A legal opinion on Populous Platform Ltd (Hong Kong, PRC).
London. Friday 11th May, 2018.
Get a long drink or not, get comfy for this is a fairly lengthy one and its verbatim.
Re: Populous Platform Ltd
1. Those instructing us, Messrs A. Williams & Co., act for Populous Platform Ltd (“Populous HK”), a company incorporated in Hong Kong. Populous HK intends to develop and operate an online peer-to-peer (“P2P”) platform (“Platform”) for auctioning invoices and matching the seller of an invoice with a buyer who will purchases the invoice at a discount to its face value. The sale and purchase will be denominated in a type of blockchain-based tokens for the time being used only on the platform (called “Pokens”).
2. We have been asked to advise on whether the proposed business would run in breach of applicable regulations. Instructing solicitors have very helpful referred us to the Money Lenders Ordinance (Cap. 163) (“MLO”) and the Securities and Futures Ordinance (Cap. 571) (“SFO”). We would add the Banking Ordinance (Cap. 155) (“BO”), the Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUMPO”), and the Payment Systems and Stored Value Facilities Ordinance (Cap. 584) (“PSSVFO”).
3. The issues as we can identify are essentially whether Populous HK through the Platform would be:
(1) Engaging in a loan business which requires licensing under the BO or the MLO?
(2) Engaging in a securities business which requires licensing under the SFO?
(3) Offering to the public securities, collective investment schemes or regulated investment agreements which require registration under the SFO and the CWUMPO?
(4) Operating a stored value facility which requires licensing under the PSSVFP?
4. On the basis and for the reasons to be explained below, we are of the view that Populous HK in operating the Platform:
(1) Would not be engaging in a loan business and would not require a license under the BO or the MLO;
(2) (a) Would not be engaging in a securities business and would not require a license under the SFO;
(b) But this is subject to care being taken to avoid rendering any credit ratings/ rankings/ scorings/ opinions on the sellers or on the invoices;
(3) Would not be offering to the public securities, collective investment schemes, or regulated investment agreements and would not require registration under the SFO and the CWUMPO;
(4) Would be operating stored value facility and would require a license under the PSSVFO.
5. We also offer some thoughts towards the end of this Joint Advice on some alternatives for seeking to avoid the proposed business from being a stored value facility and requiring a license under the PSSVFO.
B. The Proposed Business
6. Populous HK is a newly incorporated company. It is related to Populous World Ltd (“Populous UK”). Populous UK is about to launch a platform similar to the proposed Platform. The 2 platforms would, be for different invoices and uses different tokens. As we are told, the Platform would be for invoices in Hong Kong dollars from Hong Kong sellers.
7. We have obtained our understanding of the proposed business model of the Platform partly by reference to an Advice by Ms. Lucy Walker to Populous UK dated 10 November 2017. As noted above, the Platform in Hong Kong would not be identical to that in the UK. Moreover, in some places in her Advice Ms. Walker mentions matters which we have further clarified with those instructing us and the lay client.
8. For the sake of completeness, we set out our entire understanding and basis for our opinion below.
9. Populous HK proposes to develop and operate the Platform as an auction site to match sellers of invoices with buyers. Both sellers and buyers will be pre-qualified by Populous before registration with and admission to the Platform. Sellers must be limited companies and will be subject to checks by Populous HK using a standard debt-equity formula based on financial analysis ratios. Buyers must be natural persons.
10. Populous HK will perform some anti-money laundering checks and some due diligence on both sellers and buyers. It will also have some anti-fraud measures. (We have not been instructed what these checks and measures will be and do not express any opinion in relation thereto.)
11. Both buyers and sellers will have accounts with the Platform. The accounts hold Pokens.
12. Pokens can be purchased from and sold back to Populous HK with/for fiat currency at a fixed or at least relatively stable exchange rate. It will also be available on some internet sites where blockchain-based tokens are traded.
13. As noted earlier, the sale and purchase of invoices on the Platform will be denominated in Pokens. A seller will offer an invoice for sale by auction. Buyers will place bids to purchase the invoice, in effect, at a discount to its face value.
14. Upon successful completion of the auction, a transaction will be concluded and a contract automatically entered into between the seller and the highest bidder as buyer. The invoice will be sold – in legal terms, assigned – to the buyer. The Platform will debit the units of Pokens from the buyer’s account and credit the same, minus a charge or commission, to the seller’s account.
15. The seller will no longer have any beneficial interest in the invoice. It will be and only be an agent for the buyer in chasing the customer of the invoice to pay the invoice. (We have not been instructed as to the legal mechanisms and other terms of the contract and proceed on assumption of its efficacy.)
16. What will happen, in short, is a form of factoring. The seller will assign the invoice as a receivable to the buyer as the factor. Our instructions do not mention whether the customer to the invoice will be notified. But since the seller is said to be only an agent for chasing the payment, and noting that Ms. Walker refers in her Advice to the “title” in the invoice passing to the buyer, we take it that the customer will be notified of the assignment, and the process of factoring will be completed.
C. The Issues
17. As we have noted earlier, the regulatory issues arising from this proposed business model are essentially fourfold, concerning whether Populous HK through the Platform would be regarded as:
(1) Engaging in a loan business which requires licensing under the BO or the MLO (the “Loan Business Issue”)?
(2) Engaging in a securities business which requires licensing under the SFO (the “Securities Business Issue”)?
(3) Offering to the public securities, collective investment schemes or regulated investment agreements which require registration under the SFO and the CWUMPO (the “Offering Issue”)?
(4) Operating a stored value facility which requires licensing under the PSSVFP (the “Stored Value Issue”)?
18. These issues can be approached in 2 ways. First is an analysis by reference to the nature of the transactions, viz., sale and purchase of invoices. Second is a consideration of the services which the Platform will provide.
19. The first approach will answer the Loan Business Issue and the Offering Issue, and part of the Securities Business Issue. The second approach will address the Stored Value Issue and another part of the Securities Business Issue.
20. For the sake of completeness, we should note that in this Joint Advice we will not be commenting on:
(1) The legal liabilities and risks as among Populous HK, the sellers, the buyers, and the debtors of the invoices;
(2) The regulatory issues associated with any offering, sale or exchange of Pokens or any related tokens outside of the Platform;
(3) The application or implications of anti-money laundering and crime-prevention laws including the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Cap. 615), the Drug Trafficking (Recovery of Proceeds) Ordinance (Cap.405); the Organised and Serious Crimes Ordinance (Cap.455); and United Nations (Anti-Terrorism Measures) Ordinance (Cap.575).
21. To analyse these issues would require substantial further information and is simply beyond the practicable scope of the present exercise.
D. Nature of Transactions
22. The sale and purchase of an invoice on the Platform, as we have noted, is to be a form of factoring. The nature of the transaction is an assignment of a receivable. The contractual right to receive a sum of money is a chose in action, capable of legal and equitable assignment. See: Tailby v Official Receiver (1888) 13 App Cas 523, at 543.
23. The assignment of a chose in action will be a legal assignment if it satisfied the requirements in s9 of the Law Amendment and Reform (Consolidation) Ordinance (Cap. 23) (“LARCO”). An assignment by writing under the hand of the assignor, with express notice in writing to the debtor, will have the effect of passing the legal right, all legal and other remedies, and the power of discharge to the assignee.
24. The assignment will be a valid equitable assignment if it is clear from the parties’ agreement that they intend the right to be assigned. See: Secretary for Justice v Global Merchant Funding Ltd  19 HKCFAR 192, at §§46-47.
25. Whether the assignment is legal or equitable, the assignee takes his interest subject to pre-existing rights and equities. See: Roxburghe v Cox (1881) 17 Ch D 520. In particular, if the debtor can set aside the transaction as between him and the creditor-assignor or otherwise challenge or set off the debt, he has the same rights against the assignee. See: Snell’s Equity, 33rd ed., at 3-024 to 3-028; Goode on Commercial Law, 5th ed., at 29.28.
26. As we noted earlier, we have not been asked to consider and therefore here assume the efficacy of the smart contract to be concluded on the Platform. We would suggest that care be taken to ensure that the contract achieves a valid assignment under the legal principles as summarized above. For our present purposes, we have set out the nature of an assignment because of its implications on the Loan Business Issue, the Securities Business Issue, and the Offering Issue.
E. The Loan Business Issue
27. S2(1) of the MLO defines “loan” and “money lender” in terms as follows:
“‘loan’ includes advance, discount, money paid for or on account of or on behalf of or at the request of any person or the forbearance to require payment of money owing on any account whatsoever, and every agreement (whatever its terms or form may be) which is in substance or effect a loan of money, and also an agreement to secure the repayment of any such loan, and ‘lend’ and ‘lender’ shall be construed accordingly;”
“‘money lender’ means every person whose business (whether or not he carries on any other business) is that of making loans or who advertises or announces himself out as carrying on that business …”
28. S7 of the MLO requires any person who carries on a business as a money lender to obtain a license. SS18, 19, 21, 22, 26, and 27 regulate the conduct of such a business. SS29-32 create various offences for noncompliance.
29. S2(1)(a) of the BO defines “deposit” by reference to the concept of “loan” in terms as follows:
“[deposit means] a loan of money (i) at interest, at no interest or at negative interest; or (ii) repayable at a premium or repayable with any consideration in money or money’s worth …”
30. S12 then prohibits the business of taking deposits except by an authorized institution, i.e., a licenced bank.
31. The Courts have consistently taken a restrictive view of what constituted money lending. The definition of “loan” is meant for what bears the legal substance and effect of a loan, and not any agreement with such economic or commercial effect. See: Global Merchant Funding, at §21.
32. A purchase of an amount of a merchant’s future credit card receivables – not even present existing receivables – is a form of financing and may have some economic effect like a loan. But it is not a loan in legal substance. Furthermore, the assignment of receivables is not giving security for a loan; there is no question of the merchant-assignor obtaining back the property from the purchaser-assignee. See: Global Merchant Funding, at §21.
33. It follows that a sale and purchase of an invoice on the Platform, although a form of financing to the seller, will not be a loan. The proposed business of the Platform will not be “money lending” or “taking of deposits” which require licensing under the MLO or the BO.
34. As a matter of extra prudence, Populous HK would do well to refrain from using words such as “loan”, “advance”, “interest” and “security” in/on its documents and website. See: Goode on Commercial Law, at 29.19. This would help avoid unnecessary argument.
F. The Securities Business Issue
35. Schedule 5 of the SFO sets out 13 types of activity as subject to regulation. S114 then prohibits any person from engaging in each type of activity as a business without a license.
36. Of the 13 types of activity, 5 may conceivably apply to the Platform. They are:
(1) “Type 1: dealing in securities”;
(2) “Type 4: advising on securities”;
(3) “Type 6: advising on corporate finance”, which is defined to mean, inter alia, the giving of advice “concerning any offer to dispose of securities to the public [or] any offer to acquire securities from the public …”
(4) “Type 7: providing automated trading services” for the trading of, inter alia, securities; and
(5) “Type 10: providing credit rating services”.
37. We will return to consider the Type 10 activity, i.e., providing credit rating services, later herein.
38. Applicability of the other 4 types of activity to the Platform all depends on whether the invoices constitute “securities”.
39. Schedule 1 of the SFO defines “securities” in terms as follows:
“‘securities’ means –
(a) shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority;
(b) rights, options or interests (whether described as units or otherwise) in, or in respect of, such shares, stocks, debentures, loan stocks, funds, bonds or notes;
(c) certificates of interest or participation in, temporary or interim certificates for, receipts for, or warrants to subscribe for or purchase, such shares, stocks, debentures, loan stocks, funds, bonds or notes;
(d) interests in any collective investment scheme;
(e) interests, rights or property, whether in the form of an instrument or otherwise, commonly known as securities;
(f) interests, rights or property which is interests, rights or property, or is of a class or description of interests, rights or property, prescribed by notice under section 392 of this Ordinance as being regarded as securities in accordance with the terms of the notice;
(g) a structured product …,
but does not include –
(i) shares or debentures of a company that is a private company within the meaning of section 11 of the Companies Ordinance (Cap. 622);
(ii) any interest in any collective investment scheme …;
(iii) any interest arising under a general partnership agreement or proposed general partnership agreement …
(iv) any negotiable receipt or other negotiable certificate or document evidencing the deposit of a sum of money, or any rights or interest arising under the receipt, certificate or document;
(v) any bill of exchange within the meaning of section 3 of the Bills of Exchange Ordinance (Cap 19) and any promissory note within the meaning of section 89 of that Ordinance;
(vi) any debenture that specifically provides that it is not negotiable or transferable …
(vii) interests, rights or property which is interests, rights or property, or is of a class or description of interests, rights or property, prescribed by notice under section 392 of this Ordinance as not being regarded as securities in accordance with the terms of the notice;”
40. This is a long definition. It is also a somewhat strange definition.
41. In essence, it refers to a host of instruments known to be securities: shares, stocks, debentures, loan stocks, funds, bonds, notes, collective investment schemes, and structured products. It clarifies that rights, options, interests, and certificates of interest of or participation in securities are themselves securities. It then provides for a catch-all that any other interests, rights or property commonly known as securities are also securities.
42. There has not been any notice under s392 of the SFO to deem or exclude anything into/from the definition.
43. By its terms, the definition essentially ties the ambit of “securities” to what the market and the community understand to be securities. As an eminent academic on securities law has approached the matter, one may look at the types of things readily identified as securities, then try to distil the common features as defining characteristics. See: Securities Law, Alastair Hudson, at 1-23 to 1-25.
44. Approached this way, one would quickly see that the common features of different types of securities are that they are self-defined bundle of rights, that they have a market value of their own, and that ownership in them are freely transferrable. See: Securities Law, at 1-23 and 1-24.
45. These features appear to underpin the EU definition (and hence present UK definition) of securities. Article 2(1)(a) of EU Directive 2003/71/EC and Article 1(4) of Directive 93/22/EEC together defines “securities” to mean:
“— shares in companies and other securities equivalent to shares in companies,
— bonds and other forms of securitized debt
which are negotiable on the capital markets and
— any other securities normally dealt in giving the right to acquire any such transferrable securities by subscription or exchange or giving rise to a cash settlement
excluding instruments of payment;”
46. The concept of “securitized debt” is instructive. This signifies that debt in itself is not a security. There has to be an additional legal transformation, namely securitization, which turn a debt into securities. It follows that an invoice, which is merely evidence of the right to a debt, is not a security.
47. The reference to securities being “negotiable” is also significant. Inherent in this is the point that a security should be a self-defined bundle of rights, so that when it is negotiated, the purchaser does not take subject to hidden rights and equities against the seller. After the negotiation, the seller is out of the picture.
48. This idea echos another common understanding about what are securities: securities are usually thought of as assets in themselves.
49. The sale and purchase of an invoice is, as we noted earlier, an assignment of a chose in action. The assignor takes the transfer subject to all hidden rights and equities. The assignee is never out of the picture. The debtor of the invoice can always assert the rights he has against the original creditor, e.g., when subsequently discovering defects in the goods which the creditor has supplied.
50. If any further legal authority is needed, the US judicial interpretation of the term may be helpful. S2(a)(1) of the Securities Act of 1933 and s3(a)(10) of the Exchange Act of 1934 define “securities” first by listing certain well recognized types of securities, then use a catch-all concept of “investment contract”.
51. This has led to the famous “Howey test”, as enunciated in the Supreme Court case SEC v W. J. Howey & Co. 328 US 298, at 301. The nub of the test is that a security represents an investment in a common enterprise with a reasonable expectation of gain to come solely from the efforts of others in the enterprise.
52. The sale and purchase of an invoice is as perhaps as far as one can get from an investment in any common enterprise. There is simply no commonality with other investors or any persons. On the contrary, each invoice must be unique because it relates to specific goods and potentially specific rights of the debtor to challenge or set off his liability to pay the invoice.
53. In short, invoices are very different from securities. It is difficult to think of a situation where they are said to be securities. We are of the view that they are not securities.
54. It follows that Populous HK through the Platform will not be engaging in Types 1, 4, 6, and 7 activities under the SFO and will not require a license for such regulated activities.
G. The Offering Issue
55. S103 of the SFO prohibits the offering of securities, collective investment schemes (“CIS”), and regulated investment agreements to the public or any segment of the public without authorization.
56. SS38, 38B, and 38D of the CWUMPO similarly prohibits the issue of any prospectus for offering securities to the public without registration.
57. For the reasons explained above, we are of the view that the invoices to be sold and purchased on the Platform are not securities.
58. They also are not CISs. The definition of CIS in the SFO is rather lengthy and complicated. In a nutshell, it catches schemes which have an element of collectivity, whether in the pooling or management of assets or in the sharing of profits. The invoices to be sold and purchased on the Platform clearly do not qualify.
59. Schedule 1 of the SFO defines “regulated investment agreement” to mean:
“an agreement the purpose or effect, or pretended purpose or effect, of which is to provide, whether conditionally or unconditionally, to any party to the agreement a profit, income or other returns calculated by reference to changes in the value of any property, but does not include an interest in a collective investment scheme;”
60. The agreement relevant to the proposed business model of the Platform is the contract for sale and purchase of an invoice. That agreement does not have as a purpose or effect to provide either party a profit, income or other returns calculated by reference to changes in the value of any property. It is not a regulated investment agreement.
61. It follows and we are of the view that Populous HK in facilitating the sale and purchase of invoices will not be offering securities, CISs or regulated investment agreements which requires authorization or registration under the SFO or the CWUMPO.
H. Services Provided
62. We turn to the second approach to analysing the proposed business model of the Platform – by considering the services to be provided.
63. There are essentially 3 services:
(1) Conducting an auction process to facilitate the sale and purchase of invoices;
(2) Performing some checks on the parties and the invoices, including a credit assessment of each seller; and
(3) Exchanging fiat currency into Pokens and vice versa, and the value of Pokens in each seller or buyer’s account.
64. The first service relates to the nature of the transactions, which is already discussed above. The second service could potentially become a Type 10 regulated activity under the SFO. The third service gives rise to an issue under the PSSVFO. We will analyse these in turn below.
I. Credit Rating Services
65. Schedule 1 of the SFO defines the Type 10 regulated activity of “providing credit rating services” and the term “credit ratings” as follows:
“‘providing credit rating services’ means –
(a) preparing credit ratings –
(i) for dissemination to the public …; or
(ii) with a reasonable expectation that they will be so disseminated; or
(b) preparing credit ratings –
(i) for distribution by subscription …; or
(ii) with a reasonable expectation that they will be so distributed …”
“‘credit ratings’ means opinions, expressed using a defined ranking system, primarily regarding the creditworthiness of –”
(a) a person other than an individual;
(b) debt securities;
(c) preferred securities; or
(d) an agreement to provide credit;”
66. Part of the checks which Populous HK will perform will be an assessment of the seller using a formula taking into account financial analysis ratios. As we understand it, this is a kind of assessment or maybe even scoring of each seller’s creditworthiness.
67. Depending on the details of what Populous HK will do and publish on the Platform, the formula used may constitute “a defined ranking system” and the resultant assessment may be an expression of opinion “using a defined ranking system” regarding creditworthiness of each seller. If so, Populous HK would be engaging in a Type 10 regulated activity which requires a license under the SFO.
68. There is sparse learning on what constitutes a “defined ranking system”. In Moody’s Investors Service Hong Kong Ltd v SFC, SFAT No. 4 of 2014, 31 March 2016, the Securities and Futures Appeals Tribunal found at §§83-101, that a simple “red flags” approach which assigned a numeric number of red flags to each company – apart from the credit ratings of the classic kind which the appellant had also assigned – was itself a “defined ranking system”.
69. On appeal, in Moody’s Investors Service Hong Kong Ltd v SFC  3 HKLRD 565, the Court of Appeal overturned the Tribunal’s finding at §§ 53-60 on the basis that the details of the “red flags” approach was primarily about corporate governance and not primarily about creditworthiness.
70. This case illustrates the risk that any systematic assessment of companies’ creditworthiness and publication/ dissemination of such assessment may be caught as “providing credit rating services”. Populous HK should take care not to publish or disseminate “scores” or assessments which could be viewed as “scores”.
71. Showing standard financial analysis ratios would be one thing. But feeding them into another formula to calculate a score would be quite another. The latter would be in danger of being regarded as providing credit ratings.
72. We urge Populous HK to be mindful of this.
J. Exchanging Pokens
73. We turn to the last topic for consideration. Populous HK wishes to accept fiat currency from prospective buyers and exchange them into Pokens with which the buyers can bid and purchase invoices on the Platform. Populous HK would also exchange the Pokens back into fiat currency at a relatively stable exchange rate.
74. As Ms. Walker pointed out in her Advice, this means Pokens would be a kind of “electronic money” in UK legal terms. The equivalent concept in Hong Kong law is that the Pokens would be a “stored value facility” under the PSSVFO.
75. The PSSVFO was recently amended to create a regulatory regime on stored value facilities (“SVF”).
76. S2A of the PSSVFO provides that:
“(1) … a facility is a stored value facility if –
(a) the facility may be used for storing the value of an amount of money that –
(i) is paid into the facility from time to time; and
(ii) may be stored on the facility under the rules of the facility; and
(b) the facility may be used for either or both of the following purposes –
(i) as a means of making payments for goods or services under an undertaking (whether express or implied) given by the issuer as specified in subsection (2);
(ii) as a means of making payments to another person (other than payments mentioned in subparagraph (i)) under an undertaking (whether express or implied) given by the issuer as specified in subsection (3).
(2) The undertaking for subsection (1)(b)(i) is an undertaking that, if the facility is used as a means of making payments for goods or services, the issuer, or a person procured by the issuer to accept such payments, will accept the payments up to the amount of the stored value that is available for use under the rules of the facility.
(3) The undertaking for subsection (1)(b)(ii) is an undertaking that, if the facility is used as a means of making payments to another person (recipient) (other than payments mentioned in subsection(1)(b)(i)), the issuer, or a person procured by the issuer to make such payments, will make the payments to the recipient up to the amount of the stored value that is available for use under the rules of the facility.
(4) A facility is not a stored value facility … if it is a single-purpose stored value facility.
(5) In this section –
issuer, in relation to a facility, means the person who issues the facility;
rules, in relation to a facility, means the rules or terms that govern the operation, use or functioning of the facility;
single-purpose stored value facility means a facility –
(a) that may be used for the purpose mentioned in subsection (1)(a); and
(b) in respect of which the issuer –
(i) gives an undertaking that, if the facility is used as a means of making payments for goods or services (not being money or money’s worth) provided by the issuer, the issuer will provide the goods or services under the rules of the facility; and
(ii) does not give any other undertaking that falls within the description of subsection (2) or (3);
stored value, in relation to a facility, means the value stored on the facility as mentioned in subsection (1)(a).
(6) For the purposes of this section –
(a) a facility may be in physical or electronic form, but does not include cash;
(b) a reference to money is a reference to –
(i) money in any currency; or
(ii) any declared medium of exchange; and
(c) except in subsection (5), a reference to goods or services includes money or money’s worth.”
(bold in the original; underlining added)
77. Since Pokens can be readily exchanged (including by Populous HK) from/ back into fiat currency, it “may be used for storing the value of an amount of money”. It is used “as a means of making payments to another person [i.e., the seller of an invoice] under an undertaking … given by the issuer [i.e., Populous HK, which will credit the Pokens to the seller’s account]”.
78. It follows that the Pokens will be a SVF. Part 2A of the PSSVFO contains a host of requirements including for the issuer of the Pokens, i.e., Populous HK, to be licensed, to be well capitalized, and to be properly managed etc. There are also provisions on adequate support for the float and disclosure of information.
79. For Populous UK and its proposed business in the UK, Ms. Walker pointed to an exception under UK law for electronic money which is used only in a “limited network”. But Ms. Walker also warned that there are a number of potentialities where the exception would not or would cease to apply for Populous UK.
80. A similar exception under Hong Kong law may be that for “single-purpose stored value facility” (“SPSVF”). But s2A of the PSSVFO, quoted above, limits SFSVF to facilities used “as a means of making payments for goods or services … provided by the issuer” and only if the issuer undertakes to “provide the goods or services” (underlining added). This will not be so for Populous HK and the Platform, where the payments by Pokens will be to parties other than the issuer of Pokens, i.e., to the sellers of invoices.
81. S8ZZZB and Schedule 8 provide for some other exceptions. For example, s4 of Schedule 8 excepts “stored value facilities used within limited group of goods and services providers”. This provision states:
“(1) Subject to subsection (2), a stored value facility is one specified for the purposes of section 8ZZZB [i.e., exempted from regulation] if –
(a) it may be used as a means of making payments only for goods or services provided by –
(i) the issuer; and
(ii) a person who provides the goods or services under an agreement with the issuer; and
(b) it may be so used within only any of the premises occupied by the issuer.
(2) The stored value facility is not one so specified if –
(a) the amount of the float of the facility exceeds $1000000 or its equivalent; or
(b) the issuer issues more than one such facility, the aggregate amount of the float of those facilities exceeds $1000000 or its equivalent.”
82. This exception seems to be close to the “limited network” exception which Ms. Walker referred to under UK law. We have considered carefully how this may apply to Populous HK. We confess to have serious doubts, for at least 3 reasons.
83. First, the exception only applies to “payments … for goods and services”. Invoices are not goods and services. We note that s2A(6) of the PSSVFO defines “goods and services” to include “money and money’s worth”. But we are not at all confident that an invoice can count as money or money’s worth. (Incidentally, we see from Ms. Walker’s Advice that the exception under UK law also refers to “goods or services”. We would be interested to know whether Ms. Walker has identified a way to overcome this issue.)
84. Second, the exception is limited to usage “within only any of the premises occupied by the issuer”. It may be arguable that the Platform is a premise occupier by the issuer. We have to wonder whether the statutory reference is meant for physical premises and whether it applies to virtual premises. We are unable to find any reliable guidance on this issue.
85. Third, the exception caps the “float” at HK$1 million. S2 of the PSSVFPO defines “float” to mean “the stored value remaining on the facility”. This cap seems to us low and may not be meaningful to the proposed business of Populous HK and the Platform.
86. We are driven to the view that if Populous HK develops and operates the Platform on the presently proposed business model, it would be issuing a stored value facility and would require a license under the PSSVFO.
K. Some Thoughts on Alternatives
87. We have given some thought to potential alternatives. For completeness, we set them out below.
88. Ms. Walker briefly touched upon an alternative view that the seller of an invoice is not really accepting Pokens, but actually accepting the amount of fiat currency which the Pokens can be turned back into. It is not clear whether Ms. Walker meant that the Pokens would then not be electronic money subject to regulation.
89. In any case, under Hong Kong law, whether the payees are paid in units of currency or units of exchange is immaterial. The PSSVFO catches facilities which may be used to store value and make payments. What is important is that Populous HK through the Platform would accept money from the buyers and store that value in the form of Pokens in their accounts.
90. Those instructing us referred to the perspective of seeing the exchange of Pokens from/to fiat currency as an outright sale of tokens and not a deposit of money with the facility. Again, whether the exchange is a legally a sale (with a promise to repurchase) or a deposit (with an obligation to repay) is not at issue. What is important is that value is being stored.
91. A possibility was mentioned that Populous HK may (somehow) purchases the invoices from the sellers and act as the party which sells to the buyers. The hope was to enable it to take advantage of the SPSVF exception. But that exception, like that in s4 of Schedule 8, also only applies to payments for “goods or services”. Thus, for the same reasons, we do not think the exception applies.
92. Another possibility was raised that another entity, not Populous HK, could be the one to exchange Pokens from/to fiat currency. This, of course, begs the question of whether that entity and Populous HK should be treated as a single enterprise. Moreover, it just “transfers” the problem to that other entity, which would be regarded as issuing an SVF which requires a license under the PSSVFO.
93. Fundamentally, to stay outside the PSSVFO would require modifying the business model to avoid storing value by way of Pokens. We can think of 2 possibilities.
94. First, if there is no implicit or explicit promise by anyone to exchange the Pokens back into fiat currency, there is no storing of value. Pokens will be like gold bars or Bitcoins. Legally more importantly, when Populous HK through the Platform credits Pokens to a seller, such will not be a “payment to the recipient up to the amount of the stored value that is available for use under the rules of the facility” (underlining added). The definition of SVF will not be fulfilled. The PSSVFO will not apply.
95. Second, we have searched the internet for other online platforms in Hong Kong for factoring invoices, and to see how they operate. As far as we are able to tell, they do not deal in tokens or other units of exchange, and do not accept money in advance. It appears that they operate somewhat like traditional auction houses; they pre-qualify prospective buyers, allow each to bid up to an amount, and leave inherent a risk that a successful bidder may fail to complete.
96. We are not business experts, let alone innovative entrepreneurs. We offer the above thoughts not knowing whether they would fit the basic business case of Populous HK and the Platform. If those instructing us or the client can think of other possibilities in the light of our explanations of the legal issues above, we shall be glad to discuss.
Dated  February 2018.