As filed with the U.S. Securities and Exchange Commission on September 5, 2023
Registration No. 333-273053
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________
Amendment No. 1
to
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
__________________________________________
Garden Stage Limited
(Exact name of registrant as specified in its charter)
__________________________________________
Cayman Islands | 6199 | Not Applicable | ||
(State or other jurisdiction of | (Primary Standard Industrial | (I.R.S. Employer |
Room 201, 2/F, China Insurance Group Building
141 Des Voeux Road Central
Central, Hong Kong
Tel: +852 2688 6333
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
__________________________________________
c/o Cogency Global Inc.
122 East 42nd Street, 18th Floor
New York, NY 10168
+1(800) 221-0102
(Name, address, including zip code, and telephone number, including area code, of agent for service)
__________________________________________
Copies to:
William S. Rosenstadt, Esq. | Mark E. Crone, Esq. |
__________________________________________
Approximate date of commencement of proposed sale to public: As soon as practicable after the effective date of this Registration Statement.
If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
____________
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the U.S. Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
EXPLANATORY NOTE
This Registration Statement contains two prospectuses, as set forth below.
• Public Offering Prospectus. A prospectus to be used for the public offering of 2,000,000 shares of Ordinary Shares of the Registrant (the “Public Offering Prospectus”) through the underwriter named on the cover page of the Public Offering Prospectus.
• Resale Prospectus. A prospectus to be used for the resale by the Selling Shareholders of up to 1,750,000 shares of Ordinary Shares of the Registrant (the “Resale Prospectus”).
The Resale Prospectus is substantively identical to the Public Offering Prospectus, except for the following principal points:
• they contain different outside and inside front covers and back covers;
• they contain different Offering sections in the Prospectus Summary section beginning on page 1;
• they contain different Use of Proceeds sections on page Alt-2;
• a Selling Shareholder section is included in the Resale Prospectus;
• the Underwriting section from the Public Offering Prospectus on page 166 is deleted and replaced with a a Selling Shareholders Plan of Distribution section on Alt-5 is inserted in its place; and
• the Legal Matters section in the Resale Prospectus on page Alt-7 deletes the reference to counsel for the underwriter.
The Registrant has included in this Registration Statement a set of alternate pages after the back-cover page of the Public Offering Prospectus (the “Alternate Pages”) to reflect the foregoing differences in the Resale Prospectus as compared to the Public Offering Prospectus. The Public Offering Prospectus will exclude the Alternate Pages and will be used for the public offering by the Registrant and the Selling Shareholder. The Resale Prospectus will be substantively identical to the Public Offering Prospectus except for the addition or substitution of the Alternate Pages and will be used for the resale offering by the Selling Shareholder.
The information in this prospectus is not complete and may be changed. We and the Selling Shareholder will not sell these securities until the registration statement filed with the U.S. Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
PRELIMINARY PROSPECTUS | SUBJECT TO COMPLETION, DATED SEPTEMBER 5, 2023 |
GARDEN STAGE LIMITED
2,000,000 Ordinary Shares
This is an initial public offering (the “Offering”) of 2,000,000 ordinary shares, par value US$0.0001 per share (the “Ordinary Shares”), of Garden Stage Limited (the “Company” or “Garden Stage”), an exempted Cayman Islands company. We are offering 2,000,000 Ordinary Shares, representing 13.56% of the Ordinary Shares following completion of this Offering. State Wisdom Holdings Limited, Bliss Tone Limited, and Oriental Moon Tree Limited, three existing shareholders of the Company (the “Selling Shareholders”), are also offering an additional 1,750,000 Ordinary Shares of Garden Stage pursuant to the Resale Prospectus, representing 11.86% of the Ordinary Shares following the completion of this Offering. Following the Offering, 25.42% of the Ordinary Shares will be held by public shareholders, assuming the underwriters do not exercise the over-allotment option. We will not receive any of the proceeds from the sale of our Ordinary Shares by the Selling Shareholders.
Prior to this Offering, there has been no public market for our Ordinary Shares. The initial public offering price (the “Offering Price”) is expected to be between $4 and $5 per Ordinary Share. We have applied to list our Ordinary Shares on the NASDAQ Capital Market under the symbol “WIN.” There is no assurance that such application will be approved, and if our application is not approved by the NASDAQ Capital Market, this Offering will not be completed.
We historically conducted our business through I Win Holdings Limited (“I Win Holdings HK”), a company incorporated under the laws of Hong Kong, through its subsidiaries, namely, I Win Securities Limited (“I Win Securities”) and I Win Asset Management Limited (“I Win Asset Management”), both incorporated in Hong Kong (I Win Securities and I Win Asset Management are collectively referred as the “Operating Subsidiaries”). The Operating Subsidiaries are corporations licensed by the Securities and Future Commission of Hong Kong (the “HKSFC”). Since our Operating Subsidiaries are HKSFC-licensed corporations, pursuant to the rules and regulation governing the HKSFC-licensed corporations, the prior approval from the HKSFC is required in relation to the reorganization of the any HKSFC-licensed corporations and for any of the companies or individuals to become the substantial shareholder of the HKSFC-licensed corporations. On January 26, 2023, the approval from the HKSFC in relation to the Reorganization and the change of substantial shareholders was obtained on January 26, 2023. In April 2023, we have completed a series of transactions effectuating the Reorganization, as described in “Corporate History and Structure — The Reorganization.” Pursuant to the Reorganization, I Win Holdings HK has become the wholly-owned subsidiary of Garden Stage through 17 Uno Limited (“17 Uno BVI”, an intermediate holding company incorporated under the laws of British Virgin Islands, wholly-owned by Garden Stage). The Operating Subsidiaries have become the indirect wholly-owned subsidiaries of Garden Stage through 17 Uno BVI and I Win Holding HK.
Investing in our Ordinary Shares involves a high degree of risk, including the risk of losing your entire investment. See “Risk Factors” beginning on page 26 to read about factors you should consider before buying our Ordinary Shares.
Garden Stage is an exempted company with limited liability incorporated under the laws of the Cayman Islands. Under the rules of the U.S. Securities and Exchange Commission, or the SEC, we currently qualify for treatment as a “foreign private issuer.” As a foreign private issuer, we will not be required to file periodic reports and financial statements with the Securities and Exchange Commission, or the SEC, as frequently or as promptly as domestic registrants whose securities are registered under the Securities Exchange Act of 1934, as amended, or the Exchange Act.
We are an “Emerging Growth Company” under applicable U.S. federal securities laws and are, therefore, eligible for reduced public company reporting requirements. Please read “Implications of Being an Emerging Growth Company” beginning on page 20 of this prospectus for more information.
Any reference to “China” or the “PRC” is to the People’s Republic of China, including Hong Kong and Macau, except that the only time that “China” or the “PRC” does not include Hong Kong or Macau is when we are referencing specific laws and regulations adopted by the PRC. The references to “Mainland China” are to the mainland of the People’s Republic of China; excluding Taiwan and the special administrative regions of Hong Kong and Macau. “PRC government” or “Chinse government” are to the government of Mainland China for the purposes of this prospectus only.
Garden Stage Limited is not a PRC or Hong Kong operating company, but a holding company incorporated in the Cayman Islands. As a holding company with no material operations, Garden Stage Limited conducts all of its operations in Hong Kong through the Operating Subsidiaries, I Win Securities and I Win Asset Management,
both incorporated in Hong Kong. The Ordinary Shares offered in this offering are shares of Garden Stage Limited, the Cayman Islands holding company, instead of shares of the Operating Subsidiaries. Investors in this Offering will not directly hold equity interests in the Operating Subsidiaries. This structure involves unique risks to the investors, and the PRC regulatory authorities could disallow this structure, which would likely result in a material change in Garden Stage’s operations and/or a material change in the value of the securities Garden Stage is registering for sale, including that such event could cause the value of such securities to significantly decline or become worthless.
All of our operations are conducted by the Operating Subsidiaries in Hong Kong. We do not have any operation or maintain office or personnel in Mainland China, nor currently do we have, nor intend to have, any contractual arrangements to establish a variable interest entity (“VIE”) structure with any entity in Mainland China. We are subject to certain legal and operational risks associated with our Operating Subsidiaries being based in Hong Kong, having all of its operations to date in Hong Kong and having clients who are Mainland China individuals or companies that have shareholders or directors that are Mainland China individuals. We are also subject to the risks of uncertainty about any future actions the PRC government or authorities in Hong Kong may take in this regard. Should the PRC government choose to exercise significant oversight and discretion over the conduct of our business, or in the event that we or the Operating Subsidiaries were to become subject to PRC laws and regulations, we could incur material costs to ensure compliance, and we or the Operating Subsidiaries might be subject to fines, experience devaluation of securities or delisting, no longer be permitted to conduct offerings to foreign investors, and/or no longer be permitted to continue business operations as presently conducted.
The legal and operational risks associated in operating in the PRC also apply to our Operating Subsidiaries’ operations in Hong Kong, and we face the risks and uncertainties associated with the complex and evolving PRC laws and regulations and as to whether and how the recent PRC government statements and regulatory developments, such as those relating to data and cyberspace security, and anti-monopoly concerns, would be applicable to the Operating Subsidiaries and us, given the substantial operations of the Operating Subsidiaries in Hong Kong and the possibilities that Chinese government may exercise significant oversight over the conduct of business in Hong Kong. In the event that the Operating Subsidiaries or Garden Stage are to become subject to laws and regulations of the PRC, these risks could result in material costs to ensure compliance, fines, material changes in our operations and/or the value of the securities we are registering for sale, and/or could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. See “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — All of our operations are in Hong Kong. However, due to the long arm application of the current PRC laws and regulations, the PRC government may exercise significant direct oversight and discretion over the conduct of our business and may intervene or influence our operations, which could result in a material change in our operations and/or the value of our Ordinary Shares. Our Operating Subsidiaries in Hong Kong may be subject to laws and regulations of the PRC, which may impair our ability to operate profitably and result in a material negative impact on our operations and/or the value of our Ordinary Shares. Furthermore, the changes in the policies, regulations, rules, and the enforcement of laws of the PRC may also occur quickly with little advance notice and our assertions and beliefs of the risk imposed by the PRC legal and regulatory system cannot be certain” on page 26; and “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — If the PRC government chooses to extend the oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers to Hong Kong-based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless” on page 30.
We are aware that recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. See “Prospectus Summary — Recent Regulatory Development in the PRC” beginning on page 17. On August 20, 2021, the 30th meeting of the Standing Committee of the 13th National People’s Congress voted and passed the “Personal Information Protection Law of the People’s Republic of China”, or “PRC Personal Information Protection Law”, which became effective on November 1, 2021. The PRC Personal Information Protection Law applies to the processing of personal information of natural persons within the territory of Mainland China that is carried out outside of Mainland China where
(1) such processing is for the purpose of providing products or services for natural persons within Mainland China, (2) such processing is to analyze or evaluate the behavior of natural persons within Mainland China, or (3) there are any other circumstances stipulated by related laws and administrative regulations. On December 24, 2021, the China Securities Regulatory Commission (“CSRC”), together with other relevant PRC government authorities issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), and the Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (“Draft Overseas Listing Regulations”). The Draft Overseas Listing Regulations require that a Mainland China domestic enterprise seeking to issue and list its shares overseas (“Overseas Issuance and Listing”) shall complete the filing procedures of and submit the relevant information to the CSRC. The Overseas Issuance and Listing include direct and indirect issuance and listing. Where an enterprise whose principal business activities are conducted in Mainland China seeks to issue and list its shares in the name of an overseas enterprise (“Overseas Issuer”) on the basis of the equity, assets, income or other similar rights and interests of the relevant Mainland China domestic enterprise, such activities shall be deemed an indirect overseas issuance and listing (“Indirect Overseas Issuance and Listing”) under the Draft Overseas Listing Regulations. On December 28, 2021, the Cyberspace Administration of China (the “CAC”) jointly with the relevant authorities formally published the Measures for Cybersecurity Review (2021) which took effect on February 15, 2022 and replaced the former Measures for Cybersecurity Review (2020) issued on July 10, 2021. The Measures for Cybersecurity Review (2021) provide that operators of critical information infrastructure purchasing network products and services, and online platform operators carrying out data processing activities that affect or may affect national security (together with the operators of critical information infrastructure, the “Operators”), shall conduct a cybersecurity review and that any online platform operator who controls more than one million users’ personal information must go through a cybersecurity review by the cybersecurity review office if it seeks to be listed in a foreign country. On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Administrative Measures, and five supporting guidelines, which came into effect on March 31, 2023. The Trial Administrative Measures further stipulate the rules and requirements for overseas offering and listing conducted by PRC domestic companies. The Overseas Listing Regulations require that a PRC domestic enterprise seeking to issue and list its shares overseas shall complete the filing procedures of and submit the relevant information to CSRC, failing which we may be fined between RMB 1 million and RMB 10 million.
The Operating Subsidiaries may collect and store certain data (including certain personal information) from our customers, some of whom may be individuals in Mainland China, in connection with our business and operations and for “Know Your Customers” purposes (to combat money laundering). As advised by Guangdong Wesley Law Firm, our counsel with respect to PRC legal matters, the Measures for Cybersecurity Review (2021), the PRC Personal Information Protection Law and the Trial Administrative Measures will not have an impact on our business, operations or this offering, nor do we or our Hong Kong subsidiaries are covered by permission requirements from the CAC that is required to approve our subsidiary’s operations, as the Hong Kong subsidiaries will not be deemed to be an “Operator” or a “data processor” that are required to file for cybersecurity review before listing in the United States, because (i) the Operating Subsidiaries were incorporated in Hong Kong and operate in Hong Kong without any subsidiary or VIE structure in Mainland China and each of the Measures for Cybersecurity Review (2021), the PRC Personal Information Protection Law and the Trial Administrative Measures do not provide whether it shall be applied to a company based in Hong Kong; (ii) as of date of this prospectus, our Operating Subsidiaries have in aggregate collected and stored personal information of approximately 887 Mainland China individuals (approximately 48.79% of our total customers), far less than one million users as specified by Measures for Cybersecurity Review to be subjected to Cybersecurity Review; (iii) all of the data the Operating Subsidiaries have collected is stored in servers located in Hong Kong; and (iv) as of the date of this prospectus, neither of the Operating Subsidiaries has been informed by any PRC governmental authority of any requirement that it files for a cybersecurity review or a CSRC review. Moreover, pursuant to the Basic Law of the Hong Kong Special Administrative Region, or the Basic Law, PRC laws and regulations shall not be applied in Hong Kong except for those listed in Annex III of the Basic Law (which is confined to laws relating to national defense, foreign affairs and other matters that are not within the scope of autonomy). Based on the PRC laws and regulations effective as of the date of this prospectus and subject to interpretations of these laws and regulations that may be adopted by the PRC authorities, as advised and confirmed by Guangdong Wesley Law Firm, neither we, nor our Operating Subsidiaries in Hong Kong are currently required to obtain any permission or approval from the PRC government authorities, including
the CSRC and CAC, to operate, list on the U.S. exchanges, or offer the securities being registered to foreign investors. Therefore, no application to obtain permission or approval from the PRC authorities is required and no permissions or approvals have been denied as of the date of this prospectus.
However, as further advised by Guangdong Wesley Law Firm, given the uncertainties arising from the legal system in the PRC and Hong Kong, including uncertainties regarding the interpretation and enforcement of the PRC laws and the significant authority of the PRC government to intervene or influence the offshore holding company headquartered in Hong Kong, there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and other regulations. However, since the Trial Measures was newly promulgated, its interpretation, application and enforcement remain unclear and there also remains significant uncertainty as to the enactment, interpretation and implementation of other regulatory requirements related to overseas securities offerings and other capital markets activities. If Trial Administrative Measures become applicable to us or our Operating Subsidiaries in Hong Kong, if any of our Operating Subsidiaries is deemed to be an “Operator”, or if the Measures for Cybersecurity Review (2021) or the PRC Personal Information Protection Law become applicable to the Operating Subsidiaries in Hong Kong, the business operation of the Operating Subsidiaries and the listing of our Ordinary Shares in the United States could be subject to the CAC’s cybersecurity review or the CSRC Overseas Issuance and Listing review in the future. While, we do not believe we are covered by the permission requirements from CSRC or CAC, investors of our company and our business may face potential uncertainty from actions taken by the PRC government affecting our business. If the applicable laws, regulations, or interpretations change and the Operating Subsidiaries become subject to the CAC or CSRC review, we cannot assure you that the Operating Subsidiaries will be able to comply with the regulatory requirements in all respects and our current practice of collecting and processing personal information may be ordered to be rectified or terminated by regulatory authorities. If we were required to obtain such permissions or approvals in the future in connection with the listing or continued listing of our securities on a stock exchange outside of the PRC, it is uncertain how long it will take for us to obtain such approval, and, even if we obtain such approval, the approval could be rescinded. Any failure to obtain or a delay in obtaining the necessary permissions from the PRC authorities to conduct offerings or list outside of the PRC may subject us to sanctions imposed by the PRC regulatory authorities, which could include fines and penalties, proceedings against us, and other forms of sanctions, and our ability to conduct our business, invest into the Mainland China as foreign investments or accept foreign investments, ability to offer or continue to offer Ordinary Shares to investors or list on the U.S. or other overseas exchange may be restricted, and the value of our Ordinary Shares may significantly decline or be worthless, our business, reputation, financial condition, and results of operations may be materially and adversely affected. See “Risk Factors — Risks Relating to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — If the PRC government chooses to extend the oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers to Hong Kong-based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless.” on page 30.
Our Ordinary Shares may be prohibited from trading on a national exchange or “over-the-counter” markets under the Holding Foreign Companies Accountable Act (the “HFCAA”) if the Public Company Accounting Oversight Board (“PCAOB”) determines that it is unable to inspect or fully investigate our auditor and as a result the exchange where our securities are traded may delist our securities. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which was signed into law on December 29, 2022, amending the HFCAA and requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchange if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. Pursuant to the HFCAA, the PCAOB issued a Determination Report on December 16, 2021, which found that the PCAOB was unable to inspect or investigate completely certain named registered public accounting firms headquartered in Mainland China and Hong Kong.
Our auditor prior to December 15, 2022, Friedman LLP (“Friedman”), had been inspected by the PCAOB on a regular basis in the audit period, and our new auditor, Marcum Asia CPAs LLP (“Marcum Asia”), is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Neither Friedman nor Marcum Asia is subject to the Determination Report announced by the PCAOB on December 16, 2021 relating to the PCAOB’s inability to inspect or investigate completely registered public accounting firms headquartered in Mainland China or
Hong Kong because of a position taken by one or more authorities in the Mainland China or Hong Kong. On August 26, 2022, the SEC issued a statement announcing that the PCAOB signed a Statement of Protocol (“SOP”) with the CSRC and the Ministry of Finance of the People’s Republic of China governing inspections and investigations of audit firms based in China and Hong Kong, jointly agreeing on the need for a framework. On December 15, 2022, the PCAOB announced that it has secured complete access to inspect and investigate registered public accounting firms headquartered in Mainland China and Hong Kong and voted to vacate the previous 2021 Determination Report to the contrary.
However, whether the PCAOB will continue to be able to satisfactorily conduct inspections of PCAOB-registered public accounting firms headquartered in Mainland China and Hong Kong is subject to uncertainty and depends on a number of factors out of our, and our auditor’s, control. The PCAOB is continuing to demand complete access in mainland China and Hong Kong moving forward and is already making plans to resume regular inspections in early 2023 and beyond, as well as to continue pursuing ongoing investigations and initiate new investigations as needed. The PCAOB has indicated that it will act immediately to consider the need to issue new determinations with the HFCAA if needed. If the PCAOB in the future again determines that it is unable to inspect and investigate completely auditors in Mainland China and Hong Kong, then the companies audited by those auditors would be subject to a trading prohibition on U.S. markets pursuant to the HFCAA and/or AHFCAA. These recent developments could also add uncertainties to this Offering and we cannot assure you that the NASDAQ Capital Market (“NASDAQ”) or regulatory authorities would not apply additional or more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. See “Risk Factors — Risks Related to Our Ordinary Shares and this Offering — Our Ordinary Shares may be prohibited from being traded on a national exchange under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which was signed into law on December 29, 2022, amending the HFCAA to require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.” on page 35.
For Garden Stage to transfer cash to its subsidiaries, it is permitted under the laws of the Cayman Islands to provide funding to its subsidiaries incorporated in the British Virgin Islands and Hong Kong through loans or capital contributions without restrictions on the amount of the funds. Garden Stage’s subsidiary formed under the laws of the British Virgin Islands are permitted under the laws of the British Virgin Islands to provide funding to their respective subsidiaries through loans or capital contributions without restrictions on the amount of the funds. As a holding company, Garden Stage may rely on dividends and other distributions on equity paid by its subsidiaries for its cash and financing requirements. According to the BVI Business Companies Act 2004 (as amended), a British Virgin Islands company may make dividends distribution to the extent that immediately after the distribution, such company’s assets do not exceed its liabilities and that such company is able to pay its debts as they fall due. According to the Companies Ordinance of Hong Kong, a Hong Kong company may only make a distribution out of profits available for distribution. If any of Garden Stage’s subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to Garden Stage. In the fiscal year ended March 31, 2023 (“FY 2023”), the fiscal year ended March 31, 2022 (“FY 2022”) and up to the date of this prospectus, no transfer of cash or other types of assets has been made between our Cayman Islands holding company and subsidiaries. Garden Stage, our Cayman Islands holding company has not declared or made any dividends or other distributions to its shareholders, including U.S. investors, in the past, nor has any dividends or distributions been made by subsidiaries to our Cayman Islands holding company. No dividends and distributions were made by the subsidiaries of Garden Stage for FY 2023 and FY2022. Furthermore, Garden Stage and its subsidiaries do not have any plans to distribute earnings in the foreseeable future. For a more detailed discussion of how cash is transferred among Garden Stage and its subsidiaries, see “Prospectus Summary — Transfers of Cash to and from Our Subsidiaries” beginning on page 10, “Dividend Policy” on page 63 and the audited consolidated financial statements and the accompanying footnotes beginning on F-1 of this prospectus.
Following this Offering, Oriental Moon Tree Limited, our largest shareholder, will continue to own more than a majority of the voting power of our outstanding Ordinary Shares. As a result, Oriental Moon Tree Limited can control the outcome of matters submitted to the shareholders for approval. Additionally, we may be deemed a “controlled company” within the meaning of the NASDAQ listing rules and follow certain exemptions from certain corporate governance
requirements that could adversely affect our public shareholders. For a more detailed discussion of the risk of the Company being a controlled company, see “Risk Factors — Risks Related to Our Corporate Structure — Our corporate actions will be substantially controlled by our Controlling Shareholder, Oriental Moon Tree Limited, which will have 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 Ordinary Shares and materially reduce the value of your investment. Additionally, we may be deemed to be a “controlled company and may follow certain exemptions from certain corporate governance requirements that could adversely affect our public shareholders” on page 32 and “Prospectus Summary — Implication of Being a Controlled Company” on page 21 of this prospectus.
Per Share(1) | Total(4) | |||
Offering price(1) | US$ 4.00 | US$ 8,000,000 | ||
Underwriting discounts(2) | US$ 0.29 | US$ 580,000 | ||
Proceeds to the company before expenses(3) | US$ 3.71 | US$ 7,420,000 |
____________
(1) Determined based on the proposed minimum offering price per Ordinary Share.
(2) We have agreed to pay the underwriters a discount equal to 7.25% of the gross proceeds of the offering. For a description of the other compensation to be received by the underwriters, see “Underwriting” beginning on page 166.
(3) Excludes fees and expenses payable to the underwriters.
(4) Assumes that the underwriters do not exercise any portion of their over-allotment option.
Neither the U.S. Securities and Exchange Commission nor any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
This offering is being conducted on a firm commitment basis. The underwriters are obligated to take and pay for all of the shares offered by the Company if any such shares are taken. We have granted the underwriters an option, exercisable one or more times in whole or in part, to purchase up to 15% additional Ordinary Shares from the Company at the initial public offering price, less underwriting discounts, within 45 days from the closing of this offering to cover over-allotments, if any. If the underwriters exercise the option in full, assuming the public offering price per share is US$ 4.00 (the proposed minimum offering price), the total underwriting discounts payable will be US$ 667,000, and the total proceeds to the Company, before expenses, will be US$ 8,533,000.
We expect our total cash expenses for this offering to be approximately US$ 1,103,368, including expenses payable to the underwriters for their reasonable out-of-pocket expenses and non-accountable expense allowance, exclusive of the above discounts.
If we complete this offering, net proceeds will be delivered to us on the closing date.
The underwriters expect to deliver the Ordinary Shares against payment as set forth under “Underwriting” on or about , 2023.
Revere Securities, LLC
The date of this prospectus is , 2023
Page | ||
1 | ||
26 | ||
61 | ||
62 | ||
63 | ||
64 | ||
65 | ||
67 | ||
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND | 71 | |
89 | ||
97 | ||
118 | ||
132 | ||
140 | ||
143 | ||
145 | ||
157 | ||
159 | ||
164 | ||
166 | ||
172 | ||
173 | ||
173 | ||
173 | ||
174 | ||
F-1 |
You should rely only on the information contained in this prospectus. We and the Selling Shareholders have not, and the underwriters have not, authorized anyone to provide you with different information, and we and the underwriters take no responsibility for any other information others may give you. If anyone provides you with different or inconsistent information, you should not rely on it. We and the Selling Shareholders are not, and the underwriters are not, making an offer to sell our Ordinary Shares in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is accurate only as of the date on the front of this prospectus, regardless of the time of delivery of this prospectus or any sale of the securities. Our business, financial condition, results of operations and prospects may have changed since that date.
For investors outside of the United States of America (the “United States” or the “U.S.”): Neither the underwriters nor we have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction other than the United States, where action for that purpose is required. Persons outside of the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to the offering of our ordinary shares and the distribution of this prospectus outside of the United States.
Through and including ________, 2023 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.
i
This summary highlights information contained in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all of the information you should consider in making your investment decision. You should read the entire prospectus carefully before making an investment in our Ordinary Shares. You should carefully consider, among other things, our consolidated financial statements and the related notes and the sections entitled “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.
Prospectus Conventions
Except where the context otherwise requires and for purposes of this prospectus only, references to:
• “17 Uno BVI” refers to 17 Uno Limited, a company incorporated under the laws of British Virgin Islands;
• “AE” refers to an account executive, being licensed representative accredited to I Win Securities to carry out regulated activities, who is self-employed and only entitled to share the brokerage income from the clients referred by him/her;
• “AUM” refers to the amount of assets under management;
• “BSS” refers to the Broker Supplied System, being a front office solution either developed in-house by the Stock Exchange Participant or a third-party software package acquired from commercial vendors, enabling the Stock Exchange Participant to connect its trading facilities to the Open Gateway to conduct trading;
• “CAGR” refers to compounded annual growth rate, the year-on-year growth rate over a specific period of time;
• “China” or the “PRC” refer to the People’s Republic of China, including Hong Kong and Macau;
• “Code of Conduct” refers to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission of Hong Kong;
• “Controlling Shareholder” refers to Oriental Moon Tree Limited, a company incorporated under the laws of British Virgin Islands;
• “FY 2023”, “FY 2022” are to fiscal year ended March 31, 2023 and 2022, respectively;
• “Garden Stage” or “Company” are to Garden Stage Limited, an exempted company incorporated with limited liability in the Cayman Islands on August 11, 2022;
• “HKD” or “HK$” refer to the legal currency of Hong Kong.
• “HKSCC” refers to the Hong Kong Securities Clearing Company Limited
• “HKSFC” refers to the Securities and Futures Commission of Hong Kong;
• “Hong Kong” refers to the Hong Kong Special Administrative Region of the People’s Republic of China for the purposes of this prospectus only;
• “I Win Asset Management” refers to I Win Asset Management Limited, a company with limited liability under the laws of Hong Kong;
• “I Win Holdings HK” refers to I Win Holdings Limited, a company with limited liability under the laws of Hong Kong;
• “I Win Securities” refers to I Win Securities Limited, a company with limited liability under the laws of Hong Kong;
• “Licensed Representative(s)” refers to an individual who is granted a license under section 120(1) or 121(1) of the SFO to carry on one or more than one regulated activity;
• “Listing Rules” refers to the Rules Governing the Listing of Securities on the Stock Exchange of Hong Kong, as amended, supplemented or otherwise modified from time to time;
1
• “Mainland China” refers to the mainland of the People’s Republic of China; excluding Taiwan and the special administrative regions of Hong Kong and Macau for the purposes of this prospectus only;
• “Margin financing” refers to the provision of funds by a securities brokerage firm (licensed to provide margin loans as an intermediary) to clients for the purpose of their margin trading, whereby the funds borrowed from a securities brokerage firm to be used for carrying out trading of securities on a leveraged basis, and the relevant securities purchased form the collateral to secure the repayment of the loan granted by the securities brokerage firm;
• “Migo” refers to Migo Corporation Limited, an independent research consultancy firm commissioned by the Company;
• “Migo Report” refers to the “Industry Overview Report of the Financial Services Market in Hong Kong” dated June 30, 2022 prepared by Migo and commissioned by the Company;
• “Ordinary Shares” refers to the ordinary shares of the Garden Stage Limited, par value of US$0.0001 per share;
• “Open Gateway” refers to a Windows-based device provided by the Stock Exchange and installed at the Stock Exchange Participants’ office to facilitate electronic interface of the Automatic Order Matching and Execution System of the Stock Exchange with front office systems operated by the Stock Exchange Participant;
• “Operating Subsidiaries” refers to I Win Securities and I Win Asset Management, the indirectly wholly-owned subsidiaries of Garden Stage, unless otherwise specified
• “PRC government” or “Chinse government” are to the government of Mainland China for the purposes of this prospectus only;
• “Responsible Officer(s)” or “RO” refer to a Licensed Representative who is also approved as a responsible officer under section 126 of the SFO to supervise one or more than one regulated activity of the licensed corporation to which he/she is accredited;
• “SEC” refers to the United States Securities and Exchange Commission;
• “Selling Shareholders” refers to State Wisdom Holdings Limited, Bliss Tone Limited, and Oriental Moon Tree Limited, three existing shareholders of the Company that are selling their Ordinary Shares pursuant to the Resale Prospectus;
• “SFO” refers to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong), as amended, supplemented or otherwise modified from time to time;
• “Stock Exchange” or “SEHK” refer to the Stock Exchange of Hong Kong Limited;
• “Stock Exchange Trading Right” refers to the right to be eligible to trade on or through the Stock Exchange as a Stock Exchange Participant and entered as such a right in a list, register or roll kept by the Stock Exchange;
• “Stock Exchange Participant(s)” refers to corporation(s) licensed to carry on Type 1 (dealing in securities) regulated activity under the SFO who, in accordance with the rules of the Stock Exchange, may trade on or through the Stock Exchange and whose name(s) is/are entered in a list, register or roll kept by the Stock Exchange as person(s) who may trade on or through the Stock Exchange;
• “US$” or “U.S. dollars” refer to the legal currency of the United States; and
• “we,” “us,” “our,” “the Company” and “Garden Stage” are to Garden Stage Limited, an exempted company incorporated with limited liability in the Cayman Islands on August 11, 2022, and does not include its subsidiaries, 17 Uno BVI, I Win Holdings HK, I Win Securities, and I Win Asset Management. Where appropriate, we shall refer to the subsidiaries by their legal names, collectively as “our subsidiaries”, or “Operating Subsidiaries” when we refer to our operating entities, as the case may be, and clearly identify the entity in which investors are purchasing an interest;
2
Garden Stage is a holding company with operations conducted in Hong Kong through its Operating Subsidiaries, using Hong Kong dollars. The reporting currency is U.S. dollars. Assets and liabilities denominated in foreign currencies are translated at year-end exchange rates, income statement accounts are translated at average rates of exchange for the year and equity is translated at historical exchange rates. Any translation gains or losses are recorded in other comprehensive income (loss). Gains or losses resulting from foreign currency transactions are included in net income. The conversion of Hong Kong dollars into U.S. dollars are based on the exchange rates set forth in the H.10 statistical release of the Board of Governors of the Federal Reserve System. Unless otherwise noted, all translations from Hong Kong dollars to U.S. dollars and from U.S. dollars to Hong Kong dollars in this prospectus were made at an average rate of HKD 7.8392 to USD 1.00 and HKD 7.7843 to USD 1.00 for FY 2023 and FY 2022, respectively.
We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
Unless the context indicates otherwise, all information in this prospectus assumes no exercise by the underwriters of their over-allotment option.
This prospectus contains information derived from various public sources and certain information from an industry report commissioned by us and prepared by Migo Corporation Limited, or “Migo,” a third-party industry research consultancy firm, to provide information regarding our industry and market position. Industry data, projections, and estimates are subject to inherent uncertainty as they necessarily require certain assumptions and judgments. If any one or more of the assumptions underlying the market data turns out to be incorrect, actual results may differ from the projections based on these assumptions. While we generally believe the information contained in such report to be accurate and reliable, we have not independently verified the accuracy or completeness of the data contained in these industry publications and reports.
Overview
We are a holding company incorporated in Cayman Islands, and all of our operations are carried out by the two wholly-owned Operating Subsidiaries in Hong Kong: a) I Win Securities, which is licensed to conduct Type 1 (dealing in securities) regulated activities under the SFO in Hong Kong, and b) I Win Asset Management, which is licensed to conduct Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the SFO in Hong Kong. Our Operating Subsidiaries are Hong Kong-based financial services providers principally engaged in the provision of (i) placing and underwriting services; (ii) securities dealing and brokerage services; and (iii) asset management services. I Win Securities is the Stock Exchange Participant and holds one Stock Exchange Trading Right. I Win Securities is a participant of the HKSCC.
The table below sets forth the licenses obtained by our Operating Subsidiaries under the jurisdiction of Hong Kong.
License type and trading right | Entity name | |
HKSFC Type 1 License — Dealing in securities | I Win Securities | |
HKSFC Type 4 License — Advising on securities | I Win Asset Management | |
HKSFC Type 9 License — Asset management | I Win Asset Management | |
Stock Exchange Participants (Participant ID: 02092) | I Win Securities | |
HKSCC Participants (Participant ID: B02092) | I Win Securities |
The service offerings of our Operating Subsidiaries mainly comprise the following:
• Underwriting and Placing Services: I Win Securities acts as (i) book runner, lead manager, or underwriter of listing applicants in IPOs or other fundraising activities; and (ii) placing agent of listed companies in connection with their issuance or sale of securities, in return for underwriting and/or placing commission. I Win Securities also charges investors a brokerage commission when they subscribe for or acquire securities in respect of offerings of listed issuers who engaged I Win Securities to provide placing and underwriting services in respect of the relevant securities. Our revenue derived from our placing and underwriting services accounted for 48.31% and 15.41% of our total revenue for the years ended March 31, 2023 and 2022, respectively.
• Securities Dealing and Brokerage Services: I Win Securities provides securities dealing and brokerage services for trading in securities on the Hong Kong Stock Exchange and in other overseas markets. I Win Securities also acts as an intermediary between buyers and sellers of securities listed on the Main
3
Board and GEM of the Hong Kong Stock Exchange and facilitate the clients’ trading of securities listed on selected overseas stock exchanges, including the United States, in return for brokerage commission income. Ancillary to I Win Securities’ securities brokerage and dealing services, I Win Securities also provides nominee services, custodian services, scrip handling services and handling services for corporate actions to our brokerage clients. At the same time, I Win Securities also facilitates the subscriptions to IPOs and secondary placings, either conducted by Hong Kong issuers who engage I Win Securities for placing and underwriting services or conducted by other financial services providers in Hong Kong. For the years ended March 31, 2023 and 2022, respectively, 47.55% and 80.81% of our total revenue was derived from securities dealing and brokerage services.
• Asset Management Services: I Win Asset Management offers discretionary account management and fund management services that cater to different investment objectives of our Operating Subsidiaries’ clients. Our asset management services accounted for 1.03% and 1.00% of our total revenue for the years ended March 31, 2023 and 2022, respectively.
Our revenues were US$3.3 million and US$2.3 million for FY 2023 and FY 2022, respectively. We recorded net loss of US$0.2 million and US$0.5 million for FY 2023 and 2022, respectively. We plan to keep our business growing by strengthening the securities brokerage, underwriting and placement services and develop our asset management business and margin financing services. Our diversified business portfolio allows our Operating Subsidiaries to create synergies between our business lines, generate new business opportunities for each business segment and provide integrated financial services to clients. For further details of our services, please refer to the paragraph headed “Business — Our Services and Revenue Model” in this prospectus.
Our Industry
Hong Kong is one of the world’s largest securities markets by market capitalization. Hong Kong’s securities market is operated by the Hong Kong Stock Exchange. The Hong Kong Stock Exchange operates two markets, the Main Board is for more established companies that satisfy higher financial and track record requirements and Growth Enterprise Market (the “GEM”) is for a market with lower listing eligibility criteria but similar continuing obligations compared to the Main Board, serving the needs of small and mid-sized issuers. According to Migo, as an international financial hub and gateway to China, over the years, Hong Kong’s securities market has experienced remarkable growth in market capitalization. The total market capitalization of the Stock Exchange (including the Main Board and GEM) increased from approximately HK$33,999 billion (approx. US$4,358.8 billion) as of December 31, 2017 to approximately HK$ 39,065 billion (approx. US$4,979.0 billion) as of June 30, 2022. In line with the general trend of market capitalization, the number of listed securities on the Stock Exchange also increased from 12,803 as of December 31, 2017 to 16,510 as of June 30, 2022.
The financial services industry in Hong Kong is highly competitive due to the vast number of market players offering securities broking services, underwriting and placing services, and asset management services. We have to compete effectively over competitors in terms of capital resources, pricing, client base, service coverage and quality, talents, and brand recognition. Our competitors may have stronger capital resources, greater brand recognition in the market, more human resources, a wider range of services and longer operating histories than that of us. Apart from large multinational financial institutions, we also face competition from newly established local small and medium-sized financial services firms that offer similar services. We believe that competition in this market is primarily based on quality and scope of services, market reputation, business network, pricing, and human and financial resources.
Securities Dealing and Brokerage Services
The licensed securities dealing and brokerage service industry comprises corporations conducting Type 1 (dealing in securities) regulated activity, and these corporations are generally referred to as brokerage firms or brokerage service providers. These corporations provide securities dealing and brokerage services to clients (including principals and investors) which may involve (i) trading and brokering securities in respect of trades for clients, (ii) marketing and distributing of securities (including mutual funds and unit trusts) to clients, and (iii) placing and underwriting of securities in respect of fundraisings and secondary offerings and sale. Some brokerage firms may also provide securities margin financing services to facilitate the acquisitions or holdings of securities by their clients if they can meet the more stringent financial resources requirements set out in the SFO. The main function of a Type 1 licensed corporation, as the securities brokerage service provider, is to act as an agent to facilitate securities trading activities for investors in respect of securities listed on the Stock Exchange and/or on overseas markets. A securities brokerage firm may also generate revenue from commission and fee income through placing and underwriting securities in respect of fundraisings and secondary offerings and sales, and interest income from the provision of securities margin financing services.
4
Competition
In order to trade securities through the trading facilities of the Stock Exchange, a market participant shall, among other things, hold a trading right and be an Exchange Participant. It must also be a corporation licensed under the SFO to carry out Type 1 (dealing in securities) regulated activity. As of June 30, 2022, there were 711 trading right holders registered in the Hong Kong Exchanges and Clearing Limited, which comprised 623 trading Exchange Participants, 74 non-trading Exchange Participants and 14 non-exchange participants. New participants may enter the industry as long as they obtain the requisite licenses and permits. The Exchange Participants are classified into three categories of participants by the Hong Kong Stock Exchange quarterly in terms of their respective share of the total market turnover. Category A for the top 14 firms, Category B for the 15th to 65th largest firms and Category C for firms ranked 66th and below.
The following chart illustrates the respective market shares of different categories of Stock Exchange Participants from 2017 to 2022:
Participants | 2017 | 2018 | 2019 | 2020 | 2021 | 2022* | ||||||
(%) | (%) | (%) | (%) | (%) | (%) | |||||||
Category A | 54.6 | 55.7 | 58 | 58.2 | 59 | 63.6 | ||||||
Category B | 34.9 | 35.7 | 34 | 34.5 | 33.8 | 30.86 | ||||||
Category C | 10.5 | 8.7 | 8 | 7.4 | 7.2 | 5.54 |
____________
* For the six months ended June 30, 2022
Source: HKEx
Hong Kong’s securities dealing and brokerage market is dominated by the 14 Exchange Participants under Category A which accounted for approximately 59% market share in terms of turnover for 2021. The market share of Stock Exchange Participants under Category A and Category C has experienced an increase and decrease from approximately 54.6% and 10.5%, respectively, in 2017 to approximately 59% and 7.2%, respectively, in 2021, while the market share the Exchange Participants under Category B has recorded a decrease from approximately 34.9% in 2017 to approximately 33.8% in 2021. We are a Category C Stock Exchange Participant and are currently holding one Stock Exchange trading right.
Placing and Underwriting Services
Placing and underwriting services are essential for fundraising activities in the capital market, and relevant service providers in Hong Kong are required to obtain an HKSFC license to carry on Type 1 (dealing in securities) regulated activity. Such placing and underwriting services providers are generally referred to as underwriters and placing agents. The main responsibility of both underwriters and placing agents is to act as an agent to identify potential investors to subscribe for securities of issuers and to acquire securities from selling shareholders, while underwriters are also involved in carrying out and organizing roadshows and other marketing activities during the book building process as well as involved in the pricing process of IPOs. The main revenue stream of placing and underwriting service providers is the commission charged to clients from the provision of placing and underwriting services which is calculated according to a predetermined commission rate that varies on a case-by-case basis and usually ranges from less than 1% to up to 20% of the value of securities being placed or underwritten.
Competition
In 2017, there were approximately 1,247 Type 1 financial institutions that provide placing and underwriting services in Hong Kong. In 2021, the number of Type 1 financial institutions increased to 1,487, respectively, with a CAGR of about 4.5% since 2017. The placing and underwriting services market in Hong Kong is consolidated and dominated by the top market players who provide a wide range of investment banking services in addition to placing and underwriting services.
Asset Management Services
Asset management refers to the investment advisory and management of investment funds and securities by holding the licenses to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities. Major market players engaging in the asset management business in Hong Kong comprise licensed corporations (such as securities firms or asset management companies licensed by the HKSFC), registered institutions (such as banks or deposit-taking companies engaging in the asset management business), and insurance companies. Investment funds manage assets of various asset classes (shares, bonds and derivatives) and other assets (e.g. real estate) in order to meet
5
specified investment objectives for the benefit of the investors. Some investors may also authorise asset managers to manage the dealing and investments of securities in their securities trading account(s), and this is commonly referred to as discretionary account management. The mainstream of revenue of licensed asset managers is the management fee, which is paid to the asset manager on an ongoing basis and is deducted from the net asset value of managed funds.
Competition
We face keen competition from different asset management firms, including 2,039 licensed corporations, 36 registered institutions and 4,962 responsible/approved officers for Type 9 (asset management) regulated activity as at the end of June 30, 2022, according to the statistics of the HKSFC. The number of licensed corporations licensed to carry on Type 9 (asset management) regulated activity grew by approximately 7.6% to 1,979 corporations as of December 31, 2021 from 1,477 as of December 31 2017, surpassing the number of licensed corporations licensed for all other types of regulated activity. The number of responsible/approved officers licensed to carry on Type 9 (asset management) regulated activity also grew by approximately 7.9% to 4,855 as of December 31, 2021 from 3,576 as of December 31, 2017.
Competitive Strengths
We believe that the following competitive strengths contribute to our success and differentiate us from our competitors:
• A proven and experienced management team consisting of industry veterans;
• Established and strong relationship with our clients and stable client base; and
• Synergies among our different lines of services that generate diversified and stable sources of revenue.
Growth Strategies
Our business model and competitive strengths provide us with multiple avenues for growth. We intend to execute the following key strategies:
• Strengthening our placing and underwriting services;
• Expanding our securities dealing and brokerage market presence in relation to the United States exchanges;
• Developing our securities margin financing services;
• Enhancing and developing our asset management business; and
• Enhancing our IT systems.
Corporate History and Structure
Garden Stage Limited was incorporated on August 11, 2022 in the Cayman Islands under Cayman Islands law, for purposes of effectuating this Offering. Prior to the Reorganization as described below, we historically conducted our business through I Win Holdings Limited (“I Win Holdings HK”), a company incorporated under the laws of Hong Kong, and its subsidiaries, namely, I Win Securities Limited (“I Win Securities”) and I Win Asset Management Limited (“I Win Asset Management”), both incorporated under the laws of Hong Kong.
On November 10, 2016, we established I Win Securities as a company with limited liability under the laws of Hong Kong and commenced our securities brokerage and underwriting and placing business. I Win Securities was licensed by the HKSFC to undertake Type 1 (dealing in securities) regulated activity on July 19, 2017. To expand our services into asset management services, on March 25, 2020, we established I Win Asset Management as a company with limited liability under the laws of Hong Kong. I Win Asset Management obtained the relevant HKSFC licenses to undertake Type 4 (advising on securities) and Type 9 (asset management) regulated activities on January 25, 2021.
On March 25, 2020, I Win Holdings HK was also incorporated under the laws of Hong Kong as the holding company of I Win Securities and I Win Asset Management.
6
On June 6, 2022, HKSFC approved I Win Holdings HK to become the holding company of I Win Securities and I Win Asset Management. Subsequently, pursuant to the June 6, 2022 HKSFC approval, on June 24, 2022, I Win Holdings HK acquired 100% of the equity interest of I Win Securities and I Win Asset Management and became their holding company.
Pursuant to the Reorganization in April 2023 as described below, Garden Stage Limited have become the holding company of I Win Holdings HK and its subsidiaries. Upon completion of the Reorganization, our group of companies comprises Garden Stage Limited, 17 Uno Limited (“17 Uno BVI”), I Win Holdings HK, I Win Securities, and I Win Asset Management.
The Reorganization
In this prospectus, we refer to all these following events as the “Reorganization”.
As part of the Reorganization, on August 11, 2022, we formed Garden Stage, for the purposes of effectuating this Offering. Upon the incorporation of Garden Stage Limited on August 11, 2022, Garden Stage Limited issued 1 ordinary shares to Oriental Moon Tree Limited, for a consideration of US$1.00.
On August 17, 2022, the wholly-owned British Virgin Islands subsidiary of Garden Stage, 17 Uno BVI was then incorporated on August 17, 2022, as the proposed intermediate holding of I Win Holdings HK as part of the Reorganization.
On November 21, 2022, Garden Stage Limited executed a shareholder resolution to change the par value of the Ordinary Shares from US$1.00 to $0.0001, a 10,000 for 1 share subdivision (“Share Subdivision”). Upon the Share Subdivision, the one issued and outstanding Ordinary Share held by Oriental Moon Tree Limited was sub-divided into 10,000 Ordinary Shares of par value of US$0.0001 each. Pursuant to such resolution, the authorized share capital of Garden Stage Limited was US$50,000 divided into 500,000,000 Ordinary Shares with a nominal or par value of US$0.0001 each, in accordance with section 13 of the Cayman Islands Companies Act.
Since I Win Securities and I Win Asset Management are HKSFC-licensed corporations, prior approval from the HKSFC is required for any company or individual to become a holding company or the substantial shareholder of an HKSFC-licensed corporation. On September 2, 2022, the New Substantial Shareholder Application was submitted to the HKSFC, in which 17 Uno BVI, Garden Stage, and Oriental Moon Tree are to become the substantial shareholders of I Win Securities and I Win Asset Management. The HKSFC approvals were obtained on January 26, 2023 (the “January 26 HKSFC approval”).
Pursuant to the January 26 HKSFC approval, the Reorganization was completed in April 2023. Pursuant to the Reorganization, on April 3, 2023, Garden Stage acquired, through 17 Uno BVI, all of the issued equity interests of I Win Holdings HK, from the existing shareholders of I Win Holdings HK, namely, Courageous Wealth Limited, Lobster Financial Holdings Limited, Capital Hero Global Limited, Smark Holding Limited, and Gulu Gulu Limited, in cash consideration of HK$1,000 in aggregate. In April 2023, in connection with the Reorganization, Garden Stage Limited allotted and issued:
(a) additional 80,000 Ordinary Shares at the par value of US$0.0001 to Oriental Moon Tree Limited on April 3, 2023; and
(b) additional 11,385,000 Ordinary Shares at the par value of US$0.0001 to Oriental Moon Tree Limited on April 20, 2023.
Upon completion of the Reorganization, I Win Securities and I Win Asset Management, our Operating Subsidiaries, have become the indirect wholly-owned subsidiaries of Garden Stage through 17 Uno BVI and I Win Holding HK.
Pre-IPO Investment
On July 22, 2022, I Win Holdings HK entered into Investment Agreement with State Wisdom Holdings Limited (“State Wisdom Holdings”), as varied by the Supplemental Investment Agreement entered into on November 22, 2022 and a further Supplemental Investment Agreement entered into on April 3, 2023. Pursuant to aforesaid agreements, State Wisdom Holdings to acquire Ordinary Shares representing 5% of the entire issued share capital of Garden Stage Limited upon and at the time of the completion of the Reorganization, at a subscription consideration of HK$3,120,000 (approximately US$397,454), and I Win Holdings HK shall procure Garden Stage to allot and issue the corresponding amount of Ordinary Shares of Garden Stage to State Wisdom Holdings.
7
On July 22, 2022, I Win Holdings HK entered into Investment Agreement with Bliss Tone Limited (“Bliss Tone”), as varied by the Supplemental Investment Agreement entered into on November 22, 2022 and a further Supplemental Investment Agreement entered into on April 3, 2023. Pursuant to Investment Agreements, Bliss Tone to acquire Ordinary Shares of representing 5% of the entire issued share capital of Garden Stage Limited upon and at the time of the completion of the Reorganization, at a subscription consideration of HK$3,120,000 (approximately US$397,454), and I Win Holdings HK shall procure Garden Stage Limited to allot and issue the corresponding amount of Ordinary Shares of Garden Stage to Bliss Tone.
According to Investment Agreements and Supplemental Investment Agreements between I Win Holdings HK, Bliss Tone, and State Wisdom Holdings, as part of the Reorganization, Garden Stage allotted and issued:
(a) 5,000 Ordinary Shares to State Wisdom Holdings on April 3, 2023;
(b) 5,000 Ordinary Shares to Bliss Tone on April 3, 2023;
(c) 632,500 Ordinary Shares to State Wisdom Holdings on April 20, 2023; and
(d) 632,500 Ordinary Shares to Bliss Tone on April 20, 2023.
The subscription of Ordinary Shares by State Wisdom Holdings and Bliss Tone were completed on April 20, 2023.
In this prospectus, we refer to all these events as the “Reorganization”.
Corporate Structure
The following diagram illustrates our corporate structure prior to the consummation of the Reorganization:
8
The Reorganization was completed in April 2023.
Pursuant to the Public Offering Prospectus, we are offering 2,000,000 Ordinary Shares, representing 13.56% of the Ordinary Shares issued and outstanding following completion of the offering of Garden Stage, assuming the underwriters do not exercise the over-allotment option. Furthermore, State Wisdom Holdings Limited, Bliss Tone Limited, and Oriental Moon Tree Limited, the Selling Shareholders, are also offering an additional 1,750,000 Ordinary Shares of Garden Stage pursuant to the Resale Prospectus, representing 11.86% of the Ordinary Shares following the completion of this Offering. Following the offering of Garden Stage and offering of the Seller Shareholder, assuming that the underwriters do not exercise their over-allotment option and the Selling Shareholders will sell all of the Ordinary Shares offered for sale pursuant to the Resale Prospectus, 25.42% of the Ordinary Shares of the Company will be held by public shareholders.
The following diagram illustrates our corporate structure following the Reorganization, prior to completion of this Offering, and upon the completion of this Offering:
Our Subsidiaries and Business Functions
17 Uno BVI was incorporated under the laws of British Virgin Islands to be the intermediate holding company of I Win Holdings HK on August 17, 2022 as part of the Reorganization.
I Win Holdings HK was incorporated under the laws of Hong Kong as the holding company of I Win Asset Management and I Win Securities on March 25, 2020. On June 6, 2022, HKSFC approved I Win Holdings HK to be the substantial shareholder of I Win Securities and I Win Asset Management. On June 24, 2022, I Win Holdings HK acquired 100% of the equity interest of I Win Securities and I Win Asset Management and has become their holding company.
I Win Securities was established in accordance with laws and regulations of Hong Kong on November 10, 2016. With a registered capital of HKD 15,000,000 (approximately US$1.9 million) currently, I Win Securities is a limited liability corporation licensed with HKSFC to undertake Type 1 (dealing in securities) regulated activity.
I Win Asset Management was established in accordance with laws and regulations of Hong Kong on March 25, 2020. With a registered capital of HKD 900,000 (approximately US$0.1 million) currently, I Win Asset Management is a limited liability corporation licensed with the HKSFC to undertake Type 4 (advising on securities) and Type 9 (asset management) regulated activities.
9
Holding Company Structure
Garden Stage Limited is a holding company incorporated in the Cayman Islands with no material operations of its own. We conduct our operations primarily in Hong Kong through our Operating Subsidiaries in Hong Kong. The Ordinary Shares offered in this offering are shares of the Cayman Islands holding company, instead of shares of our Operating Subsidiaries in Hong Kong. Investors in our Ordinary Shares should be aware that they may never directly hold equity interests in our subsidiaries in Hong Kong.
As a result of our corporate structure, our ability to pay dividends to our shareholders depends upon dividends paid by our Hong Kong subsidiaries through our BVI subsidiary. If our existing Hong Kong subsidiaries or any newly formed ones incur debt on their own behalf in the future, the instruments governing their debt may restrict their ability to pay dividends to us.
Transfers of Cash to and from Our Subsidiaries
For Garden Stage Limited to transfer cash to its subsidiaries, Garden Stage is permitted under the laws of the Cayman Islands to provide funding to its subsidiaries incorporated in the British Virgin Islands and Hong Kong through loans or capital contributions without restrictions on the amount of the funds. According to the BVI Business Companies Act 2004 (as revised), a British Virgin Islands company may make dividends distribution to the extent that immediately after the distribution, such company’s assets do not exceed its liabilities and that such company is able to pay its debts as they fall due. According to the Companies Ordinance of Hong Kong, a Hong Kong company may only make a distribution out of profits available for distribution. Other than the above, we did not adopt or maintain any cash management policies and procedures as of the date of this prospectus.
Our Cayman Islands holding company, Garden Stage Limited, has never declared or made any dividend or other distribution to its shareholders, including U.S. investors. No dividends and distributions were made by the subsidiaries of Garden Stage Limited for years ended March 31, 2023 and 2022.
Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by us. The PRC laws and regulations do not currently have any material impact on the transfer of cash from Garden Stage Limited to our subsidiaries or from our subsidiaries to Garden Stage Limited. There are no restrictions on foreign exchange and there are no limitations on the abilities of Garden Stage Limited to transfer cash to or from our subsidiaries or to investors under Hong Kong Law. There are no restrictions or limitations under the laws of Hong Kong imposed on the conversion of HK dollar into foreign currencies and the remittance of currencies out of Hong Kong, nor is there any restriction on any foreign exchange to transfer cash between Garden Stage Limited and its subsidiaries, across borders and to U.S. investors, nor there is any restrictions and limitations to distribute earnings from our subsidiaries to Garden Stage Limited and U.S. investors and amounts owed.
For Garden Stage to make dividends to its shareholders, subject to the Companies Act (as revised) of the Cayman Islands, which we refer to as the Companies Act below, and our Amended and Restated Memorandum and Articles of Association, our board of directors may authorize and declare a dividend to shareholders from time to time out of the profits from the Company, realized or unrealized, or out of the share premium account, provided that the Company will remain solvent, meaning the Company is able to pay its debts as they come due in the ordinary course of business.
We do not have any present plan to declare or pay any dividends on our Ordinary Shares in the foreseeable future. We currently intend to retain all available funds and future earnings, if any, for the operation and expansion of our business. Any future determination related to our dividend policy will be made at the discretion of our board of directors after considering our financial condition, results of operations, capital requirements, contractual requirements, business prospects and other factors the board of directors deems relevant, and subject to the restrictions contained in any future financing instruments, in our Amended and Restated Memorandum and Articles of Association and in the Companies Act. See “Dividend Policy” on page 63 and “Risk Factors — Risks Relating to our Corporate Structure — We rely on dividends and other distributions on equity paid by the Operating Subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of the Operating Subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business” on page 32 for more information.
10
Risk Factors Summary
Investing in our Ordinary Shares involves a high degree of risk. Below is a summary of material factors that make an investment in our Ordinary Shares speculative or risky. Importantly, this summary does not address all of the risks that we face. Please refer to the information under the heading “Risk Factors” on page 26 of this prospectus for additional discussion of the risks summarized in this risk factor summary as well as other risks that we face. These risks include, but are not limited to, the following:
Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate
• All of our operations are in Hong Kong. The PRC laws and regulations are not directly applicable to Hong Kong, being a Special Administrative Region, which is constitutionally autonomous from Mainland China. There is no assurance that there will not be any changes in the economic, political and legal environment in Hong Kong in the future. If there is a significant change to current political arrangements between Mainland China and Hong Kong, companies operating in Hong Kong may face similar regulatory risks as those operated in Mainland China, including its ability to offer securities to investors, list their securities on the U.S. or other foreign exchange, conduct its business or accept foreign investment. In light of the PRC government’s recent expansion of authority in Hong Kong, there are risks and uncertainties which we cannot foresee for the time being, and the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. The PRC government may intervene or influence the operations of our Operating Subsidiaries at any time or may exert more oversight and control over offerings conducted overseas and/or foreign investment in Hong Kong-based issuers, which could result in a material change in the operations and/or the value of the securities we are registering for sale, which could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and cause the value of such securities to significantly decline or be worthless. See “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — All of our operations are in Hong Kong. However, due to the long-arm application of the current PRC laws and regulations, the PRC government may exercise significant direct oversight and discretion over the conduct of our business and may intervene or influence our operations, which could result in a material change in our operations and/or the value of our Ordinary Shares. Our Operating Subsidiaries in Hong Kong may be subject to the PRC laws and regulations, which may impair our ability to operate profitably and result in a material negative impact on our operations and/or the value of our Ordinary Shares. Furthermore, the changes in the policies, regulations, rules, and the enforcement of laws of the PRC may also occur quickly with little advance notice and our assertions and beliefs of the risk imposed by the PRC legal and regulatory system cannot be certain” on page 26.
• Recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in Mainland China with little or no advance notice, including a cracking down on illegal activities in the securities market, enhancing supervision over Mainland China-based companies listed overseas using the variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. In the future, we may become subject to a variety of PRC laws and other obligations regarding the data security and the Draft Overseas Listing Regulations, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, financial condition and results of operations and could result in a material change in such operations and/or the value of the securities we are registering for sale. See “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — We may become subject to a variety of the PRC laws and other obligations regarding data security in relation to offerings that are conducted overseas by Mainland China-based issuers, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, financial condition and results of operations and may hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless” on page 27.
• If the Chinese government chooses to extend oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers to Hong Kong-based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless. See “Risk Factors — Risks
11
Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — If the PRC government chooses to extend the oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers to Hong Kong-based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless” on page 30.
• The Hong Kong political and legal system embodies risk and uncertainties, including the risk of PRC government altering the “one country, two system” to disallow Hong Kong to function autonomously, the uncertainties arising from the legal system of the PRC, uncertainties regarding the interpretation and enforcement of the PRC laws, and the possibility of the implementation of the PRC law and regulation to Hong Kong, all of which could materially and adversely affect and hinder our business, financial condition and results of operations, the value of our Ordinary Shares, and/or our ability to offer or continue to offer securities to investors. See “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — The enforcement of laws and rules and regulations in the PRC can change quickly with little advance notice. Additionally, the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. As a result, the Hong Kong legal system embodies uncertainties which could limit the availability of legal protections, which could result in a material change in our Operating Subsidiaries’ operations and/or the value of the securities we are offering” on page 31; and “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — There are political risks associated with conducting business in Hong Kong” on page 31.
• The enactment of the Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact our Hong Kong subsidiaries. Furthermore, in response to the enactment of the Hong Kong National Security Law, the U.S. State Department has indicated that the United States no longer considers Hong Kong to have significant autonomy from China and United States ended the special status enjoyed by Hong Kong under the United States-Hong Kong Policy Act of 1992 and imposed sanctions against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong’s autonomy. These and other recent actions may represent an escalation in political and trade tensions involving the U.S, the PRC, and Hong Kong, which could potentially harm our business, and could cause investor uncertainty for affected issuers, including us, and the market price of our Ordinary Shares could be adversely affected. See “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — The enactment of the Law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact our Hong Kong subsidiaries, which represent substantially all of our business” on page 30.
• All potential parties who are to become the substantial shareholder(s) of the HKSFC-licensed subsidiaries, I Win Securities and I Win Asset Management, are required to seek prior approval from the HKSFC. This regulatory requirement may discourage, delay or prevent a change in control of Garden Stage, which could deprive the holders of our Ordinary Shares the opportunity to receive a premium for their Ordinary Shares as part of a future sale and may reduce the price of our Ordinary Shares upon the consummation of a future proposed business combination. See “Risk Factors — Risks Related to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — The Hong Kong regulatory requirement of prior approval for the transfer of shares in excess of a certain threshold may restrict future takeovers and other transactions” on page 32.
Risks Related to Our Corporate Structure
• Our public shareholders may have more difficulty in protecting their interests in the face of actions taken by management, members of the board of directors or controlling shareholders than they would as public shareholders of a company incorporated in the United States. Our public shareholders may incur additional costs and procedural obstacles in effecting service of legal process, enforcing foreign judgments or bringing actions in Hong Kong and Cayman Islands against us or our management named in this prospectus based on Hong Kong and Cayman Islands laws. See “Risk Factors — Risk Related to our Corporate Structure — 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 in the Cayman Islands” on page 34 and “Risk Factors — Risk
12
Related to our Corporate Structure — The enforcement of foreign civil liabilities in the Cayman Islands and Hong Kong is subject to certain conditions. Therefore, certain judgments obtained against us by our shareholders may be difficult to enforce in such jurisdictions” on page 33.
• We rely on dividends to be paid by our Hong Kong Operating Subsidiaries to fund our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders, service any debt we may incur, and pay our operating expenses. If our Hong Kong subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict their ability to pay dividends or make other distributions to us. See “Risk Factors — Risk Related to our Corporate Structure — We rely on dividends and other distributions on equity paid by the Operating Subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of the Operating Subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business” on page 32.
• Following this Offering, Oriental Moon Tree Limited, our Controlling Shareholder, will continue to own more than a majority of the voting power of our outstanding Ordinary Shares. Accordingly, our Controlling Shareholder could control the outcome of any corporate transaction or other matter submitted to the shareholders for approval. Additionally, we may be deemed to be a “controlled company” within the meaning of the NASDAQ listing rules, and we may follow certain exemptions from certain corporate governance requirements that could adversely affect our public shareholders. See “Risk Factors — Risk Related to our Corporate Structure — Our corporate actions will be substantially controlled by our Controlling Shareholder, Oriental Moon Tree Limited, which will have 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 Ordinary Shares and materially reduce the value of your investment. Additionally, we may be deemed to be a “controlled company and may follow certain exemptions from certain corporate governance requirements that could adversely affect our public shareholders” on page 32.
Risks Related to Our Ordinary Shares and this Offering
• Any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our Ordinary Shares could be adversely affected, and we could be delisted if our auditor and we are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time. See “Risk Factors — Risks Related to our Ordinary Shares and this Offering — Our Ordinary Shares may be prohibited from being traded on a national exchange under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which was signed into law on December 29, 2022, amending the HFCAA to require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.” on page 35.
• There has been no public market for our Ordinary Shares prior to this offering. Assuming our Ordinary Shares begin trading on the NASDAQ Capital Market, our Ordinary Shares may be “thinly-traded,” a broad or active public trading market for our Ordinary Shares may not develop or be sustained, in which case our ordinary shares’ market price and liquidity will be materially and adversely affected. See “Risk Factors — Risks Related to our Ordinary Shares and this Offering — There has been no public market for our Ordinary Shares prior to this offering, and you may not be able to resell our Ordinary Shares at or above the price you paid, or at all” on page 36.
• The trading price of our Ordinary Shares is likely to be volatile and could fluctuate widely due to broad market and industry factors which are beyond our control. Please see “Risk Factors — Risks Related to our Ordinary Shares and this Offering — We may experience extreme stock price volatility unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our ordinary shares” on page 36 for the list of factors which may cause the volatility of our trading price.
13
• Our board of directors has complete discretion as to whether to distribute dividends. You may only receive a return on your investment in our Ordinary Shares if the market price of our Ordinary Shares increases. See “Risk Factors — Risks Related to our Ordinary Shares and this Offering — Because the amount, timing, and whether or not we distribute dividends at all is entirely at the discretion of our board of directors, you must rely on price appreciation of our Ordinary Shares for return on your investment” on page 39.
• The sale or availability for sale of substantial amounts of our Ordinary Shares in the public market, by (1) our existing shareholder, (2) our underwriters, and (3) exercise of options granted to our senior management, could adversely affect the market price of our Ordinary Shares. See “Risk Factors — Risks Related to our Ordinary Shares and this Offering — The sale or availability for sale of substantial amounts of our Ordinary Shares in the public market could adversely affect the market price of our Ordinary Shares” on page 39.
• As a company incorporated in the Cayman Islands, we are permitted to adopt certain Cayman Islands’ practices in relation to corporate governance matters that differ significantly from the NASDAQ Capital Market listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ Capital Market listing standards. See “Risk Factors — Risks Related to our Ordinary Shares and this Offering — 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” on page 40 for detailed discussion of this risk factor.
• 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 our Ordinary Shares to significant adverse United States income tax consequences. See “Risk Factors — Risks Related to our Ordinary Shares and this Offering — 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 our Ordinary Shares to significant adverse United States income tax consequences” on page 41 for a detailed discussion of this risk factor.
• As an “emerging growth company,” the reduced disclosure requirements applicable to emerging growth companies may make our Ordinary Shares less attractive to investors. See “Risk Factors — Risks Related to our Ordinary Shares and this Offering — We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our Ordinary Shares less attractive to investors” on page 42.
Risks relating to the Industry in which we Operate
• Our operations are concentrated in Hong Kong and are highly subject to the performance of the Hong Kong securities and capital market. Any material deterioration in the economic, political, and regulatory environment in Hong Kong, the PRC, and elsewhere in the world could materially and adversely affect the Hong Kong securities and capital market and thus our business and prospects. See “Risk Factors — Risks relating to the Industry in which we Operate — Our business operations are concentrated in Hong Kong. Unfavorable financial market and economic conditions and material deterioration of the political and regulatory environment in Hong Kong, the PRC, and elsewhere in the world could materially and adversely affect our business, financial condition, prospects, and results of operations” on page 42 of this prospectus.
• The financial service market in Hong Kong is highly regulated. We are subject to extensive regulatory requirements. Non-compliance with such requirements could cause us to incur fines, restrictions on our activities, or even suspension or revocation of some or all of our licenses for carrying on our operation. See “Risk Factors — Risks relating to the Industry in which we Operate — We are subject to extensive and evolving regulatory requirements, the non-compliance with which may result in penalties, limitations, and prohibitions on our future business activities or suspension or revocation of our licenses, and consequently may materially and adversely affect our business, financial condition, and results of operations. In addition, we may, from time to time, be subject to regulatory inquiries and investigations by relevant regulatory authorities or government agencies in Hong Kong or other applicable jurisdictions” on page 44 of this prospectus; and “Risk Factors — Risks Relating to our Business and Operation — We may not be able to fully detect money laundering and other illegal or improper activities in our business operations on a timely basis or at all, which could subject us to liabilities and penalties” on page 52 of this prospectus.
14
• The financial services industry in Hong Kong in which we operate is intensely competitive, highly fragmented, and subject to rapid change. There is no assurance that we will be able to maintain our competitive strengths. See “Risk Factors — Risks relating to the Industry in which we Operate — We may not be able to compete successfully in the highly competitive financial service industry in Hong Kong” on page 43 of this prospectus.
Risks Relating to our Business and Operation
• Our future performance and ability to succeed may be difficult to predict given that our operating history in the financial and securities services industry in Hong Kong is relatively short. See “Risk Factors — Risks Relating to our Business and Operation — We, through our Operating Subsidiaries, have a relatively short operating history compared to some of our established competitors and face significant risks and challenges in a rapidly evolving market, which makes it difficult to effectively assess our future prospects” on page 45 of this prospectus.
• Revenue from our underwriting and placing services is generated on a project-by-project basis and thus our revenue and profitability are highly unpredictable. We are also exposed to financial and business risks in case the securities underwritten by us are undersubscribed or the placing exercise fails to complete. See “Risk Factors — Risks Relating to our Business and Operation — We are subject to market and financial risks arising from our underwriting business if the securities underwritten by us are undersubscribed” on page 46 of this prospectus and, Risk Factors — Risks Relating to our Business and Operation — Revenue from our placing and underwriting business is generated on a project-by- project basis and thus our profitability is highly unpredictable and may be adversely affected if we are unable to secure engagements at levels or on comparable commission rates similar to those during the FY 2023 and 2022 in the future” on page 46 of this prospectus.
• Our commission income from our securities dealing and brokerage service depends upon the trading volume through us, which is subject to the volatility, market conditions, and the performance of the securities markets, and competition from other securities brokerage firms. See “Risk Factors — Risks Relating to our Business and Operation — Our commission income from our securities dealing and brokerage service may be volatile, and fluctuate significantly from quarter to quarter, which may result in volatility of the price of our Ordinary Shares” on page 47 of this prospectus; and “Risk Factors — Risks Relating to our Business and Operation — Other brokerage firms may have a competitive edge over us by offering zero or lower rate of brokerage commission” on page 48 of this prospectus.
• The success of our business depends on the continued services of our key management, professional personnel, and account executives, the failure to retain and motivate them or to attract suitable replacements may adversely affect our operations. See “Risk Factors — Risks Relating to our Business and Operation — Our businesses depend on key management executives and professional staff, and our business may suffer if we are unable to recruit and retain them” on page 49 of this prospectus; and “Risk Factors — Risks Relating to our Business and Operation — Our business may be affected if we are unable to retain our employees or self-employed AEs who have strong relationships with our clients There is no assurance that the contractual arrangements we have entered with our employees or self-employed AEs are sufficient to protect our business interests” on page 48 of this prospectus.
• We are subject to the risk of fraud, illegal act, misconduct, or other improper activities committed by our directors, employees, agents, clients or other third parties, which may cause us to suffer significant reputational harm, adversely affect our results of operations, and result in regulatory sanctions, disciplinary actions, and civil and criminal proceeding against us. The precautions and internal control procedures that we take to detect and prevent such activity may not be effective in all cases. See “Risk Factors — Risks Relating to our Business and Operation — Fraud or misconduct by our directors, officers, employees, agents, AEs, clients, or other third parties could harm our reputation and business and may be difficult to detect and deter” on page 52 of this prospectus; and “Risk Factors — Risks Relating to our Business and Operation — We may be subject to litigation, arbitration or other legal proceeding risks” on page 53 of this prospectus.
• Our business and profitability are subject to customer concentration risk. Such customer concentration risk can be exacerbated due to: a) our reliance on different customers in different periods; b) the fact that the largest customer in each period for the years ended March 31, 2023 and 2022 was a different customer;
15
and c) the customers for our placing and underwriting services engaged us on a project-by-project basis. See “Risk Factors — Risks Relating to our Business and Operation — We rely on a limited number of key customers for our business” on page 56 of this prospectus.
• We rely heavily on our trading system and/or informational technology infrastructures, especially the BSS, to execute our securities trading orders and handle the instructions and personal information of our clients. Any failure of our trading system or information technology system, or cybersecurity threats to such, may have a material disruption and adverse effect on our business and results of operations. See “Risk Factors — Risks Relating to our Business and Operation — Our business is subject to various cyber-security risks and other operational risks, such as the failure or malfunction of our trading system and/or information technology infrastructure and the failure to maintaining relationship with our vendors, which may cause disruptions to our business operation and tarnish our reputation” on page 56 of this prospectus; and “Risk Factors — Risks Relating to our Business and Operation — Failure to comply with cybersecurity, data privacy, data protection, or any other laws and regulations related to data privacy and security, or the failure to protect client data or prevent breaches of our information systems, could expose us to liability or reputational damage and materially and adversely affect our business, financial condition, and results of operations” on page 57 of this prospectus.
Permission Required From the Hong Kong Authorities
Due to the licensing requirements of the HKSFC, I Win Securities and I Win Asset Management are required to obtain necessary licenses to conduct their business in Hong Kong and their business and responsible personnel are subject to the relevant laws and regulations and the respective rules of the HKSFC. I Win Securities currently holds a Type 1 license for dealing in securities. I Win Asset Management currently holds a Type 4 license for advising on securities and a Type 9 license for asset management. See “Regulation — Licensing Regime Under the SFO.” These licenses have no expiration date and will remain valid unless they are suspended, revoked, or canceled by the HKSFC. We pay standard governmental annual fees to the HKSFC and are subject to continuing regulatory obligations and requirements, including the maintenance of minimum paid-up share capital and liquid capital, maintenance of segregated accounts, and submission of audited accounts and other required documents, among others. See “Regulation — Licensing Regime Under the SFO.”
Neither we nor any of our subsidiaries are required to obtain any permission or approval from Hong Kong authorities to offer the securities of Garden Stage to foreign investors.
Holding Foreign Companies Accountable Act (the “HFCAA”)
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States.
On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. A company will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which was signed into law on December 29, 2022, amending the HFCAA and requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchange if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a
16
position taken by an authority in foreign jurisdictions. On December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (i) China, and (ii) Hong Kong.
On August 26, 2022, the PCAOB announced and signed a Statement of Protocol (the “Protocol”) with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China. The Protocol provides the PCAOB with: (1) sole discretion to select the firms, audit engagements and potential violations it inspects and investigates, without any involvement of Chinese authorities; (2) procedures for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed; (3) direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
On December 15, 2022, the PCAOB issued a new Determination Report which: (1) vacated the December 16, 2021 Determination Report; and (2) concluded that the PCAOB has been able to conduct inspections and investigations completely in the PRC in 2022. The December 15, 2022 Determination Report cautions, however, that authorities in the PRC might take positions at any time that would prevent the PCAOB from continuing to inspect or investigate completely. As required by the HFCAA, if in the future the PCAOB determines it no longer can inspect or investigate completely because of a position taken by an authority in the PRC, the PCAOB will act expeditiously to consider whether it should issue a new determination.
Our auditor prior to December 15, 2022, Friedman LLP (“Friedman”), had been inspected by the PCAOB on a regular basis in the audit period, and our new auditor, Marcum Asia CPAs LLP (“Marcum Asia”), is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Neither Friedman nor Marcum Asia is subject to the Determination Report announced by the PCAOB on December 16, 2021. However, as more stringent criteria have been imposed by the SEC and the PCAOB, recently, which would add uncertainties to our offering, and we cannot assure you whether NASDAQ or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. In the event it is later determined that the PCAOB is unable to inspect or investigate completely the Company’s auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the Company’s securities to be prohibited under the HFCAA, and ultimately result in a determination by a securities exchange to delist the Company’s securities. Furthermore, as more stringent criteria have been imposed by the SEC and the PCAOB, recently, which would add uncertainties to our offering, and we cannot assure you whether NASDAQ or regulatory authorities would apply additional and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. See “Risk Factors — Our Ordinary Shares may be prohibited from being traded on a national exchange under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which was signed into law on December 29, 2022, amending the HFCAA to require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.” on page 35.
Recent Regulatory Development in the PRC
Hong Kong is a special administrative region of the PRC and the basic policies of the PRC regarding Hong Kong are reflected in the Basic Law of the Hong Kong Special Administrative Region, or the Basic Law, which is a national law of the PRC and the constitutional document for Hong Kong. The Basic Law provides Hong Kong with a high degree of autonomy and executive, legislative and independent judicial powers, including that of final adjudication under the principle of “one country, two systems.” However, there is no assurance that there will not be any changes in the economic, political and legal environment in Hong Kong in the future. If there is a significant change to current political arrangements between Mainland China and Hong Kong, companies operating in Hong Kong may face similar regulatory risks as those operated in the PRC, including their ability to offer securities to investors, list their securities on a U.S. or other foreign exchange, and conduct their business or accept foreign investment. In light of PRC government’s recent expansion of authority in Hong Kong, there are risks and uncertainties which we cannot foresee for the time
17
being, and rules, regulations and the enforcement of laws in the PRC can change quickly with little or no advance notice. The PRC government may intervene or influence the current and future operations in Hong Kong at any time or may exert more oversight and control over offerings conducted overseas and/or foreign investment in issuers like ourselves.
We are aware that, recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in Mainland China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over Mainland China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. For example, on June 10, 2021, the Standing Committee of the National People’s Congress enacted the PRC Data Security Law, which took effect on September 1, 2021. The law requires data collection to be conducted in a legitimate and proper manner, and stipulates that, for the purpose of data protection, data processing activities must be conducted based on data classification and hierarchical protection system for data security. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly the Opinions on Strictly Cracking Down on Illegal Securities Activities in Accordance with the Law, which, among other things, requires the relevant governmental authorities to accelerate rulemaking related to the overseas issuance and listing of securities, and update the existing laws and regulations related to data security, cross-border data flow, and management of confidential information, and to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over Mainland China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws.
On August 20, 2021, the 30th meeting of the Standing Committee of the 13th National People’s Congress voted and passed the “Personal Information Protection Law of the People’s Republic of China,” or “PRC Personal Information Protection Law,” or “PIPL”, which became effective on November 1, 2021. The PIPL stipulates the rules for cross-border provision of personal information and applies to the processing of personal information of natural persons within the territory of Mainland China that is carried out outside of Mainland China where (1) such processing is for the purpose of providing products or services for natural persons within Mainland China, (2) such processing is to analyze or evaluate the behavior of natural persons within Mainland China, or (3) there are any other circumstances stipulated by related laws and administrative regulations. Prior to the cross-border provision of personal information of the natural persons, personal information processors shall obtain the approval of the corresponding natural persons and advise them of the overseas receiver’s name, contact information, processing purpose and methods, classification of personal information and information reception procedures, etc.
On December 24, 2021, the China Securities Regulatory Commission (“CSRC”), together with other relevant PRC government authorities issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) and the Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (collectively to be referred as the “Draft Overseas Listing Regulations”). The Draft Overseas Listing Regulations require that a Mainland China domestic enterprise seeking to issue and list its shares overseas (“Overseas Issuance and Listing”) shall complete the filing procedures of and submit the relevant information to CSRC. The Overseas Issuance and Listing include direct and indirect issuance and listing. Where an enterprise whose principal business activities are conducted in Mainland China seeks to issue and list its shares in the name of an overseas enterprise (“Overseas Issuer”) on the basis of the equity, assets, income or other similar rights and interests of the relevant Mainland China domestic enterprise, such activities shall be deemed an indirect overseas issuance and listing (“Indirect Overseas Issuance and Listing”) under the Draft Overseas Listing Regulations. On December 28, 2021, the CAC jointly with the relevant authorities formally published the Measures for Cybersecurity Review (2021) which took effect on February 15, 2022 and replace the former Measures for Cybersecurity Review (2020) issued on July 10, 2021. The Measures for Cybersecurity Review (2021) provide that operators of critical information infrastructure purchasing network products and services, and online platform operators (together with the operators of critical information infrastructure, the “Operators”) carrying out data processing activities that affect or may affect national security, shall conduct a cybersecurity review, any online platform operator who controls more than one million users’ personal information must go through a cybersecurity review by the cybersecurity review office if it seeks to be listed in a foreign country.
On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Administrative Measures, and five supporting guidelines, which came into effect on March 31, 2023. The Trial Administrative Measures further stipulate the rules and requirements for overseas offering and listing conducted by PRC domestic companies. The Overseas Listing Regulations require that a PRC domestic enterprise seeking to issue and list its shares overseas shall complete the filing procedures of and submit the relevant information to CSRC, failing which we may be fined between RMB 1 million and RMB 10 million.
18
Garden Stage is a holding company incorporated in the Cayman Islands with operating entities solely based in Hong Kong, and it does not have any subsidiary or VIE in Mainland China or intend to acquire any equity interest in any domestic companies within Mainland China, nor is it controlled by any companies or individuals of Mainland China. Further, we are headquartered in Hong Kong with our officers and all members of the board of directors based in Hong Kong who are not Mainland China citizens and all of our revenues and profits are generated by our subsidiaries in Hong Kong. Meanwhile, our Operating Subsidiaries may collect and store certain data (including certain personal information) from our customers, some of whom may be individuals in Mainland China, in connection with our business and operations and for “Know Your Customers” purposes (to combat money laundering).
As advised by Guangdong Wesley Law Firm, our counsel with respect to PRC legal matters, the Measures for Cybersecurity Review (2021), PRC Data Security Law, the PIPL, the Draft Overseas Listing Regulations and the Trial Administrative Measures currently does not have an impact on our business, operations or this offering, nor do we or our Hong Kong subsidiaries are covered by permission requirements from the CAC that is required to approve our Hong Kong subsidiaries’ operations and our Offering, as our Hong Kong subsidiaries will not be deemed to be an “Operator” or a “data processor” that required to file for cybersecurity review before listing in the United States. Because: (i) our Hong Kong subsidiaries were incorporated in Hong Kong and operate only in Hong Kong without any subsidiary or VIE structure in Mainland China and each of the Measures for Cybersecurity Review (2021), the PIPL, the Draft Overseas Listing Regulations and the Trial Administrative Measures do not clearly provide whether it shall be applied to a company based in Hong Kong; (ii) as of date of this prospectus, our Operating Subsidiaries have in aggregate collected and stored personal information of approximately 887 Mainland China individuals (approximately 48.79% of our total customers), far less than one million users; (iii) all of the data our Operating Subsidiaries have collected is stored in servers located in Hong Kong, and we do not place any reliance on collection and processing of any personal information to maintain our business operation; (iv) as of the date of this prospectus, neither of our Operating Subsidiaries has been informed by any PRC governmental authority of any requirement that it files for a CSRC review, nor received any inquiry, notice, warning, or sanction in such respect initiated by the CAC or related governmental regulatory authorities; and (v) data processed in our business should not have a bearing on national security nor affect or may affect national security, and we have not been notified by any authorities of being classified as an Operator. Moreover, as advised by Guangdong Wesley Law Firm, pursuant to the Basic Law, PRC laws and regulations shall not be applied in Hong Kong except for those listed in Annex III of the Basic Law (which is confined to laws relating to national defense, foreign affairs and other matters that are not within the scope of autonomy). Therefore, based on the PRC laws and regulations effective as of the date of this prospectus and subject to interpretations of these laws and regulations that may be adopted by PRC government authorities, as advised by Guangdong Wesley Law Firm, neither we, nor our Operating Subsidiaries in Hong Kong are currently required to obtain any permission or approval from the PRC government authorities, including the CSRC and CAC, to operate our business, list on the U.S. exchanges, or offer the securities to foreign investors. As of the date of this prospectus, neither we nor our Operating Subsidiaries have ever applied for any such permission or approval.
However, as further advised by Guangdong Wesley Law Firm, given the uncertainties arising from the PRC and Hong Kong legal systems, including uncertainties regarding the interpretation and enforcement of the PRC laws and the significant authority of the PRC government to intervene or influence the offshore holding company headquartered in Hong Kong, there remains significant uncertainty in the interpretation and enforcement of relevant PRC cybersecurity laws and other regulations. However, since the Trial Measures was newly promulgated, its interpretation, application and enforcement remain unclear and there also remains significant uncertainty as to the enactment, interpretation and implementation of other regulatory requirements related to overseas securities offerings and other capital markets activities. If Trial Administrative Measures become applicable to us or our Operating Subsidiaries in Hong Kong, if any of our Operating Subsidiaries is deemed to be an “Operator”, or if the Measures for Cybersecurity Review (2021) or the PRC Personal Information Protection Law become applicable to the Operating Subsidiaries in Hong Kong, the business operation of the Operating Subsidiaries and the listing of our Ordinary Shares in the United States could be subject to the CAC’s cybersecurity review or the CSRC Overseas Issuance and Listing review in the future. While, we do not believe we are covered by the permission requirements from CSRC or CAC, investors of our company and our business may face potential uncertainty from actions taken by the PRC government affecting our business. If the applicable laws, regulations, or interpretations change and our Operating Subsidiaries become subject to the CAC or CSRC review, we cannot assure you that our Operating Subsidiaries will be able to comply with the regulatory requirements in all respects and our current practice of collecting and processing personal information may be ordered to be rectified or terminated by regulatory authorities. Moreover, if there is a significant change to the current political arrangements between the PRC and Hong Kong, or the applicable laws, regulations, or interpretations change, and/or
19
if we were required to obtain such permissions or approvals in the future in connection with the listing or continued listing of our securities on a stock exchange outside of the PRC, it is uncertain how long it will take for us to obtain such approval, and, even if we obtain such approval, the approval could be rescinded. Any failure to obtain or a delay in obtaining the necessary permissions from the PRC authorities to conduct offerings or list outside of the PRC may subject us to sanctions imposed by the CSRC, CAC, or other PRC regulatory authorities. It could include fines and penalties, proceedings against us, and other forms of sanctions, and our ability to conduct our business, invest into the Mainland China as foreign investments or accept foreign investments, ability to offer or continue to offer Ordinary Shares to investors or list on the U.S. or other overseas exchange may be restricted, and the value of our Ordinary Shares may significantly decline or be worthless, our business, reputation, financial condition, and results of operations may be materially and adversely affected. The CSRC, the CAC, or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of our Ordinary Shares. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC, the CAC, or other regulatory PRC agencies later promulgate new rules requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of our securities. See Risk Factors — Risks Relating to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate — “If the PRC government chooses to extend the oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers to Hong Kong-based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless.” On page 30, and “We may become subject to a variety of PRC laws and other obligations regarding data security in relation to offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, financial condition and results of operations and may hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless.” On page 27.
Implications of Being an “Emerging Growth Company”
As a company with less than US$1.235 billion in revenues during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. An “emerging growth company” may take advantage of reduced reporting requirements that are otherwise applicable to larger public companies. In particular, as an emerging growth company, we:
• may present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations, or “MD&A”;
• are not required to provide a detailed narrative disclosure discussing our compensation principles, objectives and elements and analyzing how those elements fit with our principles and objectives, which is commonly referred to as “compensation discussion and analysis”;
• are not required to obtain an attestation and report from our auditors on our management’s assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act of 2002;
• are not required to obtain a non-binding advisory vote from our shareholders on executive compensation or golden parachute arrangements (commonly referred to as the “say-on-pay,” “say-on frequency” and “say-on-golden-parachute” votes);
• are exempt from certain executive compensation disclosure provisions requiring a pay-for-performance graph and chief executive officer pay ratio disclosure;
• are eligible to claim longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act; and
• will not be required to conduct an evaluation of our internal control over financial reporting.
20
We intend to take advantage of all of these reduced reporting requirements and exemptions, including the longer phase-in periods for the adoption of new or revised financial accounting standards under §107 of the JOBS Act. Our election to use the phase-in periods may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the phase-in periods under §107 of the JOBS Act.
We will remain an emerging growth company until the earliest of (i) the last day of the fiscal year during which we have total annual gross revenues of at least US$1.235 billion; (ii) the last day of our fiscal year following the fifth anniversary of the completion of this offering; (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt; or (iv) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our Ordinary Shares that are held by non-affiliates exceeds US$700.0 million as of the last business day of our most recently completed second fiscal quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed above.
Implication of Being a Foreign Private Issuer
We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, we are exempt from certain provisions applicable to United States domestic public companies. For example:
• we are not required to provide as many Exchange Act reports, or as frequently, as a domestic public company;
• for interim reporting, we are permitted to comply solely with our home country requirements, which are less rigorous than the rules that apply to domestic public companies;
• we are not required to provide the same level of disclosure on certain issues, such as executive compensation;
• we are exempt from provisions of Regulation FD aimed at preventing issuers from making selective disclosures of material information;
• we are not required to comply with the sections of the Exchange Act regulating the solicitation of proxies, consents or authorizations in respect of a security registered under the Exchange Act; and
• we are not required to comply with Section 16 of the Exchange Act requiring insiders to file public reports of their share ownership and trading activities and establishing insider liability for profits realized from any “short-swing” trading transaction.
Implications of Being a Controlled Company
Controlled companies are exempt from the majority of independent director requirements. Controlled companies are subject to an exemption from NASDAQ standards requiring that the board of a listed company consist of a majority of independent directors within one year of the listing date.
Public companies that qualify as a “Controlled Company” with securities listed on the NASDAQ, must comply with the exchange’s continued listing standards to maintain their listings. NASDAQ has adopted qualitative listing standards. Companies that do not comply with these corporate governance requirements may lose their listing status. Under the NASDAQ rules, a “controlled company” is a company with more than 50% of its voting power held by a single person, entity or group. Under NASDAQ rules, a controlled company is exempt from certain corporate governance requirements including:
• the requirement that a majority of the board of directors consist of independent directors;
• the requirement that a listed company have a nominating and governance committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities;
• the requirement that a listed company have a compensation committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities; and
• the requirement for an annual performance evaluation of the nominating and governance committee and compensation committee.
21
Controlled companies must still comply with the exchange’s other corporate governance standards. These include having an audit committee and the special meetings of independent or non-management directors.
Upon the completion of this offering, our Controlling Shareholder, Oriental Moon Tree Limited, will own 74.58% of our total issued and outstanding Ordinary Shares, representing 74.58% of the total voting power, assuming that the underwriters do not exercise their over-allotment option, and assuming that Oriental Moon Tree Limited, being a Selling Shareholder, will sell all of the Ordinary Shares it offered for sale (475,000 Ordinary Shares) pursuant to the Resale Prospectus. As a result, we will be a “controlled company” as defined under NASDAQ Listing Rule 5615(c) because our Controlling Shareholder will hold more than 50% of the voting power for the election of directors.
As a “controlled company,” we are permitted to elect not to comply with certain corporate governance requirements. Although we do not intend to rely on the controlled company exemptions under the NASDAQ listing standards even if we are deemed a controlled company, we could elect to rely on these exemptions in the future, and if so, you would not have the same protection afforded to shareholders of companies that are subject to all of the corporate governance requirements of the NASDAQ Capital Market.
Impact of the COVID-19
Since early 2020, the ongoing COVID-19 pandemic has led governments across the globe to impose a series of measures intended to contain its spread, including border closures, travel bans, quarantine measures, social distancing, and restrictions on business operations and large gatherings, and has caused significant disruption to worldwide economic activities, including economic activities in Hong Kong (where we operate in), and in China (where certain portion of the client and potential client locate). The COVID-19 pandemic outbreak in Hong Kong in early 2020 and early 2022 resulted in temporary pandemic-related lockdowns. These two outbreaks of COVID-19 domestically in Hong Kong caused companies such as ours, as well as our professional parties partners and clients, to implement temporary adjustments to work schedules and travel plans and to implement alternative work arrangements for some of our or their employee to work from home and collaborate remotely. As a result, we have experienced lower efficiency and productivity, internally and externally, which may adversely affect our service quality. Since April 2022, in light of the reduced severity of the COVID-19 pandemic in Hong Kong, our alternative work arrangement was largely abolished. Nonetheless, our business depends on our employees. If any of our employees has contracted or is suspected of having contracted COVID-19, these employees will be required to be quarantined and they could pass it to other of our employees, potentially resulting in severe disruption to our business.
As of the date of the prospectus, most countries around the globe have abolished the measures to contain COVID-19 pandemic and “back to normal”, and the Hong Kong government has abolished its entry restrictions and significantly lessened the Covid-19 control measures. Furthermore, the PRC government has significantly lessened its travel restrictions and abolished the quarantine requirements for international arrivals to Mainland China from January 8, 2023. However, before their abolishment, the aforesaid travel restrictions, quarantine and social control measures in Hong Kong and Mainland China had severely hindered our client development efforts in Hong Kong and the Mainland China, and our businesses and clients have been adversely affected by travel restrictions preventing PRC residents from traveling to Hong Kong.
Furthermore, our results of operations have been affected by the COVID-19 outbreak. We have witnessed huge market fluctuations in the global capital and financial markets since 2020. Due to the instability of global financial markets and other economic and financial challenges brought about by COVID-19, the deterioration of the economic condition of Mainland China due to the continuous COVID-19 control measures, the significant market volatility and declines in general economic activities in Hong Kong and globally, have severely dampened the confidence of our client in the global and Hong Kong’s financial markets and its willingness to conduct fundraising activities in Hong Kong Stock Exchanges, or trade in the secondary market. The pandemic, government measures in response to the pandemic, and the global economic deterioration, could result in an economic downturn in Hong Kong and countries where our clients and potential client locates and in the foreseeable future. Such a downturn in global and Hong Kong’s economy and financial market may lead to a decline in our consumers’ demands for our services, which could adversely affect our business and, in turn, negatively impact our business and results of operations. Given the general slowdown in economic conditions globally, volatility in the capital markets as well as the generally negative impact of the COVID-19 outbreak on the capital market markets, we cannot assure you that we will be able to maintain the growth rate we have experienced or projected. Any future impact on our results of operations will depend on, to a large extent, future
22
developments and new information that may emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by government authorities and other entities to contain the spread or treat its impact, almost all of which are beyond our control. We will continue to monitor the situation throughout 2023 and beyond closely.
Impact of Russia’s Invasion of Ukraine and Related Supply Chain Issues
Russia launched a large-scale invasion of Ukraine on February 24, 2022. The extent and duration of the military action, resulting sanctions and resulting future market disruptions, including volatilities in stock markets, disruption to global supply chain and worsening of global inflation, are impossible to predict, but could be significant. Any such disruptions caused by Russian military action or other actions (including cyberattacks and espionage) or resulting actual and threatened responses to such activity, including purchasing and financing restrictions, boycotts or changes in consumer or purchaser preferences, sanctions, tariffs or cyberattacks, may have significant collateral impact on global economy and our business model and revenue stream. Nevertheless, as of the date of this document, since (i) we principally operate in Hong Kong and do not have business presence in Russia and Ukraine; and (ii) our industry has been less dependent on oil, natural resources or global supply chain which have been disrupted significantly by Russia’s invasion of Ukraine, there is no material impact on our cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations arising from, related to, or caused by the global disruption from Russia’s invasion of Ukraine.
Corporate Information
Our principal executive office is located at Room 201, 2/F, China Insurance Group Building, 141 Des Voeux Road Central, Central, Hong Kong. Our telephone number at this address is +852 2688 6333. Our registered office in the Cayman Islands is located at the offices of International Corporation Services Ltd., P.O. Box 472, 2nd Floor, Harbour Place, 103 South Church Street, George Town, Grand Cayman KY1-1106, Cayman Islands. Our agent for service of process in the United States is Cogency Global Inc. located at 122 East 42nd Street, 18th Floor, New York, NY 10168.
Investors should contact us for any inquiries through the address and telephone number of our principal executive offices. Our website is https://www.iwinsec.com. The information contained on our website is not a part of this prospectus.
23
THE OFFERING
Issuer: | Garden Stage Limited | |
Securities being Offered: | 2,000,000 Ordinary Shares par value of US$0.0001 per ordinary share. We are also registering for resale up to 1,750,000 Ordinary Shares by certain selling shareholders. These shares will not be part of this initial public offering. | |
Ordinary Shares Outstanding Prior to Completion of this Offering: | 12,750,000 Ordinary Shares. | |
Ordinary Shares Outstanding After This Offering: | 14,750,000 Ordinary Shares. The number of Ordinary Shares outstanding after this Offering excludes 1,475,000 Ordinary Shares issuable upon exercise of stock options, representing 10% of the Ordinary Shares outstanding immediately after this Offering, outstanding as of the date of the prospectus, at the exercise price of $2.00 per Ordinary Share. | |
Initial Public Offering Price per Ordinary Share: | We estimate the initial public offering price will be between US$4.00 and US$5.00 per Ordinary Share. | |
Over-allotment Option: | We have granted the underwriters an option for a period of 45 days from the closing of this offering to purchase up to 15% of the total number of Ordinary Shares to be offered by us pursuant to this offering, solely for the purpose of covering over-allotments, at the public offering price less the underwriting discounts. | |
Lock-up: | We, our directors, executive officers and shareholders holding 5% or more of the issued and outstanding Ordinary Shares, except for the Selling Shareholders with respect to their Ordinary Shares sold in this Offering only, have agreed with the underwriters, subject to certain exceptions, not to sell, transfer or dispose of any Ordinary Shares for a period of six months from the date of this prospectus. See “Shares Eligible for Future Sale” and “Underwriting.” | |
Listing: | We plan to list our Ordinary Shares on the NASDAQ Capital Market. | |
NASDAQ Capital Market Symbol: | WIN | |
Transfer Agent: | Vstock Transfer, LLC | |
Risk Factors: | See “Risk Factors” beginning on page 26 for a discussion of risks you should carefully consider before investing in our Ordinary Shares. |
24
Use of Proceeds: | Based upon the assumed initial public offering price of US$4.00 per Ordinary Share, the lowest point of the price range set forth on the cover page of this prospectus, we estimate that the net proceeds to us from this offering will be approximately US$ 6.3 million or approximately US$ 7.4 million if the underwriters exercise their over-allotment option to purchase additional Ordinary Shares in full, after deducting underwriting discounts and estimated offering expenses payable by us, including cash expenses payable to the underwriters for their reasonable out-of-pocket expenses. We intend to use the net proceeds of this offering primarily for expanding our underwriting and placing services, commencing our securities margin financing services, enhancing our IT infrastructure and capacity, expanding our asset management service, expanding our securities dealing and brokerage services coverage in the U.S. exchanges, and general corporate purposes, including working capital. We will not receive any of the proceeds from the sale of Ordinary Shares by the Selling Shareholders. See “Use of Proceeds” on page 62 for additional information. |
25
An investment in our Ordinary Shares involves a high degree of risk. Before deciding whether to invest in our Ordinary Shares, you should consider carefully the risks described below, together with all of the other information set forth in this prospectus, including the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operation” and our consolidated financial statements and related notes. If any of these risks actually occurs, our business, financial condition, results of operations or cash flow could be materially and adversely affected, which could cause the trading price of our Ordinary Shares to decline, resulting in a loss of all or part of your investment.
Risks Relating to Doing Business in the Jurisdictions in which the Operating Subsidiaries Operate
All of our operations are in Hong Kong. However, due to the long arm application of the current PRC laws and regulations, the PRC government may exercise significant direct oversight and discretion over the conduct of our business and may intervene or influence our operations, which could result in a material change in our operations and/or the value of our Ordinary Shares. Our Operating Subsidiaries in Hong Kong may be subject to the PRC laws and regulations, which may impair our ability to operate profitably and result in a material negative impact on our operations and/or the value of our Ordinary Shares. Furthermore, the changes in the policies, regulations, rules, and the enforcement of the PRC laws and regulations may also occur quickly with little advance notice and our assertions and beliefs of the risk imposed by the PRC legal and regulatory system cannot be certain.
Our Operating Subsidiaries are located and operate their business in Hong Kong, a special administrative region of the PRC. Although a portion of our customers are individuals from Mainland China or companies that have shareholders and directors that are individuals from Mainland China, our Operating Subsidiaries does not have operations in Mainland China or is not regulated by any regulator in Mainland China. Furthermore, except for the Basic Law of the Hong Kong Special Administrative Region of the People’s Republic of China (“Basic Law”), national laws of the PRC do not apply in Hong Kong unless they are listed in Annex III of the Basic Law and applied locally by promulgation or local legislation. National laws that may be listed in Annex III are currently limited under the Basic Law to those which fall within the scope of defense and foreign affairs as well as other matters outside the limits of the autonomy of Hong Kong. National laws and regulations relating to data protection, cybersecurity and the anti-monopoly have not been listed in Annex III and so do not apply directly to Hong Kong.
However, due to long-arm provisions under the current PRC laws and regulations, there remain regulatory and legal uncertainty with respect to the implementation of the PRC laws and regulations to Hong Kong. As a result, there is no guarantee that the PRC government may not choose to implement the PRC laws and regulations to Hong Kong and exercise significant direct influence and discretion over the operation of our Operating Subsidiaries in the future and, it will not have a material adverse impact on our business, financial condition and results of operations, due to changes in laws, political environment or other unforeseeable reasons. In the event that we or our Hong Kong Operating Subsidiaries were to become subject to the PRC laws and regulations, it is possible that all the legal and operational risks associated with being based in and having operations in the PRC may also apply to the operations in Hong Kong in the future, and we face the risks and uncertainties associated with the PRC legal system, complex and evolving PRC laws and regulation, and as to whether and how the recent PRC government statements and regulatory developments, such as those relating to data and cyberspace security and anti-monopoly concerns, would be applicable to a companies like our Operating Subsidiaries and us, given the substantial operations of our Operating Subsidiaries in Hong Kong and the Chinese government may exercise significant oversight over the conduct of business in Hong Kong.
The PRC laws and regulations are evolving, and their enactment timetable, interpretation, enforcement, and implementation involve significant uncertainties, and may change quickly with little advance notice, along with the risk that the PRC government may intervene or influence our Operating Subsidiaries’ operations at any time could result in a material change in our operations and/or the value of our securities. Moreover, there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations including, but not limited to, the laws and regulations related to our business and the enforcement and performance of our arrangements with customers in certain circumstances. The laws and regulations are sometimes vague and may be subject to future changes, and their official interpretation and enforcement may involve substantial uncertainty. The effectiveness and interpretation of newly enacted laws or regulations, including amendments to existing laws and regulations, may be delayed, and our business may be affected if we rely on laws and regulations which are subsequently adopted or interpreted in a
26
manner different from our understanding of these laws and regulations. New laws and regulations that affect existing and proposed future businesses may also be applied retroactively. We cannot predict what effect the interpretation of existing or new PRC laws or regulations may have on our business.
The laws, regulations, and other government directives of the PRC may also be costly to comply with, and such compliance or any associated inquiries or investigations or any other government actions may:
• delay or impede our development;
• result in negative publicity or increase our operating costs;
• require significant management time and attention;
• cause devaluation of our securities or delisting; and,
• subject us to remedies, administrative penalties and even criminal liabilities that may harm our business, including fines assessed for our current or historical operations, or demands or orders that we modify or even cease our business operations.
We are aware that recently, the PRC government initiated a series of regulatory actions and statements to regulate business operations in certain areas in Mainland China with little advance notice, including cracking down on illegal activities in the securities market, enhancing supervision over Mainland China-based companies listed overseas using a variable interest entity structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. We have no operations in Mainland China. Based on our understanding of the PRC laws and regulations currently in effect as of the date of this prospectus, as our Operating Subsidiaries are located in Hong Kong, we are not currently required to obtain permission from the PRC government to list on a U.S. securities exchange and consummate this offering. However, there is no guarantee that this will continue to be the case in the future in relation to the continued listing of our securities on a securities exchange outside of the PRC, or even when such permission is obtained, it will not be subsequently denied or rescinded. The PRC government may intervene or influence our operations at any time or may exert control over offerings conducted overseas and foreign investment in Hong Kong-based issuers, which may result in a material change in our operations and/or the value of our Ordinary Shares. For example, there is currently no restriction or limitation under the laws of Hong Kong on the conversion of HK dollar into foreign currencies and the transfer of currencies out of Hong Kong and the laws and regulations of the PRC on currency conversion control do not currently have any material impact on the transfer of cash between the ultimate holding company and the Operating Subsidiaries in Hong Kong. The PRC government may, in the future, impose restrictions or limitations on our ability to move money out of Hong Kong to distribute earnings and pay dividends to and from the other entities within our organization or to reinvest in our business outside of Hong Kong. Such restrictions and limitations, if imposed in the future, may delay or hinder the expansion of our business to the outside of Hong Kong and may affect our ability to receive funds from our Operating Subsidiaries in Hong Kong. The promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case, that restrict or otherwise unfavorably impact the ability or way we conduct our business, could require us to change certain aspects of our business to ensure compliance, which could decrease demand for our services, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals or certificates, or subject us to additional liabilities. To the extent any new or more stringent measures are required to be implemented, our business, financial condition and results of operations could be adversely affected and such measured could materially decrease the value of our Ordinary Shares, potentially rendering it worthless.
We may become subject to a variety of PRC laws and other obligations regarding data security in relation to offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers, and any failure to comply with applicable laws and obligations could have a material and adverse effect on our business, financial condition and results of operations and may hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless.
On June 10, 2021, the Standing Committee of the National People’s Congress enacted the PRC Data Security Law, which took effect on September 1, 2021. The law requires data collection to be conducted in a legitimate and proper manner, and stipulates that, for the purpose of data protection, data processing activities must be conducted based on data classification and hierarchical protection system for data security. On July 6, 2021, the General Office of the Communist Party of China Central Committee and the General Office of the State Council jointly issued a document to crack down on illegal activities in the securities market and promote the high-quality development of the capital
27
market, which, among other things, requires the relevant governmental authorities to strengthen cross-border oversight of law-enforcement and judicial cooperation, to enhance supervision over China-based companies listed overseas, and to establish and improve the system of extraterritorial application of the PRC securities laws. On August 20, 2021, the 30th meeting of the Standing Committee of the 13th National People’s Congress voted and passed the “Personal Information Protection Law of the People’s Republic of China”, or “PRC Personal Information Protection Law (PIPL)”, which became effective on November 1, 2021. The PIPL stipulates the rules for cross-border provision of personal information and applies to the processing of personal information of natural persons within the territory of Mainland China that is carried out outside of Mainland China where (1) such processing is for the purpose of providing products or services for natural persons within Mainland China, (2) such processing is to analyze or evaluate the behavior of natural persons within Mainland China, or (3) there are any other circumstances stipulated by related laws and administrative regulations. Pursuant to the PIPL, personal data processors (“data processors”) shall meet one of the conditions in order to transmit personal information overseas for their business operations: (i) passing the security evaluation organized by the Cyberspace Administration of China (the “CAC”); (ii) acquiring personal information protection certification from the professional organizations regulated by the CAC; (iii) adopting the standard contract forms stipulated by the CAC when entering into contracts with overseas information receivers, setting forth the rights and obligations of the parties; and (iv) other conditions regulated by laws, regulations and the CAC. Prior to the cross-border provision of personal information of the natural persons, personal information processors shall obtain the approval of the corresponding natural persons and advise them of the overseas receiver’s name, contact information, processing purpose and methods, classification of personal information and information reception procedures, etc.
On December 24, 2021, the China Securities Regulatory Commission (“CSRC”), together with other relevant government authorities in China issued the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) and the Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments) (collectively to be referred as the “Draft Overseas Listing Regulations”). The Draft Overseas Listing Regulations requires that a PRC domestic enterprise seeking to issue and list its shares overseas (“Overseas Issuance and Listing”) shall complete the filing procedures of and submit the relevant information to CSRC. The Overseas Issuance and Listing includes direct and indirect issuance and listing. Where a company whose principal business activities are conducted in Mainland China seeks to issue and list its shares in the name of an overseas enterprise (“Overseas Issuer”) on the basis of the equity, assets, income or other similar rights and interests of the relevant PRC domestic enterprise, such activities shall be deemed an indirect overseas issuance and listing (“Indirect Overseas Issuance and Listing”) under the Draft Overseas Listing Regulations. On February 17, 2023, the CSRC released the Trial Administrative Measures of Overseas Securities Offering and Listing by Domestic Companies, or the Trial Administrative Measures, and five supporting guidelines, which came into effect on March 31, 2023. The Trial Administrative Measures further stipulate the rules and requirements for overseas offering and listing conducted by PRC domestic companies. The Overseas Listing Regulations require that a PRC domestic enterprise seeking to issue and list its shares overseas shall complete the filing procedures of and submit the relevant information to CSRC, failing which we may be fined between RMB 1 million and RMB 10 million. On December 28, 2021, the CAC jointly with the relevant authorities formally published Measures for Cybersecurity Review (2021) which took effect on February 15, 2022 and replace the former Measures for Cybersecurity Review (2020) issued on July 10, 2021. Measures for Cybersecurity Review (2021) stipulates that operators of critical information infrastructure purchasing network products and services, and online platform operator (together with the operators of critical information infrastructure, the “Operators”) carrying out data processing activities that affect or may affect national security, shall conduct a cybersecurity review, any online platform operator who controls more than one million users’ personal information must go through a cybersecurity review by the cybersecurity review office if it seeks to be listed in a foreign country.
Our Operating Subsidiaries may collect and store certain data (including certain personal information) from our clients, who may be Mainland China individuals, in connection with our business and operations and for “Know Your Customers” purposes (to combat money laundering). As advised by Guangdong Wesley Law Firm, our counsel with respect to PRC legal matters, the Measures for Cybersecurity Review (2021), PRC Data Security Law, the PIPL, and the Draft Overseas Listing Regulations currently does not have an impact on our business, operations or this offering, nor do we or our Hong Kong subsidiaries are covered by permission requirements from the CAC that is required to approve our Hong Kong subsidiaries’ operations and our Offering, as our Hong Kong subsidiaries will not be deemed to be an “Operator” or a “data processor” that required to file for cybersecurity review before listing in the United States. Because: (i) our Hong Kong subsidiaries were incorporated in Hong Kong and operate only in Hong Kong without any subsidiary or VIE structure in Mainland China and each of the Measures for Cybersecurity Review (2021), the PIPL and the Draft Overseas Listing Regulations do not clearly provide whether it shall be applied to a company based in Hong Kong; (ii) as of date of this prospectus, our Operating Subsidiaries have in aggregate collected and stored personal
28
information of approximately 887 Mainland China individuals (approximately 48.79% of our total customers), far less than one million users; (iii) all of the data our Operating Subsidiaries have collected is stored in servers located in Hong Kong, and we do not place any reliance on collection and processing of any personal information to maintain our business operation; (iv) as of the date of this prospectus, neither of our Operating Subsidiaries has been informed by any PRC governmental authority of any requirement that it files for a CSRC review, nor received any inquiry, notice, warning, or sanction in such respect initiated by the CAC or related governmental regulatory authorities; and (v) data processed in our business should not have a bearing on national security nor affect or may affect national security, and we have not been notified by any authorities of being classified as an Operator. Moreover, as advised by Guangdong Wesley Law Firm, pursuant to the Basic Law, PRC laws and regulations shall not be applied in Hong Kong except for those listed in Annex III of the Basic Law (which is confined to laws relating to national defense, foreign affairs and other matters that are not within the scope of autonomy). Therefore, based on the PRC laws and regulations effective as of the date of this prospectus and subject to interpretations of these laws and regulations that may be adopted by Mainland China authorities, as advised by Guangdong Wesley Law Firm, neither we, nor our Operating Subsidiaries in Hong Kong are currently required to obtain any permission or approval from the Mainland China authorities, including the CSRC and CAC, to operate our business or to offer the securities being registered to foreign investors. As of the date of this prospectus, neither we nor our Operating Subsidiaries have ever applied for any such permission or approval.
However, as further advised by Guangdong Wesley Law Firm, given the uncertainties arising from the legal system in Mainland China and Hong Kong, including uncertainties regarding the interpretation and enforcement of the PRC laws and regulations and the significant authority of the PRC government to intervene or influence the offshore holding company headquartered in Hong Kong, there remains significant uncertainty in the interpretation and enforcement of Draft Overseas Listing Regulations, Trial Administrative Measures, PIPL, relevant Mainland China data privacy, cybersecurity laws and other regulations. It is highly uncertain how soon the legislative or administrative regulation-making bodies will respond and what existing or new laws or regulations or detailed implementations and interpretations will be modified or promulgated, if any. It is also highly uncertain what the potential impact such modified or new laws and regulations will have on the daily business operations of our Operating Subsidiaries and the listing of our Ordinary Shares on the U.S. or other foreign exchanges.
If the PIPL becomes applicable to the companies headquartered in Hong Kong, our business, or the operation of our Operating Subsidiaries, there can be no assurance that we or our subsidiaries will be able to comply with the PIPL. The Operating Subsidiaries’ current practice of collecting and processing personal information may be required to be rectified or terminated by regulatory authorities. Failure to comply with any applicable requirements may subject the our to fines and other penalties which may have a material adverse effect on its business, operations, and financial condition. Furthermore, if the Trial Administrative Measures become applicable to our Operating Subsidiaries in Hong Kong, if any of our Operating Subsidiaries is deemed to be an “Operator”, or if the Measures for Cybersecurity Review (2021) or the PIPL become applicable to our Operating Subsidiaries in Hong Kong, the business operation of our Operating Subsidiaries and the listing of our Ordinary Shares in the United States could be subject to the CAC’s cybersecurity review or the CSRC Overseas Issuance and Listing review in the future. If the applicable laws, regulations, or interpretations change and our Operating Subsidiaries become subject to the CAC or CSRC review, we cannot assure you that our Operating Subsidiaries will be able to comply with the regulatory requirements in all respects and our current practice of collecting and processing personal information may be ordered to be rectified or terminated by regulatory authorities. Compliance with these laws and regulations could significantly increase the cost to us of providing our service offerings, require significant changes to our operations or even prevent us from providing certain service offerings in jurisdictions in which we currently operate or in which we may operate in the future.
Additionally, as we are based in Hong Kong without Mainland China operation and subsidiaries, and the Trial Measures have not come into effect as of the date of this prospectus, under the currently effective PRC laws and regulations, we are not required to seek approval from the CSRC, or any other PRC governmental authorities for our overseas listing plan, nor have we received any inquiry, notice, warning or sanctions regarding our planned overseas listing from the CSRC or any other PRC governmental authorities as of the date of this prospectus. However, since the Trial Measures was newly promulgated, its interpretation, application and enforcement remain unclear and there also remains significant uncertainty as to the enactment, interpretation and implementation of other regulatory requirements related to overseas securities offerings and other capital markets activities. If there is a significant change to the current political arrangements between Mainland China and Hong Kong, or the applicable laws, regulations, or interpretations change, and/or if we were required to obtain such permissions or approvals in the future in connection with the listing or continued listing of our securities on a stock exchange outside of the PRC, it is uncertain how long it will take for us to obtain such approval, and, even if we obtain such approval, the approval could be rescinded. Any failure to obtain or a delay in obtaining the necessary
29
permissions from the PRC authorities to conduct offerings or list outside of the PRC may subject us to sanctions imposed by the CSRC, CAC, or other PRC regulatory authorities. It could include fines and penalties, proceedings against us, and other forms of sanctions, and our ability to conduct our business, invest into the Mainland China as foreign investments or accept foreign investments, ability to offer or continue to offer Ordinary Shares to investors or list on the U.S. or other overseas exchange may be restricted, and the value of our Ordinary Shares may significantly decline or be worthless, our business, reputation, financial condition, and results of operations may be materially and adversely affected. The CSRC, the CAC, or other PRC regulatory agencies also may take actions requiring us, or making it advisable for us, to halt this offering before settlement and delivery of our Ordinary Shares. Consequently, if you engage in market trading or other activities in anticipation of and prior to settlement and delivery, you do so at the risk that settlement and delivery may not occur. In addition, if the CSRC, the CAC, or other regulatory PRC agencies later promulgate new rules requiring that we obtain their approvals for this offering, we may be unable to obtain a waiver of such approval requirements, if and when procedures are established to obtain such a waiver. Any uncertainties and/or negative publicity regarding such an approval requirement could have a material adverse effect on the trading price of our securities.
If the PRC government chooses to extend the oversight and control over offerings that are conducted overseas and/or foreign investment in Mainland China-based issuers to Hong Kong-based issuers, such action may significantly limit or completely hinder our ability to offer or continue to offer Ordinary Shares to investors and cause the value of our Ordinary Shares to significantly decline or be worthless.
Recent statements, laws and regulations by the PRC government, including the Measures for Cybersecurity Review (2021), the PRC Personal Information Protection Law and the Draft Rules on Overseas Listing published by CSRC on December 24, 2021 also have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in Mainland China-based issuers. It remains uncertain as to the enactment, interpretation, and implementation of regulatory requirements related to overseas securities offering and other capital markets activities and due to the possibility that laws, regulations, or policies in the PRC could change rapidly in the future.
It remains uncertain whether the PRC government will adopt additional requirements or extend the existing requirements to apply to our Operating Subsidiaries. It is also uncertain whether the Hong Kong government will be mandated by the PRC government, despite the constitutional constraints of the Basic Law, to control over offerings conducted overseas and/or foreign investment of entities in Hong Kong, including our Operating Subsidiaries. Any actions by the PRC government to exert more oversight and control over offerings (including of businesses whose primary operations are in Hong Kong) that are conducted overseas and/or foreign investments in Hong Kong-based issuers could significantly limit or completely hinder our ability to offer or continue to offer securities to investors. If there is a significant change to current political arrangements between Mainland China and Hong Kong, or the applicable laws, regulations, or interpretations change, and, in such event, if we are required to obtain such approvals in the future and we do not receive or maintain the approvals or is denied permission from Mainland China or Hong Kong authorities, we will not be able to list our Ordinary Shares on a U.S. exchange, or continue to offer securities to investors, which would materially affect the interests of the investors and cause significant the value of our Ordinary Shares significantly decline or be worthless.
The enactment of the law of the PRC on Safeguarding National Security in the Hong Kong Special Administrative Region (the “Hong Kong National Security Law”) could impact our Hong Kong subsidiaries, which represent substantially all of our business.
On June 30, 2020, the Standing Committee of the PRC National People’s Congress adopted the Hong Kong National Security Law. This law defines the duties and government bodies of the Hong Kong National Security Law for safeguarding national security and four categories of offenses — secession, subversion, terrorist activities, and collusion with a foreign country or external elements to endanger national security — and their corresponding penalties. On July 14, 2020, former U.S. President Donald Trump signed the Hong Kong Autonomy Act, or HKAA, into law, authorizing the U.S. administration to impose blocking sanctions against individuals and entities determined to have materially contributed to the erosion of Hong Kong’s autonomy. On August 7, 2020, the U.S. government imposed HKAA-authorized sanctions on eleven individuals, including former and current Chief Executives of HKSAR, Carrie Lam and John Lee, respectively. On October 14, 2020, the U.S. State Department submitted to relevant committees of Congress the report required under HKAA, identifying persons materially contributing to “the failure of the Government of China to meet its obligations under the Joint Declaration or the Basic Law.” The HKAA further authorizes secondary sanctions, including the imposition of blocking sanctions, against foreign financial institutions that knowingly conduct a significant transaction with foreign persons sanctioned under this authority. The imposition of sanctions may directly affect foreign financial institutions and any third parties or customers dealing with any foreign financial institution that
30
is targeted. It is difficult to predict the full impact of the Hong Kong National Security Law and HKAA on Hong Kong and companies located in Hong Kong. If our Hong Kong subsidiaries, which represent substantially all of our business, are determined to be in violation of the Hong Kong National Security Law or the HKAA by competent authorities, our business operations, financial position and results of operations could be materially and adversely affected.
The enforcement of laws and rules and regulations in the PRC can change quickly with little advance notice. Additionally, the PRC laws and regulations and the enforcement of such that apply or are to be applied to Hong Kong can change quickly with little or no advance notice. As a result, the Hong Kong legal system embodies uncertainties which could limit the availability of legal protections, which could result in a material change in our Operating Subsidiaries’ operations and/or the value of the securities we are offering.
As one of the conditions for the handover of the sovereignty of Hong Kong to China, China accepted conditions such as Hong Kong’s Basic Law. The Basic Law ensured Hong Kong will retain its currency (the Hong Kong Dollar), legal system, parliamentary system, and people’s rights and freedom for fifty years from 1997. This agreement has given Hong Kong the freedom to function with a high degree of autonomy. The Special Administrative Region of Hong Kong is responsible for its domestic affairs, including, but not limited to, the judiciary and courts of last resort, immigration, and customs, public finance, currencies, and extradition. Hong Kong continues using the English common law system. However, if the PRC government attempts to alter its agreement to allow Hong Kong to function autonomously, this could potentially impact Hong Kong’s common law legal system and may in turn bring about uncertainty in, for example, the enforcement of our contractual rights. This could, in turn, materially and adversely affect our Operating Subsidiaries’ business and operations. Additionally, intellectual property rights and confidentiality protections in Hong Kong may not be as effective as in the United States or other countries. Accordingly, we cannot predict the effect of future developments in the Hong Kong legal system, including the promulgation of new laws, changes to existing laws or the interpretation or enforcement thereof, or the pre-emption of local regulations by national laws. These uncertainties could limit the legal protections available to us, including the ability to enforce agreements with the customers.
There are political risks associated with conducting business in Hong Kong.
All of our operations are in Hong Kong. Accordingly, the business operations and financial conditions of our Operating Subsidiaries will be affected by the political and legal developments in Hong Kong. Any adverse economic, social and/or political conditions, material social unrest, strike, riot, civil disturbance or disobedience, as well as significant natural disasters, may affect the market and may adversely affect our operations. Given the relatively small geographical size of Hong Kong, any of such incidents may have a widespread effect on our business operations, which could in turn adversely and materially affect our business, results of operations and financial condition.
Hong Kong is a special administrative region of the PRC and the basic policies of the PRC regarding Hong Kong are reflected in the Basic Law, namely, Hong Kong’s constitutional document, which provides Hong Kong with a high degree of autonomy and executive, legislative and independent judicial powers, including that of final adjudication under the principle of “one country, two systems”. However, there is no assurance that there will not be any changes in the political arrangement between PRC and Hong Kong and the economic, political and legal environment in Hong Kong in the future. Since all of our operations are based in Hong Kong, any change of such political arrangements may pose an immediate threat to the stability of the economy in Hong Kong, thereby directly and adversely affecting our results of operations and financial positions.
Based on certain recent development including the Law of the People’s Republic of China on Safeguarding National Security in the Hong Kong Special Administrative Region issued by the Standing Committee of the PRC National People’s Congress in June 2020, the U.S. State Department has indicated that the United States no longer considers Hong Kong to have significant autonomy from China and President Trump signed an executive order and Hong Kong Autonomy Act, or HKAA, to remove Hong Kong’s preferential trade status and to authorize the U.S. administration to impose blocking sanctions against individuals and entities who are determined to have materially contributed to the erosion of Hong Kong’s autonomy. The United States may impose the same tariffs and other trade restrictions on exports from Hong Kong that it places on goods from Mainland China. These and other recent actions may represent an escalation in political and trade tensions involving the U.S, China and Hong Kong, which could potentially harm our business. It is difficult to predict the full impact of the HKAA on Hong Kong and companies with operations in Hong Kong like us. Furthermore, legislative or administrative actions in respect of China-U.S. relations could cause investor uncertainty for affected issuers, including us, and the market price of our Ordinary Shares could be adversely affected.
31
The Hong Kong regulatory requirement of prior approval for the transfer of shares in excess of a certain threshold may restrict future takeovers and other transactions.
Section 132 of Securities and Futures Ordinance (Cap. 157 of the laws of Hong Kong) (the “SFO”) requires prior approval from the HKSFC for any company or individual to become a substantial shareholder of a HKSFC-licensed corporation in Hong Kong. Under the SFO, a person will be a “substantial shareholder” of a licensed company if he, either alone or with associates, has an interest in, or is entitled to control the exercise of, the voting power of more than 10% of the total number of issued shares of the licensed corporation, or exercises control of 35% or more of the voting power of a company that controls more than 10% of the voting power of the licensed company. Further, all potential parties who will be the new substantial shareholder(s) of the HKSFC-licensed subsidiaries, which are I Win Securities and I Win Asset Management, are required to seek prior approval from the HKSFC. This regulatory requirement may discourage, delay or prevent a change in control of Garden Stage, which could deprive the holders of our Ordinary Shares the opportunity to receive a premium for their Ordinary Shares as part of a future sale and may reduce the price of our Ordinary Shares upon the consummation of a future proposed business combination.
Risk Relating to our Corporate Structure
Cayman Islands economic substance requirements may have an effect on our business and operations.
Pursuant to the International Tax Cooperation (Economic Substance) Act (as revised) of the Cayman Islands, or the ES Act, that came into force on January 1, 2019, a “relevant entity” is required to satisfy the economic substance test set out in the ES Act. A “relevant entity” includes an exempted company incorporated in the Cayman Islands as is our Company. Based on the current interpretation of the ES Act, we believe that our Company is a pure equity holding company since it only holds equity participation in other entities and only earns dividends and capital gains. Accordingly, for so long as our Company is a “pure equity holding company”, it is only subject to the minimum substance requirements, which require us to (i) comply with all applicable filing requirements under the Companies Act; and (ii) has adequate human resources and adequate premises in the Cayman Islands for holding and managing equity participations in other entities. However, there can be no assurance that we will not be subject to more requirements under the ES Act. Uncertainties over the interpretation and implementation of the ES Act may have an adverse impact on our business and operations.
We rely on dividends and other distributions on equity paid by the Operating Subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of the Operating Subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
Garden Stage Limited is a holding company and we rely on dividends and other distributions on equity paid by our subsidiaries for our cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt we may incur. We do not expect to pay cash dividends in the foreseeable future. We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. If any of the Operating Subsidiaries incurs debt on its own behalf in the future, the instruments governing the debt may restrict its ability to pay dividends or make other distributions to us. See “Dividend Policy” for more information.
According to the BVI Business Companies Act 2004 (as amended), a British Virgin Islands company may make dividends distribution to the extent that immediately after the distribution, such company’s assets do not exceed its liabilities and that such company is able to pay its debts as they fall due. According to the Companies Ordinance of Hong Kong, a Hong Kong company may only make a distribution out of profits available for distribution. Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by us. Any limitation on the ability of our Hong Kong subsidiaries to pay dividends or make other distributions to us could materially and adversely limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise fund and conduct our business.
Our corporate actions will be substantially controlled by our Controlling Shareholder, Oriental Moon Tree Limited, which will have 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 Ordinary Shares and materially reduce the value of your investment. Additionally, we may be deemed to be a “controlled company and may follow certain exemptions from certain corporate governance requirements that could adversely affect our public shareholders.
Following this offering, Oriental Moon Tree Limited, our Controlling Shareholder, will beneficially own 74.58% of our total issued and outstanding Ordinary Shares, representing 74.58% of the total voting power, assuming that the underwriters do not exercise their over-allotment option, and assuming that Oriental Moon Tree Limited, being
32
a Selling Shareholder, will sell all of the Ordinary Shares it offered for sale (475,000 Ordinary Shares) pursuant to the Resale Prospectus. Accordingly, Oriental Moon Tree Limited will have 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. The board of directors of Oriental Moon Tree Limited is fully constituted of Mr. Wai Lok Raymond, FONG, Mr. Ngan Sammy, SHUM, and Mr. Sze Ho, CHAN, who are also the directors of Garden Stage. Mr. Fong, Mr. Shum and Mr. Chan, by acting together, they will be able to control the management and affairs of Garden Stage through Oriental Moon Tree Limited.
The interests of our Controlling Shareholder may differ from the interests of our other shareholders. The 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 our Ordinary Shares. These actions may be taken even if they are opposed by our other shareholders, including those who purchase Ordinary Shares in this offering. Without the consent of our Controlling Shareholder, we may be prevented from entering into transactions that could be beneficial to us or our other shareholders. The concentration in the ownership of our shares may cause a material decline in the value of our shares. For more information regarding our principal shareholders and their affiliated entities, see “Principal Shareholders.”
Under the NASDAQ listing rules, a company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and is permitted to elect to rely, and may rely, on certain exemptions from the obligation to comply with certain corporate governance requirements, including:
• the requirement that our director nominees must be selected or recommended solely by independent directors; and
• the requirement that we have a corporate governance and nominating committee that is composed entirely of independent directors with a written charter addressing the committee’s purpose and responsibilities.
Although we do not intend to rely on the “controlled company” exemptions under the NASDAQ listing rules even if we are deemed to be a “controlled company,” we could elect to rely on these exemptions in the future. If we were to elect to rely on the “controlled company” exemptions, a majority of the members of our board of directors might not be independent directors and our nominating and corporate governance and compensation committees might not consist entirely of independent directors. Accordingly, if we rely on the exemptions, during the period we remain a controlled company and during any transition period following a time when we are no longer a controlled company, you would not have the same protections afforded to shareholders of companies that are subject to all of the corporate governance requirements of NASDAQ.
The enforcement of foreign civil liabilities in the Cayman Islands and Hong Kong is subject to certain conditions. Therefore, certain judgments obtained against us by our shareholders may be difficult to enforce in such jurisdictions.
We are a 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, except for Mr. Kevin, GUAN, who is a United States national and resident, all of others directors and officers are Hong Kong nationals or residents and a substantial portion of their assets are located in Hong Kong outside the United States. As a result, it may be difficult or impossible for you to bring an action against us or against the persons who are Hong Kong nationals or residents 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, or other relevant jurisdictions may render you unable to enforce a judgment against our assets or the assets of our directors and officers.
Travers Thorp Alberga, our counsel as to the laws of the Cayman Islands has advised us that there is uncertainty as to whether the courts of the Cayman Islands would (1) recognize or enforce judgments of U.S. courts obtained against us or our directors or officers that are predicated upon the civil liability provisions of the federal securities laws of the United States or the securities laws of any state in the United States, or (2) entertain original actions brought in the Cayman Islands against us or our directors or officers that are predicated upon the federal securities laws of the United States or the securities laws of any state in the United States. Travers Thorp Alberga has informed us that although there is no statutory enforcement in the Cayman Islands of judgments obtained in the federal or state courts of the United States (and the Cayman Islands are not a party to any treaties for the reciprocal enforcement or recognition of such judgments), a judgment in personam obtained in such jurisdiction will be recognized and enforced in the courts of the Cayman Islands at common law, without any re-examination of the merits of the underlying dispute, by an action commenced on the foreign judgment debt in the Grand Court of the Cayman Islands, provided such judgment (a) is given by a competent foreign court with jurisdiction to give the judgment, (b) imposes a specific positive
33
obligation on the judgment debtor (such as an obligation to pay a liquidated sum or perform a specified obligation), (c) is final and conclusive, (d) is not in respect of taxes, a fine or a penalty; (e) has not been obtained by fraud; and (f) was not obtained in a manner and is not of a kind the enforcement of which is contrary to natural justice or the public policy of the Cayman Islands. However, the Cayman Islands courts are unlikely to enforce a judgment obtained from the U.S. courts under civil liability provisions of the U.S. federal securities law if such judgment is determined by the courts of the Cayman Islands to give rise to obligations to make payments that are penal or punitive in nature. Because such a determination has not yet been made by a court of the Cayman Islands, it is uncertain whether such civil liability judgments from U.S. courts would be enforceable in the Cayman Islands. A Cayman Islands court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
Stevenson, Wong & Co., our counsel with respect to Hong Kong law, has advised us that judgment of United States courts will not be directly enforced in Hong Kong. There are currently no treaties or other arrangements providing for reciprocal enforcement of foreign judgments between Hong Kong and the United States. However, the common law permits an action to be brought upon a foreign judgment. That is to say, a foreign judgment itself may form the basis of a cause of action since the judgment may be regarded as creating a debt between the parties to it. In a common law action for enforcement of a foreign judgment in Hong Kong, the enforcement is subject to various conditions, including but not limited to, that the foreign judgment is a final judgment conclusive upon the merits of the claim, the judgment is for a liquidated amount in a civil matter and not in respect of taxes, fines, penalties, or similar charges, the proceedings in which the judgment was obtained were not contrary to natural justice, and the enforcement of the judgment is not contrary to public policy of Hong Kong. Such a judgment must be for a fixed sum and must also come from a “competent” court as determined by the private international law rules applied by the Hong Kong courts. The defenses that are available to a defendant in a common law action brought on the basis of a foreign judgment include lack of jurisdiction, breach of natural justice, fraud, and contrary to public policy. However, a separate legal action for debt must be commenced in Hong Kong in order to recover such debt from the judgment debtor.
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 a company incorporated under the laws of the Cayman Islands. Our corporate affairs are governed by our amended and restated memorandum and articles of association, the Companies Act 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 the Cayman Islands laws are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from the common law of England, the decisions of whose courts are of persuasive authority, but are not binding, on a court in the Cayman Islands. The rights of our shareholders and the fiduciary duties of our directors under the Cayman Islands laws 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, the 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 companies like us have no general rights under the Cayman Islands laws to inspect corporate records, other than the amended and restated memorandum and articles of association and any special resolutions passed by such companies, and the registers of mortgages and charges of such companies. Our directors have discretion under our amended and restated 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, where our holding company was incorporated, differ significantly from requirements for companies incorporated in other jurisdictions such as the United States. Currently, we do not plan to rely on home country practice with respect to our corporate governance after we complete this offering. However, if we choose to follow the Cayman Islands’ practice in the future, our shareholders may be afforded less protection than they otherwise would under rules and regulations applicable to U.S. domestic issuers.
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 Shareholder than they would as public shareholders of a company incorporated in the United States. For a discussion of significant differences between the provisions of the Companies Act and the laws applicable to companies incorporated in the United States and their shareholders, see “Description of Share Capital — Differences in Corporate Law”.
34
Risks Relating to our Ordinary Shares and this Offering
Our Ordinary Shares may be prohibited from being traded on a national exchange under the Holding Foreign Companies Accountable Act if the PCAOB is unable to inspect our auditors. The delisting of our Ordinary Shares, or the threat of their being delisted, may materially and adversely affect the value of your investment. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act, which was signed into law on December 29, 2022, amending the HFCAA to require the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchanges if its auditor is not subject to PCAOB inspections for two consecutive years instead of three.
The Holding Foreign Companies Accountable Act, or the HFCAA, was enacted on December 18, 2020. The HFCAA states if the SEC determines that we have filed audit reports issued by a registered public accounting firm that has not been subject to inspection by the PCAOB for three consecutive years beginning in 2021, the SEC shall prohibit our shares from being traded on a national securities exchange or in the over-the-counter trading market in the United States. On March 24, 2021, the SEC adopted interim final rules relating to the implementation of certain disclosure and documentation requirements of the HFCA Act. A company will be required to comply with these rules if the SEC identifies it as having a “non-inspection” year under a process to be subsequently established by the SEC. The SEC is assessing how to implement other requirements of the HFCA Act, including the listing and trading prohibition requirements described above. Furthermore, on June 22, 2021, the U.S. Senate passed the Accelerating Holding Foreign Companies Accountable Act (the “AHFCAA”), which was signed into law on December 29, 2022, amending the HFCAA and requiring the SEC to prohibit an issuer’s securities from trading on any U.S. stock exchange if its auditor is not subject to PCAOB inspections for two consecutive years instead of three consecutive years. On September 22, 2021, the PCAOB adopted a final rule implementing the HFCAA, which provides a framework for the PCAOB to use when determining, as contemplated under the HFCAA, whether the PCAOB is unable to inspect or investigate completely registered public accounting firms located in a foreign jurisdiction because of a position taken by one or more authorities in that jurisdiction. On December 2, 2021, the SEC issued amendments to finalize rules implementing the submission and disclosure requirements in the HFCA Act. The rules apply to registrants that the SEC identifies as having filed an annual report with an audit report issued by a registered public accounting firm that is located in a foreign jurisdiction and that PCAOB is unable to inspect or investigate completely because of a position taken by an authority in foreign jurisdictions. On December 16, 2021, the PCAOB issued a Determination Report which found that the PCAOB is unable to inspect or investigate completely registered public accounting firms headquartered in: (i) China, and (ii) Hong Kong.
On August 26, 2022, the PCAOB announced and signed a Statement of Protocol (the “Protocol”) with the China Securities Regulatory Commission and the Ministry of Finance of the People’s Republic of China. The Protocol provides the PCAOB with: (1) sole discretion to select the firms, audit engagements and potential violations it inspects and investigates, without any involvement of Chinese authorities; (2) procedures for PCAOB inspectors and investigators to view complete audit work papers with all information included and for the PCAOB to retain information as needed; (3) direct access to interview and take testimony from all personnel associated with the audits the PCAOB inspects or investigates.
On December 15, 2022, the PCAOB issued a new Determination Report which: (1) vacated the December 16, 2021 Determination Report; and (2) concluded that the PCAOB has been able to conduct inspections and investigations completely in the PRC in 2022. The December 15, 2022 Determination Report cautions, however, that authorities in the PRC might take positions at any time that would prevent the PCAOB from continuing to inspect or investigate completely. As required by the HFCAA, if in the future the PCAOB determines it no longer can inspect or investigate completely because of a position taken by an authority in the PRC, the PCAOB will act expeditiously to consider whether it should issue a new determination.
Our auditor prior to December 15, 2022, Friedman LLP (“Friedman”), had been inspected by the PCAOB on a regular basis in the audit period, and our new auditor, Marcum Asia CPAs LLP (“Marcum Asia”), is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess its compliance with the applicable professional standards. Neither Friedman nor Marcum Asia is subject to the Determination Report announced by the PCAOB on December 16, 2021. However, in the event it is later determined that the PCAOB is unable to inspect or investigate completely the auditor because of a position taken by an authority in a foreign jurisdiction, then such lack of inspection could cause trading in the Company’s securities to be prohibited under the HFCAA, and ultimately result in a determination by a securities exchange to delist the Company’s securities. In addition, the recent developments would add uncertainties to our offering and we cannot assure you whether NASDAQ or regulatory authorities would apply additional
35
and more stringent criteria to us after considering the effectiveness of our auditor’s audit procedures and quality control procedures, adequacy of personnel and training, or sufficiency of resources, geographic reach or experience as it relates to the audit of our financial statements. It remains unclear what the SEC’s implementation process related to the above rules will entail or what further actions the SEC, the PCAOB or NASDAQ will take to address these issues and what impact those actions will have on U.S. companies that have significant operations in Hong Kong and have securities listed on a U.S. stock exchange (including a national securities exchange or over-the-counter stock market). In addition, the above amendments and any additional actions, proceedings, or new rules resulting from these efforts to increase U.S. regulatory access to audit information could create some uncertainty for investors, the market price of our ordinary share could be adversely affected, and we could be delisted if we and our auditor are unable to meet the PCAOB inspection requirement or being required to engage a new audit firm, which would require significant expense and management time.
There has been no public market for our Ordinary Shares prior to this offering, and you may not be able to resell our Ordinary Shares at or above the price you paid, or at all.
Prior to this offering, there has been no public market for our Ordinary Shares. Although we have applied to have our Ordinary Shares listed on the NASDAQ Capital Market, we cannot assure you that a liquid public market for our Ordinary Shares will develop. If an active public market for our Ordinary Shares does not develop following the completion of this offering, the market price of our Ordinary Shares may decline, and the liquidity of our Ordinary Shares may decrease significantly.
The initial public offering price for our Ordinary Shares will be determined by negotiation between us, the Underwriters, and the Selling Shareholder and may vary from the market price of our Ordinary Shares following our initial public offering. We cannot assure you that the price at which the Ordinary Shares are traded after this offering will not decline below the initial public offering price. If you purchase our Ordinary Shares in our initial public offering, you may not be able to resell those shares at or above the initial public offering price. We cannot assure you that the initial public offering price of our Ordinary Shares, or the market price following our initial public offering, will equal or exceed prices in privately negotiated transactions of our shares that have occurred from time to time prior to our initial public offering. As a result, investors in our Ordinary Shares may experience a significant decrease in the value of their Ordinary Shares due to insufficient or a lack of market liquidity of our Ordinary Shares.
We may experience extreme stock price volatility unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Ordinary Shares.
The trading prices of our Ordinary Shares are likely to be highly volatile and could fluctuate widely due to factors beyond our control. This may happen due to broad market and industry factors, such as performance and fluctuation in the market prices or underperformance or deteriorating financial results of other listed companies based in Hong Kong and China. The securities of some of these companies have experienced significant volatility since their initial public offerings, including, in some cases, substantial price declines in the trading prices of their securities. The trading performances of other Hong Kong and Chinese companies’ securities after their offerings may affect the attitudes of investors towards Hong Kong-based U.S. — listed companies, which consequently may affect the trading performance of our Ordinary Shares, regardless of our actual operating performance. In addition, any negative news or perceptions about inadequate corporate governance practices or fraudulent accounting, corporate structure or matters of other Hong Kong and Mainland Chinese companies may also negatively affect the attitudes of investors towards Hong Kong and Mainland Chinese companies in general, including us, regardless of whether we have conducted any inappropriate activities. Furthermore, securities markets may from time to time experience significant price and volume fluctuations that are not related to our operating performance, which may have a material and adverse effect on the trading price of our Ordinary Shares.
In addition to the above factors, the price and trading volume of our Ordinary Shares may be highly volatile due to multiple factors, including the following:
• regulatory developments affecting us or our industry;
• variations in our revenues, profit, and cash flow;
• the general market reactions and financial market fluctuation due to the continuous Russo-Ukraine conflicts;
• changes in the economic performance or market valuations of other financial services firms; political, social and economic conditions of the PRC and Hong Kong;
36
• actual or anticipated fluctuations in our quarterly results of operations and changes or revisions of our expected results;
• fluctuations of exchange rates among Hong Kong dollar, Renminbi, and the U.S. dollar;
• changes in financial estimates by securities research analysts;
• detrimental negative publicity about us, our services, our officers, directors, Controlling Shareholder, other beneficial owners, our business partners, or our industry;
• announcements by us or our competitors of new service offerings, acquisitions, strategic relationships, joint ventures, capital raisings or capital commitments;
• additions to or departures of our senior management;
• litigation or regulatory proceedings involving us, our officers, directors, or Controlling Shareholder;
• release or expiry of lock-up or other transfer restrictions on our outstanding Ordinary Shares; and
• sales or perceived potential sales of additional Ordinary Shares.
Any of these factors may result in large and sudden changes in the volume and price at which our Ordinary Shares will trade.
Recently, there have been instances of extreme stock price run-ups followed by rapid price declines and strong stock price volatility with a number of recent initial public offerings, especially among companies with relatively smaller public floats. As a relatively small-capitalization company with relatively small public float, we may experience greater stock price volatility, extreme price run-ups, lower trading volume and less liquidity than large-capitalization companies. In particular, our Ordinary Shares may be subject to rapid and substantial price volatility, low volumes of trades and large spreads in bid and ask prices. Such volatility, including any stock-run up, may be unrelated to our actual or expected operating performance, financial condition or prospects, making it difficult for prospective investors to assess the rapidly changing value of our Ordinary Shares.
In addition, if the trading volumes of our Ordinary Shares are low, persons buying or selling in relatively small quantities may easily influence prices of our Ordinary Shares. This low volume of trades could also cause the price of our Ordinary Shares to fluctuate greatly, with large percentage changes in price occurring in any trading day session. Holders of our Ordinary Shares may also not be able to readily liquidate their investment or may be forced to sell at depressed prices due to low volume trading. Broad market fluctuations and general economic and political conditions may also adversely affect the market price of our Ordinary Shares. As a result of this volatility, investors may experience losses on their investment in our Ordinary Shares. A decline in the market price of our Ordinary Shares also could adversely affect our ability to issue additional shares of Ordinary Shares or other securities and our ability to obtain additional financing in the future. No assurance can be given that an active market in our Ordinary Shares will develop or be sustained. If an active market does not develop, holders of our Ordinary Shares may be unable to readily sell the shares they hold or may not be able to sell their shares at all.
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 Ordinary Shares may be thinly traded and you may be unable to sell at or near ask prices or at all if you need to sell your shares to raise money or otherwise desire to liquidate your shares.
Assuming our Ordinary Shares begin trading on the NASDAQ Capital Market, our Ordinary Shares may be “thinly-traded,” meaning that the number of persons interested in purchasing our Ordinary Shares at or near bid prices at any given time may be relatively small or non-existent. This situation may be attributable to a number of
37
factors, including the fact that we are relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we come to the attention of such persons, they tend to be risk-averse and might be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. A broad or active public trading market for our Ordinary Shares may not develop or be sustained.
Our pre-IPO shareholders will be able to sell their shares after completion of this offering subject to restrictions under the Rule 144.
Our pre-IPO shareholders, may be able to sell their Ordinary Shares under Rule 144 after completion of this offering. Because these shareholders have paid a lower price per Ordinary Share than participants in this offering, when they are able to sell their pre-IPO shares under Rule 144, they may be more willing to accept a lower sales price than the IPO price. This fact could impact the trading price of the stock following completion of the offering, to the detriment of participants in this offering. Under rule 144, before our pre-IPO shareholders can sell their shares, in addition to meeting other requirements, they must meet the required holding period. We do not expect any of the ordinary shares to be sold pursuant to Rule 144 during the pendency of this offering.
If you purchase our Ordinary Shares in this offering, you will incur immediate and substantial dilution in the book value of your shares.
Investors purchasing our Ordinary Shares in this offering will pay a price per share that substantially exceeds the pro forma as adjusted net tangible book value per Ordinary Share. As a result, investors purchasing Ordinary Shares in this offering will incur immediate dilution. For more information on the dilution you may experience as a result of investing in this offering, see “Dilution.”
If we fail to meet applicable listing requirements, NASDAQ may delist our Ordinary Shares from trading, in which case the liquidity and market price of our Ordinary Shares could decline.
Assuming our shares are listed on NASDAQ, we cannot assure you that we will be able to meet the continued listing standards of NASDAQ in the future. If we fail to comply with the applicable listing standards and NASDAQ delists our Ordinary Shares, we and our shareholders could face significant material adverse consequences, including:
• a limited availability of market quotations for our Ordinary Shares;
• reduced liquidity for our Ordinary Shares;
• a determination that our Ordinary Shares are “penny stock”, which would require brokers trading in our Ordinary Shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our Ordinary Shares;
• a limited amount of news about us and analyst coverage of us; and
• a decreased ability for us to issue additional equity securities or obtain additional equity or debt financing in the future.
The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because we expect that our shares will be listed on NASDAQ, such securities will be covered securities. Although the states are preempted from regulating the sale of our securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were no longer listed on NASDAQ, our securities would not be covered securities and we would be subject to regulations in each state in which we offer our securities.
38
If securities or industry analysts do not publish or publish inaccurate or unfavorable research about our business, or if they adversely change their recommendations regarding our Ordinary Shares, the market price for our Ordinary Shares and trading volume could decline.
The trading market for our Ordinary Shares 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 our Ordinary Shares or publishes inaccurate or unfavorable research about our business, the market price for our Ordinary Shares would likely decline. If one or more of these analysts cease coverage of the 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 our Ordinary Shares to decline.
The sale or availability for sale of substantial amounts of our Ordinary Shares in the public market could adversely affect the market price of our Ordinary Shares.
Sales of substantial amounts of our Ordinary Shares in the public market after the completion of this offering, or the perception that these sales could occur, could adversely affect the market price of our Ordinary Shares and could materially impair our ability to raise capital through equity offerings in the future. The Ordinary Shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act of 1933, as amended, or the Securities Act, and shares held by our existing shareholders may also be sold in the public market in the future, subject to the restrictions in Rule 144 and Rule 701 under the Securities Act and the applicable lock-up agreements.
There will be 14,750,000 Ordinary Shares outstanding immediately after this Offering, assuming no exercise of outstanding options (excluding the underwriters’ option to purchase additional Ordinary Shares). This includes the 2,000,000 Ordinary Shares that we are selling and 1,750,000 Ordinary Shares that the Selling Shareholder is selling in this Offering, which may be resold in the public market immediately unless purchased by any of our affiliates. Substantially all of our other Ordinary Shares are currently, and will be following the closing of this offering, restricted as a result of securities laws or lock-up agreements but will be able to be sold, subject to any applicable volume limitations, under federal securities laws with respect to affiliate sales. In connection with this offering, we, our officers, directors, and shareholders holding 5% or more of the issued and outstanding Ordinary Shares have agreed not to sell any of our Ordinary Shares or are otherwise subject to similar lockup restrictions for six months after the date of this prospectus without the prior written consent of the representatives of the underwriters, subject to certain exceptions. Upon each release of the foregoing restrictions, our securityholders subject to a lock-up agreement will be able to sell our shares in the public market. However, the underwriters may release these securities from these restrictions at any time, subject to applicable regulations of the Financial Industry Regulatory Authority, Inc. We cannot predict what effect, if any, market sales of securities held by our significant shareholders or any other shareholder or the availability of these securities for future sale will have on the market price of our Ordinary Shares. See “Underwriting” for a more detailed description of the restrictions on selling our securities after this Offering.
In addition, as of the date of prospectus, there were 1,475,000 Ordinary Shares subject to outstanding options for issuance that that will become eligible for sale in the public market to the extent permitted by any applicable vesting requirements, lock-up agreements and Rules 144 under the Securities Act. Once the Ordinary Shares are acquired upon the exercise of the options, they can be freely sold in the public market upon issuance, subject to the lock-up agreements and the restrictions imposed on our affiliates under Rule 144.
Because the amount, timing, and whether or not we distribute dividends at all is entirely at the discretion of our board of directors, you must rely on price appreciation of our Ordinary Shares for return on your investment.
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 the Cayman Islands law, namely that the Company may only pay dividends out of profits or share premium, and provided that under no circumstances may a dividend be paid if this would result in the Company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides 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 flow, 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 our Ordinary Shares will likely depend entirely upon any future price appreciation of our Ordinary Shares. We cannot
39
assure you that our Ordinary Shares will appreciate in value after this offering or even maintain the price at which you purchased the Ordinary Shares. You may not realize a return on your investment in our Ordinary Shares and you may even lose your entire investment in our Ordinary Shares. See “Dividend Policy” section for more information.
We are a foreign private issuer within the meaning of the rules under the Exchange Act, and as such we are exempt from certain provisions applicable to U.S. domestic public companies.
Because we qualify as a foreign private issuer under the Exchange Act, we are exempt from certain provisions of the securities rules and regulations in the United States that are applicable to U.S. domestic issuers, including:
• the rules under the Exchange Act requiring the filing with the SEC of quarterly reports on Form 10-Q or current reports on Form 8-K;
• the sections of the Exchange Act regulating the solicitation of proxies, consents, or authorizations in respect of a security registered under the Exchange Act;
• the sections of the Exchange Act requiring insiders to file public reports of their stock ownership and trading activities and liability for insiders who profit from trades made in a short period of time; and
• the selective disclosure rules by issuers of material nonpublic information under Regulation FD.
We will be 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 NASDAQ Capital 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 Cayman Islands’ practices in relation to corporate governance matters that differ significantly from the NASDAQ Capital Market listing standards; these practices may afford less protection to shareholders than they would enjoy if we complied fully with the NASDAQ Capital Market listing standards.
As a Cayman Islands company to be listed on the NASDAQ Capital Market, we are subject to the NASDAQ Capital Market listing standards. However, the NASDAQ Capital Market 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 Capital Market listing standards. Currently, we do not plan to rely on home country practices with respect to our corporate governance after we complete this offering. However, if we choose to follow home country practices in the future, our shareholders may be afforded less protection than they would otherwise enjoy under the NASDAQ Capital Market listing standards applicable to U.S. domestic issuers.
We may lose our foreign private issuer status in the future, which could result in significant additional costs and expenses.
We are a foreign private issuer, and therefore, we are not required to comply with all of the periodic disclosure and current reporting requirements of the Exchange Act. The determination of foreign private issuer status is made annually on the last business day of an issuer’s most recently completed second fiscal quarter. We would lose our foreign private issuer status if, for example, more than 50% of our Ordinary Shares are directly or indirectly held by residents of the United States and we fail to meet additional requirements necessary to maintain our foreign private issuer status. If we lose our foreign private issuer status on this date, we will be required to file with the SEC periodic reports and registration statements on U.S. domestic issuer forms, which are more detailed and extensive than the forms available to a foreign private issuer. We will also have to mandatorily comply with U.S. federal proxy requirements, and our officers, directors and principal shareholders will become subject to the short-swing profit disclosure and recovery provisions of Section 16 of the Exchange Act. In addition, we will lose our ability to rely upon exemptions from certain corporate governance requirements under the NASDAQ rules. As a U.S. listed public company that is not a foreign private issuer, we will incur significant additional legal, accounting and other expenses that we will not incur as a foreign private issuer, and accounting, reporting and other expenses in order to maintain a listing on a U.S. securities exchange.
40
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 our 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 (i) 75% or more of our gross income for such year consists of certain types of “passive” income, or (ii) 50% or more of the value of our assets (determined on the basis of a quarterly average) during such year produce or are held for the production of passive income (the “asset test”). Based upon our current and expected income and assets, including goodwill and (taking into account the expected proceeds from this offering) the value of the assets held by our strategic investment business, the expected proceeds from this offering as well as projections as to the market price of our Ordinary Shares immediately following the completion of this offering, we do not presently expect to be classified as a PFIC for the current taxable year or the foreseeable future.
While we do not expect to be a PFIC, because the value of our assets, for purposes of the asset test, may be determined by reference to the market price of our Ordinary Shares, fluctuations in the market price of our Ordinary Shares may cause us to become a PFIC classification 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, including the relative amounts of income generated by and the value of assets of our strategic investment business as compared to our other businesses. Because there are uncertainties in the application of the relevant rules, it is possible that the U.S. Internal Revenue Service, or 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, 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 “Taxation — United States Federal Income Tax Considerations”) may incur significantly increased United States income tax on gain recognized on the sale or other disposition of our Ordinary Shares and on the receipt of distributions on our 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 our Ordinary Shares, we will generally continue to be treated as a PFIC for all succeeding years during which such U.S. Holder holds our Ordinary Shares. For more information see “Taxation — United States Federal Income Tax Considerations — Passive Foreign Investment Company Rules”.
We will incur increased costs as a result of being a public company, particularly after we cease to qualify as an emerging growth company.
Upon completion of this offering, we will become a public company and expect to incur significant legal, accounting and other expenses that we did not incur as a private company. The Sarbanes-Oxley Act of 2002 and the rules subsequently implemented by the SEC and the New York Stock Exchange detailed requirements concerning corporate governance practices of public companies. As a company with less than US$1.235 billion in net revenues for our last fiscal year, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2012 relating to internal controls over financial reporting. We expect these rules and regulations to increase our legal and financial compliance costs and to make some corporate activities more time-consuming and costly. After we are no longer an “emerging growth company,” we expect to incur significant expenses and devote substantial management effort toward ensuring compliance with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the other time and attention to our public company reporting obligations and other compliance matters. For example, as a result of becoming a public company, we will need to increase the number of independent directors and adopt policies regarding internal controls and disclosure controls and procedures. We also expect that operating as a public company will make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. In addition, we will incur additional costs associated with our public company reporting requirements. It may also be more difficult for us to find qualified persons to serve on our board of directors or as executive officers. We are currently evaluating and monitoring developments with respect to these rules and regulations, and we cannot predict or estimate with any degree of certainty the amount of additional costs we may incur or the timing of such costs.
41
We are an “emerging growth company,” and the reduced disclosure requirements applicable to emerging growth companies may make our Ordinary Shares less attractive to investors.
We are an “emerging growth company,” as defined in the JOBS Act. For so long as we remain an emerging growth company, we are permitted and intend to rely on exemptions from certain disclosure requirements that are applicable to other public companies that are not emerging growth companies. These exemptions include:
• being permitted to provide only two years of audited financial statements, in addition to any required unaudited interim financial statements, with correspondingly reduced “Management’s Discussion and Analysis of Financial Condition and Results of Operations” disclosure;
• not being required to comply with the auditor attestation requirements in the assessment of our internal control over financial reporting of Section 404(b) of the Sarbanes-Oxley Act;
• not being required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements;
• reduced disclosure obligations regarding executive compensation; and
• exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
We have taken advantage of reduced reporting burdens in this prospectus. In particular, in this prospectus, we have only provided two years of audited financial statements and have not included all the executive compensation related information that would be required if we were not an emerging growth company. In addition, the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. This allows an emerging growth company to delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards.
We cannot predict whether investors will find our Ordinary Shares less attractive if we rely on these exemptions. If some investors find our Ordinary Shares less attractive as a result, there may be a less active trading market for our Ordinary Shares and our share price may be more volatile.
We will remain an emerging growth company until the earliest of (i) the date on which we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur if the market value of our Ordinary Shares that are held by non-affiliates exceeds US$700 million as of the last business day of our most recently completed second fiscal quarter. (ii) the end of the fiscal year during which we have total annual gross revenues of US$1.235 billion or more, (iii) the date on which we have, during the preceding three-year period, issued more than US$1.0 billion in non-convertible debt, or (iv) the last day of our fiscal year following the fifth anniversary of the completion of this offering.
Risks relating to the Industry in which we Operate
Our business operations are concentrated in Hong Kong. Unfavorable financial market and economic conditions and material deterioration of the political and regulatory environment in Hong Kong, the PRC, and elsewhere in the world could materially and adversely affect our business, financial condition, prospects, and results of operations.
Our business operations were carried out in Hong Kong. The results of operations and prospects are highly susceptible to any development of change in government policies, as well as economic, social, political and legal development in Hong Kong. Events with adverse impact on investors’ confidence and risk appetites, such as riots or mass civil disobedience movements and general deterioration of local economy, may lead to a reduction in investment or trading activities and in turn our business performance. Any change in the local economic, social and political environment, which is beyond our control, may lead to prolonged period of sluggish market activities which would in turn have material adverse impact on our business. Economic conditions in Hong Kong are also highly sensitive to conditions in the financial markets, capital market, and economic conditions of the PRC and elsewhere in the world. Any prolonged slowdown in the global or Chinese economy may affect potential clients’ confidence in financial market as a whole and have a negative impact on our business, results of operations and financial condition. Additionally, continued turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs. Financial markets and economic conditions could be negatively impacted by many factors, both economically and politically, beyond our control, such
42
as inability to access capital markets, control of foreign exchange, changes in exchange rates, rising interest rates or inflation, slowing or negative growth rate, government involvement in allocation of resources, inability to meet financial commitments in a timely manner, terrorism, pandemics such as the Covid-19 pandemic, political uncertainty, the ongoing Russo — Ukraine war and its results, the outcome of the Sino — US trade dispute, civil unrest, fiscal or other economic policy of Hong Kong or other governments, and the timing and nature of any regulatory reform.
The current heightened tensions in international economic relations, such as the one between the United States and China, may also give rise to uncertainties in global economic conditions and adversely affect general investor confidence. Amid these tensions, the U.S. government has imposed and may impose additional measures on entities in China, including sanctions. The U.S. government has imposed and has continued to propose to impose additional, new, or higher tariffs on certain products imported from China to penalize China for what it characterizes as unfair trade practices. China has responded by imposing, and proposing to impose additional, new, or higher tariffs on certain products imported from the United States. Unfavorable financial market and economic conditions in Hong Kong, the PRC, and elsewhere in the world, and the escalations of the tensions that affect trade relations may lead to slower growth in the global economy in general, could negatively affect our clients’ business and materially reduce demand for our services and increase price competition among financial services firms seeking such engagements, and thus could materially and adversely affect our business, financial condition, and results of operations.
Furthermore, the economy of Mainland China differs from the economies of most developed countries in a number of aspects, such as the extent of government intervention, growth rate and control of foreign exchange. Adverse changes in the economic and other policies of the PRC government could have a material and adverse effect on our business, financial position and operations. In particular, the PRC government exerts substantial control over the growth of the domestic economy by means of, among others, resource allocation as well as setting policy on foreign exchange. There is no assurance that China will not implement reforms or policies which may drastically (i) restrict Mainland China investors from investing abroad and in Hong Kong; and/or (ii) restrict Mainland China companies and businesses to access the financial market in Hong Kong. Such reforms or policies may potentially affect the attractiveness of Hong Kong as an alternative venue for Mainland investors to trade securities or Mainland China business to conduct fund-raising exercise, or otherwise diminish the securities and financial market of Hong Kong, given the substantial reliance of Hong Kong financial and securities market on the business and companies based in Mainland China. A portion of our revenue is derived from clients who reside in Mainland China. Any policies which reduce the willingness of our Mainland China clients to trade securities through us or restrict the Mainland China businesses for fund raising or securities offering in Hong Kong, will adversely affect our business and results of operations. Furthermore, if PRC government implements market-oriented reforms involving unprecedented or experimental revision of its economic reform measures, there is no guarantee that adjustments to its policies will not negatively affect our operations and business development.
Lastly, the outbreak of war in Ukraine has already affected global economic and financial markets, and the uncertain resolution of this conflict could result in protracted and/or severe damage to the global economy. Russia’s military action in Ukraine have led to, and may lead to, additional sanctions being levied by the United States, European Union and other countries against Russia. Russia’s military incursion and the resulting sanctions could adversely affect global energy and financial markets and thus could affect our client’s business and our business, even though we do not have any direct exposure to Russia or the adjoining geographic regions. The extent and duration of the military action, sanctions, and resulting market disruptions are impossible to predict, but could be substantial. Any such disruptions caused by Russian military action or resulting sanctions may magnify the impact of other risks described in this section. We continuously monitor the situation in Ukraine, however, we cannot predict the progress or outcome of the situation, and it is difficult to assess any potential future impact at this time, as the conflict and governmental reactions are rapidly developing and beyond our control. Prolonged unrest intensified military activities, or more extensive sanctions impacting the region could have a material adverse effect on the global economy, and such effect could in turn have a material adverse effect on the operations, results of operations, financial condition, liquidity and business outlook of our business.
We and our Operating Subsidiaries may not be able to compete successfully in the highly competitive financial service industry in Hong Kong.
The financial services industry in Hong Kong in which we operate is intensely competitive, highly fragmented, and subject to rapid change, and we expect it to remain so. As of June 30, 2022, there were 711 trading right holders registered in the Hong Kong Exchanges and Clearing Limited, which comprised 623 trading Exchange Participants, 74 non-trading Exchange Participants and 14 non-exchange participants. On the other hand, there were 1,509, 1,838 and 2,039 corporations licensed to carry on Type 1 (dealing in securities), Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the HKSFO, respectively according to market and industry statistics
43
published on the HKSFC’s website. Our larger competitors may have advantages over us such as having better brand recognition and reputation in the market, larger client base, wider range of value-adding services, stronger human and financial resources, longer operating histories, and operational presence in more geographic locations. We also face competition from local medium and small-sized financial services providers which offer similar range of services. New participants may enter into the market insofar as they have engaged appropriate qualified professionals and obtained the requisite regulatory licenses and permits. Some firms may also have resources to expand their operational scale, market share as well as geographical coverage through undertaking mergers and acquisitions.
There is no assurance that we will be able to maintain our competitive strengths even if we are able to respond rapidly to the changing business environment and/or capture new market opportunities. In addition, competition creates an unfavorable pricing environment in the market in which we operate. Our inability to remain competitive could lead to a reduction in our market share (as our clients are not bound to use our services and can freely switch to other service providers and/or decrease their use of our services), and any further intensification of competition in terms of pricing may lead to reduced profit margins. As a result, our operating performance, financial results and prospects may be materially and adversely affected.
We and our Operating Subsidiaries are subject to extensive and evolving regulatory requirements, the non-compliance with which may result in penalties, limitations, and prohibitions on our future business activities or suspension or revocation of our licenses, and consequently may materially and adversely affect our business, financial condition, and results of operations. In addition, we may, from time to time, be subject to regulatory inquiries and investigations by relevant regulatory authorities or government agencies in Hong Kong or other applicable jurisdictions.
The Hong Kong financial market in which the Operating Subsidiaries primarily operate is highly regulated. The business operations of our Operating Subsidiaries are subject to applicable laws, regulations, guidelines, circulars, and other regulatory guidance, and many aspects of our businesses depend on obtaining and maintaining approvals, licenses, permits, or qualifications from the relevant regulators. Serious non-compliance with regulatory requirements could result in investigations and regulatory actions, which may lead to penalties, including reprimands, fines, limitations, or prohibitions on our future business activities or, if significant, suspension or revocation of our licenses. Failure to comply with these regulatory requirements could limit the scope of businesses in which we are permitted to engage. Furthermore, additional regulatory approvals, licenses, permits, or qualifications may be required by relevant regulators in the future, and some of our current approvals, licenses, permits, or qualifications are subject to periodic renewal. Although the Operating Subsidiaries have not been found by any relevant regulators to be in material non-compliance with any regulatory requirements since our Operating Subsidiaries commenced their businesses, any such finding or other negative 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.
The Operating Subsidiaries, I Win Securities, and I Win Asset Management, are HKSFC-licensed companies subject to various requirements, such as remaining fit and proper at all times, minimum liquid and paid-up capital requirements, notification requirements, submission of audited accounts, submission of financial resources returns and annual returns, continuous professional training, under the SFO of Hong Kong and its subsidiary legislation and the codes and the guidelines issued by the HKSFC from time to time. If any of these HKSFC licensed companies fails to meet the regulatory capital requirements in Hong Kong, the local regulatory authorities may impose penalties on us or limit the scope of our business, which could, in turn, have a material adverse effect on our financial condition and results of operations. Moreover, the relevant capital requirements may be changed over time or subject to different interpretations by relevant governmental authorities, all of which are out of our control. Any increase in the relevant capital requirements or stricter enforcement or interpretation of the same may adversely affect business activities of our Operating Subsidiaries. Any non-compliance with applicable laws, regulations, guidance or codes or any negative findings made by the regulators may result in (i) fines, deterrent penalties, disciplinary actions against us or our subsidiaries, our Responsible Officers, Licensed Representatives or any of our personnel; or (ii) suspension or revocation of some or all of (a) the registrations or licenses of our Operating Subsidiaries for carrying on business activities; or (b) the approvals or licenses granted to our personnel enabling them to carry out their responsibilities. For instance, conditions may be imposed on the licenses of our Operating Subsidiaries restricting them from carrying on their business, or our Responsible Officers or Licensed Representatives may be banned from the industry for a specific period of time. Accordingly, our business operation, reputation, financial condition and results of operations might be materially and adversely affected.
Further, the HKSFC may amend, supplement and/or modify the requirements on licensed corporations as it considers necessary for the proper regulation of the Hong Kong securities and futures market. Any such change or tightening of regulations and/or requirements on licensed corporations (which may involve an amendment to applicable laws, regulations and guidelines) may (i) require us to incur additional costs for compliance; and (ii) potentially affect our ability to carry on our existing regulated activities.
44
From time to time, I Win Securities Limited and I Win Asset Management Limited may be subject to or required to assist in inquiries or investigations by relevant regulatory authorities or government agencies in Hong Kong or other jurisdictions, including the HKSFC, relating to its own activities or activities of third parties such as its clients. The HKSFC 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, our directors, or our employees, may be subject to such regulatory inquiries and investigations from time to time, regardless of whether we are the target of such regulatory inquiries and investigations. If any misconduct is identified as a result of inquiries, reviews or investigations, the HKSFC may take disciplinary actions that would lead to revocation or suspension of licenses, public or private reprimand or imposition of pecuniary penalties against us, our Operating Subsidiaries, Responsible Officers of the Operating Subsidiaries, licensed representatives, directors, or other officers. Any such disciplinary actions taken against us, our Operating Subsidiaries, Responsible Officers, licensed representatives, directors, or other officers may have a material and adverse impact on our business operations and financial results. In addition, our Operating Subsidiaries are subject to statutory secrecy obligations under the SFO of Hong Kong whereby we may not be permitted to disclose details on any HKSFC inquiries, reviews or investigations without the consent of the HKSFC. For further details, see “Regulation — Disciplinary Power of the HKSFC”.
Risks Relating to our Business and Operation
We, through our Operating Subsidiaries, have a relatively short operating history compared to some of our established competitors and face significant risks and challenges in a rapidly evolving market, which makes it difficult to effectively assess our future prospects.
We, through our Operating Subsidiaries, have a relatively short operating history compared to some of our established competitors. We started to provide the underwriting and placing services through I Win Securities in July 2017, securities dealing and brokerage services in July 2017, and through I Win Asset Management, asset management service in January 2021. Our future revenues and cash flows may fluctuate significantly given our short operating history, rendering it difficult to predict our results of operations and prospects.
There is no assurance that we will sustain profitability or positive cash flow from our existing operations or from any expanded or new operations, nor that we will be able, upon the completion of the offering, to expand operations beyond our current level. 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 relatively short operating history. These risks and challenges include our ability to, among other things:
• build a well-recognized I Win brand;
• maintain and expand our client base;
• maintain and enhance our relationships with our business and professional parties partners;
• attract, retain, and motivate employees and AEs;
• anticipate and adapt to changing market conditions and a competitive landscape;
• manage our future growth;
• ensure that the performance of our products and services meets client expectations;
• maintain or improve our operational efficiency;
• navigate a complex and evolving regulatory environment;
• defend ourselves in any legal or regulatory actions against us;
• enhance our technology infrastructure and maintain the security of our system;
• avoid and remedy operating errors as a result of human or system errors; and
• identify and address conflicts of interest;
45
If we fail to address any or all of these risks and challenges, our business may be materially and adversely affected. 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 operations in general. Any significant change to our business model that does not achieve expected results could have a material and adverse impact on our financial condition and results of operations. It is therefore difficult to effectively assess our future prospects.
We are subject to market and financial risks arising from our underwriting business if the securities underwritten by us are undersubscribed.
Placing and underwriting commission was our largest income source for the year ended March 31, 2023, which accounted for approximately 48.31% of our total revenue of the year ended March 31, 2023. Our underwriting service was conducted by I Win Securities, one of our Operating Subsidiaries. Our underwriting services are conducted on a fully underwritten basis, whereby I Win Securities were obliged to take up the undersubscribed securities up to the maximum of our underwriting commitment. I Win Securities has been also involved in several placing exercises as placing agents or sub-placing agents. Depending on the terms of the placing agreements, the placing exercises were either on a fully underwritten basis or on a best-effort basis.
If the securities underwritten by I Win Securities are undersubscribed and we fail to procure subscribers to take up all of the undersubscribed securities, I Win Securities is required to purchase all of the undersubscribed portion for its own account, which would materially and adversely affect our liquidity. If I Win Securities fails to sell the securities it has underwritten, we would incur expenditure, expose ourselves to market risk and capital available to us would be reduced, which may in turn materially and adversely affect our results of operations and financial conditions. Our financial position would also be adversely affected if the underwritten securities so taken up by I Win Securities becomes illiquid and/or their market value drops. Under the FRR, the value of the open position of any underwriting commitment or the market value of the securities purchased by us to fulfil the underwriting obligations would have an impact on our liquid capital. If the liquid capital of our Operating Subsidiaries falls below the minimum requirement under the FRR, our Operating Subsidiaries will be in breach of the FRR resulting in HKSFC suspending our license or imposing conditions in relation to our regulated activities.
In the case of placing of securities on a best-effort basis, if the securities are undersubscribed or if market conditions become volatile, the placing may not be completed in full or may be canceled. The commission from such placing engagements may reduce or in the worst case we may have no commission at all. Moreover, the placing and underwriting commission generated by I Win Securities is directly related to the number of placing and underwriting exercises secured and completed by us and their fund-raising sizes. The placing and underwriting business is subject to various external factors which are beyond our control, including the number and the size of IPOs in the market, and the activeness of the secondary market for fund-raising exercises under the prevailing financial market environment. There is no assurance that the performance of our placing and underwriting business will not be affected by such external factors.
Revenue from the placing and underwriting business is generated on a project-by-project basis and thus our profitability is highly unpredictable and may be adversely affected if we are unable to secure engagements at levels or on comparable commission rates similar to those during the FY 2023 and 2022 in the future.
Our Operating Subsidiaries are engaged to provide placing and underwriting services on a project-by-project basis, and our financial performance in this business segment may be affected by, among other things, demand for our services, our capacity to undertake new projects, the number and size of IPOs and secondary offerings and issuance in the debt and equity capital markets in Hong Kong as well as other external factors which may be outside our control. In particular, demand for placing and underwriting services may be materially affected by prevailing market conditions, as prospective listing applicants and listed issuers may determine to delay, terminate, scale-back or relocate their fundraising plans and/or activities in the event investment sentiment and appetite are stemmed by adverse, unfavorable or uncertain market conditions. Our financial results may also be materially and adversely affected if we are unable to secure new placing or underwriting engagements in the future at levels similar to those during the years ended March 31, 2023 and 2022.
Since the mandates for the underwriting and placing exercise were negotiated on a project-by-project basis with the clients, revenue generated from our services may fluctuate significantly from time to time and may not recur. For example, placing and underwriting commission was our largest income source for the fiscal year ended March 31, 2023, which accounted for approximately 48.31% of our total revenue, whereas for fiscal year ended March 31, 2022,
46
it only accounted for approximately 15.41% of our total revenue. There is also no assurance that the clients which have previously sought our services will continue to retain our Operating Subsidiaries for future businesses. Therefore, our future financial results may be subject to fluctuations depending on the success in entering into new engagements. There is also no assurance that the engagements our Operating Subsidiaries successfully secure can be completed due to the market conditions and circumstances of each engagement. Our revenue and profitability may therefore fluctuate significantly. Further, the terms of the placing and underwriting engagements are determined between each of our clients and us on a case-by-case basis after arm’s length negotiations based on the type of services we provide, nature of transaction, scope of duties, length of time expect to spend, complexity of the transactions and our expected workload. As such, the amount of revenue we generate from different engagements may vary on a project-by-project basis and we cannot assure that we can secure future engagements with fee rates comparable with engagements during the years ended March 31, 2023 and 2022, in the future. We also cannot assure that our commission income from the underwriting and placing service will be comparable to those accepted by our clients during the years ended March 31, 2023 and 2022. When the Operating Subsidiaries are unable to secure such engagements or on comparable commission rates, our financial results may be materially and adversely affected.
The commission income from our Operating Subsidiaries’ securities dealing and brokerage service may be volatile, and fluctuate significantly from quarter to quarter, which may result in volatility of the price of our Ordinary Shares.
We derived substantial revenue from commission and brokerage income from our securities dealing and brokerage services. For the years ended March 31, 2023 and 2022, commission and brokerage income from our securities brokerage services amounted to 47.55% and 80.81% of our total revenue for the corresponding periods. Our brokerage commission and income mainly depend upon the trading volume through our trading system and platform (including our online trading platform). Similar to other broking and financial services firms, trading volume by investors in the stock markets as a whole may continue to be affected by factors such as changes in investors’ sentiment, perception, and confidence in the financial markets, inflation expectation, market conditions, political conditions, natural disasters, riots and acts of war or terrorism. Fluctuations in the trading volume by the clients through our trading platform and services would result in reduced commission and brokerage income, and there is no assurance that we will be able to maintain or improve our relationship with the brokerage clients and they may terminate their respective relationship with us at any time. Our profit may be materially and adversely affected if any of our clients cease to use, or if any of them significantly reduces their use of our services.
We may be subject to substantial risks if the client(s) using our securities dealing and brokerage services default on payments.
During the course of the provision of securities dealing and brokerage services, our clients are required to settle their securities transactions two days after the trade date. If the clients do not have sufficient cash with us to do so, the Operating Subsidiaries are required to settle the same with Central Clearing and Settlement System (the “CCASS”) of the Hong Kong Stock Exchange on behalf of the customers using our own resources. As such, our liquidity position will be adversely affected. Therefore, we need to maintain sufficient resources for the abovementioned settlements and are exposed to potential default in payment by our clients, in which event, our liquidity position may be adversely affected. There is no guarantee that our or our Operating Subsidiaries’ risk management measures could effectively mitigate relevant default risks arising from unexpected events or circumstances. There is also no assurance that the clients will continue to meet their obligations to settle their securities transaction on time, or at all, or that they will not default on their obligations to us as a result of bankruptcy, lack of liquidity or other reasons. In the event the clients fail to meet their payment obligations, our financial conditions and results of operations may be materially and adversely affected.
We may have to bear losses resulting from trading errors.
During the course of providing securities brokerage services, we may have to process and monitor larger number of transactions, which involves complicated operational procedures and requires stable performance of our trading system. Furthermore, the clients can place their orders through the staff (employee) dealers or self-employed AEs, which may involve verbal interaction and manual input. There is no guarantee that our staff dealers or AEs will not inadvertently make trade errors, such as making mistakes when taking client instruction, including but not limited to incorrect input of security name, quantity of the transaction or incorrect buy/sell order or incorrect input of client instruction or client account number. Upon discovery of any trading error, our Operating Subsidiaries have to take immediate actions to rectify the trading error and the relevant client may be dissatisfied and refuse to settle the relevant trade, in which event, we may suffer losses from such trading error. Any loss we suffered resulting from any of the
47
aforesaid trading errors made by our licensed employees or self-employed account executives may not be indemnified by the responsible person and we may have to bear the losses resulting from those trading errors. Hence, in the event that the trading errors are not effectively prevented or controlled, or rectification measures could not cover the loss incurred, our financial results would be materially and adversely affected.
Our business may be affected if we are unable to retain our employees or self-employed AEs who have strong relationships with our clients.
Our Operating Subsidiaries rely on the employee dealers and self-employed account executives to provide reliable and quality financial services and to maintain relationships with our clients through their ability to provide personalized services through understanding their needs. In addition to maintaining relationships with existing clients, we also rely on our staff dealers and self-employed account executives to generate client referrals. There is however no guarantee that the staff or AEs will or are willing to continue to serve, in particular given that our AEs do not have employment contracts with our Operating Subsidiaries. Where our staff or AEs, determine to cease their engagements with our Operating Subsidiaries or enter into negotiations with us for a material variation of their existing terms of engagement (such as the commission arrangement), our operating performance and financial results may be materially and adversely affected.
There is no assurance that the contractual arrangements we have entered with our employees or self-employed AEs are sufficient to protect our interests.
There is no assurance that the contractual arrangements we have entered with our employees and self-employed AEs will be sufficient to protect the business interests of our Operating Subsidiaries. If any employee or self-employed AEs upon his departure leaks proprietary information, trade secrets or know-how of Operating Subsidiaries, or successfully solicits clients, employees or AEs from our Operating Subsidiaries, our business and results of operation may be materially and adversely affected. For example, any leakage of client’s information and contacts to our competitors may adversely affect Operating Subsidiaries’ competitiveness in acting as placing agent or underwriter in our placing and underwriting business. We may need to resort to litigation to enforce the restrictive covenants and undertakings, but there is no guarantee that the courts will rule in favor of us and the outcome may be unpredictable. Any litigation may also require significant expenditure and management efforts, and an unfavorable outcome may materially harm our business prospects and reputation.
We rely on a limited number of external brokers to provide access to overseas securities trading to clients. Our revenue and results of operation may be adversely affected if our existing external brokers cease cooperating with us.
We provide our clients overseas securities trading services to trade securities listed on overseas exchanges, principally the U.S. exchanges, through our Operating Subsidiaries’ platforms in Hong Kong which connect to an external broker for execution. For the years ended March 31, 2023 and 2022, our revenue derived from our overseas securities trading services accounted for 28.71% and 47.64% of our securities dealing and brokerage services revenue. Currently, our Operating Subsidiaries have engaged ViewTrade Securities, Inc. (“ViewTrade”), a securities broker-dealer in the United States, as our external broker for the U.S exchanges, to provide overseas securities trading services to the clients. Although our Operating Subsidiaries did not enter long-term agreement with ViewTrade and we believe such external brokers, such as ViewTrade, are easily replaceable, our revenue and commission income may be adversely affected should the external brokers fail to comply with the terms of our contracts with them or any regulatory requirements, or they might fail to handle instructions from our clients in a timely manner or at all. Upon any failure by our Operating Subsidiaries’ existing external brokers to discharge their obligations, we may not be able to find other suitable companies as replacements on a timely basis. Our Operating Subsidiaries may not be able to provide access to those external securities trading platforms continuously and/or at the same fee charge level to our clients, which may cause our client to cease conducting their overseas securities trading through us. Upon the occurrence of any of the above, our business, financial performance and operations may be adversely affected.
Other brokerage firms may have a competitive edge over us by offering zero or lower rate of brokerage commission.
Our clients are free to trade in securities in the secondary market with any broker that offers a more favorable rate of brokerage commission. Brokerage firms competing with us in Hong Kong may charge zero or lower rate of brokerage commission to capture a larger market share and attract our clients to use their securities dealing and brokerage services. We cannot assure that our clients who have active securities trading accounts with us will continue to conduct all or any securities trading through such account. In case we are unable to charge a competitive rate of brokerage commission for our securities dealing and brokerage services, we may lose to our competitors for the same clients in the secondary market for securities trading.
48
Our asset management business is a new business line and may not be successful.
We only recently commenced our asset management business after I Win Asset Management Limited obtained the HKSFC licenses to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities in January 2021. We launched an open-ended fund, namely, I Win Growth SPC (segregated portfolio: Fund 1 Growth SP) in June 2021. We have limited experience in operating asset management business. In the future, we cannot assure you that our AUM will be maintained or increased under the highly competitive environment with numerous competitors including other securities firms, fund managers, commercial banks, and insurance companies which may have longer operating histories, better brand names and reputation and proven record of investment performance. Given the history of operation of our asset management business is short, its ability to succeed is difficult to predict. Our investment performance is subject to market condition and volatility, our investment strategies, changes in our risk management policy and economic factors. If our future AUM decreases due to our poor management or our clients withdraw their assets, our business operations and financial results may be materially and adversely affected.
We may not be able to develop our margin financing business as expected and may be exposed to credit risks related to such business. In addition, we need adequate funding at reasonable costs to successfully operate our proposed margin financing business and access to adequate funding at reasonable costs cannot be assured.
Our margin financing business 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 intend to adopt 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 business.
Moreover, the development, growth and success of our securities margin financing business will depend on the availability of adequate funding to meet our client demand for loans on our platform. In addition to the proceeds of this offering, we expect to 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 the aforesaid institutional funding partners, the funds available for our margin financing business might be limited and our ability to provide margin financing services to our clients would be adversely impacted. In addition, to offer our clients competitively priced margin financing services, as the securities brokerage and margin financing 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 our platform is 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.
Our businesses depend on key management and professional staff, and our business may suffer if we are unable to recruit and retain them.
The businesses of our Operating Subsidiaries depend on the skills, reputation, and professional experience of our key management, the network of resources and relationships they generated for our business, and the synergies among the diverse fields of expertise and knowledge held by our management. Therefore, the success of our business depends on the continued services of these individuals. If we lose their services, we may not be able to execute our existing business strategy effectively or maintain our current level of profitability, and we may have to change our current business direction. These disruptions to our business may take up significant energy and resources of our company, and materially and adversely affect our future prospects.
Moreover, our and our Operating Subsidiaries’ business operations depend on our professional staff, our most valuable asset. Their skills, reputation, professional experience, and client relationships are critical elements in obtaining and executing client engagements. We devote considerable resources and incentives to recruiting and retaining these personnel. However, the market for quality professional staff is increasingly competitive. We expect to face significant competition in hiring such personnel. Additionally, the current compensations scheme to attract employees may not be
49
as effective as in the past. The intense competition may require us to offer more competitive compensation and other incentives to our talent, which could materially and adversely affect our financial condition and results of operations. As a result, we may find it difficult to retain and motivate these employees, and this could affect their decisions about whether or not they continue to work for us. If we do not succeed in attracting, hiring and integrating quality professional staff, or retaining and motivating existing personnel, we may be unable to grow effectively.
Where one or more of the regulated activities of our Operating Subsidiaries has less than two Responsible Officers, our Operating Subsidiaries will be in breach of the relevant licensing requirements which could adversely affect our licensing status which may jeopardize our business operation.
Under the licensing requirements of the SFO, each of our Operating Subsidiaries must have at all times at least two Responsible Officers to directly supervise the business of each of our regulated activities. Any resignation, sickness or absence of our Responsible Officers may expose us to operational disruption, and thus may result in a breach of the relevant licensing requirement. This may subsequently result in the suspension of our HKSFC licenses and jeopardize our business operations.
Our Operating Subsidiaries are required to maintain a high level of funds and liquidity for our business activities and proposed expansions.
As the corporations licensed with the HKSFC to carry on regulated activities, our Operating Subsidiaries are required to maintain a minimum amount of share capital and liquid capital as prescribed under the Securities and Futures (Financial Resources) Rules (the “FRR”). Further, the Hong Kong Stock Exchange also imposes similar financial requirements on Exchange Participants. The required liquid capital is the higher of HK$3 million and its variable required liquid capital as stipulated by the FRR. For more details, please refer to the paragraph headed ‘‘Securities and Futures (Financial Resources) Rules (Chapter 571N of the Laws of Hong Kong)’’ under the section headed ‘‘Regulation’’ in this prospectus. Therefore, our Operating Subsidiaries must maintain a high level of liquidity at all times to comply with the FRR. Failure to meet the above requirement may cause the HKSFC to suspend our licenses, impose conditions in relation to our regulated activities, or take other appropriate disciplinary actions against us, which may adversely affect our business operations and financial performance. Although we have not breached the statutory capital requirements under the FRR or imposed by the Hong Kong Stock Exchange for the years ended March 31, 2023 and 2022, there is no assurance that such failure will not happen in the future. Our liquid capital may be tightened when we commence our margin financing operation and expand our margin financing activities in the future, increase in underwriting exercises and/or settlement of securities trading transactions on behalf of our securities brokerage clients.
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 FRR, our business operations and performance will be adversely affected.
We may require additional funding for further growth and development of our business, including any investments or acquisitions we may decide to pursue. 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 our existing resources are insufficient to satisfy our requirements, we may seek to issue additional equity or debt securities or obtain new or expanded credit facilities. Our ability to obtain external financing in the future is subject to a variety of uncertainties, including our future financial condition, results of operations, cash flows, share price performance, liquidity of international capital and lending markets, and the Hong Kong financial industry. 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. In addition, our HKSFC licensed Operating Subsidiaries are required under the FRR to maintain certain levels of liquid capital. If they fail to maintain the required levels of liquid capital, the HKSFC may take actions against our Operating Subsidiaries and our business will be adversely affected.
50
We may not be able to implement our business strategies and future plans successfully.
Our business strategies and future plans are set out in the paragraph headed ‘‘Growth Strategies’’ under the section headed ‘‘Business’’ and in the ‘‘Use of Proceeds’’ section in this prospectus. However, the successful implementation of these strategies and plans depend on a number of factors including but not limited to the following:
• our ability to recruit and retain qualified and experienced professional staff; in particular, in the recruitment of qualified staff with relevant experience to support the expected expansion of our placing and underwriting services, proposed commencement of our margin financing and expansion of asset management services;
• our ability to cope with increased exposure to financial risk, operational risk, market risk and credit risk arising from our expanded scope of business;
• our ability to comply with all regulatory requirements and maintain/obtain the qualifications on the range of financial and securities services we provide or intend to provide to our clients;
• our ability to secure sufficient financial resources;
• clients’ acceptance and demand for our products and services and our ability to compete with our competitors; and
• our ability to adapt the changes in the financial market and government policies.
Many of these factors are beyond our control and by nature, are subject to uncertainty. As such, there is no assurance that our business strategies and future plans can be implemented successfully or may be materialized in accordance with our expected timetable, or at all, despite our capital commitments and investments into the same. Any failure or delay in the implementation of any or all of these strategies and plans may have a material adverse effect on our profitability and prospects. In addition, our future plans may place substantial demands on our managerial, operational, technological, financial and other resources. To manage and support our growth, we may need to improve our existing operational and administrative systems, improve our financial and management controls, enhance our ability to recruit, train and retain additional qualified personnel and staff. All of these efforts will require substantial attention and time from management and significant additional expenditures. We cannot assure you that we will be able to manage any future growth effectively and efficiently, and our ability to capitalize on new business opportunities may be materially and adversely affected if we fail to do so, which could in turn materially and adversely affect our business, results of operations, financial condition and prospects.
We may undertake acquisitions, investments, joint ventures, or other strategic alliances, which could present unforeseen integration difficulties or costs and may not enhance our business as we expect.
Our strategy includes plans to grow both organically and through possible acquisitions, joint ventures, or other strategic alliances. Joint ventures and strategic alliances may expose us to new operational, regulatory, and market risks, as well as risks associated with additional capital requirements. We may not be able, however, to identify suitable future acquisition targets or alliance partners. Even if we identify suitable targets or partners, the evaluation, negotiation, and monitoring of the transactions could require significant management attention and internal resources and we may be unable to complete an acquisition or alliance on terms commercially acceptable to us. The costs of completing an acquisition or alliance may be costly and we may not be able to access funding sources on terms commercially acceptable to us. Even when acquisitions are completed, we may encounter difficulties in integrating the acquired entities and businesses, such as difficulties in retention of clients and personnel, challenge of integration and effective deployment of operations or technologies, and assumption of unforeseen or hidden material liabilities or regulatory non-compliance issues. Any of these events could disrupt our business plans and strategies, which in turn could have a material adverse effect on our financial condition and results of operations. Such risks could also result in our failure to derive the intended benefits of the acquisitions, strategic investments, joint ventures, or strategic alliances, and we may be unable to recover our investment in such initiatives. We cannot assure you that we could successfully mitigate or overcome these risks.
51
Any negative publicity with respect to us, our directors, officers, employees, shareholders, or other beneficial owners, our peers, business partners, or our industry in general, may materially and adversely affect our reputation, business, and results of operations.
Our reputation and brand recognition of our Operating Subsidiaries play an important role in earning and maintaining the trust and confidence of our existing and prospective clients. Our reputation and brand are vulnerable to many threats that can be difficult or impossible to control, and costly or impossible to remediate. Negative publicity about us, such as alleged misconduct, other improper activities, or negative rumors relating to our business, shareholders, or other beneficial owners, affiliates, directors, officers, or other employees, can harm our reputation, business, and results of operations, even if they are baseless or satisfactorily addressed. These allegations, even if unproven or meritless, may lead to inquiries, investigations, or other legal actions against us by any regulatory or government authorities. Any regulatory inquiries or investigations and lawsuits against us, and perceptions of conflicts of interest, inappropriate business conduct by us or perceived wrongdoing by any key member of our management team, among other things, could substantially damage our reputation regardless of their merits, and cause us to incur significant costs to defend ourselves. As we reinforce our ecosystem and stay close to our clients and other stakeholders, any negative market perception or publicity on our business partners that we closely cooperate with, or any regulatory inquiries or investigations and lawsuits initiated against them, may also have an impact on our brand and reputation, or subject us to regulatory inquiries or investigations or lawsuits. Moreover, any negative media publicity about the financial services industry in general or product or service quality problems of other firms in the industry in which we operate, 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 clients, third-party partners, and key employees could be harmed and, as a result, our business, financial position, and results of operations would be materially and adversely affected.
We may not be able to fully detect money laundering and other illegal or improper activities in our business operations on a timely basis or at all, which could subject us to liabilities and penalties.
We our Operating Subsidiaries are required to comply with applicable anti-money laundering and anti-terrorism laws and other regulations in the jurisdictions where we operate. Although we have adopted policies and internal control procedures aimed at detecting, and preventing being used for, money-laundering activities by criminals or terrorist-related organizations and individuals or improper activities (including but not limited to market manipulation and aiding and abetting tax evasion), in light of the complexity of money-laundering activities and other illegal or improper activities, such policies and procedures may not completely eliminate the possibility of third parties using our business platform to engage in money laundering and/or other illegal or improper activities.
Furthermore, our Operating Subsidiaries primarily comply with applicable anti-money laundering laws and regulations in Hong Kong(for example, the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance and the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations) issued by the HKSFC), and we may not fully detect violations of anti-money laundering regulations in other jurisdictions or be fully compliant with the anti-money laundering laws and regulations in other jurisdictions to which we are required. After we become a publicly listed company in the United States, we will also be subject to the U.S. Foreign Corrupt Practices Act of 1977 and other laws and regulations in the United States, including regulations administered by the U.S. Department of Treasury’s Office of Foreign Asset Control.
To the extent that our policies and procedures currently in place fail to detect and prevent money-laundering activities, terrorist financing and other illegal or improper activities by our directors, employees, AEs, agents, clients or other third parties and/or if we fail to fully comply with the applicable laws and regulations, the relevant government authorities may initiate investigation against us, and may impose fines and/or other penalties on us, any of which may significantly and adversely affect our reputation, business operations and financial results.
Fraud or misconduct by our directors, officers, employees, agents, AEs, clients, or other third parties could harm our reputation and business and may be difficult to detect and deter.
We are subject to a number of obligations and standards arising from our businesses. The violation of these obligations and standards by any of our directors, officers, employees, agents, clients, or other third parties could materially and adversely affect us and our investors. For example, our businesses require that we properly handle confidential
52
information. If our directors, officers, employees, agents, clients, or other third parties were to improperly use or disclose confidential information, we could suffer serious harm to our reputation, financial position, and existing and future business relationships.
We our Operating Subsidiaries are also subject to the risk of fraud, illegal act, misconduct or other improper activities committed by our directors, employees, agents, clients or other third parties, such as entering into unauthorized transactions, improperly using or divulging inside information, recommending transactions not suitable for our clients, engaging in fraudulent activities, or engaging in improper or illegal. We cannot assure that our procedures and policies would fully prevent or detect illegal or improper activities in our business operations. If illegal or improper activities transpire and we fail to identify them in a timely manner, or at all, we will be in breach of the legal and regulatory requirements in Hong Kong and may be subject to regulatory sanction resulting in financial loss and reputational harm, which would adversely affect our reputation and results of operations.
It is not always possible to detect and deter fraud or misconduct by our directors, officers, employees, agents, clients, business partners, or other third parties. The precautions that we take to detect and prevent such activity may not be effective in all cases. Fraud or misconduct by any of these persons or entities may cause us to suffer significant reputational harm and financial loss or result in regulatory disciplinary actions. The potential harm to our reputation and to our business caused by such fraud or misconduct is impossible to quantify.
Our failure to appropriately identify and address conflicts of interest could materially and adversely affect our business
As we expand the scope of our business and our client base, it is critical for us or our Operating Subsidiaries to be able to address actual, potential, or even perceived conflicts of interest, including situations where we may encounter conflicts of interest arising among: (i) our various services, (ii) our clients and us, (iii) our various clients, (iv) our employees and us or (v) our clients and our employees. In light of the complexity and difficulty in appropriately identifying and dealing with potential conflicts of interest, our internal control procedures that are designed to identify and address conflicts of interest may not be sufficient. Our failure to manage conflicts of interest could harm our reputation and erode client confidence in us. In addition, potential or perceived conflicts of interest may also give rise to litigation or regulatory actions. The occurrence of any of the foregoing events could materially and adversely affect our business, results of operations and reputation.
We may be subject to litigation, arbitration or other legal proceeding risk.
We, our Operating Subsidiaries, our directors and officers, and employee may from time to time become subject to or involved in various claims, controversies, lawsuits, and legal proceedings. Claims, lawsuits, and litigations are subject to inherent uncertainties, and we are uncertain whether the foregoing claim would develop into a lawsuit. Lawsuits and litigations may cause us to incur defense costs, utilize a significant portion of our resources and divert management’s attention from our day-to-day operations, any of which could harm our business. Any settlements or judgments against us could have a material adverse impact on our financial condition, results of operations and cash flows. In addition, negative publicity regarding claims or judgments made against us may damage our reputation and may result in a material adverse impact on us.
Should we experience any event of professional liabilities, such as claims or lawsuits, our financial position and reputation will be adversely affected.
The services of our Operating Subsidiaries may involve providing professional advices to our customers. Our clients, who rely on our professional advice and suffers loss as a result of our negligence in providing such advice, might claim compensation against us. The key business risk associated with our services is, amongst others, possible claims or lawsuits arising from professional negligence and employee infidelity. Although our Operating Subsidiaries have adopted the relevant internal control measures, there is no assurance that the measures can eliminate all future possible professional negligence and/or employee infidelity. Should we experience any event of professional liabilities, such as claims or lawsuits, it may have an adverse impact on our financial position and reputation.
If our insurance coverage is insufficient, we may be subject to significant costs and business disruption.
We have limited business insurance coverage. We currently carry limited insurance in connection with our brokerage business covered by the Type 1 license from HKSFC against certain risks in accordance with the requirements under the Securities and Futures (Insurance) Rules of Hong Kong. However, we do not carry business interruption insurance
53
to compensate for losses that could occur to the extent not required. We do not currently carry insurance that covers the other aspects of our business operations. Nor do we currently maintain key man insurance covering our key personnel. 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.
Any failure to protect our intellectual property could harm our business and competitive position.
We, through our Operating Subsidiaries, own and maintain a number of registered domain names (including our website) and, although we do not currently own any registered trademarks other than our company logo, registered in Hong Kong, we may in the future acquire new intellectual property such as trademarks, copyrights, domain names, and know-how. We will rely on a combination of intellectual property laws and contractual arrangements to protect our intellectual property rights. It is possible that third parties may copy or otherwise obtain and use our trademarks without authorization or otherwise infringe on our rights. We may not be able to successfully pursue claims for infringement that interfere with our ability to use our trademarks, website, or other relevant intellectual property or have adverse impact on our brand. We cannot assure you that any of our intellectual property rights would not be challenged, invalidated, or circumvented, or such intellectual property will be sufficient to provide us with competitive advantages. In addition, other parties may misappropriate our intellectual property rights, which would cause us to suffer economic or reputational damages.
Although we and our Operating Subsidiaries have not been subject to any litigation, pending or threatened, alleging infringement of third parties’ intellectual property rights, we cannot assure you that such infringement claims will not be asserted against us or our Operating Subsidiaries in the future. Third parties may own copyrights, trademarks, trade secrets, ticker symbols, internet content, and other intellectual properties that are similar to ours in jurisdictions where we currently have no active operations. If we expand our business to or engage in other commercial activities in those jurisdictions using our own copyrights, trademarks, trade secrets, and internet content, we may not be able to use these intellectual properties or face potential lawsuits from those third parties and incur substantial losses if we fail to defend ourselves in those lawsuits. We have policies and procedures in place to reduce the likelihood that we or our employees may use, develop, or make available any content or applications without the proper licenses or necessary third-party consents. However, these policies and procedures may not be effective in completely preventing the unauthorized posting or use of copyrighted material or the infringement of other rights of third parties.
Intellectual property litigation is expensive and time-consuming and could divert resources and management attention from the operation of our business. If there is a successful claim of infringement, we may be required to alter our services, cease certain activities, pay substantial royalties and damages to, and obtain one or more licenses from third parties. We may not be able to obtain those licenses on commercially acceptable terms, or at all. Any of those consequences could cause us to lose revenues, impair our client relationships and harm our reputation.
We may be affected by the currency peg system in Hong Kong.
Since 1983, Hong Kong dollars have been pegged to the U.S. dollars within a band of HK$7.75 – 7.85 to US$1.00. We cannot assure you that this policy will not be changed in the future. If the pegging system collapses and Hong Kong dollars suffer devaluation, the Hong Kong dollar cost of our expenditures denominated in foreign currency may increase. This would in turn adversely affect the operations and profitability of our business.
Increases in labor costs may adversely affect our business and results of operations.
The economy in Hong Kong and globally has experienced general increases in inflation and labor costs in recent years. As a result, average wages in Hong Kong and certain other regions are expected to continue to increase. In addition, we are required by Hong Kong laws and regulations to pay various statutory employee benefits, including mandatory provident fund to designated government agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to fines and other penalties. We expect that our Operating Subsidiaries’ labor costs, including wages and employee benefits, will continue to increase. Unless we are able to control our labor costs or pass on these increasing labor costs, our financial condition and results of operations may be adversely affected.
54
A sustained outbreak of the COVID-19 pandemic could have a material adverse impact on our business, operating results and financial condition.
Since early 2020, the ongoing COVID-19 pandemic has led governments across the globe to impose a series of measures intended to contain its spread, including border closures, travel bans, quarantine measures, social distancing, and restrictions on business operations and large gatherings, and has caused significant disruption to worldwide economic activities, including economic activities in Hong Kong (where we operate in), and in China (where certain portion of the client and potential client locate). The COVID-19 pandemic outbreak in Hong Kong in early 2020 and early 2022 resulted in temporary pandemic-related lockdowns. These two outbreaks of COVID-19 domestically in Hong Kong caused companies in Hong Kong such as our Operating Subsidiaries, as well as our professional parties partners and clients, to implement temporary adjustments to work schedules and travel plans and to implement alternative work arrangements for some of our or their employee to work from home and collaborate remotely. As a result, we have experienced lower efficiency and productivity, internally and externally, which may adversely affect our service quality. Since April 2022, in light of the reduced severity of the COVID-19 pandemic in Hong Kong, our alternative work arrangement was largely abolished. Nonetheless, our business depends on our employees. If any of our employees has contracted or is suspected of having contracted COVID-19, these employees will be required to be quarantined and they could pass it to other of our employees, potentially resulting in severe disruption to our business.
As of the date of the prospectus, most countries around the globe have abolished the measures to contain COVID-19 pandemic and “back to normal”, and the Hong Kong government has abolished its entry restrictions and significantly lessened the Covid-19 control measures. Furthermore, the PRC government has significantly lessened its travel restrictions and abolished the quarantine requirements for international arrivals to Mainland China from January 8, 2023. However, before their abolishment, the aforesaid travel restrictions, quarantine and social control measures in Hong Kong and Mainland China had severely hindered our client development efforts in Hong Kong and the Mainland China, and our businesses and clients have been adversely affected by travel restrictions preventing PRC residents from traveling to Hong Kong.
Furthermore, our results of operations have been affected by the COVID-19 outbreak. We have witnessed huge market fluctuations in the global capital and financial markets since 2020. Due to the instability of global financial markets and other economic and financial challenges brought about by COVID-19, the deterioration of the economic condition of Mainland China due to the continuous COVID-19 control measures, the significant market volatility and declines in general economic activities in Hong Kong and globally, have severely dampened the confidence of our client in the global and Hong Kong’s financial markets and its willingness to conduct fundraising activities in Hong Kong Stock Exchanges, or trade in the secondary market. The pandemic, government measures in response to the pandemic, and the global economic deterioration, could result in an economic downturn in Hong Kong and countries where our clients and potential client locates and in the foreseeable future. Such a downturn in global and Hong Kong’s economy and financial market may lead to a decline in our consumers’ demands for our services, which could adversely affect our business and, in turn, negatively impact our business and results of operations. Given the general slowdown in economic conditions globally, volatility in the capital markets as well as the generally negative impact of the COVID-19 outbreak on the capital market markets, we cannot assure you that we will be able to maintain the growth rate we have experienced or projected. Any future impact on our results of operations will depend on, to a large extent, future developments and new information that may emerge regarding the duration and severity of the COVID-19 pandemic and the actions taken by government authorities and other entities to contain the spread or treat its impact, almost all of which are beyond our control. We will continue to monitor the situation throughout 2023 and beyond closely.
We may incur losses or experience disruption of our operations as a result of unforeseen or catastrophic events, including pandemics, terrorist attacks, or natural disasters.
Our Operating Subsidiaries’ business could be materially and adversely affected by catastrophic events or other business continuity problems, such as natural or man-made disasters, pandemics such as COVID-19, war, riots, terrorist attacks, or other public safety concerns. If we were to experience a natural or man-made disaster, disruption due to political unrest, or disruption involving electronic communications or other services used by us or third parties with which we conduct business, our operations will partially depend on the availability of our people and office facilities and the proper functioning of our computer, software, telecommunications, transaction processing, and other related systems. A disaster or a disruption in the infrastructure that supports our businesses, a disruption involving electronic communications or other services used by us or third parties with whom we conduct business or a disruption that directly affects our headquarters, could have a material adverse impact on our ability to continue to operate our
55
business without interruption. Our Operating Subsidiaries’ business could also be adversely affected if our employees are affected by pandemics. In addition, our results of operations could be adversely affected to the extent that any pandemic harms the Chinese or Hong Kong economy in general. The incidence and severity of disasters or other business continuity problems are unpredictable, and our inability to timely and successfully recover could materially disrupt our businesses and cause material financial loss, regulatory actions, reputational harm, or legal liability.
We rely on a limited number of key customers for our business.
Our top five customers accounted for 54% and 48% of our total revenues for the years ended March 31, 2023 and 2022, and our largest customer accounted for 20% and 30% of our total revenues, respectively. Therefore, our customers are concentrated, and we rely on a limited number of key customers during each period of our business. Our customer concentration risk is exacerbated due to: a) our reliance on different customers in different periods; b) the fact that the largest customer in each period for the years ended March 31, 2023 and 2022 was a different customer; and c) the customers for our placing and underwriting services engaged us on a project-by- project basis.
We cannot assure you that our Operating Subsidiaries will be successful in diversifying the customer base, engaging new customers, and reducing our customer concentration risk. For example, the largest customer for the year ended March 31, 2022 engaged us for our securities dealing and brokerage services, we cannot guarantee that this customer or any other top customers for our securities dealing and brokerage service will continue to trade on our platform at levels commensurate with previous periods, or that they will not terminate the use of our services in the future. Furthermore, the volume of trading which these customers may decide to trade during any particular period depends on their investment preferences at the time, which may be affected by their outlook and perception of the market as well as factors beyond our control. Any decline in the top customers’ transaction volume would lower our revenues, which would adversely affect our profitability. Furthermore, the largest customer for the year ended March 31, 2023 engaged us for our underwriting services, which accounted for 20% of our total revenues, and 4 out of the top 5 customers for year ended March 31, 2023 engaged us for our underwriting services. Since we are engaged to provide placing and underwriting services on a project-by-project basis, it is unlikely that our top 5 customers who engaged our underwriting and placing services will continue to retain us for their future businesses, and even if they so choose to retain us for their future businesses, the value of transaction mandated by them may be significantly lower than their mandates given to us for years ended March 31, 2023 and 2022. If we are unable to secure new customers or underwriting/placing projects, or secure underwriting/placing mandates at the similar level as the years ended March 31, 2023 and 2022, during a period of time in the future, our results of operations, financial conditions, cashflow positions may be adversely and materially impacted.
Our business is subject to various cyber-security risks and other operational risks, such as the failure or malfunction of our trading system and/or information technology infrastructure and the failure to maintaining relationship with our vendors, which may cause disruptions to our business operation and tarnish our reputation
As financial services companies, our Operating Subsidiaries face various cyber-security and other operational risks relating to our businesses on a daily basis. Their operations depend upon the secured processing, storage and transmission of confidential and other information in their information technology infrastructure and they are vulnerable to unauthorized access such as cyber-attacks, distributed denial of service attacks and ransomware attacks, malicious code and computer viruses by activists, hackers, organized crime, foreign state actors and other third parties, or other events that could lead to a security breach. We and our Operating Subsidiaries may also be subject to cyber-attacks involving leak and destruction of sensitive and confidential client information and our proprietary information, which could result from an employee’s or agent’s failure to follow data security procedures or as a result of actions by third parties, including actions by government authorities. As the breadth and complexity of our information technology infrastructure continue to grow, the potential risk of security breaches and cyber-attacks increases. Developing and enhancing new products and services, which is necessary for us to remain competitive, may involve the use or creation of new technologies, which further exposes us to cybersecurity and privacy risks that cannot be completely anticipated and increases the risk of security breaches and cyber-attacks.
While our Operating Subsidiaries have adopted various means to safeguard the integrity of their trading system, computer system and information technology infrastructure, our trading system, computer system, and information technology infrastructure may fail to operate properly or become disabled as a result of events which are beyond our
56
control, events such as human error, natural disasters, power failures, client misuse, computer viruses, cyber-attacks, spam attacks, unauthorized access and data loss or leakage. All of which may cause shutdown or disruption of operations (including data loss or corruption, interruption to our data storage system, delay or cessation in the services provided through our securities dealing and brokerage system and our online trading platform), account takeovers and unauthorized gathering, monitoring, misuse, loss, total destruction and disclosure of data and confidential information of ours, our clients, our employees or other third parties, or otherwise materially disrupt our or our clients’ or other third parties’ network access or business operations. The occurrence of one or more of such events could jeopardize the confidentiality of information processed, stored and transmitted through our computer systems and networks or otherwise disrupt our operations, which could result in reputational damage, disputes with clients and relevant parties, and financial losses. For example, our Operating Subsidiaries rely heavily on the BSS to execute our securities trading orders, and to execute and process our clients’ instructions accurately and promptly. The connection to the BSS is provided by a vendor recognized by the Stock Exchange. The BSS may be vulnerable to disruptions such as computer viruses, cyber-attacks and spam attacks leading to data corruption and interruptions, delay or cessation in executing clients’ trading instructions which could have a material adverse effect on our business, results of operations and prospects operation. Any cyber-attack may also jeopardize the security of stored confidential information (such as client data or trading records) and cause losses to us. In the event of a system failure of the BSS system, all clients’ instructions will have to be transacted through a standalone system managed by our staff dealer. This would likely lead to a delay or failure in the execution of our clients’ instructions as BSS system can accommodate multiple users while the back-up terminal can only be accessed by one user at a time.
Our Operating Subsidiaries also depend on various third-party software and platforms as well as other information technology systems provided by our information technology vendor in our business operations. These systems, including third-party systems, may fail to operate properly or become disabled because of tampering or a breach of our network security systems or otherwise, including for reasons beyond our control. Any interruption or deterioration in the performance of these third parties or failures of their information systems and technology could impair our operations, affect our reputation, and adversely affect our businesses. There is no guarantee that we are able to maintain our existing relationship with the information technology vendor of our trading system, software system or information technology infrastructure. In the event that any vendor is unable or unwilling to continue to provide existing services to our Operating Subsidiaries, our Operating Subsidiaries may not be able to replace them with service providers of equivalent expertise in a timely manner and thus resulting in disruption to our business operations.
The occurrence of any disruption to the trading system, computer system and/or other information technology infrastructure may render us unable to meet client requirements in a timely and efficient manner, and/or lead to unauthorized disclosure of personal information or any other unexpected associated losses and damages. As a result, our and our Operating Subsidiaries’ reputation may be tarnished and we may also face complaints, disciplinary action by regulatory authorities, and legal proceedings being brought against us or our Operating Subsidiaries (which can be costly and time-consuming to defend and which may significantly divert the efforts and resources of our management personnel away from our usual business operations) and may potentially result in us having to pay damages. This could materially and adversely affect our financial condition, prospects and results of operations.
Failure to comply with data privacy, data protection, or any other laws and regulations related to data privacy and security, or the failure to protect client data or prevent breaches of our information systems, could expose us to liability or reputational damage and materially and adversely affect our business, financial condition, and results of operations.
As the financial services company, in providing their services to clients, our Operating Subsidiaries manage, utilize and store sensitive and confidential client data, including personal data. As a result, we may be subject to a variety of data privacy, data protection, cybersecurity, and other laws and regulations related to data, including those relating to the collection, use, sharing, retention, security, disclosure, and transfer of confidential and private information, such as personal information and other data. These laws and regulations apply not only to third-party transactions, but also to transfers of information within our organization, which relates to our investors, employees, contractors and other counterparties. These laws and regulations may restrict our and our Operating Subsidiaries’ business activities and require us to incur increased costs and efforts to comply, and any breach or noncompliance may subject us to proceedings against us, damage our reputation, or result in penalties and other significant legal liabilities, and thus may materially and adversely affect our business, financial condition, and results of operations.
57
If any person, including any of our employees, negligently disregards or intentionally breaches our established controls with respect to client data, or otherwise mismanages or misappropriates that data, we could be subject to significant monetary damages, regulatory enforcement actions, fines and/or criminal prosecution. Unauthorized disclosure of sensitive or confidential client data, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients. In addition, vulnerabilities of our external service providers and other third parties could also pose security risks to client information and data. Although we have taken steps to reduce the risk of such threats, the risk and exposure to a cyber-attack or related breach remains heightened due to the evolving nature of these threats, our routine transmission of sensitive information to third parties, the current global economic and political environment, external extremist parties and other developing factors. Similarly, unauthorized access to or through our information systems, whether by our employees or third parties, including a cyber-attack by third parties who may deploy viruses, worms or other malicious software programs, could result in negative publicity, significant remediation costs, legal liability, regulatory fines, and damage to our reputation and could have adverse effects on our results of operations. Any actual or perceived breach of the security of our technology, or media reports of perceived security vulnerabilities of our systems or the systems of our third-party service providers, could damage our reputation, expose us to the risk of litigation and liability, disrupt our operations, increase our costs with respect to investigations and remediation, reduce our revenues as a result of the theft of intellectual property, and otherwise adversely affect our business. Further, any actual or perceived security breach or cyber-attack directed at other financial institutions or financial services companies, whether or not we are impacted, could lead to a general loss of customer confidence in the use of technology to conduct financial transactions, which could negatively impact us. The occurrence of any of these events could have adverse effects on our business and results of operations.
We also face risk related to external fraud involving the misappropriation and use of clients’ user-names, passwords or other personal information to gain access to their accounts. This could occur from the compromise of clients’ personal electronic devices or as a result of a data security breach at an unrelated company where clients’ personal information is taken and then made available to fraudsters. This risk has grown in recent years due to the increased sophistication and activities of organized crime and other external parties. Losses in client accounts reimbursed under our asset protection guarantee against unauthorized account activity (through no fault of the client) could have adverse effects on our business, financial condition and results of operations.
Our management team lacks experience in managing a U.S. public company and complying with laws applicable to such company, the failure of which may adversely affect our business, financial condition and results of operations.
Our current management team lacks experience in managing a U.S. publicly traded company, interacting with public company investors and complying with the increasingly complex laws pertaining to U.S. public companies. Prior to the completion of this offering, we were a private company mainly operating our businesses in Hong Kong. As a result of this offering, our company will become subject to significant regulatory oversight and reporting obligations under the federal securities laws and the scrutiny of securities analysts and investors, and our management currently has no experience in complying with such laws, regulations and obligations. Our management team may not successfully or efficiently manage our transition to becoming a U.S. public company. These new obligations and constituents will require significant attention from our senior management and could divert their attention away from the day-to-day management of our business, which could adversely affect our business, financial condition and results of operations.
Our lack of effective internal controls over financial reporting may affect our ability to accurately report our financial results or prevent fraud which may affect the market for and price of our Ordinary Share.
To implement Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on our internal control over financial reporting. Prior to filing the registration statement of which this prospectus is a part, we were a group of private companies with limited accounting personnel and other resources for addressing our internal control over financial reporting. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. However, in connection with the audits of our consolidated financial statements for the years ended March 31, 2023 and 2022, we and our independent registered public accounting firm identified material weaknesses in our internal control over financial reporting as well as other control deficiencies for the above mentioned periods. As defined in the standards established by the PCAOB, a “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, 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.
58
Material weaknesses that have been identified are summarized as the followings: (1) our lack of financial reporting and accounting personnel with understanding of U.S. GAAP to address complex U.S. GAAP technical issues, related disclosures in accordance with U.S. GAAP; (2) our lack of an audit committee and internal audit function to establish formal risk assessment process and internal control framework; (3) inadequate segregation of duties for certain functions due to limited staff and resources; and (4) weaknesses in IT security environment, controls and procedures, including lack of formal IT policies and procedures, risk and vulnerability assessments, vendor management, recovery management, change management and system security.
We intend to implement measures designed to improve our internal control over financial reporting to address the underlying causes of these material weaknesses, including: (i) recruiting additional employees and external consultants with extensive knowledge of U.S. GAAP within our finance and accounting department; (ii) conducting regular and continuous U.S. GAAP training programs and webinars for our financial reporting and accounting personnel; (iii) continuously developing and enhancing our internal audit function for the financial reporting matters and set up audit committee after our listing; and (iv) strengthening our IT security environment and procedures by engaging third party expertise in introducing and implementing the required changes to the overall IT environment and required upgrades to our systems. However, the implementation of these measures may not fully address the deficiencies in our internal control over financial reporting. We are not able to estimate with reasonable certainty the costs that we will need to incur to implement these and other measures designed to improve our internal control over financial reporting.
Pursuant to the JOBS Act, we qualify as an “emerging growth company” as we recorded revenues less than US$1.235 billion in our most recent fiscal year, which allows us to take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act, in the assessment of the emerging growth company’s internal control over financial reporting.
We will be subject to the requirement that we maintain internal controls and that management perform periodic evaluation of the effectiveness of the internal controls. Effective internal control over financial reporting is important to prevent fraud. As a result, our business, financial condition, results of operations and prospects, as well as the market for and trading price of our Ordinary Shares, may be materially and adversely affected if we do not have effective internal controls. We may not discover any problems in a timely manner and current and potential shareholders could lose confidence in our financial reporting, which would harm our business and the trading price of our Ordinary Shares. The absence of internal controls over financial reporting may inhibit investors from purchasing our Ordinary Shares and may make it more difficult for us to raise funds in a debt or equity financing. Additional material weaknesses or significant deficiencies may be identified in the future. If we identify such issues or if we are unable to produce accurate and timely financial statements, our stock price may decline, and we may be unable to maintain compliance with the NASDAQ listing rules.
Our business and prospects may be materially and adversely affected if the risk management and internal control systems of the Operating Subsidiaries are ineffective or inadequate. The Operating Subsidiaries may fail to update our risk management policies and procedures as needed and such policies and procedures may otherwise be ineffective, which may expose us to unidentified or unexpected risks.
The business of our Operating Subsidiaries is dependent on their risk management and internal control policies and procedures and the adherence to such policies and procedures by our risk management and other staff to manage the risks inherent in our business. Any deficiencies in Operating Subsidiaries’ internal control systems could (i) adversely affect the ability to timely and accurately record, process, summarize and report financial or other data; and (ii) adversely affect the operational efficiency and increase the potential likelihood of making financial reporting errors and/or lead to non-compliance with rules and regulations. The policies, procedures and practices used to identify, monitor and control a variety of risks are carried out by the corresponding departments of our Operating Subsidiaries. However, some of the methods for managing risks are discretionary by nature and are based on internally developed controls and observed historical market behavior, and also involve reliance on standard industry practices. These methods may not adequately prevent losses, particularly as they relate to extreme market movements, which may be significantly greater than historical fluctuations in the market. There is no assurance that our internal control policies in place could or would be properly implemented, or be strictly adhered to, or are adequate or effective under the continuously changing business environment in which we operate. In addition, we may fail to update our risk management system as needed and the system may fail to effectively function, thus exposing us to unidentified or unexpected risks.
59
New lines of business or new services may subject us to additional risks.
From time to time, we may implement new lines of business or offer new services within existing lines of business. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. In developing and marketing new lines of business and/or new services, we may invest significant time and resources. Initial timetables for the introduction and development of new lines of business and/or new services 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 a new line of business or a new service. 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 operations and we may lack experience in managing new lines of business or new services. In addition, we and our subsidiaries may be unable to proceed with the operations 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 line of business and/or new service 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 lines of business or new services could have a material adverse effect on our business, results of operations and financial condition.
60
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “may,” “might,” “will,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “goal,” “objective,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” and “ongoing,” or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements. The forward-looking statements and opinions contained in this prospectus are based upon information available to us as of the date of this prospectus and, while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:
• our goals and strategies;
• expected future economic performance;
• our future business development, financial condition and results of operations;
• projections of revenue, earnings, capital structure and other financial items;
• introduction of new product and service offerings;
• expected changes in our revenues, costs or expenditures;
• our expectations regarding the demand for and market acceptance of our products and services;
• timing of the development of future business;
• expected growth of our customers;
• competition in our industry;
• Ability to managing our growth effectively;
• changes in the laws that affect our operations and government policies and regulations relating to our industry;
• our ability to obtain and maintain all necessary government certifications, approvals, and/or licenses to conduct our business;
• uncertainty about the spread of the COVID-19 virus and the impact it may have on our operations, the demand for the our products and services, and economic activity in general;
• the dependence on our senior management and key employees; and
• other factors set forth under “Risk Factors.”
You should refer to the section titled “Risk Factors” for a discussion of important factors that may cause our actual results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the forward-looking statements in this prospectus will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
You should read this prospectus and the documents that we reference in this prospectus and have filed as exhibits to the registration statement, of which this prospectus forms a part, completely and with the understanding that our actual future results may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
61
Based upon the assumed initial public offering price of US$4.00 per share (the proposed minimum offering price) we estimate that we will receive net proceeds from this offering, after deducting the underwriting discounts and commissions, non-accountable expense allowance and the estimated offering expenses paid and to be paid by us, of approximately US$6.3 million assuming the underwriters do not exercise its over-allotment option.
We will not receive any proceeds from the resale of Ordinary Shares by the Selling Shareholders.
We plan to use the net proceeds we will receive from this offering as follows:
• Approximately US$0.7 million or 10% for increasing our capital base and liquid capital to expand our underwriting and placing services capacity, and for recruiting additional experienced professional staff, including Responsible Officers, with appropriate levels of knowledge, networks, and experience.
• Approximately US$2.0 million or 30% for commencing our securities margin financing services, especially to strengthen the capacity of our margin financing business by expanding our margin book and increasing our capital base;
• Approximately US$0.9 million or 15% for enhancing our IT infrastructure and capacity, upgrading our online trading platforms and portfolio management system, and subscribing to financial and market data platform to enhance our analytical and research capabilities;
• Approximately US$0.9 million or 15% for expanding our asset management service, by enhancing our research capabilities and recruiting professionals with relevant experiences and networks with high- net-worth and institutional clients;
• Approximately US$0.9 million or 15% for strengthening our securities dealing and brokerage services, especially to expand our service coverage in the U.S. exchanges, through joint-venture, strategic partnership, or acquisition of suitable licensed financial institutions and securities brokerage firm in the United States; and
• The balance of US$0.9 million or 15% for general working capital and corporate purposes.
With respect to possible future acquisitions of the licensed financial institutions and securities brokerage firm in the United States, our management has not identified any targets for any potential acquisition. We have no present understandings, commitments or agreements to enter into any acquisitions or make any investments. We cannot assure you that we will make any acquisitions or investments in the future.
The foregoing represents our current intentions based upon our present plans and business conditions to use and allocate the net proceeds of this offering. Our management, however, will have some flexibility and discretion to apply the net proceeds of this offering. If an unforeseen event occurs or business conditions change, we may use the proceeds of this offering differently than as described in this prospectus. To the extent that the net proceeds we receive from this offering are not imminently used for the above purposes, we intend to invest in short-term, interest-bearing bank deposits or debt instruments.
62
Our Cayman Islands holding company, Garden Stage Limited, has never declared or paid any cash dividends on our Ordinary Shares. No dividends and distributions made by our subsidiaries for the years ended March 31, 2023 and 2022.
We anticipate that we will retain any earnings to support operations and to finance the growth and development of our business. Therefore, we do not expect to pay cash dividends in the foreseeable future.
Our board of directors has complete discretion on whether to distribute dividends, subject to applicable laws. In addition, our shareholders may by ordinary resolution declare a dividend. Under Cayman Islands law, a Cayman Islands company may pay a dividend either out of profit or share premium account, provided that in no circumstances may a dividend be paid if the dividend payment would result in the company being unable to pay its debts as they fall due in the ordinary course of business. Even if our board of directors decides to pay dividends, the form, frequency, and amount will depend upon our future operations and earnings, capital requirements and surplus, general financial condition, contractual restrictions, and other factors that the board of directors may deem relevant. Cash dividends on our Ordinary Shares, if any, will be paid in U.S. dollars.
63
The following table sets forth the capitalization as of March 31, 2023 on (i) an actual basis, (ii) a pro forma basis to reflect the allotment of 1,275,000 Ordinary Shares on April 3, 2023 to State Wisdom Holdings and Bliss Tone with aggregate consideration of approximately $0.8 million, (iii) on a pro forma as adjusted basis to reflect the allotment of 2,000,000 Ordinary Shares by us in this offering at the assumed initial public offering price of US$4.00 per Ordinary Share (the proposed minimum offering price) we estimate after deducting the underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses paid and to be paid by us. You should read this table in conjunction with our financial statements and related notes appearing elsewhere in this prospectus and “Use of Proceeds” and “Description of Share Capital.”
As of | ||||||||||||
Actual | Pro Forma(1) | Pro Forma as | ||||||||||
Shareholders’ equity | $ |
| $ |
| $ |
| ||||||
|
|
|
|
|
| |||||||
Ordinary shares, US$0.0001 par value, 500,000,000 shares authorized as of March 31 2023; 11,475,000 shares issued and outstanding on an actual basis as of March 31 2023; 12,750,000 shares issued and outstanding on a pro forma basis; 14,750,000 shares issued and outstanding on a pro forma as adjusted basis |
| 1,148 |
|
| 1,275 |
|
| 1,475 |
| |||
Additional paid-in capital |
| 2,024,327 |
|
| 2,819,103 |
|
| 9,135,535 |
| |||
Accumulated deficit |
| (79,495 | ) |
| (79,495 | ) |
| (79,495 | ) | |||
Accumulated other comprehensive income |
| 1,026 |
|
| 1,026 |
|
| 1,026 |
| |||
Total shareholders’ equity |
| 1,947,006 |
|
| 2,741,909 |
|
| 9,058,541 |
| |||
Total capitalization | $ | 1,947,006 |
| $ | 2,741,909 |
| $ | 9,058,541 |
| |||
____________
(1) Reflects the allotment of 1,275,000 Ordinary Shares on April 3, 2023 to State Wisdom Holdings and Bliss Tone with aggregate consideration of approximately $0.8 million in connection with the Reorganization.
(2) Reflects the allotment of Ordinary shares in this offering (excluding any Ordinary Shares that may be allotted as a result of the underwriters exercising their over-allotment option) at an assumed initial public offering price of US$4.00 per Ordinary Share (the proposed minimum offering price), and after deducting the estimated underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses paid and to be paid by us. The pro forma as adjusted information discussed above is illustrative only. Our share premium and total equity following the completion of this Offering are subject to adjustment based on the actual initial public offering price and other terms of this offering determined at pricing. Assuming the number of Ordinary Shares offered by us as set forth on the cover page of this prospectus remains the same, and after deduction of underwriting discounts and commissions, non-accountable expense allowance, and estimated offering expenses paid and to be paid by us, a $1.00 change in the assumed initial public offering price of $4.00 per ordinary share would, in the case of an increase (decrease) each of share premium and total shareholders’ equity by approximately $1.8 million.
64
If you invest in our Ordinary Shares in this offering, your interest will be immediately diluted to the extent of the difference between the initial public offering price per Ordinary Share in this offering and the net tangible book value per Ordinary Share after this offering. Dilution results from the fact that the initial public offering price per Ordinary Share is substantially in excess of the net tangible book value per Ordinary Share.
As of March 31, 2023, we had a net tangible book value of $1,377,682, or $0.12 per Ordinary Share. Net tangible book value per share represents total tangible assets less total liabilities, divided by the number of Ordinary Shares outstanding on March 31, 2023.
The calculation in this section assumes that 14,750,000 Ordinary Shares were issued and outstanding as of March 31, 2023, excluding the impact of over-allotment option. After giving effect to the allotment of Ordinary Shares in this offering at the assumed initial public offering price of US$4.00 per Ordinary Share (the proposed minimum offering price), and after deducting the underwriting discounts, non-accountable expense allowance and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value as of March 31, 2023 would have been $8,931,980, or $0.61 per Ordinary Share. The following table illustrates the reconciliation of our pro forma as adjusted net table book value as of March 31, 2023 to our actual net tangible book value as of March 31, 2023:
Amount | Corresponding | Net tangible | |||||||
Actual net book value as of March 31, 2023 | $ | 1,947,006 |
| 11,475,000 | $ | 0.17 | |||
|
|
| |||||||
Adjustments: |
|
|
| ||||||
Operating lease right-of-use assets |
| (62,868 | ) | — |
| — | |||
Intangible assets |
| (63,694 | ) | — |
| — | |||
Deferred IPO costs |
| (442,762 | ) | — |
| — | |||
Actual net tangible book value as of March 31, 2023 |
| 1,377,682 |
| 11,475,000 |
| 0.12 | |||
|
|
| |||||||
Adjustments: |
|
|
| ||||||
Subscribed shares deposit liabilities(1) |
| 794,903 |
| 1,275,000 |
| — | |||
Pro forma net tangible book value as of March 31, 2023 |
| 2,172,585 |
| 12,750,000 |
| 0.17 | |||
|
|
| |||||||
Adjustments: |
|
|
| ||||||
Net proceeds from this offering(2) |
| 6,316,633 |
| 2,000,000 |
| — | |||
Deferred IPO costs |
| 442,762 |
| — |
| — | |||
Pro forma as adjusted net tangible book value as of March 31, 2023 | $ | 8,931,980 |
| 14,750,000 | $ | 0.61 | |||
____________
(1) Reflects the allotment of 1,275,000 Ordinary Shares on April 3, 2023 to State Wisdom Holdings and Bliss Tone with aggregate consideration of approximately $0.8 million in connection with the Reorganization.
(2) Reflects the allotment of Ordinary shares in this offering (excluding any Ordinary Shares that may be allotted as a result of the underwriters exercising their over-allotment option) at an assumed initial public offering price of US$4.00 per Ordinary Share (the proposed minimum offering price), and after deducting the estimated underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses payable by us.
65
This represents an immediate increase in pro forma as adjusted net tangible book value of $0.44 per Ordinary Share to existing investors and immediate dilution of $3.39 per Ordinary Share to new investors. The following table illustrates this dilution to new investors purchasing Ordinary Share in this offering:
Offering | |||
Assumed initial public offering price per Ordinary Share | $ | 4.00 | |
Actual net tangible book value per Ordinary Share as of March 31, 2023 |
| 0.12 | |
Pro forma net tangible book value per Ordinary Share as of March 31, 2023(1) |
| 0.17 | |
Increase in pro forma as adjusted net tangible book value per Ordinary Share attributable to new investors purchasing Ordinary Shares in this offering |
| 0.44 | |
Pro forma as adjusted net tangible book value per Ordinary Share after this offering(2) |
| 0.61 | |
Dilution per Ordinary Share to new investors in this offering | $ | 3.39 | |
____________
(1) Reflects the allotment of 1,275,000 Ordinary Shares on April 3, 2023 to State Wisdom Holdings and Bliss Tone with aggregate consideration of approximately $0.8 million in connection with the Reorganization.
(2) Reflects the allotment of Ordinary shares in this offering (excluding any Ordinary Shares that may be allotted as a result of the underwriters exercising their over-allotment option) at assumed initial public offering price of US$4.00 per Ordinary Share (the proposed minimum offering price), and after deducting the estimated underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses payable by us.
Each $1 increase (decrease) in the assumed initial public offering price of $4.00 per Ordinary Share would increase (decrease) our pro forma as adjusted net tangible book value as of March 31, 2023, after this offering by approximately $0.13 per Ordinary Share, and would increase (decrease) dilution to new investors by approximately $0.88 per Ordinary Share, assuming that the number of Ordinary Shares offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses payable by us.
An increase (decrease) of 1 million in the number of Ordinary Shares we are offering would increase (decrease) our pro forma as adjusted net tangible book value as of March 31, 2023 after this offering by approximately $0.04 per Ordinary Share, and would decrease (increase) dilution to new investors by approximately $0.04 per Ordinary Share, assuming the assumed initial public offering price per Ordinary Share, as set forth on the cover page of this prospectus remains the same, and after deducting the estimate underwriting discounts and commissions, non-accountable expense allowance and estimated offering expenses payable by us. The pro forma as adjusted information is illustrative only, and we will adjust this information based on the actual initial public offering price and other terms of this offering determined at pricing.
The following table summarizes, on a pro forma as adjusted basis as of March 31, 2023, the differences between existing shareholders and the new investors with respect to the number of Ordinary Shares purchased from us, the total consideration paid and the average price per Ordinary Share before deducting the estimated discounts and commissions to the underwriters, non-accountable expense allowance and the estimated offering expenses payable by us.
| Total | Average | ||||||||||||
Number | Percent | Amount | Percent | |||||||||||
Existing shareholders(1) | 12,750,000 | 86.4 | % | $ | 2,820,378 | 26.1 | % | $ | 0.22 | |||||
New investors(2) | 2,000,000 | 13.6 | % |
| 8,000,000 | 73.9 | % |
| 4.00 | |||||
Total | 14,750,000 | 100.0 | % | $ | 10,820,378 | 100.0 | % | $ | 0.73 | |||||
____________
(1) Include 1,275,000 ordinary shares allotted to State Wisdom Holdings and Bliss Tone on April 3, 2023 in connection with the Reorganization.
(2) Exclude the impact of over-allotment option.
The pro forma as adjusted information as discussed above is illustrative only. Our net tangible book value following the completion of this offering is subject to adjustment based on the actual initial public offering price of our Ordinary Shares and other terms of this offering determined at the pricing.
66
CORPORATE HISTORY AND STRUCTURE
Garden Stage Limited was incorporated on August 11, 2022 in the Cayman Islands under Cayman Islands law, for purposes of effectuating this Offering. Prior to the Reorganization as described below, we historically conducted our business through I Win Holdings Limited (“I Win Holdings HK”), a company incorporated under the laws of Hong Kong, and its subsidiaries, namely, I Win Securities Limited (“I Win Securities”) and I Win Asset Management Limited (“I Win Asset Management”), both incorporated under the laws of Hong Kong.
On November 10, 2016, I Win Securities has been established as a company with limited liability under the laws of Hong Kong and commenced our securities brokerage and underwriting and placing business. I Win Securities was licensed by the HKSFC to undertake Type 1 (dealing in securities) regulated activity on July 19, 2017. To expand our services into asset management services, on March 25, 2020, I Win Asset Management has been established as a company with limited liability under the laws of Hong Kong. I Win Asset Management obtained the relevant HKSFC licenses to undertake Type 4 (advising on securities) and Type 9 (asset management) regulated activities on January 25, 2021.
On March 25, 2020, I Win Holdings HK was also incorporated under the laws of Hong Kong as the holding company of I Win Securities and I Win Asset Management.
On June 6, 2022, HKSFC approved I Win Holdings HK to become the holding company of I Win Securities and I Win Asset Management. Subsequently, pursuant to the June 6, 2022 HKSFC approval, on June 24, 2022, I Win Holdings HK acquired 100% of the equity interest of I Win Securities and I Win Asset Management and became their holding company.
Pursuant to the Reorganization in April 2023 as described below, Garden Stage Limited have become the holding company of I Win Holdings HK and its subsidiaries. Upon completion of the Reorganization, our group of companies comprises Garden Stage Limited, 17 Uno Limited (“17 Uno BVI”), I Win Holdings HK, I Win Securities, and I Win Asset Management.
The Reorganization
In this prospectus, we refer to all these following events as the “Reorganization”.
As part of the Reorganization, on August 11, 2022, we formed Garden Stage, for the purposes of effectuating this Offering. Upon the incorporation of Garden Stage Limited on August 11, 2022, Garden Stage Limited issued 1 ordinary shares to Oriental Moon Tree Limited, for a consideration of US$1.00.
On August 17, 2022, the wholly-owned British Virgin Islands subsidiary of Garden Stage, 17 Uno BVI was then incorporated on August 17, 2022, as the proposed intermediate holding of I Win Holdings HK as part of the Reorganization.
On November 21, 2022, Garden Stage Limited executed a shareholder resolution to change the par value of the Ordinary Shares from US$1.00 to $0.0001, a 10,000 for 1 share subdivision (“Share Subdivision”). Upon the Share Subdivision, the one issued and outstanding Ordinary Share held by Oriental Moon Tree Limited was sub-divided into 10,000 Ordinary Shares of par value of US$0.0001 each. Pursuant to such resolution, the authorized share capital of Garden Stage Limited was US$50,000 divided into 500,000,000 Ordinary Shares with a nominal or par value of US$0.0001 each, in accordance with section 13 of the Cayman Islands Companies Act.
Since I Win Securities and I Win Asset Management are HKSFC-licensed corporations, prior approval from the HKSFC is required for any company or individual to become a holding company or the substantial shareholder of an HKSFC-licensed corporation. On September 2, 2022, the New Substantial Shareholder Application was submitted to the HKSFC, in which 17 Uno BVI, Garden Stage, and Oriental Moon Tree are to become the substantial shareholders of I Win Securities and I Win Asset Management. The HKSFC approvals were obtained on January 26, 2023 (the “January 26 HKSFC approval”).
Pursuant to the January 26 HKSFC approval, the Reorganization was completed in April 2023. Pursuant to the Reorganization, on April 3, 2023, Garden Stage acquired, through 17 Uno BVI, all of the issued equity interests of I Win Holdings HK, from the existing shareholders of I Win Holdings HK, namely, Courageous Wealth Limited,
67
Lobster Financial Holdings Limited, Capital Hero Global Limited, Smark Holding Limited, and Gulu Gulu Limited, in cash consideration of HK$1,000 in aggregate. In April 2023, in connection with the Reorganization, Garden Stage Limited allotted and issued:
(a) additional 80,000 Ordinary Shares at the par value of US$0.0001 to Oriental Moon Tree Limited on April 3, 2023; and
(b) additional 11,385,000 Ordinary Shares at the par value of US$0.0001 to Oriental Moon Tree Limited on April 20, 2023.
Upon completion of the Reorganization, I Win Securities and I Win Asset Management, our Operating Subsidiaries, have become the indirect wholly-owned subsidiaries of Garden Stage through 17 Uno BVI and I Win Holding HK.
Pre-IPO Investment
On July 22, 2022, I Win Holdings HK entered into Investment Agreement with State Wisdom Holdings Limited (“State Wisdom Holdings”), as varied by the Supplemental Investment Agreement entered into on November 22, 2022 and a further Supplemental Investment Agreement entered into on April 3, 2023. Pursuant to aforesaid agreements, State Wisdom Holdings to acquire Ordinary Shares representing 5% of the entire issued share capital of Garden Stage Limited upon and at the time of the completion of the Reorganization, at a subscription consideration of HK$3,120,000 (approximately US$397,454), and I Win Holdings HK shall procure Garden Stage Limited to allot and issue the corresponding amount of Ordinary Shares of Garden Stage Limited to State Wisdom Holdings.
On July 22, 2022, I Win Holdings HK entered into Investment Agreement with Bliss Tone Limited (“Bliss Tone”), as varied by the Supplemental Investment Agreement entered into on November 22, 2022 and a further Supplemental Investment Agreement entered into on April 3, 2023. Pursuant to Investment Agreements, Bliss Tone to acquire Ordinary Shares of representing 5% of the entire issued share capital of Garden Stage Limited upon and at the time of the completion of the Reorganization, at a subscription consideration of HK$3,120,000 (approximately US$397,454), and I Win Holdings HK shall procure Garden Stage Limited to allot and issue the corresponding amount of Ordinary Shares of Garden Stage Limited to Bliss Tone.
According to Investment Agreements and Supplemental Investment Agreements between I Win Holdings HK, Bliss Tone, and State Wisdom Holdings, as part of the Reorganization, Garden Stage allotted and issued:
(a) 5,000 Ordinary Shares to State Wisdom Holdings on April 3, 2023;
(b) 5,000 Ordinary Shares to Bliss Tone on April 3, 2023;
(c) 632,500 Ordinary Shares to State Wisdom Holdings on April 20, 2023; and
(d) 632,500 Ordinary Shares to Bliss Tone on April 20, 2023.
The subscription of Ordinary Shares by State Wisdom Holdings and Bliss Tone were completed on April 20, 2023.
68
Corporate Structure
The following diagram illustrates our corporate structure prior to the consummation of the Reorganization:
69
The Reorganization was completed in April 2023.
Pursuant to the Public Offering Prospectus, we are offering 2,000,000 Ordinary Shares, representing 13.56% of the Ordinary Shares issued and outstanding following completion of the offering of Garden Stage, assuming the underwriters do not exercise the over-allotment option. Furthermore, State Wisdom Holdings Limited, Bliss Tone Limited, and Oriental Moon Tree Limited, the Selling Shareholders, are also offering an additional 1,750,000 Ordinary Shares of Garden Stage pursuant to the Resale Prospectus, representing 11.86% of the Ordinary Shares following the completion of this Offering. Following the offering of Garden Stage and offering of the Seller Shareholder, assuming that the underwriters do not exercise their over-allotment option and the Selling Shareholders will sell all of the Ordinary Shares offered for sale pursuant to the Resale Prospectus, 25.42% of the Ordinary Shares of the Company will be held by public shareholders.
The following diagram illustrates our corporate structure following the Reorganization, prior to completion of this Offering, and upon the completion of this Offering:
Our Subsidiaries and Business Functions
17 Uno BVI was incorporated under the laws of British Virgin Islands to be the intermediate holding company of I Win Holdings HK on August 17, 2022 as part of the Reorganization.
I Win Holdings HK was incorporated under the laws of Hong Kong as the holding company of I Win Asset Management and I Win Securities on March 25, 2020. On June 6, 2022, HKSFC approved I Win Holdings HK to be the substantial shareholder of I Win Securities and I Win Asset Management. On June 24, 2022, I Win Holdings HK acquired 100% of the equity interest of I Win Securities and I Win Asset Management and has become their holding company.
I Win Securities was established in accordance with laws and regulations of Hong Kong on November 10, 2016. With a registered capital of HKD 15,000,000 (approximately US$1.9 million) currently, I Win Securities is a limited liability corporation licensed with HKSFC to undertake Type 1 (dealing in securities) regulated activity.
I Win Asset Management was established in accordance with laws and regulations of Hong Kong on March 25, 2020. With a registered capital of HKD 900,000 (approximately US$0.1 million) currently, I Win Asset Management is a limited liability corporation licensed with the HKSFC to undertake Type 4 (advising on securities) and Type 9 (asset management) regulated activities.
70
MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus. This discussion and analysis and other parts of this prospectus contain forward -looking statements based upon current beliefs, plans and expectations that involve risks, uncertainties and assumptions. Our actual results and the timing of selected events could differ materially from those anticipated in these forward -looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this prospectus. You should carefully read the “Risk Factors” section of this prospectus to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.
Overview
We, through our Operating Subsidiaries, are a Hong Kong-based financial services provider principally engaged in the provision of securities brokerage, underwriting and placement, and other financial services to a wide range of customers in Hong Kong. Our operation is carried out through our wholly-owned Operating Subsidiaries: a) I Win Securities, which is licensed to conduct Type 1 (dealing in securities) regulated activities under the SFO in Hong Kong, and b) I Win Asset Management, which is licensed to conduct Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the SFO in Hong Kong. I Win Securities is also a participant of the SEHK and HKSCC and holds one trading right with SEHK. Our diversified business portfolio, through our Operating Subsidiaries, allows us to create synergies between our business lines, generate new business opportunities for each business segment and provide integrated financial services to our customers.
The following discussion and analysis of our financial condition and results of operations is prepared based on the financial data which is derived from our audited consolidated financial statements for the years ended March 31, 2023 and 2022, included in this prospectus.
Our revenues were US$3.3 million and US$2.3 million for the years ended March 31, 2023 and 2022, respectively. We, recorded net loss of US$0.2 million and US$0.5 million for the years ended March 31, 2023 and 2022, respectively. We plan to keep our business growing by, through our Operating Subsidiaries, strengthening our securities brokerage, underwriting and placement services and develop our asset management business and margin financing services.
Factors Affecting Our Results of Operations
Our business and operating results are influenced by general factors that affect the financial and securities services industry, including economic and political conditions, the evolving needs of investors, changes in trading volume, changes in demand for financial services, changes in wealth and availability of funds of our existing and target customers, and regulatory changes governing the financial and securities services industry. In addition, the following company-specific factors can directly affect our results of operations materially:
Our ability to develop new customers’ network and retain existing customers
Our brokerage commissions mainly depend upon the trading volume. Trading volume would continue to be affected by factors such as changes in customers’ sentiment, perception and confidence in the financial markets, inflation expectation, market conditions, political conditions, natural disasters, riots and acts of war or terrorism. Fluctuations in the trading volume by our customers may impact our financial performance, and there is no assurance that we will be able to maintain or improve our relationship with our customers and they may terminate their respective relationship with us at any time.
Similarly, our mandates for the underwriting and placement activities are negotiated on a project-by-project basis with our customers. Revenue generated from our services may fluctuate from time to time and may not recur. There is also no assurance that the customers which have previously sought our services will continue to retain us for future businesses. Therefore, our future financial results may be subject to fluctuations depending on our success in entering into new engagements.
71
Our ability to earn diversified and stable sources of revenue from our different lines of services
We believe that the complementary nature of our different lines of business creates synergy and enables us to generate a diversified and stable source of income. We are able to leverage on our existing pool of securities trading customers when acting as book-runner, lead manager, underwriter or placing agent in placing and underwriting engagements in that our securities trading services act as a channel for procuring suitable investors to subscribe for securities offered under placing and underwriting projects undertaken by us. With our placing and underwriting business, we believe that there will be growing demand for our securities trading services from customers who would like to benefit from trading opportunities gained through access to allocations granted to us (for subscriptions and acquisitions of securities) under underwriting and placement projects undertaken by us. Our asset management services provide professional insights and investment advice for our customers to allocate their asset portfolios and diversify their investment risk. Our asset management services further enhance the growth of our securities brokerage and financing services, especially amongst the high-net-worth customers, which allow us to create cross-selling opportunities, optimize customer service coverage and grow a group of loyal customer base to achieve business growth. However, these business strategies and synergies are subject to uncertainty. There is no assurance that the diversification of our business can be implemented successfully or the synergies between different businesses can be materialized which may in return affect our results of operations.
Our ability to effectively improve technology infrastructure
Our technology infrastructure capabilities are critical for us to offer high quality products and services as well as to retain and attract users and customers. We must continue to upgrade and expand our technology infrastructure to keep pace with the growth of our business and to develop new features and services for our users and customers. We plan to upgrade our portfolio management system and trading system to further streamline the efficiency, convenience, and comprehensiveness of our trading system and provide our customers with a user-friendly interface to ensure that they can securely manage their wealth portfolios with ease. Furthermore, with our ongoing objective to remain competitive and to facilitate the expansion of service offering, we intend to (i) subscribe to a new integrated system comprising both portfolio management and risk management functions, including but not limited to features such as managing security, redundancy, disaster recovery and database administration as well as providing market data (such as corporate actions, massive correlation, dividend tables, and volatility datasets); (ii) subscribe to a new customer relationship management system with the aim of enhancing customer satisfaction; (iii) subscribe to a new business continuity planning service (which includes data management and cloud storage archiving) and co-location service as a back-up workplace in case there is any disruption to our office; and (iv) subscribe to market information and data to enhance our analytical and research capabilities to support our asset management and underwriting and placement services. At the date of the prospectus, we are still in the process of assessing and evaluating different solutions on the upgrade and improvement of our technology infrastructure and no commitment has been made on any of the procurement of technology solutions. The upgrade and improvement of our technology infrastructure are subject to uncertainty. There is no assurance that such can be implemented successfully or materialized which may in return affect our business plan, competitiveness, and results of operations. Our technology infrastructure capabilities would continue to play a critical role in driving our results of operations.
Our ability to meet the regulatory requirements to provide brokerage and other financial services in Hong Kong
Brokerage and other financial services are highly regulated in Hong Kong. While our operations, through our Operating Subsidiaries, are mainly located in Hong Kong, we are inevitably subject to the relevant laws and regulations, in particular, the SFO, under the supervision of the HKSFC. Pursuant to the SFO, we have to comply with all application provisions concerning statutory obligations such as maintenance of minimum capital adequacy, specific regulatory reporting, and availability of responsible officers.
If any of our HKSFC licensed companies fails to meet the regulatory capital requirements in Hong Kong, the local regulatory authorities may impose penalties on us or limit the scope of our business, which could, in turn, have a material adverse effect on our financial condition and results of operations. Moreover, the relevant capital requirements may be changed over time or subject to different interpretations by relevant governmental authorities, all of which are out of our control. Any increase in the relevant capital requirements or stricter enforcement or interpretation of the same may adversely affect our business activities. Any non-compliance with applicable laws, regulations, guidance or codes or any negative findings made by the regulators may result in (i) fines, deterrent penalties, disciplinary actions against us; or (ii) suspension or revocation of some or all of our registrations or licenses for carrying on our business activities. Accordingly, our business operation, reputation, financial condition and results of operations might be materially and adversely affected. Further, HKSFC may amend, supplement and/or modify the requirements on licensed corporations
72
as it considers necessary for the proper regulation of the Hong Kong securities and futures market. Any such change or tightening of regulations and/or requirements on licensed corporations (which may involve an amendment to applicable laws, regulations and guidelines) may (i) require us to incur additional costs for compliance; and (ii) potentially affect our ability to carry on our existing regulated activities.
Our ability to retain employees or brokers who have strong relationships with our customers
We materially rely on our experienced employees and brokers to provide reliable and quality financial services to our customers, and believe that our experienced employees and brokers have developed strong relationships with our customers through their ability to provide personalized services through understanding customers’ needs. In addition to maintaining relationships with existing clients, we also rely on them to generate customer referrals. There is however no guarantee that they will or are willing to continue to serve us. Where they determine to cease their engagements with our Operating Subsidiaries or enter into negotiations with us for a material variation of their existing terms of engagement, our operating performance and financial results may be materially and adversely affected.
Competition in the financial services industry in Hong Kong
The financial services industry in Hong Kong in which we operate is intensely competitive, highly fragmented, and subject to rapid change, and we expect it to remain so. There is a significant number of existing market participants in the financial and securities services industry in Hong Kong providing services similar to us. Our larger competitors may have advantages over us such as having better brand recognition and reputation in the market, wider range of value adding services, stronger human and financial resources, longer operating histories, and operational presence in more geographic locations. We also face competition from local medium and small-sized financial services providers which offer similar range of services. New participants may enter into the market insofar as they have engaged appropriate qualified professionals and obtained the requisite regulatory licenses. In addition, competition creates an unfavorable pricing environment in the market in which we operate. Intensified competition may cause us to reduce our service fees in order to compete with other market players, which could place significant pressure on our ability to maintain profitability and is particularly acute during market slowdowns, and will in turn materially and adversely affect our market share, financial condition and results of operations.
Impact of the COVID-19
Since early 2020, the ongoing COVID-19 pandemic has led governments across the globe to impose a series of measures intended to contain its spread, including border closures, travel bans, quarantine measures, social distancing, and restrictions on business operations and large gatherings, and has caused significant disruption to worldwide economic activities, including economic activities in Hong Kong (where we operate in), and in China (where certain portion of the client and potential client locate). The COVID-19 pandemic outbreak in Hong Kong in early 2020 and early 2022 resulted in temporary pandemic-related lockdowns. These two outbreaks of COVID-19 domestically in Hong Kong caused companies such as ours, as well as our professional parties partners and clients, to implement temporary adjustments to work schedules and travel plans and to implement alternative work arrangements for some of our or their employees to work from home and collaborate remotely. As a result, we have experienced lower efficiency and productivity, internally and externally, which may adversely affect our service quality. Since April 2022, in light of the reduced severity of the COVID-19 pandemic in Hong Kong, our alternative work arrangement was largely abolished. Nonetheless, our business depends on our employees. If any of our employees has contracted or is suspected of having contracted COVID-19, these employees will be required to be quarantined and they could pass it to other of our employees, potentially resulting in severe disruption to our business.
As of the date of the prospectus, most countries around the globe have abolished the measures to contain COVID-19 pandemic and “back to normal”, and the Hong Kong government has abolished its entry restrictions and significantly lessened the COVID-19 control measures. Furthermore, the PRC government has significantly lessened its travel restrictions and abolished the quarantine requirements for international arrivals to Mainland China from January 8, 2023. Further on May 5, 2023, World Health Organization (“WHO”) announced that it was time for countries to transition from emergency mode to managing COVID-19 alongside other infectious diseases. We consider the impact of COVID-19 have largely been eased. However, before the abolishment of COVID-19 restrictions and the resumption of normal activities and business operation, the aforesaid travel restrictions, quarantine and social control measures in Hong Kong and Mainland China had severely hindered our client development efforts in Hong Kong and the Mainland China, and our businesses and clients have been adversely affected by travel restrictions preventing PRC residents from traveling to Hong Kong.
73
Our results of operations have been affected by the COVID-19 outbreak. We have witnessed huge market fluctuations in the global capital and financial markets since 2020. Due to the instability of global financial markets and other economic and financial challenges brought about by COVID-19, the deterioration of the economic condition of Mainland China due to the continuous COVID-19 control measures, the significant market volatility and declines in general economic activities in Hong Kong and globally, have severely dampened the confidence of our client in the global and Hong Kong’s financial markets and its willingness to conduct fundraising activities in Hong Kong Stock Exchanges, or trade in the secondary market. Given the general slowdown in economic conditions globally, volatility in the capital markets as well as the generally negative impact of the COVID-19 outbreak on the capital markets, we cannot assure you that we will be able to maintain the growth rate we have experienced or projected. Any future impact on our results of operations will depend on, to a large extent, speed of recovery in general economic environment and capital markets.
Impact of Russia’s Invasion of Ukraine and Related Supply Chain Issues
Russia launched a large-scale invasion of Ukraine on February 24, 2022. The extent and duration of the military action, resulting sanctions and resulting future market disruptions, including volatilities in stock markets, disruption to global supply chain and worsening of global inflation, are impossible to predict, but could be significant. Any such disruptions caused by Russian military action or other actions (including cyberattacks and espionage) or resulting actual and threatened responses to such activity, including purchasing and financing restrictions, boycotts or changes in consumer or purchaser preferences, sanctions, tariffs or cyberattacks, may have significant collateral impact on global economy and our business model and revenue stream. Nevertheless, as of the date of this document, since (i) we principally operate in Hong Kong and do not have business presence in Russia and Ukraine; and (ii) our industry has been less dependent on oil, natural resources or global supply chain which have been disrupted significantly by Russia’s invasion of Ukraine, there is no material impact on our cash flows, liquidity, capital resources, cash requirements, financial position, or results of operations arising from, related to, or caused by the global disruption from Russia’s invasion of Ukraine.
Key Components of Results of Operations
Revenues
Our revenues consist of brokerage commissions, underwriting and placement income, introducing and referral income, handling income, investment management fee income, interest income and others. The following table sets forth the breakdown of our total revenues, both in absolute amount and as a percentage of our total revenues, for the years ended March 31, 2023 and 2022:
For the Years Ended | ||||||||
2023 | 2022 | |||||||
US$ | % of total | US$ | % of total | |||||
Revenues: | ||||||||
Brokerage commissions | 811,169 | 24.8 | 741,336 | 32.1 | ||||
Brokerage commissions-related parties | 89,743 | 2.8 | 735,401 | 31.9 | ||||
Underwriting and placement income | 1,574,613 | 48.3 | 355,371 | 15.4 | ||||
Introducing and referral income | 278,688 | 8.6 | 210,009 | 9.1 | ||||
Handling income | 367,873 | 11.3 | 176,480 | 7.7 | ||||
Handling income-related parties | 2,275 | 0.1 | 498 | 0.0 | ||||
Investment management fee income | 30,622 | 0.9 | 21,368 | 0.9 | ||||
Investment management fee income – related parties | 2,840 | 0.1 | 1,793 | 0.1 | ||||
Interest income and others | 91,311 | 2.8 | 58,587 | 2.5 | ||||
Interest income and others-related parties | 10,162 | 0.3 | 5,593 | 0.3 | ||||
Total revenues | 3,259,296 | 100.0 | 2,306,436 | 100.0 | ||||
74
Brokerage commissions
Brokerage commissions represent fees and commissions from securities brokerage services based on a fixed rate for each transaction. The following tables present the key operating data of brokerage commissions for the year ended indicated:
For the Years Ended March 31, | ||||||||||||||||||||||
2023 | 2022 | |||||||||||||||||||||
Third | Related parties | Total | Third | Related | Total | |||||||||||||||||
Brokerage commissions |
|
|
|
|
|
|
|
|
|
| ||||||||||||
exchange in Hong Kong | $ | 445,057 |
| 10,854 |
| $ | 455,911 |
| $ | 548,300 |
| 40,637 |
| $ | 588,937 |
| ||||||
exchanges in the United States |
| 365,281 |
| 78,525 |
|
| 443,806 |
|
| 183,226 |
| 693,681 |
|
| 876,907 |
| ||||||
other exchanges | $ | 831 |
| 364 |
| $ | 1,195 |
| $ | 9,810 |
| 1,083 |
| $ | 10,893 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Trading volumes related to |
|
|
|
|
|
|
|
|
|
| ||||||||||||
exchange in Hong Kong | $ | 127,174,740 |
| 16,312,231 |
| $ | 143,486,971 |
| $ | 219,803,968 |
| 63,064,888 |
| $ | 282,868,856 |
| ||||||
exchanges in the United States |
| 55,054,750 |
| 137,052,777 |
|
| 192,107,527 |
|
| 58,488,343 |
| 465,172,323 |
|
| 523,660,666 |
| ||||||
other exchanges | $ | 276,967 |
| 121,322 |
| $ | 398,289 |
| $ | 636,960 |
| 71,847 |
| $ | 708,807 |
| ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Weighted average |
|
|
|
|
|
|
|
|
|
| ||||||||||||
exchange in Hong Kong |
| 0.35 | % | 0.07 | % |
| 0.32 | % |
| 0.25 | % | 0.06 | % |
| 0.21 | % | ||||||
exchanges in the United States |
| 0.66 | % | 0.06 | % |
| 0.23 | % |
| 0.31 | % | 0.15 | % |
| 0.17 | % | ||||||
other exchanges |
| 0.30 | % | 0.30 | % |
| 0.30 | % |
| 1.54 | % | 1.50 | % |
| 1.54 | % | ||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||
Number of active accounts |
|
|
|
|
|
|
|
|
|
| ||||||||||||
exchange in Hong Kong |
| 211 |
| 7 |
|
| 218 |
|
| 296 |
| 8 |
|
| 304 |
| ||||||
exchanges in the United States |
| 249 |
| 8 |
|
| 257 |
|
| 214 |
| 8 |
|
| 222 |
| ||||||
other exchanges |
| 24 |
| 3 |
|
| 27 |
|
| 22 |
| 3 |
|
| 25 |
| ||||||
____________
(1) Weighted average commission rates are derived from our brokerage commission based on the related trading volume.
(2) Active accounts are those accounts recorded at least one trading activity, for purchase and/or sale of securities, during the related years.
When a customer executes a securities trading transaction with our Operating Subsidiaries, brokerage commission is recognized upon the completion of the transaction. The fixed rates applied to the customers vary depending on the type of customer, the type of transaction, and the trade volume from the particular customer. For the years ended March 31, 2023 and 2022, commissions from securities brokerage represented approximately 27.6% and 64.0%, respectively, of our total revenues for the respective years.
75
Underwriting and placement income
We, through our Operating Subsidiaries, provide underwriting and placement services to customers by acting as an underwriter, global coordinator, bookrunner, or lead manager for securities issuances and bonds placements, in return for underwriting and placement income. The following tables present key operating data of underwriting and placement income for the year ended indicated:
For the Years Ended March 31, | |||||||||||||||||||||
2023 | 2022 | ||||||||||||||||||||
Exchange in | Exchanges | Total | Exchange in Hong Kong | Exchanges | Total | ||||||||||||||||
Underwriting and placement income related to |
|
|
|
|
|
|
|
|
| ||||||||||||
equity shares | $ | 914,234 |
| — | $ | 914,234 |
| $ | 118,678 |
| 175,031 |
| $ | 293,709 |
| ||||||
bonds and other instruments(1) | $ | — |
| — | $ | 660,379 |
| $ | — |
| — |
| $ | 61,662 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||
Number of projects related to |
|
|
|
|
|
|
|
|
| ||||||||||||
equity shares |
| 10 |
| — |
| 10 |
|
| 5 |
| 2 |
|
| 7 |
| ||||||
bonds and other instruments(1) |
| — |
| — |
| 4 |
|
| — |
| — |
|
| 1 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||
Relevant amounts related to(2) |
|
|
|
|
|
|
|
|
| ||||||||||||
equity shares | $ | 23,018,318 |
| — | $ | 23,018,318 |
| $ | 5,056,847 |
| 23,321,648 |
| $ | 28,378,495 |
| ||||||
bonds and other instruments(1) | $ | — |
| — | $ | 40,861,368 |
| $ | — |
| — |
| $ | 1,027,704 |
| ||||||
|
|
|
|
|
|
|
|
| |||||||||||||
Weighted average fee rates related to(3) |
|
|
|
|
|
|
|
|
| ||||||||||||
equity shares |
| 3.97 | % | — |
| 3.97 | % |
| 2.35 | % | 0.75 | % |
| 1.03 | % | ||||||
bonds and other instruments(1) |
| — |
| — |
| 1.62 | % |
| — |
| — |
|
| 6.00 | % | ||||||
____________
(1) Bonds and other instruments were not listed on a specific exchange whereas the issuers of the bonds and other instruments were all located in Hong Kong.
(2) Relevant amounts represent the higher of the committed underwriting amounts and actual placement amounts based on which our income is calculated or referenced.
(3) Weighted average fee rates are derived from our underwriting and placement income based on the related relevant amounts.
We charge an underwriting and placement income based on certain percentage of the funds committed or raised in the transaction, either initial public offerings or other fundraising or placement activities. The fee structures are negotiated on a project by project basis and vary depending on the type of customer, the type of transaction, and the size of funds committed or raised in the transaction. Underwriting and placement income accounted for 48.3% and 15.4% of total revenues for the years ended March 31, 2023 and 2022, respectively.
Introducing and referral income
We, through our Operating Subsidiaries, derive introducing and referral income from the introduction of customers to other financial service providers or other interested parties. We charge an introducing and referral income based on a fixed percentage point on the amount of transactions executed between the referees and the parties to whom the referees are referred or a fixed lump sum fee. Under the agreements we have in place, we are not subject to any minimum referral numbers, any committed targets nor any other obligations once the referral is made. No claw back or adjustments to the income are allowed under these agreements. Introducing and referral income accounted for 8.6% and 9.1% of total revenues for the year ended March 31, 2023 and 2022, respectively.
76
Handling income
Handling income consisted of the followings:
For the Years Ended March 31, | ||||||||||||||||
2023 | 2022 | |||||||||||||||
Third parties | Related parties | Total | Third parties | Related parties | Total | |||||||||||
Handling income on |
|
|
|
| ||||||||||||
dividend collection | $ | 17,167 | 13 | $ | 17,180 | $ | 106,706 | 498 | $ | 107,204 | ||||||
custodian services |
| 350,706 | 2,262 |
| 352,968 |
| 69,774 | — |
| 69,774 | ||||||
Total handling income | $ | 367,873 | 2,275 | $ | 370,148 | $ | 176,480 | 498 | $ | 176,978 | ||||||
We, through our Operating Subsidiaries, charge the customers a fee for the ancillary services provided in association with our securities brokerage business, which are recognized when the services are rendered according to the relevant contracts.
Dividend collection — When the securities held by our customers have any corporate action, we, through our Operating Subsidiaries, may act as the agent of our customers in processing and collecting the related dividends. We earn a fee based on a fixed rate of the amount of dividend in concern.
Custodian services — Among all other services provided, we, through our Operating Subsidiaries, earn a fee by assisting our customers in transferring the physical shares they hold into Central Clearing and Settlement System (CCASS), a centralized electronic book-entry clearing and settlement system for transactions of securities listed in SEHK, for custodian purposes. We earn a fee based on a fixed rate of the value of shares in concern.
For the years ended March 31, 2023 and 2022, handling income accounted for 11.4% and 7.7%, respectively, of our total revenues, respectively.
Investment management fee income
We, through our Operating Subsidiaries, provide investment management services by acting as investment manager for our customers in return for investment management fee income. The following tables present key operating data for underwriting and placement income for the year ended indicated:
For the Years Ended March 31, | ||||||||||||
2023 | 2022 | |||||||||||
Average net asset values of the funds | Revenues | Average net asset values of the funds | Revenues | |||||||||
Investment management fee income |
|
|
|
| ||||||||
- Avia Trust Limited | $ | 3,434,754 | $ | 30,622 | $ | 2,849,847 | $ | 21,368 | ||||
- I Win Growth SPC – Fund 1 SP | $ | 378,659 |
| 2,840 | $ | 473,241 |
| 1,793 | ||||
Total investment management fee income |
| $ | 33,462 |
| $ | 23,161 | ||||||
We, through our Operating Subsidiaries, charge the customers a fee for the investment management services provided under our asset management business, which are recognized when the services are rendered according to the relevant contracts. For the years ended March 31, 2023 and 2022, investment management fee income accounted for 1.0% and 1.0%, respectively, of our total revenues, respectively.
Interest income and others
Interest income and others primarily consists of interests earned on bank deposits, customers’ overdue and government subsidies.
Interests on customers’ overdue represent interests charged on overdue receivables from customers arising from brokerage transactions. According to the contracts entered by into between us and our customers, we, through our Operating Subsidiaries, shall charge our customers on amounts overdue, i.e. amounts due on brokerage transactions which are not yet settled on settlement dates, an interest at Hong Kong Prime Lending Rate plus 8% per annum accrued on daily basis.
77
Government subsidies primarily relate to one-off entitlement granted by the Hong Kong Government under the Employment Support Scheme of the Anti-epidemic Fund. We recognize government subsidies as other income when the conditions are met.
For the years ended March 31, 2023 and 2022, interest income and others accounted for 3.1% and 2.8% of our total revenues, respectively.
Expenses
The following table sets forth our operating cost and expenses, both in absolute amount and as a percentage of total revenues, for the years ended March 31, 2023 and 2022:
For the Years Ended March 31, | ||||||||
2023 | 2022 | |||||||
US$ | % of total revenues | US$ | % of total revenues | |||||
Expenses: | ||||||||
Brokerage, clearing and exchange fees | 193,135 | 6.0 | 745,557 | 32.3 | ||||
Sub-underwriting and sub-placement fees | 7,654 | 0.3 | 123,186 | 5.3 | ||||
Compensation and benefits | 2,103,492 | 64.5 | 1,412,080 | 61.2 | ||||
Communications and technology | 116,435 | 3.6 | 111,832 | 4.8 | ||||
Depreciation | 10,455 | 0.3 | 5,122 | 0.2 | ||||
Occupancy costs | 85,220 | 2.6 | 49,470 | 2.1 | ||||
Professional fees | 636,240 | 19.5 | 107,122 | 4.7 | ||||
Travel and business development | 236,112 | 7.2 | 158,185 | 6.9 | ||||
Other administrative expenses | 78,246 | 2.4 | 100,141 | 4.4 | ||||
Other administrative expenses-a related party | — | — | 3,854 | 0.2 | ||||
Total expenses | 3,466,989 | 106.4 | 2,816,549 | 122.1 | ||||
Brokerage, clearing and exchange fees
Brokerage, clearing and exchange fees primarily relate to transaction costs paid to broker-dealers and clearing organizations on securities brokerage services which are expensed as incurred. Brokerage, clearing and exchange fees accounted for 6.0% and 32.3% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
Sub-underwriting and sub-placement fees
Sub-underwriting and sub-placement fees relate to fees and expenses paid to other broker-dealers in relation to the sub-underwriting and sub-placement arrangements which are expensed at the completion of the public offering, i.e., listing of the securities on relevant exchanges, or the completion of a placement. Generally, the terms of these sub-underwriting and sub-placement arrangements would mirror the master underwriting and placement agreements we have in place with our customers but give a concession fee to these broker-dealers for services rendered under the sub-underwriting and sub-placement arrangements. Sub-underwriting fees accounted for 0.3% and 5.3% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
Compensation and benefits
Compensation and benefits mainly represent the salaries and contributions to retirement benefit scheme. Compensation and benefits expenses accounted for 64.5% and 61.2% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
78
Communications and technology
Communications and technology expenses mainly represent fees we paid for the use of third party electronic trading systems and the outsourced trading solution support services we subscribed. Communications and technology expenses also include routine IT services and supplies we incurred for our day to day administrative work. Communications and technology expenses accounted for 3.6% and 4.8% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
Depreciation
Depreciation results from the depreciation of property and equipment, such as computer equipment, furniture and office equipment, as well as leasehold improvements. Depreciation accounted for 0.3% and 0.2% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
Occupancy costs
Occupancy costs are the rental expenses we incurred on the lease of our office premises, which accounted for approximately 2.6% and 2.1% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
Professional fees
Professional fees are mainly the service fees for audit, company secretary, consulting, legal, and other professional services which are needed during the ordinary course of our business operation. Professional fees accounted for 19.5% and 4.7% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
Travel and business development
Travel and business development expenses include overseas and local travelling, and other expenses incurred for the development of our business and expansion of our network. Travel and business development accounted for 7.2% and 6.9% of our total revenues for the years ended March 31, 2023 and 2022, respectively.
Income Tax
Our subsidiaries operated in Hong Kong are subjected to Hong Kong Profits Tax. For the years ended March 31, 2023 and 2022, Hong Kong Profits Tax was calculated in accordance with the two-tiered profits tax rates regime under which the tax rate is 8.25% on assessable profits of the first HK$2 million (equivalent to US$255,128) and 16.5% on any assessable profits in excess of HK$2 million (equivalent to US$255,128). For connected entities, as is the case of our Hong Kong subsidiaries, I Win Securities, I Win Asset Management and I Win Holdings HK, only one of the connected entities can elect to be charged at two-tiered tax rates. The other entity will be subject to tax rate of 16.5% on all its assessable profits, if any. For the years ended March 31, 2023 and 2022, income tax accounted for 0.0% and 0.0% of our total revenues, respectively. For the years ended March 31, 2023 and 2022, income tax mainly arose from our deferred tax.
Under relevant Hong Kong tax laws, tax case is normally subject to investigation by the tax authority for up to 6 years of assessment prior to the current year of assessment, unless in a case of fraud or willful evasion, then the investigation can be extended to cover 10 years of assessment. As of March 31, 2023 and 2022, we had no open tax investigation from the tax authority and we do not consider that there was any uncertain tax position as of those dates.
79
Results of Operations
The following table sets forth a summary of our consolidated results of operations for the years ended March 31, 2023 and 2022 as indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. The operating results in any year are not necessarily indicative of the results that may be expected for any future trends.
For the Years Ended March 31, | ||||||||||
2023 | 2022 | |||||||||
US$ | % of total revenues | US$ | % of total revenues | |||||||
Revenues: |
|
| ||||||||
Brokerage commissions | 811,169 |
| 24.8 | 741,336 |
| 32.1 | ||||
Brokerage commissions-related parties | 89,743 |
| 2.8 | 735,401 |
| 31.9 | ||||
Underwriting and placement income | 1,574,613 |
| 48.3 | 355,371 |
| 15.4 | ||||
Introducing and referral income | 278,688 |
| 8.6 | 210,009 |
| 9.1 | ||||
Handling income | 367,873 |
| 11.3 | 176,480 |
| 7.7 | ||||
Handling income-related parties | 2,275 |
| 0.1 | 498 |
| 0.0 | ||||
Investment management fee income | 30,622 |
| 0.9 | 21,368 |
| 0.9 | ||||
Investment management fee income – related parties | 2,840 |
| 0.1 | 1,793 |
| 0.1 | ||||
Interest income and others | 92,311 |
| 2.8 | 58,587 |
| 2.5 | ||||
Interest income and others-related parties | 10,162 |
| 0.3 | 5,593 |
| 0.3 | ||||
Total revenues | 3,259,296 |
| 100.0 | 2,306,436 |
| 100.0 | ||||
Expenses: |
|
| ||||||||
Brokerage, clearing and exchange fees | (193,135 | ) | 6.0 | (745,557 | ) | 32.3 | ||||
Sub-underwriting and sub-placement fees | (7,654 | ) | 0.3 | (123,186 | ) | 5.3 | ||||
Compensation and benefits | (2,103,492 | ) | 64.5 | (1,412,080 | ) | 61.2 | ||||
Communications and technology | (116,435 | ) | 3.6 | (111,832 | ) | 4.8 | ||||
Depreciation | (10,455 | ) | 0.3 | (5,122 | ) | 0.2 | ||||
Occupancy costs | (85,220 | ) | 2.6 | (49,470 | ) | 2.1 | ||||
Professional fees | (636,240 | ) | 19.5 | (107,122 | ) | 4.7 | ||||
Travel and business development | (236,112 | ) | 7.2 | (158,185 | ) | 6.9 | ||||
Other administrative expenses | (78,246 | ) | 2.4 | (100,141 | ) | 4.4 | ||||
Other administrative expenses-a related party | — |
| — | (3,854 | ) | 0.2 | ||||
Total expenses | 3,466,989 |
| 106.4 | (2,816,549 | ) | 122.1 | ||||
Loss before income taxes | (207,693 | ) | 6.4 | (510,113 | ) | 22.1 | ||||
Income tax benefits (expense) | 524 |
| 0.0 | (792 | ) | 0.0 | ||||
Net loss | (207,169 | ) | 6.4 | (510,905 | ) | 22.1 | ||||
Year Ended March 31, 2023 Compared to Year Ended March 31, 2022
Revenues
Total revenues increased significantly by 41.3% from US$2.3 million for the year ended March 31, 2022 to US$3.3 million for the year ended March 31, 2023. This increase was mainly driven by significant increase in our underwriting and placement income and partly offset by decrease in our brokerage commissions.
Brokerage commissions — Brokerage commissions decreased by 39.0% from US$1.5 million for the year ended March 31, 2022 to US$0.9 million for the year ended March 31, 2023. The decrease in brokerage commissions was mainly because our customers engaged in fewer securities brokerage activities as a result of a drop in liquidity and relatively poor performance of the market during the year ended March 31, 2023. The decrease in brokerage commissions related to exchange in Hong Kong was in line with the overall decrease in the trading volume of SEHK which dropped from US$4.7 trillion for the year ended March 31, 2022 to US$3.8 trillion for the year ended March 31, 2023. In addition, the decrease in brokerage commissions related to exchanges in the United States was a direct result of the underperformance of China concept stocks
80
listed on NASDAQ during the year ended March 31, 2023. The NASDAQ Golden Dragon China Index, which is an index summarizing the overall performance of those China concept stocks on which our customers mainly traded, gradually dropped from 15,958 on April 1, 2021 to 7,294 as of March 31, 2023. The negative return of these stocks in general resulted in a sharp decrease in our securities brokerage activities in exchanges in the United States. The trading volume related to exchanges in Hong Kong and the United States executed by us decreased from US$807 million for the year ended March 31, 2022 to US$336 million for the year ended March 31, 2023. The weighted average commission rates related to exchanges in Hong Kong and the United States increased from 0.21% and 0.17% for the year ended March 31, 2022 to 0.32%, and 0.23% for the year ended March 31, 2023. This was because during the year ended March 31, 2023, we were engaged in more securities brokerage activities in the primary market in which we normally charged a higher commission rate when compared to the secondary market. The decrease in weighted average commission rate related to exchanges in the United States for related parties between the years ended March 31, 2023 and 2022 was because during the year ended March 31, 2023, we charged a lower commission rate at 0.05%, when compared to 0.1% during the year ended March 31, 2022, against one related party, Lau Kam Yan, Karen and her spouse, who accounted for 89.4% of all trading volume related to exchanges in the United States engaged by related parties for the year ended March 31, 2023.
Underwriting and placement income — Underwriting and placement income increased significantly by 343.1% from US$0.4 million for the year ended March 31, 2022 to US$1.6 million for the year ended March 31, 2023. This was primarily because we were engaged in more underwriting and placement activities. During the year ended March 31, 2022, we were engaged in 8 underwriting and placement projects, compared to 14 underwriting and placement projects during the year ended March 31, 2023. The increase in weighted average fee rate for equity shares between the years ended March 31, 2023 and 2022, was mainly because during the year ended March 31, 2023, there was an underwriting project which accounted for approximately 33.8% of the overall underwriting and placement income for the year and generated a fee rate of 4.00%. The weighted average fee rate related to bonds and other instruments decreased from 6.00% for the year ended March 31, 2022 to 1.62% for the year ended March 31, 2023 since we managed to undertake more underwriting and placement services for bonds and other instruments during the year ended March 31, 2023 with more diversified fee rates, as compared to only one project engaged during March 31, 2022 with dominant fee rate at 6.00%. As of March 31, 2023, all related projects were completed with no outstanding obligations.
Introducing and referral income — Introducing and referral income increased by 32.7% from US$0.2 million for the year ended March 31, 2022 to US$0.3 million for the year ended March 31, 2023, primarily because we utilized our network more efficiently by engaging with more parties on the introducing and referral activities. More specifically, during the year ended March 31, 2023, there is one counterparty who contributed more than half of the introducing and referral income and generated revenue of US$0.2 million. As of March 31, 2023, all introducing and referral activities were duly completed with no outstanding obligations.
Handling income — Handling income increased from US0.2 million for the year ended March 31, 2022 to US$0.4 million for the year ended March 31, 2023. The increase was mainly due to the increase in handling income related to custodian services by US$0.3 million of which the impact was partly offset by the decrease in handling income related to dividend collection by US$0.1 million between the years ended March 31, 2022 and 2023. The increase in handling income related to custodian services was mainly because we were more actively engaged in transferring the physical shares held by customers to CCASS for custodian services. During the year ended March 31, 2023, shares with value of US$114 million were handled, compared to shares with value of US$44 million being handled during the year ended March 31, 2022. At the same time, the weighted average fee rate related to custodian services also increased from 0.08% for the year ended March 31, 2022, to 0.29% for the year ended March 31, 2023.
Investment management fee income — In relation to investment management fee income recognized for the years ended March 31, 2022 and 2023, the entire income represented management fee charged which was calculated at 1% per annum of the net asset values of the respective funds we managed. The increase in investment management fee income was because we only launched our asset management business in July 2021, thus only 9-months results were captured during the year ended March 31, 2022. No performance fee income was recognized during the year ended March 31, 2023.
Interest income and others — Interest income and others increased from US$64,180 for the year ended March 31, 2022 to US$101,473 for the year ended March 31, 2023. The increase was attributable to the increase in government subsidies, which were one-off entitlement granted by the Hong Kong Government under the Employment Support Scheme of the Anti-epidemic Fund amid the outbreak of COVID-19, from nil for the year ended March 31, 2022 to US$50,822 for the year ended March 31, 2023.
81
Expenses
Brokerage, clearing and exchange fees — Brokerage, clearing and exchange fees decreased significantly by 74.1% to US$0.2 million for the year ended March 31, 2023 from US$0.7 million for the year ended March 31, 2022. The decrease was largely because of the fact that during the year ended March 31, 2023, we brought some of our broker dealers in as our in house staff in order to gain a better control on their productivities and provide a more stable workforce to the group of companies. Their related reimbursements of US$0.5 million for the year ended March 31, 2022 were recognized under brokerage, clearing and exchange fees whilst their related reimbursements for the year ended March 31, 2023 were recognized under compensation and benefits instead. To the contrary of the decrease in brokerage, clearing and exchange fees, compensation and benefits increased significantly by 49.0% from US$1.4 million for the year ended March 31, 2022 to US$2.1 million for the year ended March 31, 2023. The decrease in brokerage, clearing and exchange fees was further contributed by a decrease in exchange fees of US$53,467 charged in relation to corporate actions of stocks held by our customers. Such decrease was consistent with the decrease in our handling income related to dividend collection.
Sub-underwriting and sub-placement fees — Sub-underwriting and sub-placement fees decreased by 93.8% to US$7,654 for the year ended March 31, 2023 from US$123,186 for the year ended March 31, 2022. The sub-underwriting and sub-placement fees decreased since we were engaged in deals of which we hold a less prominent role, i.e., placing agent rather than lead manager. Fewer sub-underwriting or sub-placement functions were required accordingly.
Compensation and benefits — Compensation and benefits expenses increased significantly by 49.0% from US$1.4 million for the year ended March 31, 2022 to US$2.1 million for the year ended March 31, 2023. The increase was mainly due to commissions of US$815,581 being paid to our staff during the year ended March 31, 2023 who were contracted as our broker dealers during the year ended March 31, 2022 of which the charges were recognized under brokerage, clearing and exchange fees.
Communications and technology — Communications and technology expenses keep stable at US$0.1 million for the years ended March 31, 2023 and 2022.
Depreciation — Depreciation expenses increased by 104.1% from US$5,122 for the year ended March 31, 2022 to US$10,455 for the year ended March 31, 2023, which was a result of addition of property and equipment of US$22,194 during the year ended March 31, 2023.
Occupancy costs — Occupancy costs increased by 72.3% from US$49,470 for the year ended March 31, 2022 to US$85,220 for the year ended March 31, 2023, primarily due to an increase in the office rent as a result of us moving into a new office premise situated at Unit 201, 2/F, China Insurance Building, No. 141 Des Voeux Road Central, Hong Kong, of which the tenancy agreement was signed in March 2022.
Professional fees — Professional fees increased significantly by 493.9% from US$0.1 million for the year ended March 31, 2022 to US$0.6 million for the year ended March 31, 2023. The sharp increase was mainly because a fee of US$0.5 million was incurred during the year ended March 31, 2023 in relation to the audit of our consolidated financial statements. The increase in professional fees was further contributed by an increase in set-up and annual fees of US$45,659 charged in relation to a fund we managed under investment management business.
Travel and business development — Travel and business development expenses increased by 49.3% from US$158,185 for the year ended March 31, 2022 to US$236,112 for the year ended March 31, 2023. The increase was a result of entertainment and travel activities being recovered and resumed during the year ended March 31, 2023 under the ease of social distance measures introduced by the Hong Kong Government as a result of the outbreak of COVID-19.
Other administrative expenses — Other administrative expenses decreased by 24.8% from US$103,995 for the year ended March 31, 2022 to US$78,246 for the year ended March 31, 2023. The decrease was mainly due to bank charges of US$22,981 incurred for the set-up and maintenance of new bank and custodian accounts during the year ended March 31, 2022 while no such fees incurred during the year ended March 31, 2023.
82
Loss before income taxes
We had a loss before income taxes of US$0.2 million and US$0.5 million for the year ended March 31, 2023 and 2022, respectively. The decrease in loss before income taxes was largely contributed by the increase in underwriting and placement revenue which was further a result of the increase in underwriting and placement activities during the year ended March 31, 2023.
Income tax benefits (expense)
Income tax benefits (expense) changed from US$792 expense for the year ended March 31, 2022 to US$524 benefits for the year ended March 31, 2023. The change was primarily due to the increase in deferred tax assets related to temporary differences on depreciation of property and equipment.
Net loss
As a result of the foregoing factors, net loss decreased by 59.3% from US$0.5 million for the year ended March 31, 2022 to US$0.2 million for the year ended March 31, 2023.
Liquidity and Capital Resources
As of March 31, 2023, we had positive working capital of US$1.3 million, US$0.8 million in cash and US$5.5 million in restricted cash, out of which US$6.0 million was held in Hong Kong dollars, and the rest was held in U.S. dollars and other currencies.
In assessing our liquidity, we monitor and analyze our cash on-hand and our operating and capital expenditure commitments. Our liquidity needs are to meet our working capital requirements, operating expenses and capital expenditure obligations. Historically, debt and equity financing from related parties and major shareholders have been utilized to finance our working capital requirements. During the year ended March 31, 2023, equity financing in form of shares allotment, capital contribution from shareholders, and cash generated from operations have been utilized to finance our working capital requirements. Prior to this offering, our principal sources of liquidity to finance our operating activities are from the financings provided by our related parties and pre-IPO investors.
Considering all facts and information on hand, we expect our cash on hand is sufficient to finance our working capital requirements within the normal operating cycle of a twelve-months period from the date of our financial statements are issued.
If we are unable to have sufficient fund to finance our working capital requirements within the normal operating cycle of a twelve-months period from the date of our financial statements are issued, we may consider supplementing our available sources of funds through the following sources:
• addition equity financing from our major shareholders or third-party investors; and/or
• financial support our related parties.
Based on the above considerations, we are of the opinion that we have sufficient funds to meet our working capital requirements and current liabilities as they become due within twelve months from the date of our financial statements are issued. However, there is no assurance that we will be successful in implementing our plans. There are a number of factors that could potentially arise and could undermine our plans, such as changes in the demand for our services, general market conditions and competitive environment of the capital market and corporate finance industry in Hong Kong and changes in regulatory requirements, etc.
Regulatory Capital Requirements
As our Operating Subsidiaries are regulated by HKSFC in relation to their operating activities in Hong Kong, local rules and regulations require the Operating Subsidiaries to maintain relevant capital adequacy levels. The following table illustrates the minimum regulatory capital as established by HKSFC that our subsidiaries were required to maintain as of March 31, 2023 and March 31, 2022 and the actual amounts of capital maintained.
83
Capital requirements as of March 31, 2023
Minimum | Capital Levels | Excess Net | Percent of | |||||||||
I Win Securities | $ | 382,167 | $ | 771,083 | $ | 388,916 | 202 | % | ||||
I Win Asset Management(1) |
| 12,739 |
| 76,306 |
| 63,567 | 599 | % | ||||
Total | $ | 394,906 | $ | 847,389 | $ | 452,483 | 215 | % | ||||
Capital requirements as of March 31, 2022
Minimum | Capital Levels | Excess Net | Percent of | |||||||||
I Win Securities | $ | 383,022 | $ | 1,449,481 | $ | 1,066,459 | 378 | % | ||||
I Win Asset Management(1) |
| 12,767 |
| 38,174 |
| 25,407 | 299 | % | ||||
Total | $ | 395,789 | $ | 1,487,655 | $ | 1,091,866 | 376 | % | ||||
____________
(1) I Win Asset Management is only required to file its regulatory returns in June and December of every year. The capital levels maintained as of March 31, 2023 and 2022, were what being submitted in its regulatory return as of December, 2022 and 2021, respectively.
As of March 31, 2023, all our Operating Subsidiaries were in compliance with their respective regulatory capital requirements. We consider ourselves having strong and adequate capital resources to carry out our operations.
Cash Flows
The following table sets forth a summary of our cash flows for the year ended March 31, 2023 and 2022 as indicated.
For the Years Ended | ||||||
2023 | 2022 | |||||
US$ | US$ | |||||
Net cash used in operating activities | (1,876,296 | ) | (6,920,029 | ) | ||
Net cash used in investing activities | (22,194 | ) | (18,313 | ) | ||
Net cash provided by (used in) financing activities | 388,346 |
| (35,431 | ) | ||
Effect of exchange rates on cash and restricted cash | (15,458 | ) | (85,440 | ) | ||
Net decrease in cash and restricted cash | (1,525,602 | ) | (7,059,213 | ) | ||
Cash and restricted cash, beginning of year | 7,842,802 |
| 14,902,015 |
| ||
Cash and restricted cash, end of year | 6,317,200 |
| 7,842,802 |
| ||
Operating activities
Net cash used in operating activities for the year ended March 31, 2023 was US$1.9 million, as compared to the net loss of US$0.2 million. The difference was primarily attributable to (i) an increase of US$0.6 million in receivables from customers and an increase of US$0.8 million in payables to customers, which were significantly impacted by our customers’ fund allocation preferences on one specific date whereas on March 31, 2023, our customers placed more cash with us in the designed accounts for their securities brokerage transactions; and (ii) an increase of US$3.4 million in receivables from broker-dealers and clearing organizations and an increase of US$1.6 million in payables to broker-dealers and clearing organizations, which were because there were more unsettled trades on trade-date basis related to exchange in Hong Kong and more cash being placed near the year end date with our broker-dealers in relation to our customers’ securities dealing activities in the United States.
84
Net cash used in operating activities for the year ended March 31, 2022 was US$6.9 million, as compared to the net loss of US$0.5 million. The difference was primarily attributable to (i) a decrease of US$6 million in payables to customers, which were significantly impacted by our customers’ fund allocation preferences on one specific date whereas on March 31, 2022, our customers left less cash with us in the designed accounts for their securities brokerage transactions; and (ii) a decrease of US$0.5 million in receivables from broker-dealers and clearing organizations and a decrease of US$0.9 million in payables to broker-dealers and clearing organizations, which were because we settled the payable balances with our broker-dealers more promptly near the year end date.
Investing activities
Net cash used in investing activities for the years ended March 31, 2023 and 2022 was US$22,194 and US$18,313 respectively, which was fully spent on the purchase of property and equipment.
Financing activities
Net cash provided by financing activities for the year ended March 31, 2023 was US$0.4 million. This was primarily due to deposit of US$0.8 million received from a group of investors who were to subscribe for our ordinary shares. The balance was partially offset by payment of offering costs related to IPO of US$0.4 million.
Net cash used in financing activities for the year ended March 31, 2022 was US$35,431. This was primarily spent on offering costs related to IPO of US$35,970 and partially offset by financings obtained from related parties of US$539.
Quantitative and Qualitative Disclosures about Market Risks
Currency risk
Our operating activities are transacted in HK$. Foreign exchange risk arises from future commercial transactions, recognized assets and liabilities and net investments in foreign operations. We consider the foreign exchange risk in relation to transactions denominated in HK$ with respect to US$ is not significant as HK$ is pegged to US$.
Concentration and credit risks
Financial instruments that potentially subject us to the credit risks consist of cash, restricted cash, receivables from broker-dealers and clearing organizations, receivables from customers and amounts due from related parties. The maximum exposures of such assets to credit risk are their carrying amounts as of the balance sheet dates.
We deposit the cash with reputable banks located in Hong Kong. As of March 31, 2023, US$6.3 million were deposited with these banks, respectively. Balances maintained with banks in Hong Kong are insured under the Deposit Protection Scheme introduced by the Hong Kong Government for a maximum amount of HK$500,000 ($63,694) for each depositor at one bank, whilst the balances maintained by us may at times exceed the insured limits. Cash balances maintained with banks in Hong Kong are not otherwise insured by the Federal Deposit Insurance Corporation or other programs. We have not experienced any losses in these bank accounts and management believes that we are not exposed to any significant credit risk on cash.
For the credit risk related to receivables from broker-dealers and clearing organizations and receivables from customers, we perform regular and ongoing credit assessments of the counterparts’ financial conditions and credit histories. We also assess historical collection trends, aging of receivables, securities we hold on hand of these counterparts. Saved as receivables from customers related to brokerage transactions of which under the contracts entered into between us and our customers, we are entitled to liquidate the security positions we hold on behalf of the particular customers in order to cover the receivable balances in case of default, we generally hold no collateral or security against other receivables. We consider that we have adequate controls over these receivables in order to minimize the related credit risk. For the years ended March 31, 2023 and 2022, no allowance for doubtful accounts were recorded.
85
For the years ended March 31, 2023 and 2022, most of our assets were located in Hong Kong. At the same time, we consider that it is exposed to the following concentrations of risk:
(a) Major customers
For the years ended March 31, 2023, and 2022, the customers who accounted for 10% or more of our revenues and their respective outstanding balances at year end dates, are presented as follows:
Year ended March 31, 2023 | As of March 31, 2023 | ||||||||
Customer | Revenue | Percentage of | Receivables | ||||||
Customer A | $ | 662,121 | 20 | % | $ | 661,208 | |||
Customer B |
| 381,162 | 12 | % |
| 25,478 | |||
Customer C |
| 341,737 | 10 | % |
| 341,266 | |||
Total: | $ | 1,385,020 | 42 | % | $ | 1,027,952 | |||
Year ended March 31, 2022 | As of March 31, 2022 | ||||||||
Customer | Revenue | Percentage of | Receivables | ||||||
Customer C | $ | 685,157 | 30 | % | $ | — | |||
(b) Major vendor
For the years ended March 31, 2023, there was no vendor accounting for 10% or more of our revenues whilst for the year ended March 31, 2022, vendors accounted for 10% or more of our revenues and their respective outstanding balances at year-end dates, are presented as follows:
Year ended March 31, 2022 | As of March 31, 2022 | ||||||||
Vendor | Cost | Percentage of | Payables to | ||||||
Vendor A | $ | 520,660 | 23 | % | $ | — | |||
(c) Receivables
As of March 31, 2023, there were three counterparties whose receivables accounted for 10% or more of our total balances of receivables from broker-dealers and clearing organizations and receivables from customers and they accounted for approximately 46%, 21% and 11% of the total balances of receivables from broker-dealers and clearing organizations and receivables from customers, respectively. As of March 31, 2022, there were two counterparties whose receivables accounted for 10% or more of our total balances of receivables from broker-dealers and clearing organizations and receivables from customers and they accounted for approximately 38% and 20% of the total balances of receivables from broker-dealers and clearing organizations and receivables from customers, respectively. As of March 31, 2023 and 2022, receivables from the top counterparty represented balances due from the clearing exchange in Hong Kong which arose from unsettled trades on trade-date basis.
Interest rate risk
Fluctuations in market interest rates may negatively affect our financial conditions and results of operations. We are exposed to floating interest rate risk on bank deposits and customers’ overdue. Nevertheless, we consider our interest rate risk is not material and we have not used any derivatives to manage or hedge our interest risk exposure.
86
Off-Balance Sheet Commitments and Arrangements
We did not have during the periods presented, and we do not currently have, any off-balance sheet financing arrangements or any relationships with unconsolidated entities or financial partnerships, including entities sometimes referred to as structured finance or special purpose entities, that were established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Specifically, we have not entered into any financial guarantees, commitments or other arrangements to guarantee payment obligations of any parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholders’ equity or that are not reflected in our consolidated financial statements. Moreover, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. We do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or product development services with us.
Commitments and Contingencies
In the normal course of business, we are subject to contingencies, such as legal proceedings and claims arising out of its business, which cover a wide range of matters. Liabilities for contingencies are recorded when it is probable that a liability has been incurred and the amount of the assessment can be reasonably estimated.
If the assessment of a contingency indicates that it is probable that a material loss is incurred and the amount of the liability can be estimated, then the estimated liability is accrued in our consolidated financial statements. If the assessment indicates that a potentially material loss contingency is not probable, but is reasonably possible, or is probable but cannot be estimated, then the nature of the contingent liability, together with an estimate of the range of possible loss, if determinable and material, would be disclosed.
As of the date of this prospectus, we did not have any loss contingencies which require to be recognized or disclosed in our consolidated financial statements.
The following table summarizes the remaining contractual maturities of lease liabilities under operating lease as of March 31, 2023:
Total | 2024 | |||
US$ | US$ | |||
Operating lease commitments | 70,310 | 70,310 |
Seasonality
The nature of our business does not appear to be affected by seasonal variations.
Inflation
Whilst inflation has been a global issue impacting many countries around the globe, inflation in Hong Kong has not materially affected our results of operations in recent years. According to the Census and Statistics Department of Hong Kong, the year-over-year percent changes in the consumer price index keeps stable at 1.7% for the years ended March 31, 2023 and 2022. Although we have not been affected by inflation at this point in time, we may be affected if Hong Kong and any other jurisdiction where we operate in the future experience higher rates of inflation in the future.
Significant Accounting Policies and Critical Accounting Judgments and Estimates
We prepare our consolidated financial statements in accordance with U.S. GAAP, which requires us to make judgments, estimates and assumptions that affect (i) the reported amounts of our assets and liabilities; (ii) the disclosure of our contingent assets and liabilities at the end of each reporting period; and (iii) the reported amounts of revenues and expenses during each reporting period. We continually evaluate these judgments, estimates and assumptions based on our own historical experience, knowledge and assessment of current business and other conditions and our expectations regarding the future based on available information, which together form our basis for making judgments about matters that are not readily apparent from other sources. Since the use of estimates is an integral component of the financial reporting process, our actual results could differ from those estimates. Some of our accounting policies require a higher degree of judgment than others in their application.
87
When reading our consolidated financial statements, you should consider our selection of critical accounting policies, including revenue recognition, receivables from customers, receivables from broker-dealers and clearing organizations, payables to customers, payables to broker-dealers and clearing organizations and income taxes, of which the details are set out in our consolidated financial statements. You should also consider the judgment and other uncertainties affecting the application of such policies and the sensitivity of reported results to changes in conditions and assumptions. We believe the following accounting policies involve the most significant judgments and estimates used in the preparation of our financial statements.
Allowance for doubtful accounts against receivables from customers
We review the adequacy of the allowance for doubtful accounts against receivables from customers on a regular and an ongoing basis, using historical collection trends, aging of receivables, securities it holds on hand. We also periodically evaluate individual customer’s financial condition, credit history, and current economic conditions to make adjustments in the allowance account when necessary. Account balances are charged off against the allowance account after all means of collection have been exhausted and the potential for recovery is considered remote. We continue to evaluate the reasonableness of the allowance policy and update it if necessary. For the years ended March 31, 2023 and 2022, no allowance for doubtful accounts against receivables from customers were recorded. Nevertheless, if 10% of the receivables eventually became doubtful, this would have resulted in $0.2m being charged to the consolidated statement of operating loss for the year ended March 31, 2023.
Valuation allowance against deferred tax assets
Deferred tax is calculated using tax rates that are expected to apply to the period when the asset is realized or the liability is settled. Deferred tax is charged or credited in the income statement, except when it is related to items credited or charged directly to equity. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Valuation allowance is provided against deferred tax assets when we determine that it is more-likely-than-not that the deferred tax assets will not be utilized in the future. We consider positive and negative evidence to determine whether some portion or all of the deferred tax assets will more-likely-than-not be realized. This assessment considers, among other matters, the nature, frequency and severity of recent losses and forecasts of future profitability. These assumptions require significant judgment and the forecasts of future taxable income are consistent with the plans and estimates we are using to manage the underlying businesses.
As of March 31, 2023, we had net operating loss carryforwards indefinitely of $611,394 and $894,263, respectively, which fully arose from the subsidiaries established in Hong Kong and can be carried forward indefinitely against future assessable profits. Due to the successive years of losses recognized by the Hong Kong subsidiaries, we are uncertain when these net operating losses can be utilized. As a result, we provided a 100% allowance on deferred tax assets on net operating losses of $52,750 and $73,777 related to the Hong Kong subsidiaries as of March 31, 2023 and 2022, respectively.
If the Hong Kong subsidiaries turned out to have taxable profits in the forthcoming years and had eventually utilized these net operating losses, these would have resulted in an overstatement and understatement of our income tax expense for the current and subsequent years, respectively. A 10% reduction in our valuation allowance against deferred tax assets would have resulted in $5,275 being recorded as income tax benefits in the consolidated statement of operating loss for the year ended March 31, 2023.
Recent Accounting Pronouncements
See the discussion of the recent accounting pronouncements contained in Note 3 to the consolidated financial statements, “Summary of Significant Accounting Policies”.
88
Industry Overview
Hong Kong is one of the world’s largest securities markets by market capitalization. Hong Kong’s securities market is operated by the Hong Kong Stock Exchange and its futures market by the Hong Kong Futures Exchange (the “HKFE”), both being wholly-owned by subsidiaries of the Hong Kong Exchanges and Clearing Limited (the “HKEx”). According to Migo, as an international financial hub and gateway to China, over the years, Hong Kong’s securities market has experienced remarkable growth in market capitalization. As of June 30 2022, in terms of market capitalization, the Hong Kong Stock Exchange ranked the seventh largest securities market in the world, and the fourth largest stock market in Asia, with a total market capitalization of approximately US$ 4,979.0 billion. The following table sets out the market capitalization and ranking of the world’s top stock exchanges as of June 30, 2022.
Worldwide | Ranking | Market | ||||
US (NYSE) | 1 | 25,857.1 | ||||
US (NASDAQ) | 2 | 17,363.5 | ||||
China (Shanghai) | 3 | 1 | 7,374.5 | |||
Europe (NYSE Euronext)(1) | 4 | 6,419.9 | ||||
China (Shenzhen) | 5 | 2 | 5,290.0 | |||
Japan (Japan Exchange Group)(2) | 6 | 3 | 5,160.1 | |||
China (Hong Kong)(3) | 7 | 4 | 4,979.0 | |||
UK (London Stock Exchange Group)(4) | 8 | 3,071.6 | ||||
India | 9 | 5 | 3,065.7 | |||
Saudi Arabia (Tadawul) | 10 | 3,059.5 | ||||
Canada (Toronto)(5) | 11 | 2,855.9 | ||||
Switzerland | 12 | 1,806.5 | ||||
Germany (Deutsche Börse) | 13 | 1,752.4 | ||||
Northern Europe (NASDAQ Nordic Exchange)(6) | 14 | 1,746.4 | ||||
Korea | 15 | 6 | 1,670.4 |
Notes:
____________
(1) Comprises Euronext Amsterdam, Euronext Brussels, Euronext Lisbon and Euronext Paris
(2) Comprises Tokyo Stock Exchange and Osaka Securities Exchange
(3) Includes GEM
(4) Comprises London Stock Exchange and Borsa Italiana
(5) Includes TSX Venture
(6) Comprises Copenhagen, Helsinki, Iceland, Stockholm, Tallinn, Riga and Vilnius Stock Exchanges
(7) Ranking is based on market capitalization. Market capitalization excludes investment funds. All World Federation of Exchanges (WFE) member stock exchanges, not solely the main exchange for each country, are included in the ranking. Ranking excludes Bombay Stock Exchange to avoid double counting with National Stock Exchange of India.
Sources: The Securities and Futures Commission (SFC) of Hong Kong
Hong Kong capital market has a high level of openness to and freedom of capital flow. There is no limit on foreign investments imposed in the Hong Kong stock market. Local investors can freely participate in investment in free capital markets overseas. There is also no foreign exchange control. According to Hong Kong Monetary Authority, such free flow of capital and barrier-free investment attracted overseas institutions and made significant contributions to the development of the Hong Kong capital market. This also allows the development of diversified financial instruments and mergers and acquisitions and financing activities to be conducted conveniently.
89
Total market capitalization and the number of Hong Kong listed companies
The Hong Kong Stock Exchange operates two markets, the Main Board is for more established companies that satisfy higher financial and track record requirements and Growth Enterprise Market (the “GEM”) is for a market with lower listing eligibility criteria but similar continuing obligations compared to the Main Board, serving the needs of small and mid-sized issuers.
The total market capitalization of the Stock Exchange (including the Main Board and GEM) increased from approximately HK$33,999 billion (approx.US$4,358.8 billion) as of December 31, 2017 to approximately HK$39,065 billion (approximately US$4,979.0 billion) as of June 30, 2022. In 2021, the market capitalization of the companies listed amounted to approximately HK$58,672 billion (approx. US$7,522.0 billion), with a CAGR of about 14.6% since 2017. In line with the general trend of market capitalization, the number of listed securities on the Stock Exchange also increased from 12,803 as of December 31, 2017 to 16,510 as of June 30, 2022.
Total market capitalization and aggregated number of listed securities(#) in Hong Kong from 2017-2022
____________
* As of June 30, 2022
(#) Listed securities include ordinary shares, preferred ordinary/preference shares, warrants, callable bull/bear contracts, equity instruments, debt securities and unit trust/mutual fund listed on the Stock Exchange.
Sources: HKEx
Securities Dealing and Brokerage Service
The licensed securities dealing and brokerage service industry comprises corporations conducting Type 1 (dealing in securities) regulated activity, and these corporations are generally referred to as brokerage firms or brokerage service providers. These corporations provide securities dealing and brokerage services to clients (including principals and investors) which may involve (i) trading and brokering securities in respect of trades for clients, (ii) marketing and distributing of securities (including mutual funds and unit trusts) to clients, and (iii) placing and underwriting of securities in respect of fundraisings and secondary offerings and sale. Some brokerage firms may also provide securities margin financing services to facilitate the acquisitions or holdings of securities by their clients if they can meet the more stringent financial resources requirements set out in the SFO. The main function of a Type 1 licensed corporation, as the securities brokerage service provider, is to act as an agent to facilitate securities trading activities for investors in respect of securities listed on the Stock Exchange and/or on overseas markets. The main revenue stream of brokerage firms is the commission fee charged to clients, as well as the interest income in the event that the clients fail to settle trades. A securities brokerage firm may also generate revenue from commission and fee income through placing and underwriting securities in respect of fundraisings and secondary offerings and sales, and interest income from the provision of securities margin financing services.
90
Secondary Market Turnover
According to Migo, the commission income of the securities brokerage firm is highly dependent on the performance of the stock market and the overall securities market turnover. According to the statistics of HKEx, the total annual trading turnover and average daily trading turnover grew significantly from approximately HK$21,709 billion (approx.US$2,783.2 billion) and approximately HK$88 billion (approx.US$11.3 billion) in 2017 to approximately HK$ 41,182 billion (approx.US$5,279.7 billion) and approximately HK$167 billion (approx.US$21.4 billion) in 2021, representing CAGRs of 17.4% and 17.4%.
However, according to Migo, the performance of Hong Kong’s securities and stock market has experienced fluctuation over 2017 to 2021. From 2017 to 2018, the trading turnover in Hong Kong stock market was driven by the launch and implementation of the Shenzhen-Hong Kong Stock Connect, with average daily trading turnover reaching a record high of approximately HK$26,423 billion (approx.US$3,387.5 billion) and approximately HK$107 billion (approx.US$13.7 billion) respectively in 2018. In 2019, the total annual turnover and average daily turnover dropped down to approximately HK$21,440 billion (approx.US$2,748.7 billion) and approximately HK$87 billion (approx.US$11.1 billion), which was affected by a series of negative factors including U.S.-China trade tension and prolonged local unrest and social incidents. Nonetheless, in 2020-2021, despite of the fact that the outbreak of COVID-19 has adversely impacted the economic development in Hong Kong, the securities market remained strong and active, with the total annual trading turnover and average daily trading turnover registering year-on-year growth rates of 28.3% and 29.5%, respectively.
Total turnover and average daily turnover from 2017 to 2021 of the Hong Kong securities market
Sources: HKEx
Competition Landscape of Securities Dealing and Brokerage Industry
To trade securities through the trading facilities of Hong Kong Stock Exchange, the participants must (among others) hold the Stock Exchange Trading Rights and be a Stock Exchange Participant. They should also be licensed corporations that can carry on Type 1 (dealing in securities) regulated activity under the SFO. They should also comply with the financial resources rules stipulated by the Financial Resources Rules (amendments) and the HKEx. As of June 30, 2022, there were 711 trading right holders registered in the Hong Kong Exchanges and Clearing Limited, which comprised 623 trading Exchange Participants, 74 non-trading Exchange Participants and 14 non-exchange participants. The participants are divided into 3 categories, ‘‘A’’, ‘‘B’’ and ‘‘C’, based on market share, by the Stock Exchange:
(a) Category A (brokerage firms ranking 1st to 14th, by proportion to total turnover);
(b) Category B (brokerage firms ranking 15th to 65th, by proportion to total turnover); and
(c) Category C (brokerage firms ranking after 65th, by proportion to total turnover).
91
The following chart illustrates the respective market shares of different categories of Stock Exchange Participants from 2017 to 2022.
Participants | 2017 | 2018 | 2019 | 2020 | 2021 | 2022* | ||||||
(%) | (%) | (%) | (%) | (%) | (%) | |||||||
Category A | 54.6 | 55.7 | 58 | 58.2 | 59 | 63.6 | ||||||
Category B | 34.9 | 35.7 | 34 | 34.5 | 33.8 | 30.86 | ||||||
Category C | 10.5 | 8.7 | 8 | 7.4 | 7.2 | 5.54 |
____________
* For the six months ended June 30, 2022
Source: HKEx
Hong Kong’s securities dealing and brokerage market is dominated by the 14 Stock Exchange Participants under Category A that accounted for approximately 59% market share in terms of turnover for 2021. The market share of Stock Exchange Participants under Category A has experienced an increase and Category C has experienced an decrease from approximately 54.6% and 10.5%, respectively, in 2017 to approximately 59% and 7.2%, respectively, in 2021, while the market share the Stock Exchange Participants under Category B has recorded a decrease from approximately 34.9% in 2017 to approximately 33.8% in 2021. The number of Category C firms reached 637 in 2021, representing a CAGR of 7.4%.
For the year ended December 31, 2021, I Win Securities Limited, our wholly-owned subsidiary, was ranked as a Category C broker by the Stock Exchange.
Placing and Underwriting Services
The Placing and underwriting services are essential for fundraising activities in the capital market, and relevant service providers in Hong Kong are required to obtain an HKSFC license to carry on Type 1 regulated activity. Such placing and underwriting services providers are generally referred to as underwriters and placing agents. The main responsibility of both underwriters and placing agents is to act as an agent to identify potential investors to subscribe for securities of issuers and to acquire securities from selling shareholders, while underwriters are also involved in carrying out and organizing roadshows and other marketing activities during the book building process as well as involved in the pricing process of IPOs. The main revenue stream of the placing and underwriting services providers is the commission charged to clients from the provision of the placing and underwriting services which is calculated according to a predetermined commission rate that varies on a case-by-case basis and usually ranges from less than 1% to up to 20% of the value of securities being placed or underwritten.
According to the statistics of the HKSFC, in 2017, there were approximately 1,247 Type 1 financial institutions that provide the placing and underwriting services in Hong Kong. In 2021, the number of Type 1 financial institutions increased to 1,487, respectively, with a CAGR of about 4.5% since 2017. As of June 30, 2022, the licensed corporations that can carry on Type 1 regulated activity under the HKSFO increased to 1,509. The placing and underwriting services market in Hong Kong is consolidated and dominated by the top market players who provide a wide range of investment banking services in addition to the placing and underwriting services. The other players in the market, being Category B and C participants, operate on a boutique scale and focus on the provision of several services.
IPO and Fund Raising in Hong Kong
According to Migo, total revenue generated in the placing and underwriting service market in Hong Kong is positively correlated with IPO and funds raised on the Hong Kong Stock Exchange. Hong Kong is one of the world’s most active markets for IPO. According to the statistics of HKSFC, Hong Kong ranks fourth in total funds raised among the global IPO markets in 2021 and has been the world’s top five IPO markets in the past five years. The large number of listed and newly listed companies on the Hong Kong stock market has created significant demands for the placing and underwriting services in Hong Kong. Furthermore, the total funds raised from the equity markets in Hong Kong, through IPO and post-IPO, increased from approximately HK$580 billion (approx. US$74.3 billion) in 2017 to approximately HK$771 billion (approx. US$98.8 billion) in 2021, representing a CAGR of approximately 7.4%.
92
In 2021, there were 98 IPOs launched in Hong Kong, representing a decline CAGR of approximately 13.4% from 2017, when there were a total number of 174 IPOs launched in 2017. According to Migo, the reason for such a decrease is due to the fact that the Hong Kong IPO market has been hit by the COVID-19 pandemic, the U.S.-China trade tensions, China’s regulatory changes in relation to security concerns regarding Chinese companies listing overseas, and other geopolitical tension.
However, according to Migo, with reference to the Government press release in May 2022, in light of heightened geopolitical tensions, the uncertainty of the COVID-19 pandemics, inflation, and interest rate increase by major central banks, which cause uncertainty to the outlook for Hong Kong IPO markets, but the Hong Kong IPO market should remain resilient given its unique advantages as an international financial center. According to the statistics of HKEx Fact Book, despite the decline in the number of IPO, there has been an overall increase in the funds raised through IPO from 2017 to 2021, from approximately HK$129 billion (approx.US$16.5 billion) in 2017 to approximately HK$331 billion (approx.US$42.4 billion) in 2021, representing a CAGR of approximately 26.6%. In terms of post-IPO equity funds raised in Hong Kong, the amount decreased from approximately HK$452 billion in 2017 to approximately HK$346 billion in 2020, then rebounded to HK$442 billion in 2021.
Number of IPOs and the total funds raised through IPO in Hong Kong from 2017 to 2021
Source: HKEx Fact Book
Furthermore, according to the statistics of HKEx Fact Book, in 2020, there were 154 new IPO launched, raising approximately HK$400 billion, which is a record high since 2017 in terms of total funds raised; compared with 183 IPOs raising approximately HK$314 billion (approx. US$40.2 billion) in 2019 — despite a 15.8% drop in the number of IPOs, there was a 27.4% increase in terms of funds raised. With reference to the Government press release May 2022, the strong performance can be attributable to the launch of the Hang Seng Tech Index, the acceptance by the Hong Kong Stock Exchange of the Weighted Voting Rights (WVR) used by the tech giants based in Mainland China, and changes in market sentiments towards the U.S. securities market regulatory environment, which drives more Mainland Chinese companies to get listed on the Hong Kong Stock Exchange, instead in the U.S. For example, there were nine Chinese companies listed in the US having their secondary listing on the Hong Kong Stock Exchange in 2020, raising a total of HK$131 billion (approx. US$16.8 billion), representing approximately 34% of the total funds raised in 2020. According to Migo, although the geopolitical issues have triggered certain negative factors that affected Hong Kong’s capital market, as China’s most internationalized city with the free flow of capital, ample liquidity, and an ability to innovate and reform to embrace change, Hong Kong is certain to remain the most preferred overseas listing destination for the Mainland Chinese companies.
93
Asset Management Services
Asset management refers to the investment advisory and management of investment funds and securities by holding the licenses to carry on Type 4 (advising on securities) and Type 9 (asset management) regulated activities.
Major market players engaging in the asset management business in Hong Kong comprise licensed corporations (such as securities firms or asset management companies licensed by the HKSFC), registered institutions (such as banks or deposit-taking companies engaging in the asset management business), and insurance companies.
According to the statistics of the HKSFC, 1,838 and 2,039 licensed corporations, 94 and 36 registered institutions, 5,010 and 4,962 responsible/approved officers for Type 4 (advising on securities) and Type 9 (asset management) regulated activity as of the end of June 30, 2022. The number of licensed responsible/approved officers to carry on Type 4 and Type 9 licenses increased from 3,513 and 3,576 in 2017 to 4,905 and 4,855 in 2021, at a CAGR of approximately 8.7% and 7.9%. As of June 30, 2022, the number of licensed corporations and licensed responsible/approved officers recorded an increase of 65 and 105 for Type 4 license, as well as 60 and 107 for Type 9 license. Recently, there has been an increase in the number of China asset management service firms. Investment funds manage assets of various asset classes (shares, bonds and derivatives) and other assets (e.g. real estate) in order to meet specified investment objectives for the benefit of the investors. Some investors may also authorise asset managers to manage the dealing and investments of securities in their securities trading account(s), and this is commonly referred to as discretionary account management. According to Migo, services and transactions under discretionary asset management are often tailored for professional, high-net-worth individuals or institutional investors, while products, such as pension fund, possess a relatively higher minimum investment requirement for investors. The main stream of revenue of licensed asset managers is the management fee, which is paid to the asset manager on an ongoing basis and is deducted from the net asset value of managed funds.
According to the Asset and Wealth Management Activities Survey (previously known as the Fund Management Activities Survey) 2021 published by the HKSFC in July 2022, the asset and wealth management business in Hong Kong amounted to increase from approximately HK$24,270 billion (approx.US$3,111.5 billion) in 2017 to approximately HK$35,546 billion (approx.US$4,557.2 billion) in 2021, representing a CAGR of approximately 10%. The following chart illustrates a breakdown of the asset and wealth management business’ assets related in Hong Kong by major market players from 2017 to 2021.
Source: HKSFC
94
According to Migo, the demand for asset management services, especially the demand for discretionary asset management services, is expected to continue to grow in Hong Kong, for: (i) the unwillingness of investors to devote substantial time and effort in connection with making day-to-day investment decisions; (ii) engaging of asset managers time-constrained locals and Mainland China high-net-worth or institutional clients are able to delegate the investment process to a qualified and competent asset manager who is able to spontaneously and efficiently act on available real-time information; (iii) the comfort of access to better investment opportunities through the professional portfolio or fund managers; and (iv) discretionary account managers are generally more proactive in seizing investment opportunities at better offers, as they are incentivized through the performance-driven compensation mechanism of a percentage fee of the assets under management.
Market drivers and opportunities
Emerging and innovative sectors to be listed on the Stock Exchange
The Stock Exchange’s new rules to broaden Hong Kong’s listing regime became effective on April 30, 2018. Under the new listing regime, companies from emerging and innovative sectors, including biotech companies, are encouraged to seek listing in Hong Kong. The new listing rules offer domestic and international investors greater access to fast-growing companies from emerging and innovative sectors, and hence may generate an increase in equity issues and investments. Therefore, the new regime is expected to provide a growth opportunity for placing and underwriting services providers in Hong Kong.
Increase in the number of Mainland Chinese Companies listing on the Stock Exchange
The number of Mainland China companies listed on the Hong Kong Stock Exchange increased from 1,051 in 2017 to 1,368 in 2021 representing a CAGR of approximately 6.8%. The increase in the number of Mainland Chinese Companies listed in Hong Kong may support the growth of funds raised through the Hong Kong stock market, facilitating the development of the placing and underwriting services market. With a general expectation of Hong Kong as the preferred listing destination due to the positive impacts brought by the recent regulatory reforms, an increasing number of small and medium-sized listing applicants will continue to present opportunities for the placing and underwriting services market in Hong Kong.
Furthermore, according to Migo, with reference to a report released by an accounting firm in the year 2022, Hong Kong continues to be the natural choice for homecoming listings because of the location of the primary gateway and its capital flow mechanisms with Mainland China, underpinned by the current uncertainties Mainland Chinese issuers are facing in the US market. Homecoming listings in Hong Kong from the U.S. capital market are expected to continue to support the fundraising and capital market of Hong Kong in the second half of 2022.
Comprehensive and evolving regulatory regime
Supervision of the securities and futures markets by the HKSFC and the HKEx ensures the regular and normative operation of the market and strengthens and protects the integrity and soundness of Hong Kong’s securities and futures markets for the benefit of investors and the industry. Hong Kong’s regulatory regime continues to evolve with an aim of capturing the latest opportunities and market dynamics in the capital market, including the new listing regime for emerging and innovative companies.
The fast growth in of Ultra High Net Worth Individuals (UHNWIs) who require private wealth and asset management services
Despite the COVID-19 and economic uncertainties, according to Migo, with reference to the Wealth Report 2022 released by a real estate consultancy firm, the number of UHNWI (individuals who have a net worth of over US$30 million) was in Mainland China and Hong Kong increased by 15.8% and 13.4% to 70,426 and 5,042 in 2020, respectively; and is forecasted to expand by 46.3% and 25.8% between 2020 to 2025, respectively. There is a growing trend of leading and large-scale financial and wealth management service providers shifting their business focus to ultra-high net worth clients and off-boarding midmarket clients, which motivates these leading and large-scale
95
players to enhance their service capability for expanding their ultra-high net worth client bases, while providing an opportunity to other small to mid-scale players to increase their market share and acquire high net worth clients in the mid-market segment in Hong Kong.
Entry Barrier
Client and investor bases, and industry network
The main responsibility of the placing and underwriting services providers in a placing/underwriting deal is to sell equities issued by the company to suitable investors, which requires leveraging the service provider’s wide industry network and diversified investor base. According to Migo, new entrants with unestablished client and investor bases and limited industry connections may find it difficult to compete with existing industry players. In addition, placing and underwriting deals are often awarded through current or previous clients or investors or referrals. Limited industry networks and unestablished client and investor bases may, therefore, hinder a new entrant’s exposure to business opportunities in the placing and underwriting services market in Hong Kong, posing a barrier to enter.
According to Migo, it would be difficult for new entrants to enter the licensed securities dealing service industry in Hong Kong as competitors are well-established with well-recognized reputations in the industry, and have solid relationships with clients. Further, current market players are more familiar with the industry and business operations, and therefore, new entrants may find it difficult to compete in a such mature market.
The requirement to comply with the FRR and the new conduct requirements for book building and placing activities that have taken effect since August 2022
All licensed corporations are required to comply with the paid-up capital requirements (minimum paid-up share capital HK$10 million (providing securities margin financing), or HK$5 million (in any other case) for Type 1 and HK$5 million for Type 4 and Type 9). The minimum liquid capital requirements are HK$500,000 (approved introducing agent or trader) or HK$3 million (in any other case) for Type 1 and HK$100,000 (if does not hold client assets) or HK$3 million (in any other case) for Type 4 and HK$100,000 (if does not hold client assets) or HK$3 million (in any other case) for Type 9 under the FRR in order to become and remain licensed by the HKSFC. Licensed corporations are required to have sufficient liquid assets to meet ongoing liabilities as they fall due and to periodically report their financial positions to the HKSFC. Therefore, new entrants and existing licensed corporations may face challenges in meeting the requirements regulated by the FRR. The new requirements have become effective on August 5 2022. There are more compliance with the new requirements will inevitably involve extra time, costs and resources for newcomers. The new conduct requirements for book building and placing activities will be set out in a new paragraph 21 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) while the sponsor coupling requirement will be reflected in the amended paragraph 17 of the Code of Conduct. There will also be consequential changes to the Guideline to sponsors, underwriters and placing agents involved in the listing and placing of the GEM stocks.
Human capital constraint
According to Migo, the financial industry is labor-intensive and the requirement to employ skilled professionals such as Licensed Responsible/Approved Officers, and such skilled professionals are very scarce. The ability of the management team determines the earning of market share and stability of the asset management business. Therefore, whether there is an excellent talent team is also a potential factor restricting market entrants, and would be costly for new entrants to comply with and fulfill licensing conditions.
Fierce competition
According to Migo, various licensed corporations, including international large-scale investment banks, China-funded securities groups, and local securities companies, are competing intensively for larger market share. According to Migo, new entrants need to compete with leading players or other established players in the industry who usually have years of experience, the pool of talents, sound reputation, large client base and network accumulation in the market, with mature business models and operational processes.
96
Overview
We, through our Operating Subsidiaries, are a Hong Kong-based financial services provider principally engaged in the provision of (i) placing and underwriting services; (ii) securities dealing and brokerage services; and (iii) asset management services. Our operation is carried out through our wholly-owned Operating Subsidiaries: a) I Win Securities, which is licensed to conduct Type 1 (dealing in securities) regulated activities under the SFO in Hong Kong, and b) I Win Asset Management, which is licensed to conduct Type 4 (advising on securities) and Type 9 (asset management) regulated activities under the SFO in Hong Kong. I Win Securities is the Stock Exchange Participant and holds one Stock Exchange Trading Right. I Win Securities is a participant of the HKSCC.
The table below sets forth the licenses obtained by our Operating Subsidiaries under the jurisdiction of Hong Kong.
License type and trading right | Entity name | |
HKSFC Type 1 License — Dealing in securities | I Win Securities | |
HKSFC Type 4 License — Advising on securities | I Win Asset Management | |
HKSFC Type 9 License — Asset management | I Win Asset Management | |
Stock Exchange Participants (Participant ID: 02092) | I Win Securities | |
HKSCC Participants (Participant ID: B02092) | I Win Securities |
The service offerings of the Operating Subsidiaries mainly comprise the following:
• Underwriting and Placing Services: I Win Securities acts as (i) book runner, lead manager, or underwriter of listing applicants in IPOs or other fundraising activities; and (ii) placing agent of listed companies in connection with their issuance or sale of securities, in return for underwriting and/or placing commission. I Win Securities also charges investors a brokerage commission when they subscribe for or acquire securities in respect of offerings of listed issuers who engaged I Win Securities to provide placing and underwriting services in respect of the relevant securities. Our revenue derived from our placing and underwriting services accounted for 48.31% and 15.41% of our total revenue for the years ended March 31, 2023 and 2022, respectively.
• Securities Dealing and Brokerage Services: I Win Securities provides securities dealing and brokerage services for trading in securities on the Hong Kong Stock Exchange and in other overseas markets. I Win Securities also acts as an intermediary between buyers and sellers of securities listed on the Main Board and GEM of the Hong Kong Stock Exchange and facilitate the clients’ trading of securities listed on selected overseas stock exchanges, including the United States, in return for brokerage commission income. Ancillary to I Win Securities’ securities brokerage and dealing services, I Win Securities also provides nominee services, custodian services, scrip handling services and handling services for corporate actions to our brokerage clients. At the same time, I Win Securities also facilitates the subscriptions to IPOs and secondary placings, either conducted by Hong Kong issuers who engage I Win Securities for placing and underwriting services or conducted by other financial services providers in Hong Kong. For the years ended March 31, 2023 and 2022, respectively, 47.55% and 80.81% of our total revenue was derived from securities dealing and brokerage services.
• Asset Management Services: I Win Asset Management offers discretionary account management and fund management services that cater to different investment objectives of our Operating Subsidiaries’ clients. Our asset management services accounted for 1.03% and 1.00% of our total revenue for the years ended March 31, 2023 and 2022, respectively.
Our revenues were US$3.3 million and US$2.3 million for the years ended March 31, 2023 and 2022, respectively. We recorded net loss of US$0.2 million and US$0.5 million for the years ended March 31, 2023 and 2022, respectively. We plan to keep the business of the Operating Subsidiaries growing by strengthening their securities brokerage, underwriting and placement services and developing asset management business and margin financing services. The diversified business portfolio allows our Operating Subsidiaries to create synergies between their business lines, generate new business opportunities for each business segment and provide integrated financial services to clients. For further details of our services, please refer to the paragraph headed “Business — Our Services and Revenue Model.”
97
Competitive Strengths
A proven and experienced management team consisting of industry veterans
Our Operating Subsidiaries have a team of experienced and competent professionals consisting of industry veterans in Hong Kong’s financial services industry with substantial expertise and experience in formulating business strategies, monitoring and supervising compliance matters, overseeing financial condition and performance, and managing, executing and supervising our operations with an aim to provide services to our clients in a reliable, efficient and professional manner. Mr. Wai Lok Raymond, FONG, our Director, who is also the Responsible Officer and the member of the senior management of our Operating Subsidiaries, has over 22 years of experience in the financial services industry, including but not limited to underwriting and placing, private wealth management, asset management, compliance and risk management, with a proven track of participating in over 110 IPO underwriting and placement projects. Mr. Ngan Sammy, SHUM, our Director, who is also the Responsible Officer and the member of the senior management of the Operating Subsidiaries, possesses over 18 years of experience in the financial services industry, including private wealth, asset management and compliance. He is also well-connected with various high-net-worth clients and family offices in Mainland China and Hong Kong.
Leveraging on our industry veteran’s experience and networks in the financial industry, we believe that our Operating Subsidiaries are able to respond promptly and appropriately to the ever-changing market conditions and environment as well as continue to expand our client base. Further, our Operating Subsidiaries have an experienced team of licensed representatives who are responsible for carrying out our regulated activities, together with our professional staff who carry out requisite business functions (including compliance, risk management, finance, accounting, and settlement). Together with our senior management team, our staffs of our Operating Subsidiaries enable us to implement our business strategies, provide quality services to the clients, manage our compliance and risks, identify and capture business opportunities, maintain relationships with existing clients, and procure prospective clients.
Established and strong relationship with our clients and stable client base
We benefit from the extensive business networks and stable client relationship of our Operating Subsidiaries which have over the years assisted our Operating Subsidiaries in gaining market exposure and brand recognition in Hong Kong. Through these networks and contacts, our Operating Subsidiaries have established a solid and stable client base which we believe will continue to grow.
We believe that the growth of the client base is not materially attributable to the use of price competition measures or the undertaking of aggressive advertising or marketing campaigns, but through fostering and maintaining relationships with the client network of our Operating Subsidiaries, which are developed through the provision of reliable and personalized services by our experienced account executives, staff dealers, and management over the years, building our brand’s reputation and understanding the clients’ needs and requirements. We believe that, through maintaining good relationships with our Operating Subsidiaries’ existing clients, client referrals through the word-of-mouth of the clients who were satisfied with our Operating Subsidiaries’ services are critical to our continuous growth.
We believe that over the years, I Win brand has become a recognized brand within the securities industry in Hong Kong and this is largely attributable to a number of factors including, but not limited to, (i) the ability of our Operating Subsidiaries to provide personalized services through our understanding of the clients’ needs in the constantly evolving financial landscape; (ii) the reasonableness and competitiveness of fees and commissions that our Operating Subsidiaries charge for their services; and (iii) the reliability of operating systems of our Operating Subsidiaries and qualified staff capable of satisfying clients’ needs. We believe that these attributes will continue to assist us in growing our Operating Subsidiaries’ client base.
Synergies among our different lines of services which generate diversified and stable sources of revenue
We believe that the complementary nature of our Operating Subsidiaries’ different lines of business creates synergy and enables us to generate a diversified and stable source of income. Our Operating Subsidiaries can leverage on their existing pool of securities trading clients when acting as book-runner, lead manager, underwriter or placing agent in placing and underwriting engagements in that the securities trading services act as a channel for procuring suitable investors to subscribe for securities offered under placing and underwriting projects undertaken by our Operating Subsidiaries. With the growth of our placing and underwriting business, we believe that there will be growing demand for our Operating Subsidiaries’ securities trading services from clients who would like to benefit from trading opportunities gained through access to allocations granted to our Operating Subsidiaries (for subscriptions and acquisitions of securities) under placing and underwriting projects undertaken.
98
The asset management services of I Win Asset Management provide professional insights and investment advice for the clients to allocate their asset portfolios and diversify their investment risk. Each of the high-net-worth clients is served by our experienced and professional account manager who is able to readily render personalized service, and we are ready to provide support when needed. Our Operating Subsidiaries are committed to providing progressive, pragmatic, and quality asset management plans with regular analyses of market trends, along with flexible wealth management solutions to help clients to broaden their investment horizons. The asset management services further enhance the growth of our securities brokerage and financing services, especially amongst the high-net-worth clients, which allow our Operating Subsidiaries to create cross-selling opportunities, optimize client service coverage and grow a group of a loyal high-net-worth client base to achieve business growth.
Growth Strategies
Strengthening our placing and underwriting services
The placing and underwriting business is the core competence of our Operating Subsidiaries. We intend to further market position of our Operating Subsidiaries to capitalize on opportunities arising from sustainable growth in the Hong Kong capital market by (i) extending our Operating Subsidiaries’ industry networks; (ii) exploring business opportunities, in particular, to take up more significant values or to participate in a more significant manner (in terms of underwriting and placing amounts) in respect of project engagements; and (iii) expanding the placing and underwriting team of I Win Securities through the recruitment of additional staff, including Responsible Officer of directors grade with extensive securities and equity capital markets experience and network and staff dealers, respectively, with equity capital market and finance experience.
Expanding our securities dealing and brokerage market presence in relation to the United States exchanges
We have observed a significant increase in client’s demand for securities trading in U.S. exchanges. For the year ended March 31, 2023, 49.3% of our brokerage commission income was derived from the trades in the United States market, whereas 50.6% and 0.1% is derived from Hong Kong Stock Exchange and other stock exchange respectively. Currently, we do not have any trading rights in the United States. Instead, we have engaged ViewTrade Securities, Inc. (“ViewTrade”), a securities broker-dealer in the U.S., as the external broker for carrying out the trades in the U.S exchanges, for our Operating Subsidiaries to provide U.S. securities trading and brokerage services to our clients. As the institutional client of ViewTrade, we are required to pay commissions and fees to ViewTrade at agreed rates for orders we placed with them on behalf of our Operating Subsidiaries’ clients. In turn, our Operating Subsidiaries charge the clients a markup on commissions and fees on top of the amounts our Operating Subsidiaries are required to pay to external brokers. However, we believe the external broker arrangement is insufficient to maintain our pricing competitiveness against other securities brokerage firms who may offer lower or even zero rate of brokerage commission to our Operating Subsidiaries’ current or potential clients.
We plan to establish long-term partnership and collaboration with suitable licensed financial institutions, brokerage firms, and asset management firms in the United States, through joint-venture or strategic partnership, to obtain a more favorable commission and fees arrangement from our partners in the United States. Additionally, we plan to commence our U.S. exchanges securities and brokerage services, instead of relying on external brokers, by obtaining the relevant licenses and trading rights in the United States, either applying for those licenses by establishing U.S. offices and recruiting suitable personnel locally in the U.S., or through business acquisition.
Developing our securities margin financing services
We have been observing an increase in client’s demand to provide margin financing to facilitate their purchase of securities listed on the Stock Exchange and short-term IPO financing for subscription of shares, on a margin basis. Margin financing refers to the provision of funds by a securities brokerage firm, like I Win Securities, whereby the funds borrowed from a securities brokerage firm to be used for carrying out margin trading on a leveraged basis, and the relevant securities purchased form the collateral to secure the repayment of the loan granted by the securities brokerage firm.
99
Although our Operating Subsidiaries have received the approval from the HKSFC on November 12, 2020 to provide the margin financing services, we decided not to commence such services due to the capital requirements under the FRR and the HKSFC, as the ability for our Operating Subsidiaries to commence the margin financing services and the size and operation of such are limited by our capital resources and our level of bank borrowings, which are subject to the capital requirements under the FRR by the SFC. Furthermore, as per SFC’s Guidelines for Securities Margin Financing Activities (“Margin Financing Guideline”), licensed brokers like I Win Securities, are required not to over-leverage themselves in conducting margin financing activities. In particular, the margin loans-to-capital multiple benchmarks should be restricted to five or less, i.e., the licensed broker may not provide margin loans exceeding five times its capital (including shareholders’ funds and any outstanding subordinated loans approved by the SFC).
We now intend to commence the securities and IPO financing business and expand the customer base which will trade securities with I Win Securities on a margin basis with an aim to increase our interest income. We intend to enlarge our capital resources, while in compliant with Margin Financing Guideline and FRR. We intend to apply part of the net proceeds from this offering to develop our Operating Subsidiaries’ financing services, in addition to the banking borrowing and our internal resources. With the expansion of margin book of our Operating Subsidiaries (i.e. increase the amount of share capital which may be utilized for the purpose of granting margin loans), we intend to enhance the size and volume of margin loans our Operating Subsidiaries may be able to extend to our clients. Coupled with the expansion in the margin financing services, securities dealing and brokerage service of our Operating Subsidiaries is expected to be more active as customers are required to trade through their accounts with us when utilizing our securities and IPO financing services. We also envision that establishing the margin financing service will create synergies with our Operating Subsidiaries’ asset management services, which provide our high-net-worth individual clients who have strong demand for financing services, thereby creating more cross-selling opportunities.
Enhancing and developing our asset management business
We aim to develop the asset management business by diversifying the types of asset management schemes to satisfy the needs of different clients. We plan to enhance our Operating Subsidiaries’ research capabilities to better serve the asset management team, high-net-worth individual clients and institutional investors by continuously recruiting qualified research analysts to support the investment decision-making and investment management processes of the asset management team. We will expand the breadth and depth of research of listed companies in relevant key areas, to provide quality research reports to our operation team and client, ultimately increasing investment return and the AUM of the I Win Growth SPC fund and discretionary accounts under management. We believe that by achieving strong returns for the clients, our Operating Subsidiaries can attract more AUM from our existing or potential clients. We also anticipate that growth in the asset management services will lead to organic growth in our securities broking services. We envision, with the proper development of the asset management business, we will gradually achieve a sound growth of the total size of the assets under management by I Win Asset Management, generating more asset management fees and performance-based incentive income, so as to broaden our revenue base in the long run.
Enhancing our IT systems
With the rapid development of financial technology, we believe our clients are putting significant value to the use of technology as a consideration when they select brokerage and other intermediary service providers, other than the commission rate. We believe that the continued enhancement of the Operating Subsidiaries’ IT systems and infrastructure and the optimization of IT resources are important for fostering our business growth.
We plan to upgrade our Operating Subsidiaries’ portfolio management system and trading system to further streamline the efficiency, convenience, and comprehensiveness of our trading system and provide our clients with a user-friendly interface to ensure that they can securely manage their wealth portfolios with ease. Furthermore, with our ongoing objective to remain competitive and to facilitate the expansion of service offering, we intend to (i) subscribe to a new integrated system comprising both portfolio management and risk management functions, including but not limited to features such as managing security, redundancy, disaster recovery and database administration as well as providing market data (such as corporate actions, massive correlation, dividend tables, and volatility datasets); (ii) subscribe to a new clients’ relationship management system with the aim of enhancing client satisfaction; (iii) subscribe to a new business continuity planning service (which includes data management and cloud storage archiving) and co-location service as a back-up workplace in case there is any disruption to our office; and (iv) subscribe to the financial and market data vendors, such as the Bloomberg Terminal, to enhance our analytical and research capabilities to support the asset management and placing and underwriting services of our Operating Subsidiaries.
100
Our Services and Business Model
Our Operating Subsidiaries are financial services provider in Hong Kong engaging in the provision of (i) placing and underwriting services; (ii) securities brokerage and dealing services; and (iii) asset management services.
Placing and Underwriting Services
I Win Securities, which is licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity as defined under the SFO, participates in different kinds of fund-raising exercises for companies listed on the Hong Kong Stock Exchange by acting as the joint-bookrunner, lead manager, co-lead manager, underwriter, sub-underwriter, sub-agent, placing agent or sub-placing agent. Those fund-raising exercises included placing and IPO of shares of newly-listed companies, placing of new shares of listed companies under general mandate or specific mandate, top-up placement of shares of listed companies, issue of new shares of listed companies by way of rights issue or open offer and unlisted debt securities by listed companies. In addition to acting for listed companies on the Stock Exchange, I Win Securities is engaged as placing agents for listed companies to place bulk volume of securities in the secondary market. During the course of providing the placing and underwriting services, I Win Securities may engage sub-placing agents or sub-underwriters, to form placing and/or underwriting syndicates.
For the underwriting exercise, I Win Securities generally underwrites IPOs on a fully underwritten basis, by which I Win Securities is obliged to take up or procure the applications of any unsubscribed shares offered by the issuer in the IPO up to our maximum underwriting commitment, as agreed with the lead bookrunner or manager and the issuer in the relevant underwriting agreement, in the event of any under-subscription of shares in the relevant share offer. For placing exercises, I Win Securities usually agrees with the contracting party to place a number of securities on an agreed price on a best-effort basis within a period of time. I Win Securities charges a commission for acting as a placing agent, a sub-placing agent or a sub-agent in a fund-raising exercise based on the aggregate placing price of the number of securities successfully placed by I Win Securities to its placees or sub-agents. The placing commission rates are subject to negotiation on a case-by-case basis with the listing applicants or listed issuer and is generally determined with reference to, among other matters, the type of securities offered, fundraising size, market condition and prevailing market rate.
For acting as a bookrunner, a lead manager, a co-lead manager, a co-manager, an underwriter or a sub-underwriter in a fund-raising exercise, our commission is based on the underwriting commitment and the aggregate offer price of the number of securities underwritten by I Win Securities. The underwriting commissions are typically either a pre-determined fixed fee or a fixed percentage of the aggregate offer price of the number of securities underwritten. Depending on the role under various fund-raising exercises, I Win Securities collects commission either from the listed companies, the shareholders of the listed companies or our immediate distributors of the fund raising exercises. I Win Securities also charges investors a brokerage commission when they subscribe for or acquire securities in respect of offerings of listed issuers who engaged I Win Securities to provide placing and underwriting services in respect of the relevant securities.
I Win Securities completed 14 and 8 placing and underwriting exercise for the financial years ended March 31, 2023 and 2022 respectively. Subsequent to March 31, 2023, and up to the date of the prospectus, I Win Securities were newly engaged in 1 engagements as underwriter/sub-underwriter/placing agents/sub-placing agent. For years ended March 31, 2023 and 2022, fee and commission income from the placing underwriting service amounted to approximately US$1.575 million, and US$0.355 million, respectively, representing approximately 48.31% and 15.41% of our total revenue for the respective years. For the years ended March 31, 2023 and 2022, none of the underwriting projects in which I Win Securities participated was undersubscribed, and therefore we were not required to take up any unsubscribed offer shares.
Commissions and Fees
The placing and underwriting commission, which may be a fixed fee or a fee charged as a percentage of the fundraising size, is determined on a case-by-case basis after arm’s length negotiations with each client and/or among the members of the underwriting syndicate, based on various factors including but not limited to, the proposed fund raising size, proposed pricing and valuation of the offering, prevailing market conditions and sentiments, target types and geographical locations of investors, perceived market response to and demand for the offering, the expected amount of time and resources required for performing our roles and duties in the book building process, the business and financial performance of the relevant listing applicant or listed issuers, number of underwriters and/or placing agents
101
involved and number of shares to be placed or underwritten by us. Therefore, the commission rates for the placing and underwriting projects may vary to a wide extent. The placing and underwriting commission receivable by I Win Securities ranged from 0.65% to 21.75% of the fund-raising size and/or the aggregate offer price of the number of securities placed and/or underwritten by I Win Securities, which we consider was in line with the market rates and market practice.
Operational Procedures
Deal origination: the underwriting projects generally originate from networks of the Operating Subsidiaries’ management, referrals from professional parties or existing clients. The management of I Win Securities discusses with the clients about fund raising proposals including alternatives of fund raising methods, proposed fund-raising size, terms and structure, pricing basis, target investors, use of proceeds, and timetable. The staff of I Win Securities will also perform preliminary due diligence on the clients before accepting the engagement.
Engagement: the pre-engagement KYC checklist detailing the findings from the due diligence will be reviewed and approved by the management committee. The approval process takes into consideration a number of aspects concerning the project including the deal size, tentative timetable, estimated income attributable to us, commission rate, underwriting commitment, risk exposure, financial resources requirement and benefits under the engagement. If approval for engagement is granted, I Win Securities will, in conjunction with the underwriters’ legal advisers, review and comment on the underwriting agreement, which will typically be signed on or before the date of the prospectus (in the case of public offer underwriting agreement) and on or about the date of price determination (in the case of placing underwriting agreement).
Deal execution: in execution of the projects, I Win Securities will mainly perform the following tasks: (i) forming the underwriting syndicate and liaising and coordinating with each syndicate member; (ii) arranging the marketing and book-building process; (iii) monitoring the FRR compliance and any market, credit and liquidity risks on an ongoing basis; (iv) reviewing and executing underwriting documentation; (v) enquiring the independence of the relevant investors; (vi) monitoring despatch of the prospectus, refund cheques and share certificates; and (vii) monitoring the project.
Completion: I Win Securities are responsible for monitoring the settlement of all underwriting transactions and retaining all of the internal records and files in accordance with our internal control policy and the relevant laws and regulations. Debit notes for our commissions will be issued to the clients in accordance with the payment terms set out in the engagement letter or the underwriting agreement.
Securities Brokerage and Dealing Services
The securities brokerage, dealing and trading services are provided through I Win Securities, which is licensed under the SFO to carry on Type 1 (dealing in securities) regulated activity as defined under the SFO. As of the date of the prospectus, the securities trading service is comprised of a team of 8 staff dealers (7 of which are also the Responsible Officers of I Win Securities) and 8 self-employed Account Executives (“AE”), all of whom were licensed under the SFO. For the years ended March 31, 2023 and 2022, brokerage commission and other related ancillary services fees income generated from the securities brokerage and dealing business was approximately US$1.55 million and US$1.864 million, respectively, respectively, representing approximately 47.55% and 80.81% of our total revenue for the respective years.
I Win Securities offers securities trading services, including dealing and brokerage services for trading of securities on the Hong Kong Stock Exchange and on other overseas exchanges. I Win Securities also facilitates subscriptions to IPOs and secondary placings, either conducted by Hong Kong issuers who engage our placing and underwriting services or conducted by other financial services providers in Hong Kong, such as investment banks and other securities brokerage firms. I Win Securities also provides ancillary services related to the securities brokerage and dealing services, including the provision of nominee services (to assist clients with the collection of share certificates or dividends), custodian services, scrip handling services and handling services for corporate actions.
I Win Securities is a Stock Exchange Participant with requisite trading rights which allow us to execute trades, as an intermediary, of securities listed on the Hong Kong Stock Exchange. In order to facilitate the trading by our Operating Subsidiaries’ clients of securities listed on U.S. stock exchanges, I Win Securities has also established arrangements with various external brokers in the U.S. who possess requisite trading rights with the U.S. stock exchanges which enable our Operating Subsidiaries to arrange relevant trades through them. Our Operating Subsidiaries maintain
102
securities trading accounts with such external brokers and are required to pay brokerage commissions and fees to them for orders we placed with them on behalf of our clients. Our Operating Subsidiaries do not conduct actual brokerage activities in the U.S. stock exchanges.
Trading Accounts
The clients must maintain a securities trading account with our Operating Subsidiaries before they may place any securities trading orders with us. After opening a securities trading account, the client may place trading orders (i) by phone; (ii) onsite at our office premises by submitting an order ticket; or (iii) through an online trading platform, which can be accessed by web browser through our website at www.iwinsec.com or by mobile device application.
The securities trading account holders are provided with their own usernames and passwords to log into our Operating Subsidiaries’ online trading platform for carrying out trading activities. Other than placing securities trading orders, the online trading platform also allows the clients to trace the transaction status and account balances on a real-time basis and review their transaction histories for the past twelve months. For those trading orders placed by phone, all relevant phone communications with the customers are recorded by our telephone recording system as our Operating Subsidiaries’ internal control measures.
Types of Account
As of March 31, 2023 and 2022, there were a total of 1,818 and 1,335 trading accounts comprising 1,603 and 1,155 trading accounts of retail clients (including individual and joint accounts) and 215 and 180 trading accounts of institutional and corporate clients. As of March 31, 2023, out of all the trading accounts, 569 were active accounts. The active account being clients whose accounts recorded at least one trading activity, for purchase and/or sale of securities, broking transaction, in the past twelve months.
All trade orders placed by the clients are managed by our Operating Subsidiaries’ self-employed Account Executives (“AE”) or staff dealers. The staff dealers are full-time employees of I Win Securities and are entitled to a fixed monthly salary, statutory employee benefit, and certain staff dealers are also entitled to a portion of the brokerage commission generated from trades in Referred Accounts of clients referred by them, in addition to the fixed monthly salary and benefit. The AEs are mainly responsible for sourcing clients and handling client relationship, serving and handling the Referred Accounts under their own portfolio, as well as processing trading orders for their own clients. The AEs are self-employed rather than employees of our Operating Subsidiaries, and are engaged on a commission basis (i.e. entitled to a portion of commissions generated from Referred Accounts of clients sourced and referred to our Operating Subsidiaries exclusively by them), and are not entitled to contractual fixed remuneration such as fixed monthly salary or statutory employee benefits. The engagement of AEs on a self-employed basis is in line with industry practice in Hong Kong, and enables our Operating Subsidiaries to broaden the business network, and reach out to more potential clients whilst minimizing staff costs in a relatively lean staff structure.
The securities trading accounts are categorized as House Accounts and Referred Accounts. The trading account(s) whose holders are walk-in clients or clients introduced by our Operating Subsidiaries’ management without the direct involvement or referral of our staff dealers or AEs are classified as House Accounts, while customers sourced by the AE and staff dealer through their personal networks are classified as Referred Accounts. As of March 31, 2023 and 2022, we had 784 and 690 House Accounts, and 1,034 and 645 Referred Accounts, respectively.
External Brokers
As I Win Securities a licensed corporation in Hong Kong with integration into the trading systems of the Hong Kong Stock Exchange and the CCASS clearing system, it manages the processing of the securities transactions independently for securities listed on the Hong Kong Stock Exchange. For securities trading on overseas stock exchanges in which our Operating Subsidiaries do not have any trading right, I Win Securities have entered arrangements with various oversea brokerage firms, who have requisite trading rights and/or being a trading participant of overseas stock exchanges. Currently, our Operating Subsidiaries enable the clients who have made appropriate applications to trade securities listed on U.S. exchanges. For clients trading securities listed on U.S. exchanges, they are generally conducted on our Operating Subsidiaries’ online trading platform which connects to an external broker for execution.
103
At the date of the prospectus, Our Operating Subsidiaries have engaged ViewTrade Securities, Inc. (“ViewTrade”), a securities broker-dealer in the U.S., as the external broker for the U.S exchanges. Our Operating Subsidiaries maintain securities trading accounts with ViewTrade and have entered into standard brokerage agreements with them. It is required to pay commissions and fees to the external broker at agreed rates for orders our Operating Subsidiaries placed with them on behalf of the clients. In turn, our Operating Subsidiaries charge the clients a markup on commissions and fees at agreed rates on top of the amounts our Operating Subsidiaries are required to pay to external brokers. ViewTrade, as the external broker, is responsible for carrying out the trades as well as safekeeping the assets in our designated accounts with them.
Brokerage Commission and Pricing Policy
Act as an intermediary between buyers and sellers of securities listed on the Main Board and GEM of the Hong Kong Stock Exchange, we charge a brokerage commission for arranging the execution and/or executing trade orders on behalf of the clients. We also charge brokerage commission in connection with dealing in securities (namely, subscriptions to IPOs and secondary placing of listed issuers) which we facilitated through our placing and underwriting services. The brokerage commission we charge our clients for an executed trade in the overseas exchanges will include the total fees charged by the overseas external brokers, together with a brokerage commission which we will charge for arranging the trade through these overseas external brokers.
The brokerage services revenue represents commission and brokerage fee which is recognized on a trade date basis when the relevant transactions are executed. Commission income generated from the House Accounts is completely attributed to us, while the income generated from the Referred Accounts are shared between the responsible AEs and staff dealers and us. The sharing portion of commissions varies among each AE Referred Account and is determined on a case-by-case basis, taking into account factors including the clients’ transaction histories, trading volumes and frequencies, financial positions, and the prevailing commission rates.
In respect of House Accounts, the existing standard brokerage commission rate for online trading is 0.15% with a minimum charge of HK$50 (approximately US$6.4), whereas the existing standard brokerage commission rate for phone trading is 0.25% with a minimum charge of HK$100 (approximately US$12.8). Our Operating Subsidiaries may offer, and some clients would request, for a lower commission rate. These offers are made and approved by us on a case-by-case basis, based on considerations such as (i) the brokerage commission charged by other securities brokerage firms who provide a similar quality of services as we provide and, (ii) arm’s length negotiation with our clients with reference to their background and profile (including their trading history, current and predicted volume and frequency of trades, financial credibility and the length of client relationship). For example, our Operating Subsidiaries may agree to offer clients who are active traders a more favorable commission rate if their trading volume reach or are expected to reach a certain prescribed amount.
In respect of Referred Accounts, our Operating Subsidiaries generally permit its staff dealers and AEs to negotiate with our clients in respect of the amount of brokerage commission chargeable on Referred Accounts. In respect of Referred Accounts, out of the commission rate our Operating Subsidiaries charge its clients for executing and/or arranging execution of trades ranged from 0.04% to 0.25% of the transaction value of the relevant trade order, our Operating Subsidiaries generally retain a range of commissions ranging from 0.02% to 0.125% of the transaction value (as agreed with our staff dealers and AEs).
In respect of subscription to Hong Kong IPOs and secondary placing transactions procured through the placing and underwriting services, our Operating Subsidiaries charge our client a commission of at 1.0% of the subscription price of relevant securities, which is equivalent to the amount set for the IPO in the Hong Kong Stock Exchange transaction, pursuant to paragraph 7 of Appendix 8 to the Main Board Listing Rules and paragraph 6 of Appendix 9 to the GEM Listing Rules or other applicable requirements.
We are aware that recently, certain brokerage firms, in particular online and discount brokers in United States, or market makers, solicit or accept payment for the brokerage firm’s order flow, or pay brokerage firm for their customer’s orders. Such practice or arrangement is commonly known as Payment for Order Flow, or PFOF. Under a typical PFOF arrangement, a brokerage firm that has order flow receives cash or other economic incentives to route its customers’ orders to an exchange that has been designated by the provider of payment. We and our Operating Subsidiaries did not, and do not have, any intention, arrangement, agreement, or understanding to implement any PFOF arrangement or its equivalence. Our Operating Subsidiaries have not received any considerations, such as in the form of fee, rebate, or commission, in exchange for routing our client’s trade orders to market makers for execution, or in connection with any PFOF arrangement or its equivalence.
104
For the years ended March 31, 2023 and 2022, we generated a total securities brokerage commission of approximately US$900,912 and US$1,476,737 respectively. The commission income derived from the brokerage of trades in overseas markets represents approximately 14% and 38% respectively of our total revenue for the years ended March 31, 2023 and 2022, respectively while the commission income we derived from the brokerage of trades on the Hong Kong Stock Exchange for the same period was approximately 14% and 26% of our total revenue in the respective periods. The table below sets out a geographical breakdown of the commission and brokerage income for the periods/years indicated:
For the Years Ended | ||||||||||
2022 | 2023 | |||||||||
Brokerage commissions | Brokerage commissions | |||||||||
Hong Kong Stock Exchange | US$ 588,937 | 40.00 | % | US$ 455,911 | 50.60 | % | ||||
U.S. exchanges | US$ 876,907 | 59.00 | % | US$ 443,806 | 49.30 | % | ||||
Other exchanges | US$ 10,893 | 1.00 | % | US$ 1,195 | 0.1 | % | ||||
Total | US$ 1,476,737 | 100.00 | % | US$ 900,912 | 100.00 | % | ||||
Collaboration with Other Financial Services Providers
To maximize our profitability by utilizing the Operating Subsidiaries’ network with other financial services providers in Hong Kong and existing and potential securities brokerage clients network, our Operating Subsidiaries also collaborate with other financial services providers in Hong Kong, in particular, the major investment banks and other securities brokerages firm which we have a close relationship with, to introduce and refer institutional, high-net-worth, and retail investors to: a) open securities trading account in the financial services provider we collaborate with; and b) subscribe the IPOs and placings conducted by these financial services providers. In return, the Operating Subsidiaries charge financial services providers which we referred clients to an introduction/referral fee. The introduction/referral fee is negotiated on a case-by-case basis between financial services provider we collaborate with and us, for a fixed amount of fee,