relevant legal documents
for each transfer with the Foreign-invested Enterprise and/or the Designee (whichever is applicable), following
the provisions of this Agreement and the Equity Interest Purchase Notice;
The relevant Parties shall execute all other necessary contracts, agreements or documents, obtain all necessary
government licenses and permits and take all necessary actions to transfer valid ownership of the Purchased
Equity Interests to the Foreign-invested Enterprise and/or the Designee, unencumbered by any security interests,
and cause the Foreign-invested Enterprise and/or the Designee to become the registered owner(s) of the
Purchased Equity Interests. For the purpose of this Article and this Agreement, “security interests” shall include
securities, mortgages, third party’s rights or interests, any stock options, acquisition right, right of first refusal,
right to offset, ownership retention or other security arrangements, but shall be deemed to exclude any security
interest created by this Agreement, the Existing Shareholders’ Equity Interest Pledge Agreement and the
Existing Shareholders’ Power of Attorney, for the purpose of definite. The “Existing Shareholders’ Equity
Interest Pledge Agreement” as used in this Agreement shall refer to the Equity Interest Pledge Agreement
executed by and among the Foreign-invested Enterprise, the Existing Shareholders and the Domestic Company
on the date hereof and any modification, amendment and restatement thereto. The “Existing Shareholders’
Power of Attorney” as used in this Agreement shall refer to the Power of Attorney executed by the Existing
Shareholders on the date hereof granting the Foreign-invested
Enterprise a power of attorney and any modification, amendment and restatement thereto.
Article 2
Covenants
2.1
Covenants regarding the Domestic Company
The Existing Shareholders (as shareholders of the Domestic Company) and the Domestic Company hereby
covenant as follows:
2.1.1 Without the prior written consent of the Foreign-invested Enterprise, they shall not in any manner supplement,
change or amend the articles of association of the Domestic Company, increase or decrease its registered capital,
or change its structure of registered capital in other manners;
2.1.2
They shall maintain the Domestic Company’s corporate existence in accordance with good financial and
business standards and practices, obtain and maintain all necessary government licenses and permits for
conducting business by Domestic Company, and prudently and effectively operating its business and handling its
affairs; the annual budget and final accounts of the Domestic Company shall be subject to the prior written
consent of the Foreign-invested Enterprise;
2.1.3 Without the prior written consent of the Foreign-invested Enterprise, they shall not, at any time following the
effective date hereof, sell, transfer, mortgage or otherwise dispose the equity interests in the Domestic Company
and its subsidiaries, or allow to set any other security interest thereon;
2.1.4 Without the prior written consent of the Foreign-invested Enterprise, they shall not at any time following the
effective date hereof, sell, transfer, mortgage or otherwise dispose of legal or beneficial interest of any material
assets, business or revenues of the Domestic Company and its subsidiaries, or allow to set any other security
interest thereon;
2.1.5 Without the prior written consent of the Foreign-invested Enterprise, the Domestic Company and its subsidiaries
shall not incur, inherit, guarantee or suffer the existence of any debt, except for payables incurred in the normal
or ordinary course of business other than through loans and the liability between the Domestic Company and its
subsidiaries;
2.1.6
They shall always operate all businesses of the Domestic Company within the normal business scope to maintain
the asset value of the Domestic Company and its subsidiaries, and refrain from any action/omission that may
affect its operating status and asset value;
2.1.7 Without the prior written consent of the Foreign-invested Enterprise, they shall not cause the Domestic Company
and its subsidiaries to execute any major contract, except the contracts in the normal course of business;
2.1.8 Without the prior written consent of the Foreign-invested Enterprise, the Domestic Company and its subsidiaries
shall not provide any person with any loan or credit (except for loans or credits extended to the wholly-owned
subsidiaries of the Domestic Companies);
2.1.9
They shall provide the Foreign-invested Enterprise with all information on the business operations and financial
condition of the Domestic Company and its subsidiaries at the Foreign-invested Enterprise's request;
2.1.10
If requested by the Foreign-invested Enterprise, the Domestic Company and its subsidiaries shall procure and
maintain insurance in respect of their assets and business from an insurance carrier acceptable to the Foreign-
invested Enterprise, at an amount and with a type of coverage typical for companies that operate similar
businesses;
2.1.11 Without the prior written consent of the Foreign-invested Enterprise, Domestic Company and its subsidiaries
shall not merge, consolidate with, acquire or invest in any person;
2.1.12 They shall immediately notify the Foreign-invested Enterprise of the occurrence or possible occurrence of any
litigation, arbitration or administrative proceedings relating to the assets, business or revenue of the Domestic
Company and its subsidiaries;
2.1.13 To maintain the ownership by the Domestic Company and its subsidiaries of all its assets, they shall execute all
necessary or appropriate documents, take all necessary or appropriate actions, file all necessary or appropriate
complaints, and raise necessary or appropriate defenses against all claims;
2.1.14 Without the prior written consent of the Foreign-invested Enterprise, they shall ensure that the Domestic
Company shall not in any manner distribute dividends to its shareholders, provided that upon the Foreign-
invested Enterprise’s request, the Domestic Company shall immediately distribute all distributable profits to its
shareholders;
2.1.15 Upon the request of the Foreign-invested Enterprise, they shall appoint any person designated by the Foreign-
invested Enterprise as directors, supervisors (if applicable), and senior management of the Domestic Company
and its subsidiaries and/or remove any director, supervisor, and senior
management in office of the Domestic Companies and its subsidiaries, and fulfill all relevant resolutions and
filing procedures;
2.1.16 Without the prior written consent of the Foreign-invested Enterprise, the Domestic Companies and its
subsidiaries shall not engage in any business that competes with the Foreign-invested Enterprise or its related
companies; and
2.1.17 Unless compulsively required by the PRC laws, the Domestic Company and its subsidiaries shall not be
dissolved or liquated without the written consent of the Foreign-invested Enterprise.
2.2
Covenants of the Existing Shareholders
The Existing Shareholders hereby covenant as follows:
2.2.1 Without the prior written consent of the Foreign-invested Enterprise, from the effective date of this Agreement,
the Existing Shareholders shall not sell, transfer, mortgage or otherwise dispose of any legal or beneficial
interest in the equity interests in the Domestic Company held by them, or allow to set any other security
interest thereon, except for any interest created under the Existing Shareholders’ Equity Interest Pledge
Agreement and the Existing Shareholders’ Power of Attorney;
2.2.2 Without the prior written consent of Foreign-invested Enterprise, the Existing Shareholders shall cause the
shareholder’s meeting and/or the directors of Domestic Company not to approve any sale, transfer, mortgage or
other disposal of any legal or beneficial interest in the equity interests in the Domestic Company held by any
Existing Shareholders, or allowing to set any other security interest thereon, except for approval of any interest
created under the Existing Shareholders’ Equity Interest Pledge Agreement and the Existing Shareholders’
Power of Attorney;
2.2.3 Without the prior written consent of the Foreign-invested Enterprise, the Existing Shareholders shall cause the
shareholder’s meeting and/or the director of Domestic Company not to approve any merge or consolidation
with any person, or any acquisition of or investment in any person, by the Domestic Company and its
subsidiaries;
2.2.4
2.2.5
2.2.6
The Existing Shareholders shall immediately notify the Foreign-invested Enterprise of the occurrence or
possible occurrence of any litigation, arbitration or administrative proceedings relating to the equity interests in
the Domestic Company held by the Existing Shareholders;
The Existing Shareholder shall cause the shareholder’s meeting or the directors of Domestic Company to vote
for the transfer of the Purchased Equity Interests as set forth in this Agreement and to take any other action at
the request of the Foreign-invested Enterprise;
To maintain their ownership of the equity interests, the Existing Shareholders shall execute all necessary or
appropriate documents, take all necessary or appropriate actions, file all necessary or appropriate complaints,
and raise necessary or appropriate defenses against all claims;
2.2.7
2.2.8
Upon the request of the Foreign-invested Enterprise, the Existing Shareholders shall appoint any person
designated by the Foreign-invested Enterprise as directors, supervisors (if applicable) and senior management
of the Domestic Company and its subsidiaries;
The Existing Shareholders hereby waive their right of first refusal (if any) in respect of any transfer of the
equity interests by any other shareholders of the Domestic Company to the Foreign-invested Enterprise or the
Designee, give consent to any execution by any other shareholders of the Domestic Company with the Foreign-
invested Enterprise, the Designee, or the Domestic Company of exclusive option agreements, equity interest
pledge agreement and power of attorney similar to this Agreement, the Existing Shareholders’ Equity Interest
Pledge Agreement and the Existing Shareholders’ Power of Attorney, and guarantee not to take any action in
conflict with any of such documents executed by the other shareholders;
2.2.9
If the Existing Shareholders received any profit, dividend, bonus or proceeds of liquidation from the Domestic
Company, they shall promptly donate the same to the Foreign-invested Enterprise or any other person
designated by Foreign-invested Enterprise to the extent permitted by the PRC laws; and
2.2.10 The Existing Shareholder shall strictly abide by the provisions of this Agreement and other agreements jointly
and separately executed by and among the Existing Shareholders, the Domestic Company and the Foreign-
invested Enterprise, perform the obligations thereunder, and refrain from any action/omission that may affect
the effectiveness and enforceability thereof. To the extent that the Existing Shareholders have any remaining
rights with respect to the equity interests under this Agreement or the Existing Shareholders’ Equity Interest
Pledge Agreement or the Existing Shareholders’ Power of Attorney, the Existing Shareholders shall not
exercise such rights except in accordance with the written instruction of the Foreign-invested Enterprise.
Article 3 Representations and Warranties
The Existing Shareholders and Domestic Company hereby represent and warrant to the Foreign-invested Enterprise, jointly and
separately, as of the date of this Agreement and each transfer date, that:
3.1
They have the power, capacity and authority to execute and deliver this Agreement and any equity interest transfer
contracts to which they are parties concerning each transfer of the Purchased Equity Interests according to this
Agreement (each a “Transfer Contract”), and to perform their obligations under this Agreement and any Transfer
Contract. The Existing Shareholders and the Domestic Company agree to enter into transfer contracts consistent with
the terms of this Agreement upon the Foreign-invested Enterprise’s exercise of the Equity Interest Purchase Option.
Once executed, this Agreement and each Transfer Contract to which they are parties constitute or will constitute their
legal, valid and binding obligations and shall be enforceable against them in accordance with the provision thereof;
3.2
3.3
3.4
3.5
3.6
The Existing Shareholders and the Domestic Company have obtained approval and consents from third parties and the
government authorities (if necessary), to sign, deliver and perform this Agreement;
Neither the execution and delivery of this Agreement or any Transfer Contract nor the performance of the obligations
under this Agreement or any Transfer Contract will: (i) cause any violation of any applicable laws of the PRC; (ii)
conflict with the articles of association or other organizational documents of the Domestic Company; (iii) cause the
violation of any contract or instrument to which they are parties or which are binding on them, or constitute any breach
under any contract or instrument to which they are parties or which are binding on them; (iv) cause any violation of any
condition to grant and/or maintain the validity of any approval or permit granted to them; or (v) cause any permit or
approval granted to them to be suspended, cancelled or imposed with additional conditions;
The Existing Shareholders have a good and merchantable title to the equity interests held by them in the Domestic
Company, excepted for Existing Shareholders’ Equity Interest Pledge Agreement and the Existing Shareholders’ Power
of Attorney, the Exiting Shareholders have not placed any security interest on such equity interests;
The Domestic Company has a good and merchantable title to all the assets held by them, and has not placed any
security interest on such assets, excepted for the disclosures made by the Domestic Company to the Foreign-invested
Enterprise;
The Domestic Company does not have any outstanding debts, except for (i) the debts arising from the normal course of
business, and (ii) the debts which have been disclosed to the Foreign-invested Enterprise and require the written consent
of Foreign-invested Enterprise pursuant to this Agreement and to which the Foreign-invested Enterprise has agreed;
3.7
The Domestic Company shall comply with all laws and regulations applicable to asset acquisition; and
3.8
There are no pending or threatened litigation, arbitration or administrative proceedings relating to the equity interests,
the assets of the Domestic Company, or the Domestic Company, except for those which have been disclosed to the
Foreign-invested Enterprise.
Article 4 Effective Date and Termination
4.1
Each party confirms that this Agreement shall become effective upon formal execution by each Party, and shall be
legally binding on each Party of this Agreement, and each Party shall have all the rights hereunder and shall perform all
the obligations hereunder.
4.2
This Agreement shall terminate when and only if one of the following circumstances occurs:
4.2.1
This Agreement will terminate upon all the equity interests in the Domestic Company held by the Existing
Shareholders or its successors or assignees are legally transferred to the Foreign-invested Enterprise and/or
other persons designated by it in accordance with this Agreement; or
or
4.2.2
This Agreement must be terminated under the requirements of applicable PRC laws;
Article 5 Governing Law and Resolution of Disputes
5.1
Governing Law
The execution, validity, interpretation, performance, amendment and termination of this Agreement and resolution of
disputes hereunder shall be governed by the laws of the PRC.
5.2 Methods of Resolution of Disputes
For any dispute arising from the performance of or in connection with this Agreement, either Party shall be entitled to
submit the relevant dispute to the China International Economic and Trade Arbitration Commission (“CIETAC”) for
arbitration in Beijing in accordance with the arbitration proceedings and rules then being in force. The arbitral tribunal
shall consist of three (3) arbitrators appointed in accordance with the arbitration rules. The applicant and the respondent
shall appoint one (1) arbitrator respectively, and the third arbitrator shall be appointed by the two arbitrators above through
negotiations. Subject to the requirement of the PRC laws, the arbitral tribunal or the arbitrators shall make a ruling on
remedial measures with respect to the equity interests in or assets of the Domestic Company or the assets of the Existing
Shareholders under the terms of resolution of disputes and/or applicable PRC laws, including restricting business
operations, restricting or prohibiting transfers or sales of the equity interests or assets, or proposing liquidation of the
Domestic Company. In addition, during the formation of arbitral tribunal, Party A is entitled to apply to any court of
competent jurisdiction (including courts in the PRC, Hong Kong and the Cayman Islands) for granting interim remedial
measures. The arbitration proceedings shall be confidential and conducted in Chinese. The arbitration awards shall be final
and legally binding upon the Parties. During arbitration, except for the part in dispute and under arbitration, the Parties
shall continue to enjoy and perform the other rights and the corresponding obligations hereunder.
Article 6 Taxes and Fees
Each Party shall pay any and all transfer and registration taxes, expenses and fees incurred thereby or levied thereon in
accordance with the laws of the PRC in connection with the preparation and execution of this Agreement and the Transfer
Contracts, as well as the completion of the transactions contemplated under this Agreement and the Transfer Contracts.
Article 7 Notices
7.1
All notices and other communications required or permitted to be given to a Party pursuant to this Agreement shall be
delivered personally or sent by registered mail, postage prepaid, commercial courier service or email to the address of
such Party set forth below. The dates on which notices shall be deemed to have been effectively given shall be
determined as follows:
7.1.1 If the notice is given by personal delivery (including express mail), the date of receipt shall be the effective date
of service;
7.1.2 If the notice is sent by registered mail, postage prepaid, the fifteenth (15) day after the date on the receipt of
registered mail shall be the effective date of service;
7.1.3 If the notice is sent by email, when the sender receives the system message indicating that the email was sent
successfully or the sender did not receive the system message within twenty-four (24) hours indicating that the
email was not delivered or was returned, the date of successful transmission of the email shall be the effective
date of service. However, if this email was delivered later than 5:00 P.M. or on a non-working date at the place
of service, the date of service shall be the next working day shown on the date record.
7.2
For the purpose of notices under this Article, the addresses of the Parties to receive notices are as follows:
Party A: Shensi Network Technology (Beijing) Co., Ltd.
Address: 28th floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and
Technology Park, Yuehai Street, Nanshan District, Shenzhen
Attn: Legal Center
Party B: Li Hua / Li Lei
Address:
Attn:
Email:
Party C: Shenzhen Futu Network Technology Co., Ltd.
Address: 28th floor, Building D1, Kexing Science Park, No. 15 Keyuan Road, Community of Science and
Technology Park, Yuehai Street, Nanshan District, Shenzhen
Attn: Legal Center
7.3
Any Party may at any time change its address for notices by a notice delivered to the other Parties in accordance with
this Article.
Article 8 Confidentiality
The Parties acknowledge and confirm that any oral or written information in relation to this Agreement or the contents hereof
and exchanged between the Parties in connection with the preparation and performance of this Agreement shall be regarded as
confidential information. Each Party shall maintain the confidentiality of all such confidential information and, without
obtaining the written consent of other Parties, shall not disclose any confidential information to any third parties, except for the
information that: (a) is or will be in the public domain (other than through the receiving Party’s unauthorized disclosure to the
Public); (b) is required to be disclosed pursuant to the applicable laws and regulations, rules of any stock exchange, or orders
of government authorities or courts; or (c) is required to be disclosed by any Party to its shareholders, directors, employees,
legal counsels or financial advisors regarding the transaction contemplated hereunder, provided that such shareholders,
directors, employees, legal counsels, or financial advisors shall be bound by the confidentiality obligations similar to those set
forth in this Article. Disclosure of any confidential information by the shareholders, director, employees of, or agencies
engaged by any Party shall be deemed disclosure by such Party and such Party shall be held liable for breach of this
Agreement.
Article 9 Further Warranties
The Parties agree to promptly execute documents that are reasonably required for or are conducive to the implementation of
the provisions and purposes of this Agreement and take further actions that are reasonably required for or are conducive to the
implementation of the provisions and purposes of this Agreement.
Article 10 Breach of Agreement
10.1
If the Existing Shareholders or the Domestic Company conducts any material breach of any term of this Agreement,
the Foreign-invested Enterprise shall have right to terminate this Agreement and/or require the Existing Shareholders
or the Domestic Company to compensate for all damages; this Article 10 shall not prejudice any other rights of the
Foreign-invested Enterprise herein;
10.2
The Existing Shareholders or the Domestic Company shall not have any right to terminate or rescind this Agreement
in any event unless otherwise required by the applicable laws.
Article 11 Miscellaneous
11.1
Amendment, Change and Supplement
Any amendment and supplement to this Agreement shall be executed in writing. Party A shall have right to change or
supplement any term of this Agreement at its own discretion according to the requirements of relevant regulatory
authorities or other considerations. Once Party A issues a written notice to amend and supplement this Agreement,
Party B shall sign the revised and supplemented agreement as required by Party A.
If regulatory authorities propose any amendments to this Agreement, the Parties shall amend this Agreement
accordingly.
11.2
Entire Agreement
Except for the amendments, supplements or changes made in writing after the execution of this Agreement, this
Agreement shall constitute the entire agreement reached by and among the Parties hereto with respect to the subject
matter hereof, and shall supersede all prior oral and written consultations, representations and contracts reached with
respect to the subject matter of this Agreement.
11.3
Headings
The headings of this Agreement are for convenience only, and shall not be used to interpret, explain or otherwise
affect the meanings of the provisions of this Agreement.
11.4
Severability
In the event that one or several of the provisions of this Agreement are found to be invalid, illegal or unenforceable in
any aspect in accordance with any laws or regulations, the validity, legality or enforceability of the remaining
provisions of this Agreement shall not be affected or compromised in any respect. The Parties shall strive in good
faith to replace such invalid, illegal or unenforceable
provisions with provisions that are effective to the greatest extent permitted by laws and the intentions of the Parties,
and the economic effect of such effective provisions shall be as close as possible to that of those invalid, illegal or
unenforceable provisions.
11.5
Successors
This Agreement shall be binding on and shall inure to the benefit of the respective successors of the Parties and the
permitted assignees of such Parties.
11.6
Survival
11.6.1 Any obligations that occur or that are due as a result of this Agreement upon the expiration or early
termination of this Agreement shall survive the expiration or early termination thereof.
11.6.2 The provisions of Articles 5, 8, 10 and this Article 11.6 shall survive the termination of this Agreement.
11.7
Waivers
Any Party may waive the terms and conditions of this Agreement, provided that such a waiver must be provided in
writing and shall require the signatures of the Parties. No waiver by any Party in certain circumstances with respect to
a breach by other Parties shall operate as a waiver by such a Party with respect to any similar breach in other
circumstances.
11.8
Language and Text
This Agreement is written in Chinese language in three (3) copies. Each of the Foreign-invested Enterprise, the
Existing Shareholders and the Domestic Company has one (1) copy.
(Remainder of page intentionally left blank. Signature page to follow)
IN WITNESS WHEREOF, the Parties have executed, or caused their authorized representatives to execute, this Exclusive Option
Agreement as of the date first above written.
Party A:
Shensi Network Technology (Beijing) Co., Ltd. (Seal)
/s/ Li Hua
By:
Name: Li Hua
Title: Legal Representative
Party B:
Li Hua / Li Lei
By:
/s/ Li Hua / /s/ Li Lei
Party C:
Shenzhen Futu Network Technology Co., Ltd. (Seal)
/s/ Li Hua
By:
Name: Li Hua
Title: Legal Representative
Signature Page of the Exclusive Option Agreement
Appendix 1: Existing Shareholders
Name
Li Hua
Li Lei
Total
Amount of
contribution
(ten thousand
yuan)
850
150
1,000
Method of
investment
contribution
cash
cash
cash
Shareholding
ratio
85%
15%
100%
Signature Page of the Exclusive Option Agreement
To:
Futu Holdings Limited
Shensi Network Technology (Beijing) Co., Ltd. (the “Wholly-owned Company”)
Shenzhen Futu Network Technology Co., Ltd. (the “Domestic Company”)
Consent Letter
Exhibit 4.9
I, LI Lei / LI Hua (citizen of the People’s Republic of China (the “PRC”), ID No.: [ID Card Number]), am the lawful spouse of
LI Hua / LI Lei (citizen of the PRC, ID No.: [ID Card Number], hereafter referred to “my Spouse” ). I hereby confirm that I am
aware, and unconditionally and irrevocably agree, that the following documents shall be signed by my Spouse and the Domestic
Company directly held by my Spouse, and agree that the equity interests in the Domestic Company owned by my Spouse, as well as
any interests attached thereto, shall be disposed of pursuant to the provisions of the control agreements:
1. The Exclusive Business Cooperation Agreement dated September 30, 2021 entered into between the Domestic Company and
the Wholly-owned Company;
2. The Exclusive Option Agreement dated September 30, 2021 entered into among my Spouse, the Wholly-owned Company
and the Domestic Company;
3. The Equity Interest Pledge Agreement dated September 30, 2021 entered into among my Spouse, the Wholly-owned
Company and the Domestic Company;
4. The Power of Attorney dated September 30, 2021 issued to the Wholly-owned Company by my Spouse; and
5. Any amendment or change to the documents specified in Items 1 to 4 above and/or supplemental agreements (documents
specified in Items 1 to 5 above collectively referred to as the “Control Agreements”) signed hereafter by the relevant parties
from time to time.
I hereby:
1. confirm and agree that the equity interests in the Domestic Company held by my Spouse currently and in the future, as well as
any interest attached thereto, are individual property of my Spouse, not the joint property of my Spouse and I. Therefore, I do not
own and cannot dispose of such property or interest, and my Spouse is entitled to dispose of the equity interests and any interest
attached thereto on his/her own. The relevant equity interests and any interest attached thereto will be disposed of in accordance
with the Control Agreements signed by my Spouse and/or the Domestic Company. I confirm that, I will fully cooperate with the
performance of the Control Agreements at any time.
2. unconditionally and irrevocably waive any right or interest on such equity interests and the
1
corresponding assets which might be granted to me by any applicable laws, and undertake not to raise any claim on such equity
interests and the corresponding assets, including claiming that such equity interests and the corresponding assets constitute the
joint property of my Spouse and me, and claiming direct or indirect participation in the daily operation and management and
voting of the Domestic Company or in any way imposing influence on the determination of my Spouse regarding such equity
interests and any interest attached thereto based on the aforementioned claim. I have never participated, and will not participate,
in the actual operation and management or any other matters about voting of the Domestic Company.
3. confirm that my Spouse is entitled to enjoy his/her rights and perform his/her obligations under the Control Agreements through
the Domestic Company on his/her own, and my separate authority or consent is not required for my Spouse’s performance of the
Control Agreements through the Domestic Company, further amendments to or termination of the Control Agreements, or
execution of other documents to replace the Control Agreements.
4. undertake that I will sign all necessary documents and take all necessary actions to ensure the proper performance of the Control
Agreements (as amended from time to time).
5. agree and covenant that I will not act in any manner in conflict with the arrangements contemplated under the Control
Agreements or this Consent Letter at any time. If I acquire any equity interest in the Domestic Company and any interest attached
thereto for any reason, I shall be bound by the Control Agreements (as amended from time to time), and comply with the
obligations of shareholders of the Domestic Company under the Control Agreements (as amended from time to time). For such
purpose, at the request of the Wholly-owned Company, I will execute a series of written documents in the form and with the
content substantially the same as the Control Agreements (as amended from time to time).
6.
further confirm, covenant and undertake that, in any case, including, without limitation, the occurrence of a divorce between my
Spouse and me, my Spouse is entitled to handle the equity interests in the Domestic Company held by him/her and the
corresponding assets on his/her own, and I will not take any action that may affect or hinder my Spouse’s performance of his/her
obligations under the Control Agreement, including but not limited to any claim to the equity interests in the Domestic Company
and the rights obtained through the contractual control arrangement.
For any dispute arising from the performance of or in connection with this Consent Letter, any interested party and I shall be
entitled to submit the dispute to the China International Economic and Trade Arbitration Commission (the “CIETAC”) for arbitration
in Beijing in accordance with the arbitration proceedings and rules then being in force. The arbitral tribunal shall consist of three (3)
arbitrators appointed in accordance with the arbitration rules. The applicant and the respondent shall appoint one (1) arbitrator
respectively, and the third arbitrator shall be appointed by the two arbitrators above through negotiations. The arbitration proceedings
shall be confidential and conducted in Chinese. The
2
arbitral awards shall be final and legally binding upon the Parties. Under appropriate circumstances, the arbitral tribunal or the
arbitrators shall make a ruling on remedial measures with respect to the equity interests in or assets of the Domestic Company under
applicable PRC laws, including restricting business operations, restricting or prohibiting transfers or sales of the equity interests or
assets, or proposing liquidation of relevant parties. In addition, during the formation of arbitral tribunal, the interested parties are
entitled to apply to any court of competent jurisdiction (including courts in the PRC, Hong Kong and the Cayman Islands) for
granting interim remedial measures. During the arbitration, except for the part over which I and any stakeholder have disputes and
under arbitration, the Consent Letter shall continue to be valid.
(Remainder of page intentionally left blank. Signature page to follow)
3
(Signature Page of the Consent Letter)
/s/ LI Lei / /s/ LI Hua
By:
Name: LI Lei / LI hua
Date: September 30, 2021
Significant Subsidiaries and Consolidated Entity of the Registrant
EXHIBIT 8.1
Place of Incorporation
Subsidiary
Futu Financial Limited
Futu Lending Limited
Futu Network Technology Limited
Futu Securities (Hong Kong) Limited
Futu Securities International (Hong Kong) Limited
Futu Trustee Limited
Futu US Inc.
Futu Inc.
Futu Clearing Inc.
Moomoo Inc.
Shensi Network Technology (Beijing) Co., Ltd.
Futu Network Technology (Shenzhen) Co., Ltd.
Futu Singapore Pte. Ltd.
Futu Securities (Australia) Ltd
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
Hong Kong
the United States
the United States
the United States
the United States
PRC
PRC
Singapore
Australia
Consolidated Variable Interest Entity
Place of Incorporation
Shenzhen Futu Network Technology Co., Ltd.
PRC
Exhibit 12.1
Certification by the Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Leaf Hua Li, certify that:
1. I have reviewed this annual report on Form 20-F of Futu Holdings Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;
and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: March 18, 2022
By:
Name:
Title:
/s/ Leaf Hua Li
Leaf Hua Li
Chief Executive Officer
Exhibit 12.2
Certification by the Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Arthur Yu Chen, certify that:
1. I have reviewed this annual report on Form 20-F of Futu Holdings Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered
by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and
15d-15(f)) for the company and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others
within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by
the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting;
and
5. The company’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting,
to the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal
control over financial reporting.
Date: March 18, 2022
By:
Name:
Title:
/s/ Arthur Yu Chen
Arthur Yu Chen
Chief Financial Officer
Certification by the Principal Executive Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1
In connection with the Annual Report of Futu Holdings Limited (the “Company”) on Form 20-F for the fiscal year ended December 31, 2021
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Leaf Hua Li, Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 18, 2022
By:
Name:
Title:
/s/ Leaf Hua Li
Leaf Hua Li
Chief Executive Officer
Certification by the Principal Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 13.2
In connection with the Annual Report of Futu Holdings Limited (the “Company”) on Form 20-F for the fiscal year ended December 31, 2021
as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Arthur Yu Chen, Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my
knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
Date: March 18, 2022
/s/ Arthur Yu Chen
By:
Name: Arthur Yu Chen
Title:
Chief Financial Officer
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-233721) and in the Registration
Statement on Form F-3 (File No. 333-248076) of Futu Holdings Limited of our report dated March 18, 2022 relating to the financial statements
and the effectiveness of internal control over financial reporting, which appears in this Form 20-F.
Exhibit 15.1
/s/ PricewaterhouseCoopers Zhong Tian LLP
Shenzhen, the People’s Republic of China
March 18, 2022
Exhibit 15.2
Date: March 18, 2022
Futu Holdings Limited
11/F, Bangkok Bank Building
No. 18 Bonham Strand W
Sheung Wan
Hong Kong S.A.R.,
People’s Republic of China
Dear Sir/Madam:
We hereby consent to the reference to our firm and the summary of our opinion under the headings, “Item 3. Key Information—D. Risk
Factors—Risks Related to Our Business and Industry”, “Item 3. Key Information—D. Risk Factors—Risks Related to Our Operations in China”,
“Item 4. Information on the Company—C. Organizational Structure” and “Item 10. Additional Information—E. Taxation—PRC Taxation” in Futu
Holdings Limited’s Annual Report on Form 20-F for the year ended December 31, 2021 (the “Annual Report”), which will be filed with the
Securities and Exchange Commission (the “SEC”) in the month of March 2022, and further consent to the incorporation by reference of the
summary of our opinion under these headings into the Registration Statement on Form S-8 (File No. 333-233721) pertaining to Futu Holdings
Limited’s Amended and Restated 2014 Share Incentive Plan and the 2019 Share Incentive Plan and the Registration Statement on Form F-3 (File
No. 333-248076). We also consent to the filing of this consent letter with the SEC as an exhibit to the Annual Report.
In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, or under the Securities Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Yours Sincerely,
/s/ Han Kun Law Offices
Han Kun Law Offices
Exhibit 15.3
Futu Holdings Limited
11/F, Bangkok Bank Building
No. 18 Bonham Strand W
Sheung Wan
Hong Kong S.A.R.,
People’s Republic of China
18 March 2022
Dear Sir or Madam
Re: Futu Holdings Limited
We have acted as legal advisers as to the laws of the Cayman Islands to Futu Holdings Limited, an exempted company with limited liability
incorporated in the Cayman Islands (the “Company”), in connection with the filing by the Company with the United States Securities and
Exchange Commission (the “SEC”) of an annual report on Form 20-F for the year ended 31 December 2021 (the “Annual Report”), which will be
filed with the SEC in the month of March 2022.
We consent to the reference to our firm under the heading “Item 10. Additional Information—E. Taxation—Cayman Islands Taxation” in the
Annual Report, and further consent to the incorporation by reference into the Registration Statement on Form S-8 (File No. 333-233721) filed on
12 September 2019 and the Registration Statement on Form F-3 (File No. 333-248076) filed on 17 August 2020 of the summary of our opinion
under the heading “Item 10. Additional Information—E. Taxation—Cayman Islands Taxation” in the Annual Report.
We also consent to the filing with the SEC of this consent letter as an exhibit to the Annual Report. In giving such consent, we do not thereby
admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, or under the Securities
Exchange Act of 1934, in each case, as amended, or the regulations promulgated thereunder.
Yours faithfully
/s/ Maples and Calder (Hong Kong) LLP
Maples and Calder (Hong Kong) LLP