RISK FACTORS
An investment in the ADSs involves risks. Before you decide to buy these securities, you should consider carefully all
of the information in this prospectus supplement as well as the section titled "Risk Factors" included in the accompanying prospectus and all the documents incorporated therein by reference. Any of
these risks could have a material adverse effect on our business, prospects, financial condition and results of operations. In any such case, the trading price of the ADSs could decline, and you could
lose all or part of your investment. Please see "Where You Can Find More Information About Us" and, in the accompanying prospectus, "Incorporation of Documents by Reference" for information on where
you can find the documents we have filed with or furnished to the SEC and which are incorporated into the accompanying prospectus by reference.
Risks Related to Our Business and Industry
We have a limited operating history which makes it difficult to evaluate our future prospects.
We launched our online brokerage business in 2012 and experienced significant growth since 2015. Between 2012 and 2015, we focused on
continuously improving our platform and technology infrastructure. As our business is built on cutting-edge technology and a majority of our staff come from internet and technology companies, which
differentiate us from traditional brokers, we have limited experience in most aspects of our business operation, such as trading, margin financing and securities lending. In addition, we launched our
fund distribution platform in August 2019 and have limited experience in serving our current user and client base. We have also seen significant growth in our U.S. operations. 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.
The
online brokerage and wealth management industries may not develop as expected. Prospective users and clients of our services may not be familiar with the development of online
brokerage and wealth management markets and may have difficulty distinguishing our services from those of our competitors. Convincing prospective users and clients of the value of using our services
is critical to increasing the amount of transactions conducted through our platform and to the success of our business.
You
should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly evolving market in which we operate and our limited
operating history. These risks and challenges include our ability to, among other things:
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manage our future growth;
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navigate a complex and evolving regulatory environment;
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offer personalized and competitive online brokerage, wealth management and other financial services;
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increase the utilization of our services by existing and new users;
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offer attractive commission fees while driving the growth and profitability of our business;
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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;
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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;
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improve our operational efficiency;
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attract, retain and motivate talented employees to support our business growth;
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navigate economic condition and fluctuation; and
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defend ourselves against legal and regulatory actions, such as actions involving intellectual property or privacy claims.
Our historical growth rates may not be indicative of our future growth.
We have experienced rapid growth in our business and operations since our inception. Our total revenues increased by 30.9% from
HK$811.3 million in 2018 to HK$1,061.6 million in 2019, and further by 211.9% from HK$1,061.6 million in 2019 to HK$3,310.8 million (US$427.0 million) in 2020.
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. If our growth rate
declines, investors' perceptions of our business and business prospects may be adversely affected and the market price of the ADSs could decline. You should consider our prospects in light of the
risks and uncertainties that fast-growing companies with limited operating histories in a quickly-evolving industry may encounter.
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. We upgrade our systems from time to time to cater to the need of launching new services and executing increasing trading volume, and the process of upgrading our current systems may
disrupt our ability to timely and accurately process information, which could adversely affect our results of operations and cause harm to our business.
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 our culture to meet
the needs of our
future and evolving operations as we continue to grow, in particular as we grow 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.
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 several regulators.
We are subject to extensive regulations and the markets in which we operate including Hong Kong, the United States and Singapore are highly
regulated. However, the online-based 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. 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 Service Rules, including, for example, the SFO and its
subsidiary legislation. These HK Brokerage Service Rules 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
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CompanyB.
Business OverviewRegulationOverview of the Laws and Regulations Relating to Our Business and Operations in Hong Kong" in our 2020 Annual Report, which
is incorporated by reference in this prospectus supplement. In addition, our operations in the United States are subject to applicable United States law, rules and regulatory guidance, or 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 CompanyB. Business
OverviewRegulationOverview of the Laws and Regulations Relating to Our Business and Operations in the United States" in our 2020 Annual Report, which is incorporated by
reference in this prospectus supplement. Also, our operations in Singapore are subject to applicable Singapore laws. This would include the Securities and Futures Act, and its subsidiary legislation
such as the Securities and Futures (Licensing and Conduct of Business) Regulations. In Singapore, we hold a capital markets services license 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. Collectively, these laws and regulatory requirements, or the SG Licensing
Requirements, establish a framework within which we carry out our local business operations.
Failure to comply with applicable laws and regulations in markets we operate in 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 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 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 would 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, may be subject to similar examinations and regulatory actions initiated by the SEC, FINRA or the various state
regulatory authorities in the United States. 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.
As
of the date of this prospectus supplement, we are involved in ongoing regulatory inquiries by several regulators. For example, Futu International Hong Kong is involved in ongoing
regulatory inquiries by the HK SFC for matters including, among others, client onboarding process. We are unable to accurately predict the outcome of the inquiries because of their ongoing nature. See
"Item 4. Information on the CompanyB. Business OverviewOngoing Regulatory Actions" in our 2020 Annual Report, which is incorporated by reference in this prospectus
supplement. There remains a risk that on conclusion of the inquiries, the HK SFC may identify misconduct or material non-compliance and decide to proceed with investigation and take regulatory
actions, which may include, among other things, reprimands, fines, limitations or prohibitions on our future business activities or suspension or
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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
Service Rules 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 business, results of operations, financial conditions and prospects. Our reputation may also be harmed.
Our online client onboarding procedures do not strictly follow the specified steps set out by the relevant
authorities in Hong Kong, which may subject us 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.
As online-based brokerage services in Hong Kong and China 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. Residents in China can open Hong Kong or U.S. trading accounts with us by following the online application procedures summarized in our 2020 Annual Report,
which is incorporated by reference in this prospectus supplement. See "Item 4. Information on the CompanyB. Business OverviewOur ServicesTrading, Clearing
and SettlementAccount Opening" in our 2020 Annual Report, which is incorporated by reference in this prospectus supplement. Our system supports the online verification procedures, among
others, based on a prospective client's PRC identification information and debit card issued by a bank based in China. 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 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 (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. As our current online client onboarding procedures for residents in China as discussed above do not
strictly follow the specified methods set out in the SFC Circulars, we have been testing a new e-certification procedure through a mutually recognized certification authority as part of our online
onboarding process since 2019. We have not implemented such procedure on a wide basis. We are currently involved in ongoing inquiries by the HK SFC regarding our online client onboarding procedures.
If we are required by the HK SFC to adopt the e-certification procedures or remediate our account opening procedures for all of our existing clients retroactively or to make further adjustments to our
online client onboarding process, there is no assurance that we will be able to achieve full implementation timely, or at all, and we will need to incur extensive time and 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 China. Although we do not
believe we engage in securities brokerage business in China, there remain uncertainties to the interpretation and implementation of relevant PRC laws and regulations.
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 CompanyB. Business OverviewRegulationsOverview of the Laws and
Regulations Relating to Our Business and Operations in ChinaRegulations on Securities Business" in our 2020 Annual Report, which is incorporated by reference in this prospectus
supplement. We do not hold any license or permit in relation to providing securities brokerage business in China. A significant portion of our technology, research and development, management,
supporting and other teams are based in China and a large number of our clients are PRC citizens. However, 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. In the past, we received inquiries relating to our business from certain regulatory authorities in China. We have since then
taken measures to modify and enhance our business and platform to be in compliance with the 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 counsel, Han
Kun Law Offices, we are not in violation of the applicable PRC laws and regulations related to securities brokerage business in China after such modifications in all material aspects. However, there
remain some uncertainties as to how the current and any future PRC laws and regulations will be interpreted or implemented in the context of operating securities related business in China. We cannot
assure you that our current operation model, such as redirecting users and clients to open accounts and make transactions outside China, will not be deemed as operating securities brokerage business
in China, which may subject us to further inquiries or rectifications. If certain of our activities in China were deemed by relevant regulators as provision of securities brokerage services,
investment consulting services and stock options brokerage 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 and mobile application in China. In such cases, our business, financial condition, results of operations and prospects may be materially and adversely affected.
PRC governmental control of currency conversion, cross-border remittance and offshore investment could have a
direct impact on the trading volume facilitated by our platform. If the government further tightens restrictions on converting Renminbi to foreign currencies, including Hong Kong dollars and U.S.
dollars, and/or deems our practice as in violation of PRC laws and regulations, our business will be materially and adversely affected.
A significant portion of our clients are Chinese nationals. We do not provide cross-border currency conversion services related to Renminbi to
our clients, and we require those who would like to trade securities listed on the Hong Kong Stock Exchange or any major stock exchanges in the United States or purchase any wealth management products
through our platform to deposit funding into their respective offshore trading accounts.
In
addition, the PRC government imposes controls on the convertibility of Renminbi into foreign currencies and, in certain cases, currency remittance out of the PRC. Since 2016, the PRC
government has tightened its foreign exchange policies and stepped up its scrutiny of outbound capital movement. Under the current regulatory framework, Chinese nationals are limited to a foreign
exchange quota of US$50,000 per year for approved uses only, such as tourism and education purposes and Chinese nationals can only engage in offshore investments under capital items through provided
method such as
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Qualified
Domestic Institutional Investors. See "Item 4. Information on the CompanyB. Business OverviewRegulationsOverview of the Laws and Regulations
Relating to Our Business and Operations in ChinaRegulations on Offshore Stocks Investment" in our 2020 Annual Report, which is incorporated by reference in this prospectus supplement. If
the government further tightens the amount of currency exchange allowed for Chinese nationals, increases the control over remittance of currency out of the PRC, and/or specifically prohibits any
exchanges for securities-related investment, the trading activities of Chinese nationals through our platform could be restricted, which would significantly reduce the trading volume facilitated by
our platform. As our revenues from brokerage commission income depends heavily on the total trading volume facilitated by our platform, the occurrence of any of the above regulatory changes would have
a material and adverse impact on our business, operating and financial results.
In
addition, under the existing regulations on offshore investment, approval from or registration with appropriate government authorities is required when Renminbi is to be converted
into foreign currency for the purpose of offshore investment. As we do not provide cross-border currency conversion services related to Renminbi to our Chinese national clients, we do not require our
clients to submit evidence of approval or registration from relevant authorities with respect to the foreign currency used for offshore investments. However, since the PRC authorities and the
commercial banks designated by the SAFE to conduct foreign exchange services have significant amount of discretion in interpreting,
implementing and enforcing the relevant foreign exchange rules and regulations, and for many other factors that are beyond our control and anticipation, we cannot assure you that our operation will
not be deemed by relevant authorities as providing currency conversion service or otherwise violating relevant foreign exchange laws and regulations and we have been subject to a fine by relevant
authority in the past. While the amount of the fine is immaterial and we have taken measures to ensure our compliance with foreign exchange laws and regulations, we cannot assure you that such
measures are sufficient, and we may face more severe consequences, including but not limited to being asked to take additional and burdensome measures to monitor the source and use of the foreign
currency funds in the accounts of our clients, verify evidence of approval from relevant authorities or suspend our operations pending an investigation or indefinitely. In such cases, we may face
regulatory warnings, correction orders, condemnation and fines, and may not be able to conduct our current business in the future. We may also be subject to regular inspections from relevant
authorities from time to time. If such situations occur, our business, financial condition, results of operations and prospects would 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.
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 who, in an effort to satisfy the demands
of their clients for hands-on electronic trading facilities, universal access to markets, smart routing, better trading tools, lower commissions and financing rates, have embarked upon 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. For example, major international brokerage companies that have large retail online brokerage businesses as well as
online brokerage units of commercial banks may 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 platform, we depend on retaining current clients and attracting more new clients. If there is insufficient demand for our online brokerage, margin financing and wealth management 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, in particular those that have highly frequent transactions. Our clients may not continue to place trading orders or
increase the level of their trading activities through our platform 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 platform less frequently or even stop using our platform
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 platform in a timely manner and at
favorable price terms, we cannot assure you that we will be able to retain existing clients, encourage repeat and increase trading transactions 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$98.1 million, HK$164.7 million and HK$385.3 million (US$49.7 million) in selling and marketing expenses,
representing 12.1%, 15.5% and 11.6% of our total revenues in 2018, 2019 and 2020, 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 platform, 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.
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Similar
to other brokerage and financial services providers, we cannot guarantee the profitability of the investment made by clients through our platform. 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. We provide a social community 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 clients on our platform, 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 platform may blame our platform, seek to recover their damages from us or bring lawsuits against us.
Because our revenues and profitability depend largely on clients' trading volume, they are prone to
significant fluctuations and are difficult to predict.
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 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 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 and/or eruptions of regional tensions could negatively impact our revenues
and profitability. As a result of these risks, our income and operating results may be subject to significant fluctuations. See "A sustained outbreak of the COVID-19 virus could have a
material adverse impact on our business, operating results and financial condition."
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 in China and globally. Since 2020, governments in China and around the globe have
taken measures to contain the spread of the COVID-19 virus. For example, in early 2020, in response to intensifying efforts to contain the spread of
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COVID-19,
the Chinese government took a number of actions, which included extending the Chinese New Year holiday, 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 across China. In addition, as the outbreak continues to threaten global economies, it may continue to cause significant market volatility and declines in general economic activities.
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 2020 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 2021 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 Chinese and 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 within
China 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 2021 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 CompanyB. Business OverviewImpact of COVID-19 and Our Responses and Opportunities" in our 2020 Annual Report,
which is incorporated by reference in this prospectus supplement.
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
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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
platform.
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. Our headquarters are located in Shenzhen and Hong Kong, where most of our management and employees currently reside. Most of our system hardware and back-up systems are hosted in facilities
located in Shenzhen and Hong Kong. Consequently, if any natural disasters, health epidemics or other public safety concerns were to affect Shenzhen and/or Hong Kong, 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 platform. In
2018, 2019 and 2020, our brokerage commission income and handling charge income amounted to HK$408.0 million, HK$511.4 million and HK$1,990.1 million (US$256.7 million),
representing 50.3%, 48.2% and 60.1% 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 2018, 2019 and 2020, our revenues from interest income derived from our margin financing and securities lending businesses amounted to HK$226.1 million, HK$258.9 million
and HK$571.8 million (US$73.7 million), representing 27.9%, 24.4% and 17.3% of our total revenues during the same years, respectively. For the same years, our interest income derived
from bank deposits were HK$123.8 million, HK$187.2 million and HK$208.6 million (US$26.9 million), representing 15.3%, 17.6% and 6.3% 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.
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
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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 RiskInterest Rate Risk" in our 2020 Annual Report, which is incorporated by reference in this prospectus supplement.
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. 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. 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. Nevertheless, 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 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. 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 platform. We provided
margin financing service for securities listed on the Hong Kong Stock Exchange and the major stock exchanges in the U.S., and we provided securities lending services for securities listed on the major
stock exchanges in the U.S. As of December 31, 2020, outstanding margin financing and securities lending balance was HK$19.5 billion (US$2.5 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. In addition, we rely on a limited number of wealth management product
providers.
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 offering 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 platform 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.
We
rely on a limited number of third-parties who provide us with wealth management products, and our relationships with these product providers are integral to the smooth operation of
our wealth management business. If our relationships with third-party service providers deteriorate or third-party service providers decide to terminate our respective business relationships for any
reasons, such as to work with our competitors on more exclusive or favorable terms or if they themselves become our competitors, our operation may be disrupted.
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, following the PRC National People's Congress' passage of Hong Kong's national security legislation,
the U.S. Department of Treasury imposed sanctions on certain officials of the Hong Kong Special Administrative Region and the central government of China. In the same month, U.S. President Donald J.
Trump issued executive orders prohibiting certain transactions with ByteDance Ltd. and WeChat-related transactions with Tencent Holdings Ltd. and the respective subsidiaries of such
companies. 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 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 ban has not come into force as of the date of this prospectus supplement. As of March 31, 2021, entities directly or beneficially owned by
Tencent Holdings Limited owned 22.8% of our outstanding shares and 27.9% 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. 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 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.
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 platform. 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 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
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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;
-
-
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. 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 platform. 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
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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, 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.
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, option 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 and Hong Kong Exchange and Clearing Limited 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
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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.
If we fail to protect our platform 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.
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 willful security breaches or other unauthorized access to our system could cause confidential user and client 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.
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We
are subject to governmental regulation and other legal 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 that restrict or control the use of personal data. See "Item 4. Information on the CompanyB. Business
OverviewRegulationsOverview of the Laws and Regulations Relating to Our Business and Operations in ChinaRegulations on Cybersecurity and Privacy" in our 2020
Annual Report, which is incorporated by reference in this prospectus supplement. 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 Personal Information Security Specification, or China Specification, came into force on October 1, 2020. Although
the China Specification is not a mandatory regulation, it nonetheless has a key implementing role in relation to China's Cybersecurity Law in respect to protecting personal information in China.
Furthermore, 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.
Meanwhile, under the China Specification, 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 and the United States also have their respective data privacy legislation that regulates the collection, use and handling of personal data. Under the relevant legislation, 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
October 21, 2020, the Standing Committee of the National Peoples' Congress issued a Draft Personal Information Protection Law, or the Draft Personal Information Protection Law,
which integrates the scattered rules with respect to personal information rights and privacy protection. The Draft Personal Information Protection Law 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. Personal information, as defined in the Draft 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 Draft Personal Information Protection Law provides 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. It also stipulates certain specific rules with respect to the obligations of a personal information processor, such as to inform the purpose and method of processing
to the individuals, and the obligation of the third party who has access to the personal information by way of co-processing or delegation. The SCNPC is still soliciting comments on the Draft Personal
Information Protection Law and substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. Although we may be subject to requirements on protection of
personal data, privacy and information security under laws and regulations that may be promulgated in the future from time to time, 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 and/or other sanctions on us.
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
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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. We have
revised our privacy policy on Futubull in accordance with the rectification notice we received to satisfy the relevant regulatory authorities'
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 one jurisdiction which may be interpreted and applied in a manner inconsistent to another jurisdiction and may conflict with our current policies and practices or require
changes to the features of our system. If we are unable to address any 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.
We have not obtained certain relevant licenses from PRC authorities in connection with some of the
information and services available 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 CompanyB. Business
OverviewRegulationOverview of the Laws and Regulations Relating to Our Business and Operations in ChinaRegulations on the Securities Investment Consulting
Service" in our 2020 Annual Report, which is incorporated by reference in this prospectus supplement. 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 Classroom and NiuNiu Community. According to the PRC Administrative Provisions on Internet
Audio-Video Program Services, the provider of audio-video service, such as NiuNiu Classroom or NiuNiu
Community, is required to obtain the Audio and Video Service Permission. See "Item 4. Information on the CompanyB. Business
OverviewRegulationOverview of the Laws and Regulations Relating to Our Business and Operations in ChinaRegulation on Internet Audio-Visual Program Services" in
our 2020 Annual Report, which is incorporated by reference in this prospectus supplement. 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 prospectus supplement. However, if we are required to obtain an
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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 CompanyB. Business OverviewRegulationOverview of the Laws and Regulations Relating to Our Business and Operations in
ChinaRegulation on Internet News Dissemination" in our 2020 Annual Report, which is incorporated by reference in this prospectus supplement. 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 CompanyB. Business
OverviewRegulationsOverview of the Laws and Regulations Relating to Our Business and Operations in ChinaRegulation on Fund Sales Business" in our 2020 Annual
Report, which is incorporated by reference in this prospectus supplement. 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.
PRC
laws and regulations are evolving, and there are uncertainties relating to the regulation of different aspects of the services we provide through our platforms 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.
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:
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engaging in misrepresentation or fraudulent activities when marketing or performing online brokerage and other services to users and clients;
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improperly using or disclosing confidential information of our users and clients or other parties;
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concealing unauthorized or unsuccessful activities; or
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otherwise not complying with applicable laws and regulations or our internal policies or procedures.
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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.
Any future change in the regulatory and legal regime for the securities brokerage and wealth management
industries 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. 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 may continue to incur losses 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 platform 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 platform. 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.
If there is any negative publicity with respect to us, our industry peers or our industries in general, 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 high net worth individuals
or enterprises that are current or potential users and clients. Our reputation and brand are vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to
remediate. Regulatory inquiries or investigations, lawsuits initiated by clients or other third parties, employee misconduct, perceptions of conflicts of interest and rumors, among other things, could
substantially damage our reputation, even if they are baseless or satisfactorily
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addressed.
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.
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 platform 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 platform, 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.
Fraudulent or illegal activities on our platform 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
platform. Nevertheless, we remain subject to the risk of fraudulent or illegal activities both on our platform 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 platform and therefore harm our operating and financial
results. For example, the HK SFC has in the past issued restriction notices to brokers, including us, to prohibit order placing in certain client accounts linked to suspected market misconduct. Any
misbehavior 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
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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 public 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 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, a large number 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 platform and internal systems rely on software and technological infrastructure that is highly technical,
and if they contain undetected errors, our business could be adversely affected.
Our platform and internal systems rely on software that is highly technical and complex. In addition, our platform 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.
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.
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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 2018, 2019 and 2020, we generated HK$123.8 million, HK$187.2 million and HK$208.6 million (US$26.9 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 platform), or a transfer of cash out of their accounts opened through our platform 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 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.
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 March 31, 2021, Mr. Leaf Hua Li, our founder, chairman and chief executive officer, beneficially owned 37.2% of our outstanding
shares and 68.0% of the total voting power of our
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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, 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.
Our business growth may be affected by 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.
In
addition, uncertainties about China 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. 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.
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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 in China, as well as confidentiality procedures and contractual provisions to protect our intellectual property and our
brand. Intellectual property rights and confidentiality protections in China may not be as effective as those in the U.S. or other countries for
many reasons, including lack of procedural rules for discovery and evidence, and low damage awards. Implementation and enforcement of China intellectual property laws have historically been deficient
and ineffective. 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.
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 platform by our employees and users and clients. Although we follow common
content management and review practices to monitor the content uploaded to our platform, 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 platform 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. 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 platform 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.
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We may be held liable for information or content displayed on, retrieved from or linked to our platform,
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 Ministry of Industry and Information Technology 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 such measures 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 platform 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.
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
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several
regulators" and "Item 4. Information on the CompanyB. Business OverviewOngoing Regulatory Actions" in our 2020 Annual Report, which is incorporated by
reference in this prospectus supplement. 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 such defense 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 platform 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 partner, 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.
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
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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 in the PRC and Hong Kong and enforcement of stricter labor laws and regulations in
the PRC may adversely affect our business and results of operations.
The economy in China and Hong Kong has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC
and Hong Kong are expected to continue to increase. In addition, we are required by PRC and Hong Kong laws and regulations to make the required contributions for various statutory employee benefits,
including 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. 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.
Prior to our initial public offering, we have been a private company with limited accounting personnel and other resources with which to address
our internal controls. In the course of auditing our consolidated financial statements as of and for the years ended December 31, 2018 and 2019 included in our 2020 Annual Report, which is
incorporated by reference in this prospectus supplement, we and our independent registered public accounting firm identified a material weakness in our internal controls. A material weakness is a
deficiency, or combination of deficiencies, in internal controls such that there is a reasonable possibility that a material misstatement of our annual or
interim financial statements will not be prevented or detected on a timely basis. The material weakness identified related to our lack of sufficient and competent accounting and financial reporting
personnel with appropriate knowledge of U.S. GAAP to design and implement robust period-end financial reporting policies and procedures for the preparation of consolidated financial statements
and related disclosures in accordance with U.S. GAAP and the financial reporting requirements set forth by the SEC. In the past, we made certain corrections to our interim financial reporting.
We have implemented a number of measures to address the material weakness that had been identified. For details of these remedial measures, see "Item 15. Controls and
ProceduresRemediation of the Material Weakness in Internal Control over Financial Reporting" in our 2020 Annual Report, which is incorporated by reference in this prospectus supplement.
As of December 31, 2020, based on our management's assessment on the performance of the remediation measures, we determined that the material weakness had been remediated. In the future we may
determine that we have additional material weaknesses, or our independent registered public accounting firm may disagree with our management assessment of the effectiveness of our internal controls.
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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 2020 Annual Report beginning with our annual report for the fiscal year ending December 31,
2020. 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, 2020. See "Item 15. Controls and
ProceduresManagement's Annual Report on Internal Control over Financial Reporting" in our 2020 Annual Report, which is incorporated by reference in this prospectus supplement. However, 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.
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 revenues, earnings 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. To date, we have not entered into any hedging transactions in an effort to
reduce our exposure to foreign currency exchange risk. While we may decide to enter into hedging transactions in the future, the availability and 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
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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 in Hong Kong and the PRC. We have expanded our operations into the United States and Singapore and
may expand further into 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:
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currency exchange restrictions or costs and exchange rate fluctuations;
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exposure to local economic or political instability, threatened or actual acts of terrorism and security concerns in general;
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weaker or uncertain enforcement of our contractual and intellectual property rights;
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preferences by local populations for local service providers;
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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;
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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, we and
our U.S. subsidiaries are subject to the US Brokerage Regulations. While we currently do not execute securities trades directly on the U.S. stock exchanges, we aggregate trade instructions from
clients for securities traded on the major stock exchanges in the United States and collaborate with qualified third-party brokerage companies who execute and settle trade orders for our clients. 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 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
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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 PRC, 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 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 HK SFC, the Hong Kong Monetary Authority and the PBOC. 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.
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 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
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rights,
and consequently may materially and adversely affect our business, financial condition, operations and prospects. In addition, we are involved in ongoing inquiries by several 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. 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. 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
may 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 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.
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 the Securities and Futures (Financial Resources) 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 following this offering. 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
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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 platform 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.
We depend on contractual arrangements with our VIE and its shareholders to operate a limited part of our
business in China, which may not be as effective as direct ownership in providing operational control and otherwise have a material adverse effect as to our business.
Although the vast majority of our business is conducted in Hong Kong, we depend on our VIE to conduct a limited part of our operations in China.
In 2018, 2019 and 2020, we generated 0.4%, 0.2% and 0.3% of our total revenues through our VIE in China, respectively, whose
assets accounted for 0.2%, 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
CompanyC. Organizational StructureContractual Arrangements with Our VIE and Its Shareholders" in our 2020 Annual Report, which is incorporated by reference in this prospectus
supplement. These contractual arrangements may not be as effective as direct ownership in providing us with control over our VIE. If our VIE or its shareholders fail to perform their respective
obligations under these contractual arrangements, our recourse to the assets held by our 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 our 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.
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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 our VIE, and our ability to conduct our business and our financial condition and results of operations may be materially and adversely affected. See
"Risks Related to Doing Business in ChinaThere are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations" in our 2020 Annual Report,
which is incorporated by reference in this prospectus supplement. 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, our business, financial condition and results of operations could be materially and adversely affected.
The shareholders of our 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 our VIE to abide by the obligations under such contractual
arrangements. The interests of these shareholders in their individual capacities as the shareholders of our VIE may differ from the interests of our company as a whole, as what is in the best
interests of our 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 our 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 our VIE may encounter, on 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 our 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
our VIE as provided under the power of attorney agreements, directly appoint new directors of our VIE. We rely on the shareholders of our 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 our 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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The audit report included in our 2020 Annual Report, which is incorporated by reference in this prospectus
supplement, is prepared by an auditor who is not inspected by the Public Company Accounting Oversight Board and, as such, our investors are deprived of the benefits of such inspection.
Our independent registered public accounting firm that issues the audit report included in our annual report filed with the SEC, as auditors of
companies that are traded publicly in the United States and a firm registered with the U.S. Public Company Accounting Oversight Board, or the PCAOB, is required by the laws of the United States to
undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and professional standards. Because our auditors are located in the People's Republic of China, a
jurisdiction where the PCAOB is currently unable to conduct inspections without the approval of the Chinese authorities, our auditors are not currently inspected by the PCAOB.
Inspections
of other firms that the PCAOB has conducted outside China have identified deficiencies in those firms' audit procedures and quality control procedures, which may be addressed
as part of the inspection process to improve future audit quality. This lack of the PCAOB inspections in China prevents the PCAOB from fully evaluating the effectiveness of audit 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, 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. As part of our continued efforts to
ensure accuracy and high quality of our financial reporting, our audit committee periodically communicates with our independent auditor to oversee and evaluate the audit procedures and status.
However, we cannot assure you that the measures our audit committee has taken or will take in the future will be effective.
Our ADSs could be delisted and prohibited from trading "over the counter" if the Public Company Accounting
Oversight Board is unable to inspect our auditor who is located in China. The delisting of our ADSs and inability to trade, or the threat thereof, may materially and adversely affect the value of your
investment.
On December 18, 2020, the Holding Foreign Companies Accountable Act, or the HFCA Act, was enacted. The HFCA Act requires the SEC to
prohibit securities of any foreign companies from being listed on U.S. securities exchanges or traded "over-the-counter" if a company retains a foreign accounting firm that cannot be inspected by the
PCAOB for three consecutive years, beginning in 2021. On March 24, 2021, the SEC adopted interim final amendments to implement the HFCA Act. A registrant will not be required to comply with the
amendments until the SEC has identified it as having a non-inspection year. As of the date of this annual report, the SEC is seeking public comment on this identification process. 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. We are not required to comply with the amendments until the SEC has identified us as having a "non-inspection" year
under a process to be subsequently established by the SEC. If we are identified by the SEC as a registrant that will have to
comply with the interim final amendments, we will be subject to additional submission and disclosure requirements. For example, the amendments will require any identified registrant to submit
documentation to the SEC establishing that the registrant is not owned or controlled by a governmental entity in that foreign jurisdiction, and will also require disclosure in a foreign issuer's
annual report regarding the audit arrangements of, and governmental influence on, such a registrant. The SEC is seeking public comment on these submission and disclosure requirements and plans to
separately address implementation of the trading prohibitions in the HFCA Act in the future.
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There
could be additional regulations or legislation that could impact us if our auditor is not subject to PCAOB inspection. For example, on August 6, 2020, the President's
Working Group on Financial Markets issued the Report on Protecting United States Investors from Significant Risks from Chinese Companies to the then
President of the United States, or the PWG Report. The PWG Report contained recommendations to address the lack of PCAOB inspection access. Some of these recommendations were implemented in the HFCA
Act. However, some of the recommendations were more stringent than the HFCA Act. For example, the PWG report recommended that the transition period before a company would be delisted would end on
January 1, 2022.
Whether
the PCAOB will be able to conduct inspections of our auditors in the next three years, or at all, is subject to substantial uncertainty and depends on a number of factors out of
our control. If we are unable to meet the PCAOB inspection requirement 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. If our securities are unable to be listed on another securities exchange by then, such a delisting would substantially impair your
ability to sell or purchase our ADSs when you wish to do so, and the ongoing risk and uncertainty associated with delisting 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, or 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.
Risks Related to this Offering, our Class A Ordinary Shares and 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:
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regulatory developments affecting us or our industry;
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announcements of studies and reports relating to the quality of our credit offerings or those of our competitors;
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changes in the economic performance or market valuations of other financial service providers;
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actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
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changes in financial estimates by securities research analysts;
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conditions in the market for financial services;
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announcements by us or our competitors of new product and service offerings, acquisitions, strategic relationships, joint ventures, capital
raisings or capital commitments;
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additions to or departures of our senior management;
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fluctuations of exchange rates between the Renminbi and the U.S. dollar;
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release or expiry of lock-up or other transfer restrictions on our outstanding shares or the ADSs; and
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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,
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each
of such Class B ordinary shares will be automatically and immediately converted into one Class A ordinary share.
As
of March 31, 2021, 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 owned all of our issued Class B ordinary shares. Immediately after the completion of this offering, these Class B ordinary shares constitute 42.6% of our total
issued and outstanding share capital and 93.7% 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, assuming the underwriters do not exercise their over-allotment option. As a result of the dual-class share structure and the concentration of ownership, holders of Class B ordinary
shares has 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:
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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;
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we have instructed the depositary that we wish a discretionary proxy to be given;
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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
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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.
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 the ADSs to be sold in
this 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 your 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 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.
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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.
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
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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.
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 our 2020 Annual Report, which is
incorporated by reference in this prospectus supplement, 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
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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.
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.
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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:
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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;
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the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under
the Exchange Act;
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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
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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 2020. 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.
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 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.
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As
a result, you do not have the same protection afforded to shareholders of companies that are subject to these corporate governance requirements.
We have not determined a specific use for a portion of the net proceeds from this offering, and we may use
these proceeds in ways with which you may not agree.
We have not determined a specific use for a portion of the net proceeds of this offering, and our management will have considerable discretion
in deciding how to apply these proceeds. You will not have the opportunity to assess whether the proceeds are being used appropriately before you make your investment decision. You must rely on the
judgment of our management regarding the application of the net proceeds of this offering. We cannot assure you that the net proceeds will be used in a manner that will improve our results of
operations or increase the ADS price, nor that these net proceeds will be placed only in investments that generate income or appreciate in value.
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 our 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. Assuming that we are the owner of our VIE (including its subsidiaries) for
United States federal income tax purposes, and based upon our current and expected income and assets, we do not believe that we were a PFIC for the taxable year ended December 31, 2020 and do
not expect to be a PFIC for the current taxable year or the foreseeable future.
While
we do not expect to become 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 and the cash raised in this offering. 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 our 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.
If
we are a PFIC in any taxable year, a U.S. Holder (as defined in "TaxationUnited 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
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all
succeeding years during which such U.S. Holder holds the ADSs or our ordinary shares. For more information see "TaxationUnited States Federal Income Tax
ConsiderationsPassive Foreign Investment Company Rules".
If a United States person is treated as owning at least 10% of the value or voting power of our ordinary
shares, such holder may be subject to adverse U.S. federal income tax consequences.
Depending upon the aggregate value and voting power of our ordinary shares that United States persons are treated as owning (directly,
indirectly or constructively), we could be treated as a controlled foreign corporation. If a United States person is treated as owning (directly, indirectly, or constructively) at least 10% of the
value or voting power of our ordinary shares, such person may be treated as a "United States shareholder" with respect to each "controlled foreign corporation" in our group (if any). Because our group
includes a U.S. subsidiary, certain of our non-U.S. subsidiaries will be treated as controlled foreign corporations (regardless of whether or not we are treated as a controlled foreign corporation). A
United States shareholder of a controlled foreign corporation may be required to report annually and include in its U.S. taxable income its pro rata share of "Subpart F income," "global
intangible low-taxed income," and investments of earnings in "United States property" by controlled foreign corporations, regardless of whether we make any distributions of profits or income of a
controlled foreign corporation to such United States shareholder. Failure to comply with these reporting obligations may subject a United States shareholder to significant monetary penalties and may
prevent the statute of limitations with respect to such shareholder's U.S. federal income tax return for the year for which reporting was due from starting. An individual that is a United States
shareholder with respect to a controlled foreign corporation generally would not be allowed certain tax deductions or foreign tax credits that would be allowed to a United States shareholder that is a
U.S. corporation. We cannot provide any assurances that we will assist investors in determining whether we are or any of our non-U.S. subsidiaries is treated as a controlled foreign corporation or
whether any investor is treated as a United States shareholder with respect to any such
controlled foreign corporation or furnish to any United States shareholders information that may be necessary to comply with the aforementioned reporting and tax paying obligations. The IRS has
provided limited guidance on situations in which investors may rely on publicly available information to comply with their reporting and taxpaying obligations with respect to foreign-controlled
controlled foreign corporations. A United States investor should consult its advisors regarding the potential application of these rules to an investment in our ordinary shares.
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DESCRIPTION OF SHARE CAPITAL
We are a Cayman Islands exempted company with limited liability and our corporate affairs are governed by our memorandum and articles of
association, as amended and restated from time to time, the Companies Law (as amended) of the Cayman Islands, which is referred to as the Companies Law below, and the common law of the Cayman Islands.
As
of the date of this prospectus, our authorized share capital is US$500,000 divided into 50,000,000,000 shares, comprising of (i) 48,700,000,000 Class A ordinary shares
of a par value of US$0.00001 each, (ii) 800,000,000 Class B ordinary shares of a par value of US$0.00001 each, and (iii) 500,000,000 shares of a par value of US$0.00001 each of
such class or classes (however designated) as the board of directors may determine in accordance with our fourth amended and restated memorandum and articles of association (the "Memorandum and
Articles of Association").
The
following are summaries of material provisions of our Memorandum and Articles of Association and the Companies Law 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.
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 Law. 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
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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 Law 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 Law 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 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 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.
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 the 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 the board ("Tencent Director") by sending a joint notice to the registered office of the Company. 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 term described above. The term of the Tencent Director
shall automatically end once the Tencent Investors together hold less than 91,671,323 shares of the Company (as may be adjusted by share splits, recapitalization, reorganization, consolidation or
other similar transaction).
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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:
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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;
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the instrument of transfer is in respect of only one class of ordinary shares;
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the instrument of transfer is properly stamped, if required;
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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
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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.
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 Law, 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
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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 Law 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 class of
shares (unless otherwise provided by the terms of issue of the shares of that class), whether or not our company is being wound-up, may be 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 resolution passed by a majority of two-thirds of the votes cast at a separate meeting of the issued
shares of that class. The rights conferred upon the holders of the shares of any class issued shall not, unless otherwise expressly provided by the terms of issue of the shares of that class, be
deemed to be varied by the creation or issue of further shares ranking pari passu with such existing class of shares.
Issuance of Additional Shares. Our Memorandum and Articles 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
Memorandum and Articles 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:
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the designation of the series;
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the number of shares of the series;
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the dividend rights, dividend rates, conversion rights, voting rights; and
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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. However, we will provide our shareholders with annual audited financial statements. See "Item 10. Additional InformationH.
Document on Display" in our annual report on Form 20-F for the year ended
December 31, 2019, which is incorporated in this prospectus by reference.
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:
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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
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limit the ability of shareholders to requisition and convene general meetings of 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.
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Exempted
Company. We are an exempted company with limited liability under the Companies Law. The Companies Law 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:
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does not have to file an annual return of its shareholders with the Registrar of Companies;
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is not required to open its register of members for inspection;
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does not have to hold an annual general meeting;
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may issue shares with no par value;
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may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in the first
instance);
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may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
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may register as a limited duration company; and
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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 Law or any other law of the Cayman Islands.
Differences in Corporate Law
The Companies Law 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 Law and the current Companies Act of England. In addition, the Companies Law differs from laws applicable to U.S.
corporations and their shareholders. Set forth below is a summary of certain significant differences between the provisions of the Companies Law applicable to us and the laws applicable to companies
incorporated in the United States and their shareholders.
Mergers and Similar Arrangements. The Companies Law permits mergers and consolidations between Cayman Islands companies and between
Cayman Islands
companies and non-Cayman Islands companies. For these purposes, (i) "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 (ii) a "consolidation" means the combination of two or more constituent companies into a consolidated 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.
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The
written plan of merger or consolidation must be filed with the Registrar of Companies of the Cayman Islands 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. Court approval is not required for a merger or consolidation which is effected
in compliance with these statutory procedures.
A
merger between a Cayman parent company and its Cayman subsidiary or subsidiaries does not require authorization by a resolution of shareholders of that Cayman subsidiary if a copy of
the plan of merger is given to every member of that Cayman subsidiary to be merged unless that member agrees otherwise. For this purpose a company is a "parent" of a subsidiary if it holds issued
shares that together represent at least ninety percent (90%) of the votes at a general meeting of the subsidiary.
The
consent of each holder of a fixed or floating security interest over a constituent company is required unless this requirement is waived by a court in the Cayman Islands.
Save
in certain limited circumstances, a shareholder of a Cayman constituent company who dissents from the merger or consolidation is entitled to payment of the fair value of his shares
(which, if not agreed between the parties, will be determined by the Cayman Islands court) upon dissenting to the merger or consolidation, provided that the dissenting shareholder complies strictly
with the procedures set out in the Companies Law. The exercise of dissenter rights will preclude the exercise by the dissenting shareholder of any other rights to which he or she might otherwise be
entitled by virtue of holding shares, save for the right to seek relief on the grounds that the merger or consolidation is void or unlawful.
Separate
from the statutory provisions relating to mergers and consolidations, the Companies Law 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 and creditors 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 has the
right to express to
the court the view that the transaction ought not to be approved, the court can be expected to approve the arrangement if it determines that:
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the statutory provisions as to the required majority vote have been met;
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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;
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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
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the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Law.
The
Companies Law also contains a statutory power of compulsory acquisition which may facilitate the "squeeze out" of dissentient minority shareholder upon a tender offer. When a tender
offer is made and accepted by holders of 90.0% 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
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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 to sue for a wrong done to us as a company, 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
follow and apply the common law principles (namely the rule in Foss v. Harbottle and the exceptions thereto) so that a non-controlling shareholder may be permitted to commence a class action against
or derivative actions in the name of the company to challenge actions where:
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a company acts or proposes to act illegally or ultra vires;
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the act complained of, although not ultra vires, could only be effected duly if authorized by more than a simple majority vote that has not
been obtained; and
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those who control the company are perpetrating a "fraud on the minority."
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.
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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.
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 acts 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, the 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 it is considered that he owes the
following duties to the companya duty to act bona fide in the best interests of the company, a duty not to make a 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.
Shareholder Action by Written Consent. Under the Delaware General Corporation Law, a corporation may eliminate the right of
shareholders to act by
written consent by amendment to its certificate of incorporation. Cayman Islands law and our post-offering memorandum and articles of association provide that our shareholders may approve corporate
matters by way of a unanimous written resolution signed by or on behalf of each shareholder who would have been entitled to vote on such matter at a general meeting without a meeting being held.
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. 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.
The
Companies 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
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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. There are no
prohibitions in relation to cumulative voting under the laws of the Cayman Islands, 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 the 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 the board ("Tencent Director") by sending a joint notice to the Company's registered office of the Company. 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 term described above. The term of the Tencent
Director shall automatically end once the Tencent Investors together hold less than 91,671,323 shares of the 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.
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 share 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
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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, for a proper 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 of directors.
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 resolution passed at a separate meeting of the holders of the shares of that class by the holders of two-thirds of the issued shares of that
class.
Amendment of Governing Documents. Under the Delaware General Corporation Law, a corporation's governing documents may be amended with
the approval of
a majority of the outstanding shares entitled to vote, unless the certificate of incorporation provides otherwise. Under the Companies Law and our Memorandum and Articles of Association, our
Memorandum and Articles of Association may only be amended by special resolution of our shareholders.
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.
History of Securities Issuances
The following is a summary of our securities issuances in the past three years:
On March 12, 2019, we completed our initial public offering of 7,500,000 American depositary shares, each representing eight
Class A ordinary share, at a public offering price of US$12.00 per ADS.
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Concurrently
with our initial public offering, we issued 46,666,666 Class A ordinary shares to General Atlantic Singapore FT Pte. Ltd., a non-U.S. and non-affiliated entity (the
"Concurrent Private Placement") at the public offering price.
We have granted options to purchase our ordinary shares to certain of our directors, executive officers and employees. See "Item 6.
Directors, Senior Management and EmployeesB. Compensation of Directors and Executive Officers" in
our annual report on Form 20-F for the year ended December 31,
2019, which is incorporated in this prospectus by reference.
We entered into a second amended and restated shareholders agreement on May 22, 2017 with our then-existing shareholders. The
shareholders agreement terminated upon the consummation of our initial public offering other than provisions with respect to registration rights granted to our then-existing shareholders. We have also
entered into a subscription agreement with General Atlantic Singapore FT Pte. Ltd. in connection with the Concurrent Private Placement, pursuant to which we have granted the investor
registration rights on terms and conditions equivalent to and on a pari passu basis as the shareholders entitled to registration rights under the shareholders agreement. A description of the
registration rights granted under the shareholders agreement and the subscription agreement is set forth below.
Registration other than on Form F-3 or Form S-3. At any time or from time to time after the date that is six (6) months
after
the closing of our initial public filing, 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 (as defined in the shareholders agreement). 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.
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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.
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).
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 our 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.
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