As filed with the U.S. Securities and Exchange Commission on September 28, 2022.
Registration No. 333-253342
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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to
FORM -1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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(Exact Name of Registrant as Specified in Its Charter)
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Not Applicable
(Translation of Registrant’s Name into English)
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| | 6211 | Not Applicable | ||
| (State or Other Jurisdiction of | (Primary Standard Industrial | (IRS Employer |
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
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c/o
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
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Copies to:
Lawrence Venick, Esq.
Loeb & Loeb LLP
2206-19 Jardine House
1 Connaught Place, Central
Hong Kong SAR
Tel: +852.3923.1111
Fax: +852.3923.1100
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Approximate date of commencement of proposed sale to the public: as soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, 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 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 Securities and Exchange Commission, acting pursuant to such Section 8(a), may determine.
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† 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 information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the 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 jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED SEPTEMBER 28, 2022
PROSPECTUS
LION GROUP HOLDING LTD.
12,288,980 AMERICAN DEPOSITARY SHARES REPRESENTING
CLASS A ORDINARY SHARES
This prospectus relates to the partial resale from time to time of up to an aggregate of 12,288,980 Class A Ordinary Shares, represented by American Depositary Shares (“ADS”) (par value $0.0001 per share, of Lion Group Holding Ltd. (“Lion,” the “Company,” “we,” “our,” or “us”), including (i) 4,744,490 ADSs issuable upon exercise of a one-year warrant (the “Series E Warrant”) to purchase ADSs, (ii) 2,800,000 ADSs issuable upon exercise of a five-year warrant (the “Series D Warrant”) to purchase ADSs, and (iii) 4,744,490 ADSs issuable upon exercise of a five-year warrant (the “Series F Warrant”) to purchase ADSs (collectively, referred to as the “2021 Registrable Warrants”). The 2021 February Warrants were issued to ATW Opportunities Master Fund, L.P. (the “selling shareholder”) in connection with a private placement, completed on February 18, 2021 (the “February Private Placement”). We are registering for a partial resale the ADSs issuable upon exercise of the 2021 Registrable Warrants pursuant to the securities purchase agreement (the “Securities Purchase Agreement”) that we entered into with the selling shareholder as of February 15, 2021.
The Series E Warrant has a one-year term and is immediately exercisable at an exercise price of $3.00 per ADS, each exercise of which entitles the Series E Warrant holder to receive one ADS and a 8% cash discount. The Series D Warrant is exercisable until on or prior to 5:00 p.m. (New York City time) on the five year anniversary of the closing date of the February Private Placement at an exercise price of $3.00 per ADS. The Series F Warrant has a five-year term and is immediately exercisable at an exercise price of $3.00 per ADS, but the exercisability of which shall vest ratably from time to time in proportion to the exercise of the Series E Warrants by the holder of the Series E Warrant. The 2021 February Warrants include an adjustment provision in the event of a Share Combination Event (as defined below) that reduces to exercise price of such warrants to the Market Price on the sixteenth (16th) trading day following the Share Combination Event. Additionally, if we issue ordinary shares or ordinary share equivalents for an effective price less than $3.00, subject to adjustment, then the exercise price shall be adjusted to such lower price and the number of ADSs issuable upon exercise of the 2021 February Warrants shall be adjusted proportionally to maintain the aggregate exercise price of the 2021 February Warrants. According to the Securities Purchase Agreement dated December 13, 2021, between the Company and the selling shareholder, the selling shareholder agreed to waive such the “full ratchet” anti-dilution provision in the Series A Convertible Preferred Stock and the Series D, Series E, and Series F American Depositary Shares Purchase Warrants issued on February 18, 2021, which would reduce the respective conversion price or exercise prices to the effective price at which any future securities are sold and both parties agreed to set the exercise prices as follows: (i) the exercise price of the Series D Warrants is adjusted to $2.50; (ii) the exercise price of the Series E Warrants is adjusted to $2.00; and (iii) the exercise price of the Series F Warrants is adjusted to $2.50.
The selling shareholder may offer, sell or distribute all or a portion of the securities registered hereby publicly or through private transactions at prevailing market prices or at negotiated prices. The selling shareholder may retain underwriters, dealers or agents from time to time. See “Plan of Distribution” for more information about how the selling shareholder may sell the ADSs being registered pursuant to this prospectus.
As of the date of this prospectus, our ADSs and our 2019 Warrants are listed on the NASDAQ under the symbols “LGHL” and “LGHLW”, respectively. On May 11, 2022, the closing trading prices of our ADSs and our 2019 Warrants were $0.94 and $0.09, respectively.
The offering price of the ADS will be determined between the selling shareholder and us at the time of pricing, considering our historical performance and capital structure, prevailing market conditions, and overall assessment of our business, and may be at a discount to the current market price. Therefore, the recent market price used throughout this prospectus may not be indicative of the actual public offering price for our ADSs and the warrants.
Our ADSs each represent one of our Class A Ordinary Shares. Our ordinary shares consist of Class A Ordinary Shares and Class B Ordinary Shares. In respect of matters requiring the votes of shareholders, holders of Class A Ordinary Shares are entitled to one vote per share, while holders of Class B Ordinary Shares are entitled to twenty five votes per share based on our dual-class share structure. Each Class B ordinary share is convertible into one Class A ordinary share at any time by the holder thereof, while Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. Upon any transfer of Class B Ordinary Shares by a holder thereof to any person or entity which is not an affiliate of such holder, such Class B Ordinary Shares shall be automatically and immediately converted into the equal number of Class A Ordinary Shares. See “Description of Share Capital.”
Lion Group Holding Ltd is incorporated in Cayman Islands. As a holding company, we may rely on dividends and other distributions on equity paid by our subsidiaries in Hong Kong and the Cayman Islands for our cash and financing requirements. If any of our subsidiaries incurs debt on its own behalf in the future, the instruments governing such debt may restrict their ability to pay dividends to us. We did not pay any dividends to our shareholders for the year ended December 31, 2021. On December 5, 2019 and December 31, 2019, we declared dividends of US$2.6 million and US$2.4 million, respectively, to the then sole shareholder, which were utilized to reduce the amount due from shareholder by US$4.6 million to nil, resulting in dividends payable of US$0.4 million included in the consolidated balance sheet as of December 31, 2019. In 2020, dividends paid to the individual shareholder were US$386,000. For the fiscal year ended December 31, 2021, we did not pay any dividends to our shareholders. Our subsidiaries received an aggregate transfer of $2,150,000 and $28,302,204 for the period from June 16, 2020 to December 31, 2020 and for the year ended December 31, 2021, respectively, from the Company to fund their business operations. Our Company received an aggregate transfer of nil and $4,835,117 for the period from June 16, 2020 to December 31, 2020 and for the year ended December 31, 2021, respectively, from its subsidiaries. In the future, any cash proceeds raised from overseas financing activities, including this offering, may be transferred by us to our subsidiaries via capital contribution or shareholder loans, as the case may be. For a detailed description of the transfers from the Company to its subsidiaries and from its subsidiaries to the Company, see “Transfers of Cash to and from Our Subsidiaries” in the Summary of the Prospectus section and condensed consolidated schedule and consolidated financial statements starting from page F-1 of this prospectus. As a holding company with no material operations of our own, we conduct our substantial operations through our subsidiaries in Hong Kong and the Cayman Islands and our apps are available to download in the app stores of China and most of our users are PRC citizens, which may subject us to certain laws and regulations in China. As such, the Chinese government may exercise significant oversight and discretion over the conduct of our business and may intervene in or influence our operations at any time. Such governmental actions:
• could result in a material change in our operations;
• could hinder our ability to continue to offer securities to investors; and
• may cause the value of our ADSs to significantly decline or be worthless.
Currently, we are not aware there are any material restrictions on foreign exchange, the ability to transfer cash between our entities, or the ability to distribute earnings to investors outside of China. Further, we are aware that recently, the Chinese government recently initiated a series of regulatory actions and statements to regulate business operations 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 entity variable interest entity (“VIE”) structure, adopting new measures to extend the scope of cybersecurity reviews, and expanding the efforts in anti-monopoly enforcement. Since these statements and regulatory actions are new, it is highly uncertain how soon 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, and the potential impact such modified or new laws and regulations will have on the Company’s business operations in China, the ability to accept foreign investments and list on an U.S. or other foreign exchange. Any future action by the Chinese government expanding the categories of industries and companies whose foreign securities offerings are subject to government review could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and could cause the value of such securities to significantly decline or be worthless. For a detailed description of the risks related to doing business in the PRC, and the offering, see “Risks Related to Doing Business in Jurisdictions We Operate” and “Risks Related to our ADSs, our Securities and this Offering” in the Risk Factors section.
On December 16, 2021, the United States Public Company Accounting Oversight Board, or 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. Our auditor, UHY LLP, headquartered in New York, NY, is an independent registered public accounting firm with the PCAOB and has been inspected by the PCAOB on a regular basis. The PCAOB currently has access to inspect the working papers of our auditor. Our auditor is not headquartered in China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination. On August 26, 2022, the China Securities Regulatory Commission, or CSRC, the Ministry of Finance of the PRC, and PCAOB signed a Statement of Protocol, or the Protocol, governing inspections and investigations of audit firms based in China and Hong Kong. Pursuant to the Protocol, the PCAOB has independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist whether this new framework will be fully complied with.
Investing in our securities is highly speculative and involves a high degree of risk. See “Risk Factors” section beginning on page 19 of this prospectus for a discussion of information that should be considered in connection with an investment in our securities and in the documents incorporated by reference into this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued under this prospectus or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The date of this prospectus is September [•], 2022.
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F-1 |
You should rely only on information contained in this prospectus. We have not, and the selling shareholder have not, authorized anyone to provide you with additional information or information different from that contained in this prospectus. Neither the delivery of this prospectus nor the sale of our securities means that the information contained in this prospectus is correct after the date of this prospectus. This prospectus is not an offer to sell or the solicitation of an offer to buy our securities in any circumstances under which the offer or solicitation is unlawful or in any state or other jurisdiction where the offer is not permitted.
The information in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since those dates.
No person is authorized in connection with this prospectus to give any information or to make any representations about us, the securities offered hereby or any matter discussed in this prospectus, other than the information and representations contained in this prospectus. If any other information or representation is given or made, such information or representation may not be relied upon as having been authorized by us.
Neither we nor the selling shareholder have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourself about, and to observe any restrictions relating to, this offering and the distribution of this prospectus.
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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for our business. Specifically, forward-looking statements may include statements relating to:
• changes in the market for our products and services;
• our ability to access additional capital;
• our ability to attract and retain qualified personnel;
• changes in general economic, business and industry conditions;
• changes in applicable laws or regulations;
• expansion plans and opportunities;
• the ongoing coronavirus (“COVID-19”) pandemic;
• the timing and success of new services, features, and offerings we introduce through our trading platform, including our recently launched NFT platform;
• other risks and uncertainties indicated in this prospectus, including those set forth under the section entitled “Risk Factors”; and
• other statements preceded by, followed by or that include the words “estimate,” “plan,” “project,” “forecast,” “intend,” “expect,” “anticipate,” “believe,” “seek,” “target” or similar expressions.
These forward-looking statements are based on information available as of the date of this prospectus, and current expectations, forecasts and assumptions, and involve a number of judgments, risks and uncertainties. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date, we do not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
As a result of a number of known and unknown risks and uncertainties, our actual results or performance may be materially different from those expressed or implied by these forward-looking statements. For a discussion of the risks involved in our business and investing in our securities, see “Risk Factors.”
Should one or more of these risks or uncertainties materialize, or should any of the underlying assumptions prove incorrect, actual results may vary in material respects from those expressed or implied by these forward-looking statements. You should not place undue reliance on these forward-looking statements.
ii
SUMMARY OF THE PROSPECTUS
This summary highlights selected information from this prospectus and may not contain all of the information that is important to you in making an investment decision. Before investing in our securities, you should carefully read this entire prospectus, including our consolidated financial statements and the related notes included in this prospectus and the information set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” See also the section entitled “Where You Can Find More Information.”
Prior to the Business Combination, we owned no material assets and did not operate any business. Upon the consummation of the Business Combination, we became the ultimate parent company of Lion Financial Group Limited (“Lion”) and all of our business will be conducted through Lion and its subsidiaries. Unless otherwise indicated or the context otherwise requires, references in this prospectus to “we,” “our” “us” and other similar terms refer to Lion Group Holding Ltd. and its consolidated subsidiaries.
Overview
We are one of the few Chinese investor-focused trading platforms that offer a wide spectrum of products and services. Currently, our business lines include our (i) CFD trading services, (ii) insurance brokerage services, (iii) futures and securities brokerage services, (iv) total return swap (TRS) trading business and (v) asset management services. We provide these services through our all-in-one Lion Brokers Pro app and a variety of other apps available on iOS, Android and PC platforms. Our clients are mostly well-educated and affluent Chinese investors residing both inside and outside the PRC (excluding the United States), as well as institutional clients in Hong Kong that use our futures trading service.
Our trading platform allows users to trade approximately 100 futures products on major futures exchanges worldwide (excluding the PRC), including the Chicago Mercantile Exchange (CME), Singapore Exchange (SGX), the Hong Kong Futures Exchange (HKFE) and Eurex Exchange (Eurex), as well as stocks listed on the New York Stock Exchange (NYSE), Nasdaq and Hong Kong Stock Exchange (HKSE), and PRC stocks listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) that are eligible for the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs (together, “Stock Connect”). In addition, our customers may also use our platform to trade various financial products, such as stock indices, commodities, futures, forex, ETFs, warrants and callable bull/bear contracts, on global exchanges or OTC markets.
Our financial performance increased significantly from 2018 to 2019, as our revenue increased from US$6.6 million to US$18.5 million, respectively. We generated income before income taxes of US$8.3 million in 2019 as compared to a loss before income taxes of US$2.7 million in 2018.
Our financial performance decreased significantly from 2019 to 2020, as our revenue decreased from US$18.5 million to US$10.2 million, respectively. We had a loss before income taxes of US$3.4 million in 2020 as compared to an income before income taxes of US$8.3 million in 2019.
Our financial performance increased significantly from 2020 to 2021, as our revenue increased from US$10.2 million to US$27.1 million, respectively. We had a loss before income taxes of US0.77 million in 2021 as compared to an loss before income taxes of US$2.6 million in 2020.
Our Strengths
We believe that the following strengths contribute to our success and differentiate us from our competitors:
• We are well positioned in a fast-growing trillion-dollar segment with substantial growth potential.
• We will be providing superior user experience to our clients through our industry-leading Internet platform.
• We offer a diversified product portfolio for trading in global financial markets.
• We have an experienced management team supported by industry talents.
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Our Strategies
We plan to implement the following strategies:
• Strengthen our leading position in key markets and expand our demographic and geographic coverages in new markets.
• Enhance technological infrastructure and cybersecurity.
• Drive product innovation and explore other complementary services.
• Attract and retain key talent.
Launch of NFT Marketplace
In January 2022, we launched our non-fungible token, or NFT, business through Flying Lion Limited, including (i) issuance of MetaWords character NFTs and MetaWords work NFTs (collectively, the “MetaWords NFTs”), and (ii) the establishment of our NFT trading platform, namely the Lion NFT platform (f/k/a/ Meta World). We created and minted the MetaWords NFTs by converting Xu Bing’s characters in his artwork Book from the Ground and sold MetaWords NFTs to the NFT collectors. MetaWords characters serve as the basic units of the MetaWords language system. MetaWords works are excerpts drawn from Mr. Xu’s artwork Book from the Ground. The sales were conducted through an online auction or blind boxes direct sell on the Lion NFT platform in January 2022. We sold in an aggregate of six MetaWords NFTs created by us by the auction in the amount of 197 wrapped Binance Coin, a cryptocurrency, and 2,742 blind-boxes which includes MetaWords NFTs at 0.40 Binance Coin, or BNB, per unit for a total amount of 749 BNB, net of the consideration paid to customers of 348 BNB in form of incentive credits. Total sales of character NFTs and blind boxes were approximately $438,000 USD at the spot token price upon the completion of the sale. In addition, we launched a MetaWords NFT creation tool, giving users the ability to create their own MetaWords NFTs. Once approved by the Lion NFT platform, the MetaWords NFT created by our users can be traded on the Lion NFT platform. The profits generated from the Lion NFT platform will be retained by Flying Lion Limited, a Cayman Islands company, one of our subsidiaries, as working capital. We conduct our NFT business through Flying Lion Limited. We hold 70% equity interest in Flying Lion Limited through Lion NFT Limited, a British Virgin Islands company, in which we hold 90% equity interest.
The users can resell the MetaWords NFTs to other users on the Lion NFT platform, or MetaWords Resale. For the MetaWords Resale conducted on the Lion NFT platform, we charge 5% of the purchase price as the authorization fee for Xu Bing’s artwork; 5% of the purchase price as the licensing fee for the author; and 2.5% of the purchase price as the transaction fee. Lion is the author for MetaWords NFTs. The commissions are collected in the form of BNB tokens when the users buy and sell MetaWords NFTs on the Lion NFT platform. As of the date of this prospectus, the fees abovementioned we are entitled to such MetaWords Resale were de minimis. We will charge 2.5% of the purchase price as the transaction fee and 5% of the purchase price as the authorization fee for Xu Bing’s artwork. The author of the MetaWords will be able to receive 5% of the purchase price as the licensing fee for future resale.
The February 2021 Private Placement
On February 18, 2021, we completed a private placement (the “February Private Placement”) of $7,000,000 stated value of the Series A Convertible Preferred Shares. Upon conversion of the Series A Convertible Preferred Shares at the initial conversion price of $3.00 per share, there will be 2,333,333 ADSs outstanding. Dividends on the Series A Convertible Preferred Shares offered hereby are cumulative and will be payable on quarterly on January 1, April 1, July 1 and October 1, beginning on the first such date after the six month anniversary of the closing date of the February Private Placement, when, as and if declared by our Board of Directors. Dividends will be payable out of amounts legally available therefor at a rate equal to 8.00% per annum. No dividend shall accrue hereunder within six (6) months of the closing date of the February Private Placement, regardless of whether the Registration Statement is effective or not. The Series A Convertible Preferred Shares will be credited as having accrued daily dividends since the date after six (6) months of the closing date of the February Private Placement. Any dividend payable on the Series A Convertible Preferred Shares will be computed on-the-basis-of a 360-day year consisting of twelve 30-day months. The Series A Preferred Shares are convertible at $3.00 per ADS at any time.
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The Series A Convertible Preferred Shares shall redeemable by us by an optional redemption notice to the selling shareholder at any time after effective date of this registration statement, so long as at such time the company meets customary equity conditions including the effectiveness of a registration statement registering all of the ADSs issuable upon conversion of the Series A Convertible Preferred Shares (“Conversion Shares”), there is no existing event of default and the ADSs continue to trade on the primary trading market, we may at our option call for redemption all or part of the Series A Convertible Preferred Shares, upon not more than 20 trading days written notice, for cash at a redemption price equal to $1,000.00 per share for a maximum of 7,000 shares, plus any accumulated and unpaid dividends, on the 90th trading day following the optional redemption notice.
Any stock splits, reverse splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events (“Share Combination Event”) will result in a customary adjustment of the conversion price of the Series A Convertible Preferred Shares. Additionally, the Series A Convertible Preferred Shares include an adjustment provision that, subject to certain exceptions, on the sixteenth (16th) trading day, following the Share Combination Event, if the 5 lowest daily volume weighted average prices (“VWAP”) during the twenty (20th) trading days immediately prior to the Share Combination Event (“Market Price”) is less than the then conversion price, then the conversion price of the Series A Convertible Preferred Shares will be reduced to equal to the Market Price. In addition to the foregoing, the conversion price of the Series A Convertible Preferred Shares also includes full ratchet anti-dilution in the event that the Company issues any ADSs or ordinary shares for a per share purchase price less than the then conversion price of the Series A Convertible Preferred Shares. In addition until the earlier of the date that shares of Series A Convertible Preferred Shares are no longer outstanding and the 90th calendar day after the effective date of this registration statement, the consent of a majority of the then outstanding Series A Convertible Preferred Shares holders will be required before we can (i) other than permitted indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including, but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom; (ii) other than permitted liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom; (iii) amend, alter, or repeal any provision of our charter documents, including, without limitation, certificate of incorporation or bylaws, in a manner adverse to the Series A Convertible Preferred Shares; (iv) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of ADSs, ordinary shares or ordinary shares equivalents other than as to (a) the Conversion Shares or the shares issuable upon exercise of the Series E Warrant as permitted or required under the related documents pursuant to the Securities Purchase Agreement and (b) repurchases of ADSs, ordinary shares or ordinary shares equivalents of departing officers and directors of the Company, provided that such repurchases shall not exceed an aggregate of $100,000 for all officers and directors during the term of the Series A Convertible Preferred Shares; (v) repay, repurchase or offer to repay, repurchase or otherwise acquire any indebtedness, other than the Series A Convertible Preferred Shares if on a pro-rata basis, other than regularly scheduled principal and interest payments as such terms are in effect as of the original issue date of the Series A Convertible Preferred Shares provided that such payments shall not be permitted if, at such time, or after giving effect to such payment, any event of default exist or occur; (vi) pay cash dividends or distributions on any equity securities of the Company; (vii) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing with the Securities and Exchange Commission (the “SEC”), unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); or (viii) enter into any agreement with respect to any of the above foregoing.
We also issued three series of the 2021 February Warrants which are exercisable for, in the aggregate, up to 28,999,999 ADSs. The Series E Warrant has a one-year term and is immediately exercisable at an exercise price of $3.00 per ADS, each exercise of which entitles the Series E Warrant holder to receive one ADS and a 8% cash discount. The Series D Warrant is exercisable until on or prior to 5:00 p.m. (New York City time) on the five year anniversary of the closing date of the February Private Placement at an exercise price of $3.00 per ADS. The Series F Warrant has a five-year term and is immediately exercisable at an exercise price of $3.00 per ADS, but the exercisability of which shall vest ratably from time to time in proportion to the exercise of the Series E Warrants by the holder of the Series E Warrant. Similar to the Series A Convertible Preferred Shares, the 2021 February Warrants include an adjustment provision in the event of a Share Combination Event (as defined above) that reduces to exercise price of such warrants to the Market Price on the sixteenth (16th) trading day following the Share Combination Event. Additionally, if we issue ordinary shares or ordinary share equivalents for an effective price less than $3.00, subject to adjustment, then the exercise price shall be adjusted to such lower price and the number of ADSs issuable upon exercise of the 2021 February Warrants shall be adjusted proportionally to maintain the aggregate exercise price of the 2021 February Warrants. According to
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the Securities Purchase Agreement dated December 13, 2021, between the Company and the selling shareholder, the selling shareholder agreed to waive such the “full ratchet” anti-dilution provision in the Series A Convertible Preferred Stock and the Series D, Series E, and Series F American Depositary Shares Purchase Warrants issued on February 18, 2021, which would reduce the respective conversion price or exercise prices to the effective price at which any future securities are sold and both parties agreed to set the conversion price and exercise prices as follows: (i) the conversion price of the Series A Preferred Stock is adjusted to the lower of $1.75 or 90% of the lowest daily volume-weighted average price in the last 10 trading days prior to conversion; (ii) the exercise price of the Series D Warrants is adjusted to $2.50; (iii) the exercise price of the Series E Warrants is adjusted to $2.00; and (iv) the exercise price of the Series F Warrants is adjusted to $2.50.
If at any time after 120 days following February 18, 2021, and prior to the respective expiration date of the Series D Warrant, the Series E Warrant and the Series F Warrant, the Company fails to maintain an effective registration statement with the SEC covering the resale of the ADSs underlying the Series A Convertible Preferred Shares and the 2021 February Warrants, the 2021 February Warrants may be exercised by means of a cashless exercise, subject to applicable law and the terms of the relevant deposit agreement governing the ADSs, until such time as there is an effective registration statement.
The Series A Convertible Preferred Shares and the 2021 February Warrants are subject to a “conversion blocker” such that each of the selling shareholder cannot convert the Series A Convertible Preferred Shares or exercise the 2021 February Warrants to the extent that the conversion or exercise would result in the selling shareholder and its affiliates holding more than 4.99% of the outstanding ordinary shares (which the selling shareholder can increase to 9.99% upon at least 61 days prior written notice to us). We have agreed to file a registration statement with the SEC registering for resale the number of ADSs equal to the stated value of the Series A Convertible Preferred Shares and the ADSs underlying the 2021 February Warrants.
The December 2021 Private Placement
On December 13, 2021, Lion Group Holding Ltd. entered into a Securities Purchase Agreement (the “Securities Purchase Agreement”) with ATW Opportunities Master Fund, L.P. (the “Purchaser”), pursuant to which the Company received net proceeds of $3,800,000 in consideration of the issuance of:
• Series B Convertible Preferred Shares (the “Series B Convertible Preferred Shares”) with a stated value of $4,000,000; and
• a 5-year warrant to purchase 2,285,715 American Depositary Shares (“ADS”) (the “Series G Warrant”) of the Company until on or prior to 5:00 p.m. (New York City time) on December 13, 2026 at an exercise price of $2.50 per ADS.
The transactions contemplated under the Securities Purchase Agreement closed on December 13, 2021. The Company intends to use the proceeds from the issuance of the Series B Convertible Preferred Shares and the Series G Warrant for working capital purposes.
The Series B Convertible Preferred Shares bears dividends at a rate of 8% per annum if paid in cash or 12% per annum if paid in ADSs, payable quarterly beginning on the first such date after the closing date, and is convertible into the ADSs, beginning after its original date of issuance at an initial conversion price of $1.75 per share or 90% of the lowest daily volume-weighted average price during the 10 consecutive trading days prior to the conversion date. Dividends are payable quarterly in cash, or the Company may pay accrued interest in its ADSs.
The Warrants contain provisions permitting cashless exercise subject to certain conditions. On the third anniversary of the original issue date, the Company shall redeem, at the option of the holder, all of the then outstanding Series B Convertible Preferred Stock, for an amount in cash equal to the sum of (a) 100% of the aggregate cash investment and (b) accrued but unpaid dividends due in respect of the Preferred Stock.
The Series B Convertible Preferred Shares and the Warrants contain conversion limitations providing that a holder thereof may not convert the Series B Convertible Preferred Shares or exercise the Warrants to the extent (but only to the extent) that, if after giving effect to such conversion or exercise, the holder or any of its affiliates would beneficially own in excess of 4.99% the ordinary shares immediately after giving effect to such conversion or exercise. A holder may increase or decrease its beneficial ownership limitation upon notice to the Company provided that in no event
4
such limitation exceeds 9.99%, and that any increase shall not be effective until the 61st day after such notice. The Series B Convertible Preferred Shares and Warrants contain a “full ratchet” anti-dilution provision which would reduce the respective conversion price or exercise price to the effective price at which any future securities are sold.
The Series A Convertible Preferred Stock and the Series D, Series E, and Series F American Depositary Shares Purchase Warrants issued on February 18, 2021 (collectively, the “February 2021 Securities”) contained a “full ratchet” anti-dilution provision which would reduce the respective conversion price or exercise prices to the effective price at which any future securities are sold (the “Provision”). As part consideration of entering into the Securities Purchase Agreement, the Purchaser agreed to waive such the Provision and set the conversion price and exercise prices as follows: (i) the conversion price of the Series A Preferred Stock will be adjusted to the lower of $1.75 or 90% of the lowest daily volume-weighted average price in the last 10 trading days prior to conversion; (ii) the exercise price of the Series D Warrants will be adjusted to $2.50; (iii) the exercise price of the Series E Warrants will be adjusted to $2.00; and (iv) the exercise price of the Series F Warrants will be adjusted to $2.50.
Risks Factors Summary
Our business is subject to a number of risks, including risks that may prevent us from achieving our business objectives or may materially and adversely affect our business, financial condition, results of operations, cash flows and prospects that you should consider before making a decision to invest in our ADSs. These risks are discussed more fully in “Risk Factors” beginning on page 19. These risks include, but are not limited to, the following:
Risks Related to Our Business and Industry
• We operate in a heavily regulated industry, and are subject to extensive and evolving regulatory requirements in the jurisdictions in which we operate.
• We had incurred net losses in the past, and we may incur losses again in the future.
• We may not be able to obtain or maintain all necessary licenses, permits and approvals and to make all necessary registrations and filings for our business activities in multiple jurisdictions and related to residents therein, especially in the PRC or otherwise relating to PRC residents.
• PRC governmental control of currency conversion, cross-border remittance and offshore investment could have a direct impact on the trading volume on our platform, and the PRC government could further tighten restrictions on converting Renminbi to foreign currencies and/or deems our practices to be in violation of PRC laws and regulations.
• We may be unable to retain existing clients or attract new clients, or we may fail to offer services to address the needs of our clients as they evolve.
• Our level of commission and fee rates may decline in the future. Any material reduction in our commission or fee rates could reduce our profitability.
• We cannot guarantee the profitability of our clients’ investments or ensure that our clients will make rational investment judgements.
• We may incur material trading losses from our market making activities.
• We are dependent on wholesale forex trading partners to continually provide us with forex market liquidity. If we lost access to the prices and levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which would materially adversely affect our CFD trading business, financial conditions and results of operations.
• Failure to comply with regulatory capital requirements set by local regulatory authorities could materially and negatively affect our business operation and overall performance.
• Our total return swap (TRS) trading services may not be successful, and we may not find adequate funding at reasonable costs to successfully operate our TRS trading business.
• We face risks related to insurance brokerage business.
• Our risk management policies and procedures may not be adequate and effective, which may expose us to unidentified or unexpected risks.
5
• Fluctuations in exchange rates could have a material adverse effect on our results of operations.
• We depend on the services of prime brokers and clearing agents to assist in providing us with access to liquidity in CFD trading. The loss of one or more of our prime brokerage relationships could lead to increased transaction costs and capital posting requirements, as well as having a negative impact on our ability to verify our open positions, collateral balances and trade confirmations.
• We rely on a number of external service providers for technology, processing and supporting functions, and if they fail to provide these services, it could adversely affect our business and harm our reputation.
• A failure in our information technology, or IT, systems could cause interruptions in our services, undermine the responsiveness of our services, disrupt our business, damage our reputation and cause losses.
• We may be subject to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions on us our external service providers.
• We may be liable for improper collection, use or appropriation of personal information provided by our customers.
• We may encounter potential conflicts of interest from time to time, and the failure to identify and address such conflicts of interest could adversely affect our business.
• We face intense competition, and if we do not compete effectively, our results of operations and business prospects may be adversely affected.
• We face risks related to our know-your-customer, or KYC procedures when our clients provide outdated, inaccurate, false or misleading information.
• Our clients may engage in fraudulent or illegal activities on our platform.
• User growth and activity on mobile devices depend upon effective use of mobile operating system, networks and standards, over which we do not have control.
• If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet reporting obligations or prevent fraud. As a result, holders of our securities could lose confidence in our financial and other public reporting, which would harm our business and trading price of our securities.
• A sustained outbreak of the COVID-19 pandemic could have a material adverse impact on our business, operating results and financial condition.
• Our business is sensitive to general economic and political conditions and other factors beyond our control, and our results of operation are prone to significant and unpredictable fluctuations.
• The current trade war between the U.S. and China may dampen growth in China and other markets where the majority of our clients reside.
Risk Related to Our Corporate Structure
• We may rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
Risks Related to Doing Business in Jurisdictions We Operate
• A downturn in the Hong Kong, China or global economy, and economic and political policies of China could materially and adversely affect our business and financial condition.
• The Hong Kong legal system embodies uncertainties which could limit the legal protections available to Lion.
• Hong Kong regulatory requirement of prior approval for transfer of shares in excess of certain threshold may restrict future takeovers and other transactions.
6
• Uncertainties with respect to the PRC legal system could adversely affect us.
• Changes in the policies, regulations, rules, and the enforcement of laws of the PRC government may be quick with little advance notice and could have a significant impact upon our ability to operate profitably in the PRC.
• The Chinese government may exercise significant oversight and discretion over the conduct of business in the PRC and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our securities.
• The PRC government may intervene or influence our business operations at any time or may exert more control over offerings conducted overseas and foreign investment in China based issuers, which could result in a material change in our business operations or the value of our securities. Additionally, the approval or other administration requirements of the CSRC, or other PRC governmental authorities, may be required in connection with this offering under a PRC regulation or any new laws, rules or regulations to be enacted, and if required, we cannot assure you that we will be able to obtain such approval. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.
Risks Related to our ADSs, our Securities and this Offering
• The price of our ADSs may be volatile.
• Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our ADSs.
• We may issue additional Class A Ordinary Shares or other equity securities, from time to time, without your approval, which would dilute your ownership interests and may depress the market price of our ADSs.
• Holders of our ADSs may not have the same voting rights as our registered shareholders and might not receive voting materials in time to be able to exercise their right to vote.
• The voting rights ADSs holders are limited by the terms of the deposit agreement, and ADSs holders may not be able to exercise rights to direct how the Class A Ordinary Shares represented by ADSs are voted.
• We and the depository are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement, and we may terminate the deposit agreement, without the prior consent of the ADS holders.
• ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
• An ADSs holder’s right to participate in any future rights offerings may be limited, which may cause dilution to such holder’s holdings.
• ADSs holders may be subject to limitations on transfer of their ADSs.
• ADSs holders might not receive distributions on our equity shares, or any value for them at all, if it is unlawful or impracticable for us to make them available to such holders.
• Our warrants are speculative in nature.
• Holders of our warrants will not have any rights of common shareholders until such warrants are exercised.
• The Series A Convertible Preferred Shares are subordinate to our existing and future debt, and your interests could be diluted by the issuance of additional preferred shares and by other transactions.
• The Series A Convertible Preferred Shares have not been rated.
• As a holder of the Series A Convertible Preferred Shares, you have no voting rights.
• Our cash available for distributions may not be sufficient to pay distributions on the Series A Convertible Preferred Shares at expected levels, and we cannot assure you of our ability to pay distributions in the future. We may use borrowed funds or funds from other sources to pay distributions, which may adversely impact our operations.
7
• We could be prevented from paying cash dividends on the Series A Convertible Preferred Shares due to prescribed legal requirements.
• We may redeem the Series A Convertible Preferred Shares and you may not receive dividends that you anticipate if we do redeem the Series A Convertible Preferred Shares.
• We may not be able to generate sufficient cash to service our obligations, including our obligations under the Series A Convertible Preferred Shares.
• We may incur additional indebtedness and obligations to pay dividends on preferred stock, some of which may be senior to the rights of the Series A Convertible Preferred Shares.
• Our ability to meet our obligations under the Series A Convertible Preferred Shares depends on the earnings and cash flows of our subsidiaries and the ability of our subsidiaries to pay dividends or advance or repay funds to us.
• We and/or our non-U.S. subsidiaries could be controlled foreign corporations, or CFCs, which could result in adverse U.S. federal income tax consequences.
• We may be a Passive Foreign Investment Company, which could result in adverse U.S. federal income tax consequences to U.S. investors.
• We may or may not pay cash dividends in the foreseeable future.
• We are a Cayman Islands exempted company and, because judicial precedent regarding the rights of shareholders is different under Cayman Islands law than under U.S. law, you could have less protection of your shareholder rights than you would under U.S. law.
• You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman Islands, because we conduct all of our operations in Hong Kong and the Cayman Islands and most of our directors and officers reside outside the United States.
• As a “foreign private issuer” under the rules and regulations of the SEC, we are permitted to, and will, file less or different information with the SEC than a company incorporated in the United States or otherwise subject to these rules, and will follow certain home-country corporate governance practices in lieu of certain Nasdaq requirements applicable to U.S. issuers.
• We are an “emerging growth company,” and any decision to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our securities less attractive to investors.
• We are a “controlled company” within the meaning of Nasdaq Stock Market LLC listing rules and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
• Our controlling shareholders have substantial influence over and our interests may not be aligned with the interests of our other shareholders.
• The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.
Transfers of Cash to and from Our Subsidiaries
Lion Group Holding Ltd. is incorporated in Cayman Islands on February 11, 2020, to be the ultimate parent company of the Group upon the consummation of a business combination on June 16, 2020. As a holding company with no material operations of our own, we conduct our substantial operations through our subsidiaries in Hong Kong and the Cayman Islands and our apps are available to download in the app stores of China and most of our users are PRC citizens, which may subject us to certain laws and regulations in China. Lion Group Holding Ltd is permitted under the laws of Cayman Islands to provide funding to our subsidiaries in Hong Kong and Cayman Islands through loans or capital contributions without restrictions on the amount of the funds. Lion Group Holding Ltd. can distribute earnings
8
from its businesses, including subsidiaries, to the U.S. investors. Our operations in Hong Kong and the Cayman Islands were in loss position since the second half of 2020, and the Company has raised capital through financing transactions and provided funding to our operations in Hong Kong and the Cayman Islands.
Our operating subsidiaries are permitted under the laws of Hong Kong, Cayman Islands, Singapore, and British Virgin Islands, respectively, to provide funding to Lion Group Holding Ltd, the holding company incorporated in the Cayman Islands through dividend distributions. Our Group currently intend to retain all available funds and future earnings, if any, for the operation and expansion of our business and do not anticipate declaring or paying any dividends in the foreseeable future. We currently do not have any dividend policy, any future determination 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.
Currently, we conduct our substantial operations through our subsidiaries in Hong Kong and the Cayman Islands. We have established Lion Group (Hangzhou) Investment Limited, our PRC subsidiary, holding through Lion Wealth Limited in May 2021. The PRC subsidiary was established solely for purpose of passive equity investment in China with no substantial business activities, which does not require contractual arrangements or variable interest entity, or VIE, to operate. Since 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, providing 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”. We are dependent on our customers in the PRC, the laws and regulations of the PRC currently have restrictions on currency conversion, cross-border remittance and offshore investment for PRC citizens. See “Risk Factors — Risks Related to Our Business and Industry — PRC governmental control of currency conversion, cross-border remittance and offshore investment could have a direct impact on the trading volume on our platform, and the PRC government could further tighten restrictions on converting Renminbi to foreign currencies and/or deems our practices to be in violation of PRC laws and regulations.” for more information on the risk of PRC governmental control of currency conversion, cross-border remittance and offshore investment with respect to our operations. However, the laws and regulations of the PRC do not currently have any material impact on transfer of cash from the Company to our Cayman Islands and Hong Kong subsidiaries to or from Cayman Islands and Hong Kong subsidiaries to the Company and the investors in the U.S. As a result, cash can be transferred freely between the Company and its operating subsidiaries, across borders, and to U.S. investors.
Subject to the Companies Act 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. There is no further Cayman Islands statutory restriction on the amount of funds which may be distributed by us in the form of dividends.
The following are the aggregate transfers from the Company to its subsidiaries for the period from June 16, 2020 to December 31, 2020 and for the year ended December 31, 2021:
|
|
From June 16 |
|
||||
|
Lion Broker Limited(1) |
$ |
1,260,000 |
$ |
19,513,433 |
||
|
Lion Futures Limited(2) |
$ |
— |
$ |
130,000 |
||
|
Lion International Securities Group Limited(3) |
$ |
— |
$ |
64,271 |
||
|
Lion Wealth Limited(4) |
$ |
470,000 |
$ |
4,096,171 |
||
|
BC Wealth Management Limited(5) |
$ |
— |
$ |
292,186 |
||
|
Lion International Financial (Singapore) Pte. Ltd.(6) |
$ |
— |
$ |
1,000,000 |
||
|
Lion Financial Group Limited(7) |
$ |
420,000 |
$ |
2,506,143 |
||
|
Lion Group North American Corp.(8) |
$ |
— |
$ |
700,000 |
||
|
Total |
$ |
2,150,000 |
$ |
28,302,204 |
||
____________
(1) Lion Broker Ltd was incorporated in under the laws of the Cayman Islands in March 2017.
(2) Lion Futures Limited was incorporated in Hong Kong in May 2016.
(3) Lion International Securities Group Limited was incorporated in under the laws of the Hong Kong in May 2016.
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(4) Lion Wealth Limited was incorporated in Hong Kong in October 2018.
(5) BC Wealth Management Limited was incorporated in Hong Kong in October 2014 and became a wholly owned subsidiary of the Group in May 2016.
(6) Lion International Financial (Singapore) Pte. Ltd. was incorporated in Singapore in July 2019.
(7) Lion Financial Group Limited was incorporated in the British Virgin Islands in June 2015.
(8) Lion Group North American Corp was incorporated under the laws of the State of Nevada in July 2018.
The following are the aggregate transfers from its subsidiaries to the Company for the period from June 16, 2020 to December 31, 2020 and for the year ended December 31, 2021:
|
|
From June 16 |
|
||||
|
Lion Broker Limited(1) |
$ |
— |
$ |
4,508,885 |
||
|
Lion Futures Limited(2) |
$ |
— |
$ |
130,000 |
||
|
Lion International Securities Group Limited(3) |
$ |
— |
$ |
64,271 |
||
|
Lion Wealth Limited(4) |
$ |
— |
$ |
50,000 |
||
|
BC Wealth Management Limited(5) |
$ |
— |
$ |
81,960 |
||
|
Total |
$ |
— |
$ |
4,835,116 |
||
____________
(1) Lion Broker Ltd was incorporated in under the laws of the Cayman Islands in March 2017.
(2) Lion Futures Limited was incorporated in Hong Kong in May 2016.
(3) Lion International Securities Group Limited was incorporated in under the laws of the Hong Kong in May 2016.
(4) Lion Wealth Limited was incorporated in Hong Kong in October 2018.
(5) BC Wealth Management Limited was incorporated in Hong Kong in October 2014 and became a wholly owned subsidiary of the Group in May 2016.
We did not pay any dividends to our shareholders in 2021. On December 5, 2019 and December 31, 2019, we declared dividends of US$2.6 million and US$2.4 million, respectively, to the then sole shareholder, which were utilized to reduce due from shareholder by US$4.6 million to nil, resulting in dividends payable of US$0.4 million included in the consolidated balance sheet as of December 31, 2019. In 2020, dividends paid to the individual shareholder were US$386,000. We are able to distribute earnings from our operating subsidiaries, to the parent company and U.S. investors and settle amounts owed, although we currently do not have any dividend policy. There were no dividends or distributions that a subsidiary made to the holding company during the period. If we determine to pay dividends on any of our ADSs in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries in Hong Kong and Cayman Islands. 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, and under the current laws of the Cayman Islands, we are also not subject to tax on income or capital gains and withholding tax is not imposed upon payments of dividends from the Company to its shareholders.
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 the Company and its subsidiaries, across borders and to investors outside of PRC, nor is there any restrictions and limitations to distribute earnings from the subsidiaries, to the Company and investors outside of PRC and amounts owed. There are no exchange controls in Cayman Islands.
See “Risk Factors — Risk Related to Our Corporate Structure — We may rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.” for more information.
PRC Limitation on Conducting Our Current Business and Overseas Listing and Share Issuances
Although the substantial operation of us is based in Singapore, Hong Kong and the Cayman Islands and all of the data and personal information we collected are stored in servers outside mainland China, we launched our apps in the app stores of China and most of our users are PRC citizens, which may subject us to certain laws and regulations in China. Recent cybersecurity regulations mandate clearance of cybersecurity review of internet platform operator holding personal information of more than one million users before applying for listing at a foreign stock exchange, and relevant
10
governmental authorities in the PRC may initiate cybersecurity review if they determine an operator’s data processing activities affect or may affect national security. However, it remains unclear as to whether relevant requirements will be applicable to companies that have already been listed in the United States, such as us, for our future offerings, and the laws and regulations then effective as of our previous listing did not require any issuer to obtain pre-approval from the Cybersecurity Administration Committee, or CAC, before listing at a foreign stock exchange. As of the date of this prospectus, we do not hold personal information of more than one million users and our business activities does not involve risk factors regarding national security as stipulated in the Cybersecurity Review Measures. We have not been informed by any government authorities that we are deemed as a critical information infrastructure operator, and we have not received any inquiry or notice of and is not currently subject to any proceedings initiated by the CAC. Based on the foregoing and as advised by our PRC legal counsel, JunHe LLP, we believe that we are not required to apply for pre-approval from CAC before the issuance of our securities to foreign investors and we are not subject to mandatory application requirement for cybersecurity review under the current PRC laws and regulations. However, no detailed rules or implementation rules regarding the cybersecurity review have been issued and the PRC government authorities may have wide discretion in the interpretation and enforcement of the applicable laws. We cannot assure you that we would not be deemed as a critical information infrastructure operator or carrying out data processing activities that affect or may affect national security, which may subject us to order of clearance of cybersecurity review or other specific actions.
In addition, the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, adopted by six PRC regulatory agencies requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. As advised by our PRC legal counsel, JunHe LLP, based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval is not required for our listing, trading of our securities on Nasdaq and this offering, given that our PRC subsidiary was incorporated as wholly foreign-owned enterprises by means of direct investment rather than by merger or acquisition of equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial owners. However, our PRC counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do.
Furthermore, the Draft Overseas Listing Regulations set out new filing procedures for China-based companies seeking direct or indirect listings and offerings in overseas markets. The Draft Overseas Listing Regulations require that China-based companies seeking to offer and list securities in overseas markets complete certain post-application/post-listing filing procedures with the CSRC. The Draft Overseas Listing Regulations do not require a China-based company including the Company to obtain the CSRC’s pre-approval before it applies for or completes a listing or offering of securities in overseas markets. However, the Draft Overseas Listing Regulations were released only for public comments and their provisions and anticipated adoption date are subject to changes and their interpretation and implementation remain uncertain.
Our substantial operation based in Singapore, Hong Kong and the Cayman Islands, and we do not operate through any VIE agreement with our subsidiaries in China. However, if it is determined that any CSRC approval, filing, cybersecurity review or other governmental authorization is required for our previous or future offering, we may face sanctions by the CSRC, the CAC or other PRC regulatory agencies for failure to do so, and if we are denied from PRC authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange, which would materially affect the interest of the investors. For more detailed information, see “Risk Factors –– We may be liable for improper collection, use or appropriation of personal information provided by our customers.” and “Risk Factors –– The PRC government may intervene or influence our business operations at any time or may exert more control over offerings conducted overseas and foreign investment in China based issuers, which could result in a material change in our business operations or the value of our securities. Additionally, the approval or other administration requirements of the CSRC, or other PRC governmental authorities, may be required in connection with this offering under a PRC regulation or any new laws, rules or regulations to be enacted, and if required, we cannot assure you that we will be able to obtain such approval. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions”.
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Our Current Corporate Structure in China
We hold 100% equity interests in Lion Group (Hangzhou) Investment Limited, our PRC subsidiary, holding through Lion Wealth Limited in May 2021. The PRC subsidiary was established solely for purpose of passive equity investment in China with no substantial business activities, which does not require contractual arrangements or variable interest entity, or VIE, to operate. While our current corporate structure does not contain any VIEs in the PRC, and we have no intention establishing any VIEs in the PRC in the future, if in the future our group’s corporate structure were to contain a VIE, the PRC regulatory authorities could disallow the VIE structure, which would likely result in a material change in our operations and/or a material change in the value of the securities we are registering for sale, including that it could cause the value of such securities to significantly decline or in extreme cases, become worthless. For more detailed information, see “Risk Factors –– The Chinese government may exercise significant oversight and discretion over the conduct of business in the PRC and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our securities”.
PCAOB Report
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. Our auditor, UHY LLP, headquartered in New York, NY, is an independent registered public accounting firm with the PCAOB and has been inspected by the PCAOB on a regular basis. The PCAOB currently has access to inspect the working papers of our auditor. Our auditor is not headquartered in China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination.
Corporate Information
Our principal executive office is located at 3 Phillip Street, #15-04 Royal Group Building, Singapore 048693, and the telephone number is +65 8877 3871. Our website is https://ir.liongrouphl.com/.
Impact of COVID-19 on Our Operations and Financial Performance
In December 2019, COVID-19 emerged and has subsequently spread worldwide. In March 2020, the World Health Organization declared COVID-19 as a pandemic. Our various business lines have been adversely impacted by COVID-19. CFD trading volumes and futures contract volumes decreased significantly compared to the same period of prior year, which was mainly attributable to economic and financial impact brought about by COVID-19 on the Group’s customers, causing a decrease in both their willingness to trade and make investments as well as their disposable income allocated making such transactions. Further, customers’ concerns about future unpredictability also caused their trading activity to decline, impacting our CFD trading business in particular. In addition, travel restrictions in Hong Kong caused cancellations and prevented management from attending branding, business promotions, and exhibition activities, which limited the opportunities to acquire new customers. Meanwhile, our futures and insurance brokerage businesses were adversely affected as new or existing customers may not be able to travel to Hong Kong to open new futures trading accounts or purchase insurance products. No impairments were recorded as of the consolidated balance sheet date, as the carrying amounts of the Group’s assets are expected to be recoverable; however, due to significant uncertainty surrounding the situation, management’s judgment regarding this could change in the future. In addition, the Group cannot reasonably estimate the related financial impact to the Group’s future financial results given the uncertainties surrounding the duration of the outbreak. The Group will continue to monitor the impact of the COVID-19 outbreak closely.
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SUMMARY OF THE OFFERING
|
Issuer: |
Lion Group Holding Ltd. |
|
|
Securities offered by selling shareholder: |
Up to an aggregate of 12,288,980 ADSs including (i) 4,744,490 ADSs issuable upon exercise of the Series E Warrant to purchase ADSs, (ii) 2,800,000 ADSs issuable upon exercise of the Series D Warrant to purchase ADSs, and (iii) 4,744,490 ADSs issuable upon exercise of the Series F Warrant to purchase ADSs. |
|
|
Offering price: |
The selling shareholder may offer, sell or distribute all or a portion of the securities hereby registered publicly or through private transactions at prevailing market prices or at negotiated prices. See “Plan of Distribution.” |
|
|
Shares outstanding prior to the offering: |
47,120,039(1) |
|
|
Use of proceeds: |
We will not receive any proceeds from the sale of our ADSs by the selling shareholder except for proceeds from the exercise of the 2021 Registrable Warrants. We will bear all other costs, fees and expenses incurred by us, or by the selling shareholder, in effecting the registration of the shares covered by this prospectus. The selling shareholder, however, will pay any other expenses incurred in selling its ADSs, including any brokerage commissions or costs of sale. |
|
|
For more information on the use of proceeds, see “Use of Proceeds” on page 72. |
||
|
Trading symbol: |
Our ADSs and Warrants are listed on the NASDAQ under the symbols “LGHL” and “LGHLW”, respectively. |
|
|
Risk factors: |
Investing in our securities involves a high degree of risk and purchasers of our securities may lose their entire investment. See “Risk Factors” and the other information included and incorporated by reference into this prospectus for a discussion of risk factors you should carefully consider before deciding to invest in our securities. |
____________
(1) This number excludes 7,000 preferred shares issued and held by our selling shareholder pursuant to the February Private Placement.
Conventions that Apply to this Prospectus
Unless otherwise indicated or the context otherwise requires, references in this prospectus to:
“$,” “USD,” “US$” and “U.S. dollar” each refers to the United States dollar.
“2019 Warrant” means a warrant to purchase shares of common stock of Proficient issued in Proficient’s Initial Public Offering and simultaneous private placements. Each Warrant entitles the holder thereof to purchase one share of common stock of Proficient at a price of $11.50 per share.
“2020 Debentures” means the senior secured convertible debentures, convertible into 800,000 ADSs, which will mature in 30 months from the dates of issuance pursuant to the 9% Senior Secured Convertible Debenture dated December 14, 2020.
“2020 Warrants” means, together, the Series A Warrant, Series B Warrant and the Series C Warrant.
“2021 February Warrants” means, together, the Series D Warrant, Series E Warrant and the Series F Warrant.
“ADSs” refers to our American depositary shares, each of which represents one Class A Ordinary Share.
13
“Amended and Restated Memorandum and Articles of Association” means the currently effective amended and restated memorandum and articles of association of Lion Group Holding Ltd.
“Business Combination Agreement” means the Business Combination Agreement, dated as of March 10, 2020, which is later amended and restated as of May 12, 2020, by and among us, Proficient, Merger Sub, Lion, the Sellers and the other parties thereto.
“Business Combination” or “Transactions” means the Merger and the Share Exchange, and other transactions contemplated by the Business Combination Agreement.
“CFD” means a contract for differences, an agreement between an investor and a CFD broker to exchange the difference in the value of a financial product between the time the contract opens and closes.
“Class A Ordinary Shares” means our Class A ordinary shares, par value $0.0001 per share.
“Class B Ordinary Shares” means our Class B ordinary shares, par value $0.0001 per share.
“Code” means the Internal Revenue Code of 1986, as amended.
“Companies Act” means the Companies Act (2020 Revision) of the Cayman Islands, as may be amended from time to time.
“December Private Placement” means the 2020 Debentures and the 2020 Warrants owned by ATW Opportunities Master Fund, L.P. and issued by the Company pursuant to Securities Purchase Agreement dated December 11, 2020.
“Escrow Shares” means 45% of the Exchange Shares otherwise issuable to the Sellers at the Closing set aside in escrow upon the closing of the Business Combination.
“Exchange Act” means the Securities Exchange Act of 1934, as amended.
“Exchange Shares” means the ordinary shares that Sellers received in exchange of their original holdings in Lion Financial Group Limited upon the consummation of the Business Combination.
“February Private Placement” means the Series A Convertible Preferred Shares and the 2021 February Warrants owned by ATW Opportunities Master Fund, L.P. and issued by the Company pursuant to Securities Purchase Agreement dated February 15, 2021.
“Founder Shares” means shares of Proficient common stock, 2,875,000 of which are currently outstanding and were issued to the Initial Stockholders prior to the Initial Public Offering of Proficient.
“HK$” or “Hong Kong dollars “means” the legal currency of Hong Kong.
“Initial Public Offering” means the initial public offering of Proficient, consummated on June 3, 2019.
“Initial Stockholders” means the holders of Founder Shares.
“iResearch” means iResearch Consulting Group.
“JOBS Act” means the Jumpstart Our Business Startups Act.
“Lion” means Lion Financial Group Limited, a corporation organized under the laws of the British Virgin Islands.
“Merger” means the merger of Merger Sub with Proficient, with Proficient surviving such merger, prior security holders of Proficient receiving our securities and Proficient becoming a wholly-owned subsidiary of us.
“Merger Sub” means Lion MergerCo I, Inc., a Cayman Islands exempted company.
“Nasdaq” means the Nasdaq Stock Market LLC.
“Ordinary Shares” means our ordinary shares, par value $0.0001 per share, including Class A Ordinary Shares and Class B Ordinary Shares, unless otherwise specified.
14
“OTCQB” means OTCQB marketplace operated by OTC Markets Group.
“OTCQX” means the OTCQX marketplace operated by OTC Markets Group.
“Pink Open Market” means the OTC — Pink Open Market operated by OTC Markets Group.
“PIPE Warrants” means the warrant represents the right to purchase one Class A Ordinary Share in the form of ADSs at a price of $3.00 per share or $3.00 per ADS.
“Private Warrants” or “Private Placement Warrants” means the Warrants sold to Sponsor simultaneously with the closing of the Initial Public Offering, each of which is exercisable for one share of common stock of Proficient, in accordance with its terms.
“Proficient,” “PAAC” or “Purchaser” means Proficient Alpha Acquisition Corp., currently known as Lion Group North America Corp., a Nevada corporation.
“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this prospectus, Taiwan.
“Public Stockholders” means the holders of Public Shares.
“Public Shares” means shares of common stock of Proficient issued as part of the Units sold in the Initial Public Offering.
“Public Warrants” means the Warrants included in the Units sold in the Initial Public Offering, each of which is exercisable for one share of common stock of Proficient, in accordance with its terms.
“Redemption” means the right of the holders of Proficient common stock to have their shares redeemed in accordance with the procedures set forth in this prospectus.
“Rights” means the rights included in the Units sold in the Initial Public Offering, each of which is exercisable for one-tenth (1/10) of one share of common stock of Proficient, in accordance with its terms.
“RMB” and “Renminbi” each refers to the legal currency of China.
“SEC” means the U.S. Securities and Exchange Commission.
“Sellers” means the shareholders of Lion named as seller parties to the Business Combination Agreement as of the effective date of this registration statement.
“Series A Convertible Preferred Shares” means our 8% Series A Convertible Preferred Shares, par value $0.0001 per share, and stated value $1,000.00 per share.
“Series A Warrant” means a warrant until on or prior to 5:00 p.m. (New York City time) on December 14, 2027 exercisable into 1,200,000 ADSs at an exercise price of $2.45 per ADS pursuant to the Series A American Depositary Shares Purchase Warrant dated December 14, 2020.
“Series B Warrant” means a 2-year warrant exercisable into 5,000,000 ADSs at an exercise price of $2.00 per ADS pursuant to the Series B American Depositary Shares Purchase Warrant dated December 14, 2020.
“Series C Warrant” means a 7-year warrant exercisable into 7,500,000 ADSs at an exercise price of $2.45 per ADS pursuant to the Series C American Depositary Shares Purchase Warrant dated December 14, 2020.
“Series D Warrant” means a warrant until on or prior to 5:00 p.m. (New York City time) on the five year anniversary of the closing date of the February Private Placement exercisable into 2,800,000 ADSs at an exercise price of $2.50 per ADS pursuant to the Series D American Depositary Shares Purchase Warrant dated February 18, 2021.
“Series E Warrant” means a one-year warrant exercisable into 13,333,333 ADSs at an exercise price of $2.00 per ADS which entitles the Series E warrant holder pursuant to the Series E American Depositary Shares Purchase Warrant dated February 18, 2021, each exercise of which entitles the Series E Warrant holder to receive one ADS and a 8% cash discount.
15
“Series F Warrant” means a five-year warrant exercisable into 13,333,333 ADSs at an exercise price of $2.50 per ADS pursuant to the Series F American Depositary Shares Purchase Warrant dated February 18, 2021, but the exercisability of which shall vest ratably from time to time in proportion to the exercise of the Series E Warrant by the holder of the Series E Warrant.
“Share Exchange” means the exchange of 100% of the ordinary shares of Lion for our capital shares.
“Sponsor” means Complex Zenith Limited, a British Virgin Islands company controlled by Shih-Chung Chou, a director of Proficient. Shih-Chung Chou had served as the sponsor of Proficient since its Initial Public Offering until March 12, 2020, when he entered into an agreement with Complex Zenith Limited and assigned all of his equity interest in Proficient and his rights and obligations as a sponsor to Complex Zenith Limited.
“Trust Account” means the trust account that holds a portion of the proceeds of the Initial Public Offering and the concurrent sale of the Private Placement Warrants.
“Units” means units issued in the Initial Public Offering, each consisting of one share of common stock of Proficient, one Warrant and one Right.
“U.S.” means the United States of America.
“U.S. GAAP” means United States generally accepted accounting principles.
“Warrant” means a warrant to purchase shares of common stock of Proficient issued in the Initial Public Offering and simultaneous private placements. Each Warrant entitles the holder thereof to purchase one share of common stock of Proficient at a price of $11.50 per share.
“we,” “our,” “us,” “the company” and other similar terms refer to Lion Group Holding Ltd. and its consolidated subsidiaries.
This prospectus contains translations of Hong Kong dollars into U.S. dollars solely for the convenience of the reader. 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 a rate of HK$7.79756 to US$1.00, buying rate at closing in effect as of December 31, 2021.
16
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables set forth selected historical financial information derived from Lion’s audited consolidated financial statements as of and for the years ended December 31, 2019, 2020 and 2021, each of which is included elsewhere in this prospectus. Such financial information should be read in conjunction with the audited financial statements and related notes included elsewhere in this prospectus.
The historical results presented below are not necessarily indicative of the results to be expected for any future period. You should carefully read the following selected financial information in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Lion’s financial statements and the related notes contained elsewhere in this prospectus.
Selected Consolidated Statements of Operation and Comprehensive (Loss) Income Data
|
For the Year Ended December 31, |
|||||||||||||||
|
|
|
|
2020 |
|
|||||||||||
|
US$ |
US$ |
US$ |
US$ |
US$ |
|||||||||||
|
Revenues |
|
|
|
|
|
||||||||||
|
CFD trading services |
— |
|
— |
|
12,843,574 |
|
6,823,677 |
|
8,700,009 |
|
|||||
|
TRS trading services |
— |
|
— |
|
— |
|
210,770 |
|
13,132,833 |
|
|||||
|
Futures and securities brokerage services |
268,252 |
|
2,066,354 |
|
2,215,867 |
|
2,029,669 |
|
2,800,543 |
|
|||||
|
Insurance brokerage services |
9,623,359 |
|
5,378,679 |
|
2,648,141 |
|
959,299 |
|
509,067 |
|
|||||
|
Others |
— |
|
(876,770 |
) |
819,268 |
|
206,720 |
|
1,916,033 |
|
|||||
|
Total Revenue |
9,891,611 |
|
6,568,263 |
|
18,526,850 |
|
10,230,135 |
|
27,058,485 |
|
|||||
|
|
|
|
|
|
|||||||||||
|
Expenses |
|
|
|
|
|
||||||||||
|
Commission expenses |
(8,221,372 |
) |
(5,471,602 |
) |
(3,355,205 |
) |
(1,845,994 |
) |
(3,317,692 |
) |
|||||
|
Compensation expenses |
(1,211,785 |
) |
(1,639,288 |
) |
(2,430,636 |
) |
(3,802,793 |
) |
(4,069,203 |
) |
|||||
|
Communication and technology expenses |
(144,156 |
) |
(588,353 |
) |
(823,433 |
) |
(1,454,050 |
) |
(1,929,981 |
) |
|||||
|
Cost of crypto mining |
— |
|
— |
|
— |
|
— |
|
(1,163,846 |
) |
|||||
|
General and administrative expenses |
(272,682 |
) |
(539,773 |
) |
(692,648 |
) |
(2,264,318 |
) |
(2,016,582 |
) |
|||||
|
Professional fees |
(59,038 |
) |
(227,998 |
) |
(761,238 |
) |
(1,565,834 |
) |
(3,836,817 |
) |
|||||
|
Services fees |
— |
|
(53,592 |
) |
(384,840 |
) |
(833,864 |
) |
(3,574,579 |
) |
|||||
|
Research and development |
— |
|
— |
|
— |
|
— |
|
(1,205,040 |
) |
|||||
|
Interest expenses |
(36,665 |
) |
(118 |
) |
(731,812 |
) |
(183,157 |
) |
(1,608,100 |
) |
|||||
|
Occupancy expenses |
(502,120 |
) |
(548,331 |
) |
(591,936 |
) |
(683,160 |
) |
(778,881 |
) |
|||||
|
Marketing expenses |
(47,028 |
) |
(195,933 |
) |
(55,378 |
) |
(651,324 |
) |
(913,675 |
) |
|||||
|
Depreciation expenses |
(19,416 |
) |
(32,743 |
) |
(52,852 |
) |
(40,556 |
) |
(916,916 |
) |
|||||
|
Payment service charge |
— |
|
— |
|
(355,585 |
) |
(245,030 |
) |
181,249 |
|
|||||
|
Unrealized loss on equity securities |
— |
|
— |
|
— |
|
— |
|
(1,916,033 |
) |
|||||
|
Change in fair value of option liabilities |
— |
|
— |
|
— |
|
— |
|
(149,740 |
) |
|||||
|
Change in fair value of warrant liabilities |
— |
|
— |
|
— |
|
777,266 |
|
(470,804 |
) |
|||||
|
Other expenses |
(9,068 |
) |
(15,406 |
) |
(10,463 |
) |
(11,464 |
) |
(144,175 |
) |
|||||
|
Total expenses |
(10,523,330 |
) |
(9,313,137 |
) |
(10,246,026 |
) |
(12,804,278 |
) |
(27,830,815 |
) |
|||||
|
(Loss)/income before income taxes |
(631,719 |
) |
(2,744,874 |
) |
8,280,824 |
|
(2,574,143 |
) |
(772,330 |
) |
|||||
|
Income tax expenses |
(102,936 |
) |
(26,334 |
) |
(64,472 |
) |
(1,316 |
) |
(54,367 |
) |
|||||
|
Net (loss)/income |
(734,655 |
) |
(2,771,208 |
) |
8,216,352 |
|
(2,575,459 |
) |
(826,697 |
) |
|||||
|
Other comprehensive income (loss) |
|
|
|
|
|
||||||||||
|
Foreign currency translation adjustment |
(95,125 |
) |
(24,749 |
) |
75,637 |
|
20,487 |
|
(40,064 |
) |
|||||
|
Comprehensive (loss)/income |
(829,780 |
) |
(2,795,957 |
) |
8,291,989 |
|
(2,554,972 |
) |
(866,761 |
) |
|||||
|
(Loss) earnings per share for both Class A and Class B – basic and diluted(i) |
(0.10 |
) |
(0.39 |
) |
1.16 |
|
(0.25 |
) |
(0.27 |
) |
|||||
|
Weighted average Class A ordinary shares outstanding – basic and diluted(i) |
3,140,388 |
|
3,140,388 |
|
3,140,388 |
|
6,180,795 |
|
26,046,212 |
|
|||||
|
Weighted average Class B ordinary shares outstanding – basic and diluted(i) |
3,949,993 |
|
3,949,993 |
|
3,949,993 |
|
3,962,294 |
|
4,041,875 |
|
|||||
____________
(i) Share and per share data have been retroactively restated to give effect to the reverse recapitalization
17
Selected Consolidated Balance Sheet Data
|
As of December 31, |
||||||||||
|
2017 |
2018 |
2019 |
2020 |
2021 |
||||||
|
US$ |
US$ |
US$ |
US$ |
US$ |
||||||
|
Total current assets |
5,148,552 |
15,251,892 |
13,042,676 |
16,614,229 |
128,399,308 |
|||||
|
Total assets |
5,419,775 |
15,672,761 |
13,418,348 |
22,906,069 |
148,916,831 |
|||||
|
Total current liabilities |
2,268,204 |
9,902,693 |
6,227,463 |
12,788,185 |
91,510,853 |
|||||
|
Total liabilities |
2,269,982 |
9,903,843 |
6,227,463 |
13,604,191 |
93,451,478 |
|||||
|
Total stockholders’ equity |
3,149,793 |
5,768,918 |
7,190,885 |
9,301,878 |
54,242,582 |
|||||
|
Total liabilities and stockholders’ equity |
5,419,775 |
15,672,761 |
13,418,348 |
22,906,069 |
148,916,831 |
|||||
Selected Consolidated Cash Flow Data
|
For the Year Ended December 31, |
|||||||||||||||
|
2017 |
2018 |
2019 |
2020 |
2021 |
|||||||||||
|
US$ |
US$ |
US$ |
US$ |
US$ |
|||||||||||
|
Net cash provided by (used in) operating activities |
448,961 |
|
(1,176,853 |
) |
7,976,995 |
|
105,675 |
|
(20,482,499 |
) |
|||||
|
Net cash (used in) investing activities |
(203,361 |
) |
(62,586 |
) |
(27,254,283 |
) |
(6,549,514 |
) |
(12,104,687 |
) |
|||||
|
Net cash provided by financing activities |
839,843 |
|
5,415,082 |
|
20,664,343 |
|
2,640,316 |
|
43,578,397 |
|
|||||
|
Effect of exchange rate changes on cash |
(95,125 |
) |
(24,616 |
) |
85,966 |
|
16,441 |
|
(33,833 |
) |
|||||
|
Net increase (decrease) in cash and cash equivalents |
990,318 |
|
4,151,027 |
|
1,473,021 |
|
(3,787,082 |
) |
10,957,378 |
|
|||||
|
Cash and cash equivalents at the beginning of the year |
1,966,813 |
|
2,957,131 |
|
7,108,158 |
|
8,581,179 |
|
4,794,097 |
|
|||||
|
Cash and cash equivalents at the end of the year |
2,957,131 |
|
7,108,158 |
|
8,581,179 |
|
4,794,097 |
|
15,751,475 |
|
|||||
18
RISK FACTORS
An investment in our securities involves a high degree of risk. You should carefully consider the risks described below before making an investment decision. Our business, prospects, financial condition, or operating results could be harmed by any of these risks, as well as other risks not currently known to us or that we currently consider immaterial. The trading price of our securities could decline due to any of these risks, and, as a result, you may lose all or part of your investment.
Risks Related to Our Business and Industry
We operate in a heavily regulated industry, and are subject to extensive and evolving regulatory requirements in the jurisdictions in which we operate.
We operate in a highly-regulated industry and must comply with the applicable regulatory requirements in the jurisdictions it operates. Our major regulators include, Cayman Islands Monetary Authority (CIMA), Securities and Futures Commission of Hong Kong (HKSFC), the Hong Kong Insurance Authority (HKIA), and Hong Kong Customs and Excise Department (HKCED). These regulators and self-regulatory organizations govern our business operations in a variety of ways and conduct regular examinations of our business to monitor our compliance with applicable regulations. Among other things, we are subject to regulations with regard to (i) our sales practices, including our interaction with and solicitation of clients and our marketing activities; (ii) the custody, control and safeguarding of our clients’ assets; (iii) maintaining specified minimum amounts of capital and limiting withdrawals of funds from our regulated operating subsidiaries; (iv) submitting regular financial and other reports to regulators; (v) licensing for our operating subsidiaries and our employees; and (vi) the conduct of our directors, officers, employees and affiliates. In addition, as the online brokerage service industry in Hong Kong is at a relatively early stage of development, interpretation and enforcement of the applicable regulatory regime are subject to significant uncertainties, which may result in difficulties in determining whether our existing practices violate any applicable laws and regulations.
Compliance with these regulations is complicated, time consuming and expensive. Our ability to comply with all applicable laws and regulations is largely dependent on our internal compliance system, as well as our ability to attract and retain qualified compliance personnel. While we maintain systems and procedures designed to ensure that we comply with applicable laws and regulations, we cannot assure you that we are able to prevent all possible violations. Non-compliance with applicable laws or regulations could result in sanctions being levied against us, including the imposition of fines or penalties, censures, restrictions on certain business activities, suspension or expulsion from a jurisdiction or market or the revocation or limitation of licenses, which could adversely affect our reputation, prospects, revenues and earnings. Furthermore, any future change in the regulatory, legal and industry environment for the futures brokerage services, securities brokerage services, CFD trading services, insurance brokerage services, or asset management services may have a significant impact on our business.
In addition, we are subject to regular investigations, inquiries and inspections from the relevant regulatory bodies. For example, from time to time, our HKSFC-licensed subsidiaries may be subject to or required to assist in inquiries or investigations by regulatory authorities in Hong Kong, principally the HKSFC. 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. Similarly, our Cayman subsidiary may be subject to CIMA’s on-site inspections and inquiries from time to time. If any misconduct is identified as a result of inquiries, reviews, investigation or inspections, the relevant regulatory authorities may take disciplinary actions against us. There also remains a risk that we may not be able to rectify our practices to be in compliance with the relevant rules and regulations following the identification of any such misconduct or material non-compliance, which may result in regulators taking additional actions against it. We were inspected by both the HKSFC and CIMA during 2019, and both regulators identified certain areas in which our operations can improve. We have finished implementing the measures recommended by the HKSFC and received letters from the HKSFC confirming that they had no further comments relating to their inspections of Lion Asset Management Limited on November 21, 2019, and of both Lion International Securities Group Limited and Lion Futures Limited on May 20, 2020. These are the only subsidiaries subject to HKSFC oversight and inspection. We have also finished implementing the measures recommended by CIMA during 2019 and CIMA had no further comments relating to their 2019 inspection. We were inspected by CIMA separately on February 4, 2021 as a regular exercise following which CIMA had identified certain areas in which our operators can improve, with the changes to be made no later than August 4, 2021. We are still in the process of implementing the improvements recommended by CIMA and expect that we will be able to adopt a
19
sufficient number of these changes in time to satisfy CIMA. However, if we are unable to make these changes we may be subject to fines or other disciplinary actions. If any such outcome occurs, there may be a material and adverse effect on our business, results of operations, financial condition and prospects.
We had incurred net losses in the past, and we may incur losses again in the future.
We had net income of US$8.2 million, net losses of US$2.6 million (as restated), and net loss US$0.83 million in 2019, 2020 and 2021 respectively. We cannot assure you that we will be able to generate net income in the future. We anticipate that our operating cost and expenses will increase in the foreseeable future as we continue to grow our business, attract new clients, enhance our risk management capabilities and increase our brand recognition. These efforts may prove more costly than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. There are other external and internal factors that could negatively affect our financial condition. For example, the trading volume achieved on our platform may be lower than expected, which may lead to lower than expected revenues. Furthermore, we may adopt a new share incentive plans in the future, which will result in significant share-based compensation expenses to us. We generated 85.9%, 76.0%, and 29.7% of our total revenues from commissions charged to our clients who trade on our platform in 2019, 2020, and 2021 respectively. Any material decrease in our commissions would have a substantial impact on our financial conditions. As a result of the foregoing and other factors, we may continue to incur net losses in the future.
We may not be able to obtain or maintain all necessary licenses, permits and approvals and to make all necessary registrations and filings for our business activities in multiple jurisdictions and related to residents therein, especially in the PRC or otherwise relating to PRC residents.
We operate in a heavily-regulated industry which requires various licenses, permits and approvals in different jurisdictions to conduct our businesses. Our clients include people who live in jurisdictions where we do not have licenses issued by the local regulatory bodies. It is possible that authorities in those jurisdictions may take the position that we are required to obtain licenses or otherwise comply with local laws and regulations in order to conduct our business with residents living in those jurisdictions. In any jurisdictions, if we fail to comply with the regulatory requirements, we may risk being disqualified for our existing businesses or being rejected for renewal of our qualifications and/or licenses upon expiry by the regulatory authorities as well as other penalties, fines or sanctions. In addition, in respect of any new business that we may contemplate, we may not be able to obtain the relevant approvals for developing such new business if we fail to comply with the relevant regulations and regulatory requirements. As a result, we may fail to develop new business as planned, or we may fall behind our competitors in such businesses.
We do not hold any licenses or permits from any PRC regulatory bodies for our securities brokerage business. Currently, a large number of our clients are PRC residents and certain of the executive directors and other independent contractors are providing supporting services remotely from the PRC. The transactions on our trading platform are all conducted outside PRC and our current activities in China does not require a securities brokerage license, a making license or permit under existing PRC securities laws and regulations. However, there remains uncertainties as to how the current and any future PRC laws and regulations will be interpreted or implemented in the context of operating securities-related business in China. We cannot assure you that our current operating model will not be deemed as operating securities brokerage business in China, subjecting us to further inquiries or rectifications. If certain of our activities in China were deemed by PRC regulators to be providing securities brokerage services, investment consulting services or stock options brokerage business in China, we would be required to obtain the required licenses or permits from the relevant regulatory bodies, including the China Securities Regulatory Commission, or CSRC. The failure to obtain such licenses or permits may subject us to regulatory actions and penalties, including fines, suspension of parts or all of our operations in the PRC, and temporary suspension or removal of our websites and mobile application in China. In such cases, our business, financial condition, results of operations and prospects may be materially and adversely affected.
PRC governmental control of currency conversion, cross-border remittance and offshore investment could have a direct impact on the trading volume on our platform, and the PRC government could further tighten restrictions on converting Renminbi to foreign currencies and/or deems our practices to be in violation of PRC laws and regulations.
A majority of our clients are PRC residents and are therefore subject to the restrictions under the rules and regulations promulgated by the State Administration of Foreign Exchange (SAFE), regarding the conversion of Renminbi into foreign currencies and the remittance and the use of such funds outside China. Under current PRC foreign exchange regulations, each PRC citizen is permitted to convert up to an aggregate of US$50,000 equivalent Renminbi each year
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for appropriate personal use. Such appropriate use does not include direct investment into secondary stock markets, futures, insurances, asset management products or other CFD trading. PRC residents who intend to convert U.S. dollars exceeding such quota are required to go through additional application and review procedures with commercial banks designated by the SAFE. In addition, approval from or registration with appropriate government authorities is required when Renminbi is to be converted into foreign currency for the purpose of offshore investment. Although we require our clients to comply with the relevant rules and regulations in the agreements we enter into with them, we cannot assure you that our clients will follow the rules and regulations or the provisions in the agreements at all times. We do not handle the Renminbi cross-border currency conversion for our Chinese clients through any of our accounts or entities, and we do not require our clients to submit evidence of approval or registration with respect to the foreign currency used for offshore investments. We cannot assure you that our current operating model, which includes redirecting our clients to open accounts with third party service provider, will be not deemed as assisting with the currency conversion by SAFE. In such cases, we may face regulatory warnings, correction orders, condemnation and fines, and may not be able to conduct our current business in the future. In addition, any misbehavior or violation by our clients of applicable laws and regulations could lead to regulatory inquiries, investigations or penalties that involve us.
Since the PRC authorities and the commercial banks designated by the SAFE to conduct foreign exchange services have significant discretion in interpreting, implementing and enforcing the foreign exchange rules and regulations, and due to many other factors that are beyond our control and ability to anticipate, we may face more severe consequences, including being asked to take additional and burdensome measures to monitor the source and use of the foreign currency funds in the accounts of our clients, remove our account opening functions, or suspend our operations pending an investigation or indefinitely. In such cases, we may face regulatory warnings, correction orders, condemnation, fines and confiscation of income, and may not be able to conduct our current business in the future. We may also be subject to regular inspections from relevant authorities from time to time. If such situations occur, our business, financial condition, results of operations and prospects would be materially and adversely affected.
In addition, if the PRC government further tightens the amount of currency exchange allowed for PRC residents, increases control over the remittance of currency out of the PRC, restricts the assistance or participation of any non-resident entities in the currency conversion, or specifically prohibits any exchanges for securities-related investment purposes, the trading activities of Chinese residents on our platform could be restricted, which would significantly reduce the trading volume on our platform. As our revenues from brokerage commission and market making income depends heavily on the total trading volume facilitated on our platform, the occurrence of any of the above regulatory changes would have a material and adverse impact on our business, operating and financial results.
Furthermore, we have established Lion Group (Hangzhou) Investment Limited, our PRC subsidiary, holding through Lion Wealth Limited in May 2021. Our PRC subsidiary was established solely for purpose of passive equity investment in China with no substantial business activities and our PRC subsidiary has not made any dividends or other distributions since its incorporation. However, the PRC government imposes controls on the convertibility of the Renminbi into foreign currencies and the remittance of currency out of mainland China which may restrict our PRC subsidiary’s ability to transfer cash from our PRC subsidiary to our other non-mainland China entities. To the extent cash is generated in our PRC subsidiary, and may need to be used to fund operations outside of mainland China, such funds may not be available due to limitations placed by the PRC government. In addition, any foreign loan procured by our PRC subsidiary is required to be registered with SAFE or its local branches and any of our PRC subsidiary may not procure loans which exceed the difference between its total investment amount and registered capital or, as an alternative, they may only procure loans subject to the calculation approach and limitation as provided by the People’s Bank of China.
We may be unable to retain existing clients or attract new clients, or we may fail to offer services to address the needs of our clients as they evolve.
We derive a significant portion of our revenues from our commissions based upon the trading volume or the number of relevant transaction contracts executed by our clients. The rapidly growing trading volume on our platform is primarily driven by the increasing number of our active clients. Our total revenue-generating clients grew from 1,722 as of December 31, 2017 to 4,047 as of December 31, 2019, and continued to increase to 5,010 as of December 31, 2020 and 5,261 as of December 31, 2021. To further grow our business and expand our operation, we rely on continuous efforts in retaining existing clients and attracting new ones.
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Our ability to retain existing clients is dependent upon multiple factors, some of which are beyond our control. Our clients may not continue to place trading orders or increase the level of their trading activities on our platform if we cannot match the prices offered by other market players or if we fail to deliver satisfactory services. Failure to deliver services in a timely manner at competitive prices and provide a satisfactory experience will cause our clients to lose confidence in us and use our platform less frequently or even stop using our platform altogether. Even if we are able to provide high-quality and satisfactory services on our platform in a timely manner and at favorable pricing terms, we cannot assure you that we will be able to retain existing clients, encourage repeat and increase trading transactions, in part due to reasons beyond our control, such as the personal financial situation of our clients or the deterioration of capital markets generally. We have taken efforts in attracting new clients and expanding our brand influence, and we plan to continue doing so. However, these efforts may not be cost-effective and we cannot assure you that we will be able to grow our client base as we expect, which may in turn materially and adversely affect our business operations and prospects.
Our level of commission and fee rates may decline in the future. Any material reduction in our commission or fee rates could reduce our profitability.
We derive a significant portion of our revenues from commissions. We charge our clients commission for our insurance brokerage services, securities and future brokerage services and CFD and TRS trading services. Revenues generated from commission amounted to US$15.9 million, US$7.8 million, and US$8.05 million in 2019, 2020 and 2021, respectively. We may experience pressure on our commission or fee rates as a result of competition in the financial service industry and online brokerage industry. Some of our competitors offer a broader range of services to a larger client base and enjoy higher trading volumes than we do. Consequently, our competitors may be able to offer trading services at lower commissions or fee rates than we currently offer or may be able to offer. For example, some banks in Hong Kong and the United States have started offering zero commission fees or similar promotions to attract clients. As a result of this pricing competition, we could lose both market share and revenues. We believe that any downward pressure on commission or fee rates would likely continue and intensify as we continue to develop our business and gain recognition in our markets. A decline in our commission or fee rates could lower our revenues, which would adversely affect our profitability. In addition, our competitors may offer other financial incentives we may not be able to offer, such as rebates or discounts in order to induce trading in their systems, which may in turn materially and adversely affect our operating and financial results.
We cannot guarantee the profitability of our clients’ investments or ensure that our clients will make rational investment judgements.
We cannot guarantee the profitability of the investment made by clients on our trading platform. The profitability of our clients’ investments is directly affected by elements beyond our control, such as economic and political conditions, broad trends in business and finance, changes in volume of securities and futures transactions, changes in the markets in which such transactions occur and changes in how such transactions are processed.
Moreover, many of our clients are retail investors, who are less sophisticated compared with institutional investors. In addition, CFD products and futures are complex investment products that require a higher level of knowledge and experience that some retail investors may not have. Although we include prominent risk warnings and disclaimers on our apps throughout the transaction process and, in accordance with relevant regulations, have designed an appropriateness test to assess the level of experience and risk level of the client to assess whether certain services or products are appropriate for such client, there is no guarantee that the appropriateness test for any product is adequate.
Clients who have suffered from unfavorable trading results, financial losses, or even liquidity issues in connection with the financial losses may attribute their losses to us and/or may discontinue trading with us, which may have a material and adverse effect on our business and results of operation. Some clients who have suffered substantial losses on our platform may seek to recover their damages from us or bring lawsuits against us. These allegations against us, regardless of their veracity, may negatively affect our reputation and clients’ confidence with us. If we were to become the subject of any unfavorable allegations or lawsuits, whether such allegations are proven to be true or untrue and regardless of the outcome of the lawsuits, we may have to expend a significant amount of resources to investigate and/or defend itself, which could divert our management’s attention from the day-to-day operations. In addition, if any litigation or other legal proceeding to which we are a party is resolved adversely, we may be ordered to pay substantial amount of damages or compensation to the other party, which could adversely affect our business, financial condition and results of operations.
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We may incur material trading losses from our market making activities.
A portion of our revenue is derived from our market making activities. When an offsetting transaction of CFD trading from another client is not available, we may choose to act as a principal (i.e. market maker) to trade with the client. As a market maker, we attempt to derive a profit from the difference between the prices at which we buy and sell CFD products. Since these activities involve the purchase or sale of CFD products for our own account, we may incur trading losses for a variety of reasons, including price changes in CFD products and lack of liquidity in CFD products in which we have positions. As we offer leveraged trading of up to 100:1 to certain of our forex trading clients, our risk exposure is greatly amplified. If our risk management system fails to identify or prevent high risk trades and the market develops in a way adverse to our position, we may incur significant losses in these trades. We may also incur losses due to inaccuracies in our proprietary pricing mechanism, or rate engine, which evaluates, monitors and assimilates market data and reevaluates our outstanding CFD product quotes, and is designed to publish prices reflective of prevailing market conditions throughout the trading days. Risks of incurring trading losses may affect the prices at which we are able to sell or buy CFD products, or may limit or restrict our ability to either resell CFD products that we have purchased or repurchase CFD products that we have sold.
We are dependent on wholesale forex trading partners to continually provide us with forex market liquidity. If we lost access to the prices and levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which would materially adversely affect our CFD trading business, financial conditions and results of operations.
Clients frequently trade currency pairs on our platform. In order to continually provide our market making services and to limit our own capital exposure, we maintain cooperative relationships with established market makers and leading international wholesale forex trading partners, which gives us access to a pool of potential liquidity. Through these relationships, we are able to execute our clients’ desired trades at competitive rates while hedging our net positions and limiting our exposure. The trading partners, although under contract with us, have no obligation to provide us with liquidity and may terminate our arrangements at any time. In the event that we no longer have access to the competitive wholesale forex pricing spreads and/or levels of liquidity that we currently have, we may be unable to provide competitive forex trading services, which will materially affect our business, financial conditions and results of operations.
Failure to comply with regulatory capital requirements set by local regulatory authorities could materially and negatively affect our business operation and overall performance.
Our regulated operating subsidiaries are subject to various regulatory capital requirements, including minimum capital requirements, capital ratios and buffers established by competent authorities in their respective jurisdiction. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our business and financial position. For example, our Cayman Islands’ operating subsidiary, Lion Brokers Limited, licensed under the Securities Investment Business Act of the Cayman Islands (2020 Revision) (as amended, “SIBA”), is subject to the regulation of CIMA to maintain minimum regulatory capital. Similarly, our HKSFC-licensed operating subsidiaries, Lion International Securities Group Limited, Lion Futures Limited and Lion Capital Management Limited, are required under the Securities and Future Ordinance (Cap.571) (“SFO”) to maintain certain level of liquid capital.
As of December 31, 2021, all of our operating subsidiaries have not been subject to any administrative penalty or fine in relation to regulatory capital requirements that, individually or in the aggregate, would be reasonable expected to have a material adverse effect on our results of operations or financial condition. However, if any of our operating subsidiaries fail to remain well-capitalized for regulatory purposes, CIMA and HKSFC may take actions against them and their business operation, and we may face penalties, including limitations and prohibitions on our business activities or suspension or revocation of our licenses and trading rights. This could affect client confidence, our ability to grow, our costs of funds and professional insurance costs, our ability to pay dividends on ordinary shares, our ability to make acquisitions, and in turn, our business, results of operations and financial condition.
Our total return swap (TRS) trading services may not be successful, and we may not find adequate funding at reasonable costs to successfully operate our TRS trading business.
We began offering our TRS trading services in early 2020 and officially launched it in July 2020, which may not develop as expected if clients fail to perform their contractual obligations or the value of collateral held to secure the obligations is inadequate. The total rate of return of a portfolio of the underlying assets on which a swap is based may exhibit substantial
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volatility and may be positive or negative in any given period. In the event that the total rate of return is negative and we are receiving the total rate of return of that portfolio of underlying assets in our part of a swap agreement, we would be required to make a payment to the counterparty in addition to that required on the other, generally floating rate, part of the swap agreement. Also, unusual market conditions affecting the portfolio on which the swap is based may prevent the total rate of return from being calculated, in which case other provisions in the swap agreement may be invoked which could cause us to lose some of the anticipated benefit from the swap or otherwise reduce our return.
Moreover, the growth and success of our TRS trading business depends on the availability of adequate funding to meet clients’ demand for loans on our platform. We derive the funding for our TRS trading business from a variety of sources, including commercial banks, other licensed financial institutions and other parties as well as financing generated from our business operations. To the extent there is insufficient funding from institutional funding partners who are willing to accept the credit risk related to the collateral from our clients, the funds available might be limited and our ability to provide TRS trading services to our clients to address their demand would be adversely impacted. In addition, as we strive to offer our clients services with competitive prices, 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 TRS trading business.
We face risks related to insurance brokerage business.
We operate our insurance brokerage business through our HKIA-licensed subsidiary, BC Wealth Management Limited. Our revenues from insurance brokerage business amounted to US$2.6 million, US$1 million, and US$0.5 million in 2019, 2020 and 2021, respectively, representing 14.3%, 9.3%, and 2.0% of our total revenues during the same periods. There are various risks related to our insurance brokerage business. For instance, we may fail to introduce diversified insurance products and services to effectively address our clients’ needs. In addition, because the commission revenue we earn on the sale of insurance products is based on premium and commission rates set by insurance companies, any decrease in these premiums or commission rates, or increases in the referral fees we pay to our external referral sources, may have an adverse effect on our results of operation. Furthermore, we rely on various business partners to operate our insurance brokerage business. If we fail to maintain stable relationships with insurance companies and referral service providers, our business, results of operations, financial condition and business prospects could be materially and adversely affected. In addition, our insurance brokerage business is vulnerable to risks that are beyond our control. For example, we experienced significant decrease in revenues generated from insurance brokerage business in 2020 and 2021 compared to 2018 and 2019, primarily due to our strategic shift of business focus and the unrest in Hong Kong following the forfeited extradition bill in 2019, which negatively affected our clients’ confidence and interest in Hong Kong market. Moreover, our insurance brokerage business was further negatively affected by the outbreak of COVID-19, as potential customers were not able to travel to Hong Kong to purchase insurance products because of the travel ban. See “Our business is sensitive to general economic and political conditions and other factors beyond our control, and our results of operation are prone to significant and unpredictable fluctuations.”
Our risk management policies and procedures may not be adequate and effective, which may expose us to unidentified or unexpected risks.
Our business activities expose us to various risks, including regulatory environment risk, market condition risk, credit risk, liquidity risk, capital adequacy risk and operational risk. We have put in place procedures and controls to identify, measure and manage each of these risks. See “Business — Risk Management.” We are dependent on our risk management policies and procedures and adherence to such policies and procedures by our staff to manage the risks inherent in our business. Nonetheless, our policies and procedures to identify, monitor and manage risks may not be fully effective in mitigating our risk exposure in all market environments or against all types of risks. Some of our 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. Many of our risk management policies are based upon observed historical market behavior or statistics based on historical models. During periods of market volatility or due to unforeseen events, the historically derived correlations upon which these methods are based may not be valid. As a result, these methods may not predict future exposures accurately, which could be significantly greater than what our models indicate. This could cause us to incur losses or cause our risk management strategies to be ineffective.
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In addition, we may fail to update our risk management system as needed or as fast as the industry evolves, which may weaken our ability to identify, monitor and control new risks. Other risk management methods depend upon the evaluation of information regarding markets, clients, catastrophe occurrence or other matters that are publicly available or otherwise accessible to us, which may not always be accurate, complete, up-to-date or properly evaluated. These may adversely affect our results of operations and financial conditions.
Fluctuations in exchange rates could have a material adverse effect on our results of operations.
The functional currency for Lion Brokers Limited, our Cayman Islands subsidiary, is U.S. dollars, whereas the functional currencies for our other operating subsidiaries are Hong Kong dollars. However, the financial statements we provided to you and filed with the SEC are presented in U.S. dollars. Our assets and liabilities denominated in foreign currencies are translated at year-end rates of exchange, whereas the income statement accounts are translated at average rates of exchange for the year. Any such translation may result in gains or losses, which are recorded under other comprehensive income (loss) in the financial statements. Changes in the exchange rates between the Hong Kong dollars or other currencies to the U.S. dollars could have a material effect on our results of operations. The value of Hong Kong dollars against U.S. dollars and other currencies is affected by a variety of factors which are beyond our control, including, among other things, changes in Hong Kong’s or China’s political and economic conditions.
Our reputation, or the reputation of our industry as a whole, may be harmed.
The reputation of our brand is critical to our business and competitiveness. If we fail, or are perceived to have failed, to deal with issues that may give rise to reputational risk, our business and prospects may be harmed. Such issues may include mishandling client complaints, potential conflicts of interest, privacy breaches, client data leak, improper sales practices, as well as failures to identify legal, credit, liquidity, and market risks inherent in our business. Failure to appropriately address these issues could reduce clients’ confidence in us or increase client attrition rate, which may adversely affect our reputation and business. In addition, any malicious or negative allegation made by the media or other parties about the foregoing or other aspects of us, including our management, business, compliance with law, financial condition or prospects, whether with merit or not, could severely compromise our reputation and harm our business and operating results.
Negative publicity about the CFD trading industry, the online brokerage industry, the insurance brokerage industry or asset management in general may also have a negative impact on our reputation, regardless of whether we have engaged in any inappropriate activities. Moreover, negative publicity about our partners, service providers or other counterparties, such as negative publicity about their client complaints and any failure by them to adequately protect the information of our investors and borrowers, to comply with applicable laws and regulations or to otherwise meet required quality and service standards could harm our reputation. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected.
We depend on the services of prime brokers and clearing agents to assist in providing us with access to liquidity in CFD trading. The loss of one or more of our prime brokerage relationships could lead to increased transaction costs and capital posting requirements, as well as having a negative impact on our ability to verify our open positions, collateral balances and trade confirmations.
We depend on the services of prime brokers to assist in providing us with access to liquidity through our CFD trading partners. We currently have established two prime brokerage relationships with major financial institutions, which act as central hubs through which we are able to deal with our existing CFD trading partners. In return for paying a transaction-based prime brokerage fee, we are able to aggregate our clients and our trading positions, thereby reducing our transaction costs and increasing the efficiency of the capital we are required to post as collateral in order to conduct our market making trading activities. Since we trade with our CFD trading partners through our prime brokers, they also serve as a third party check on our open positions, collateral balances and trade confirmations. If we were to lose one or more of our prime brokerage relationships, we could lose this source of third party verification of our trading activity, which could lead to an increased number of documentation errors. Although we have relationships with CFD trading partners who could provide clearing services as a back-up for our prime brokerage services, if we were to experience a disruption in prime brokerage services due to a financial, technical or other development adversely affecting any of our current prime brokers, our business could be materially adversely affected to the extent that we are unable to transfer positions and margin balances to another financial institution in a timely fashion. In the event of the insolvency of a prime broker, we might not be able to fully recover the assets we have deposited (and have deposited on behalf of our clients) with the prime broker or our unrealized profits since we will be among the prime broker’s unsecured creditors.
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We rely on a number of external service providers for technology, processing and supporting functions, and if they fail to provide these services, it could adversely affect our business and harm our reputation.
We collaborate with a number of external service providers in providing services to our clients for technology, processing and supporting functions, including, other market makers to which we pass on certain orders, referring brokers we collaborate with for client acquisition, custody banks, securities exchanges, clearing agents and online payment service providers. Furthermore, external content providers provide us with financial information, market news, charts, option and stock quotes and other fundamental data that we offer to our clients.
These service providers face technical, operational and security risks of their own. Any significant failures by them, including improper use or disclosure of their confidential client, employee or company information, deterioration in their performance, interruption in these third party services or software, or other improper operation could interfere with our trading activities, cause losses due to erroneous or delayed responses, harm our reputation or otherwise be disruptive to our business. For instance, when there is a sudden surge in trading volume caused by a large amount of concurrent orders, usually subsequent to a major social event, we may not be able to retrieve the real-time quote due to delays or interruptions of third party systems, which may cause a delay in the exercise of automatic settlements initiated by our risk management system. Such delays may result in negative balance in our clients’ account and a potential loss to it. Also, we have contracted with external payment service providers to facilitate our clients’ payment procedures for trading and transactions through our platform. Any failure by these service providers to continue with good business operations, comply with applicable laws and regulations or any negative publicity on these parties could damage our reputation, expose us to significant penalties and decrease our total revenues and profitability.
Furthermore, if our arrangements with any of these external service providers are terminated, we may not be able to find an alternative source to support us on a timely basis or on commercially reasonable terms. This could also have a material adverse effect on our business, financial condition and results of operations.
A failure in our information technology, or IT, systems could cause interruptions in our services, undermine the responsiveness of our services, disrupt our business, damage our reputation and cause losses.
Our IT systems support all phases of our operations. If our systems fail to perform, we could experience disruptions in operations, slower response time or decreased client satisfaction. We must process, record and monitor a large number of transactions and our operations are highly dependent on the integrity of our technology systems and our ability to make timely enhancements and additions to our systems. System interruptions, errors or downtime can result from a variety of causes, including unexpected interruptions to the internet infrastructure, technological failures, changes to our systems, changes in client usage patterns, linkages with third-party systems and power failures. Our systems are also vulnerable to disruptions from human error, execution errors, errors in models such as those used for risk management and compliance, employee misconduct, unauthorized trading, external fraud, computer viruses, distributed denial of service attacks, computer viruses or cyber-attacks, terrorist attacks, natural disaster, power outage, capacity constraints, software flaws, events impacting our key business partners and vendors, and other similar events.
It could take an extended period of time to restore full functionality to our IT systems or other operating systems in the event of an unforeseen occurrence, which could affect our ability to process and settle client transactions. Moreover, instances of fraud or other misconduct might also negatively impact our reputation and client confidence in us, in addition to any direct losses that might result from such instances. Despite our efforts to identify areas of risk, oversee operational areas involving risks, and implement policies and procedures designed to manage these risks, there can be no assurance that we will not suffer unexpected losses, reputational damage or regulatory actions due to technology or other operational failures or errors, including those of our vendors or other third parties.
While we devote substantial attention and resources to the reliability, capacity and scalability of our systems, extraordinary trading volume could cause our computer systems to operate at unacceptably slow speeds or even fail, affecting our ability to process client transactions and potentially resulting in some clients’ orders being executed at prices they did not anticipate. Disruptions in service and slower system response time could result in substantial losses and decreased client satisfaction. We are also dependent on the integrity and performance of securities exchanges, clearinghouses and other intermediaries to which client orders are routed for execution and clearing. System failures and constraints and transaction errors at such intermediaries could result in delays and erroneous or unanticipated execution prices, cause substantial losses for our clients and for ourselves, and subject us to claims from our clients for damages.
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We currently maintain a disaster recovery and business continuity plan, which is intended to minimize service interruptions and secure data integrity, however, our plan may not work effectively during an emergency. IT system failures may lead to interruption of our operations, which in turn will prevent our clients from trading and hence significantly reduce client satisfaction and confidence in us, cause loss or reduce potential gain for our clients, or cause regulatory authorities’ investigation and penalization. Any such system failure could impair our reputation, damage our brand, subject us to claims and materially and adversely affect our business, financial condition, operating results or prospects.
Failure of third-party systems upon which we rely could adversely affect our business operation.
Due to the rapid pace of technological changes in online brokerage and CFD trading industry, parts of our business rely on technologies developed or licensed by third parties, for example, we conduct our CFD trading business through a trading platform licensed from third parties. Any interruption in the third parties’ services, or deterioration in the third parties’ performance or quality could adversely affect our business operation. Moreover, we may not be able to obtain or continue to obtain licenses and technologies from these third parties on reasonable terms, or at all, which could materially impact our business and results of operations.
We may be subject to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions on us our external service providers.
Our platform collects, stores and processes certain personal and other sensitive data from our users. The massive data that we have processed and stored makes us or external service providers who host our servers a target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect the confidential information that we have access to, our security measures could be breached. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our platform could cause confidential information to be stolen and used for criminal purposes. As personally identifiable and other confidential information is increasingly subject to legislation and regulation in numerous jurisdictions, any inability to protect confidential information of our clients could result in additional cost and liability for us, damage our reputation, inhibit the use of our platform and harm our business.
We also face indirect technology, cybersecurity and operational risks relating to the third parties whom we work with to facilitate or enable our business activities. As a result of increasing consolidation and interdependence of technology systems, a technology failure, cyber-attack or other information or security breach that significantly compromises the systems of one entity could have a material impact on our counterparties. Any cyber-attack, computer virus, physical or electronic break-ins or similar disruptions of such third-party service providers could, among other things, adversely affect our ability to serve our users, and could even result in the misappropriation of funds of our investors and borrowers. If that were to occur, both we and third-party service providers could be held liable to clients who suffer losses from the misappropriation.
Security breaches or unauthorized access to confidential information could also expose us to risk relating to misappropriation of funds of our clients, which may subject us to liabilities, reduce the attractiveness of our marketplace and cause reputational harm and adversely impact our results of operations and financial condition.
We may be liable for improper collection, use or appropriation of personal information provided by our customers.
We collect certain personal data from our customers in connection with our business and operations and we are subject to various regulatory requirements relating to the security and privacy of data in various jurisdictions. Regulatory requirements regarding the protection of data are constantly evolving and can be subject to different interpretations or significant change, making the extent of our responsibilities in that regard uncertain.
PRC regulators, including the Standing Committee of the PRC National People’s Congress (SCNPC) the Central Cyberspace Affairs Commission (CAC), the Ministry of Industry and Information Technology (MIIT), and the Ministry of Public Security have been increasingly focused on regulation in the areas of data security and data protection and have enforced laws and regulations with varying and evolving standards and interpretations. For instance, the Civil Code of the PRC provides main legal basis for privacy and personal information infringement claims under the Chinese civil laws. On November 7, 2016, the SCNPC issued the PRC Cybersecurity Law, pursuant to which, network
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operators must not, without users’ consent, collect their personal information, and may only collect users’ personal information necessary to provide their services. On June 10, 2021, the SCNPC promulgated the PRC Data Security Law, which became effective on September 1, 2021. The PRC Data Security Law imposes data security and privacy obligations on entities and individuals carrying out data activities and it specifies that data activities carried out outside China shall also be liable if it involves and damages the interests of PRC citizens. In order to implement the PRC National Security Law, the PRC Cybersecurity Law and the PRC Data Security Law, the CAC, and related authorities promulgated the Cybersecurity Review Measures in December 2021, which took effect in February, 2022, which requires, among others that critical information infrastructure operators that procure internet products and services and network platform operators that carry out data processing activities that affect or may affect national security should be subject to the cybersecurity review, and that network platform operators that possess personal information of more than one million users shall apply for cybersecurity review before seeking to list in a foreign stock exchange. On August 20, 2021, the SCNPC promulgated the PRC Personal Information Protection Law, or the PIPL, which took effect in November 2021. The PIPL imposes specific rules for processing personal information and it also specifies that the law shall also apply to personal information activities carried out outside China but for purpose of providing products or services to PRC citizens. On November 14, 2021, the CAC released the Administration Regulations on the Cyber Data Security (Draft for Comments), or the Draft Cyber Data Regulations. The Draft Cyber Data Regulations provide that data processors refer to individuals or organizations that, during their data processing activities such as data collection, storage, utilization, transmission, publication and deletion, have autonomy over the purpose and the manner of data processing. In accordance with the Draft Cyber Data Regulations, data processors shall apply for a cybersecurity review for certain activities, including, among other things, (i) the listing abroad of data processors that process the personal information of more than one million users and (ii) any data processing activity that affects or may affect national security. However, there have been no clarifications from the relevant authorities as of the date of prospectus as to the standards for determining whether an activity is one that “affects or may affect national security.” In addition, the Draft Cyber Data Regulations requires that data processors that process “important data” or are listed overseas must conduct an annual data security assessment by itself or commission a data security service provider to do so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. In addition, the Administrative Provisions on Internet Information Service Algorithm Recommendation, or Algorithm Recommendation Provisions, that took effect on March 1, 2022 implements classification and hierarchical management for algorithm recommendation service providers based on various criteria, and stipulates that algorithm recommendation service providers with public opinion attributes or social mobilization capabilities shall submit the relevant information within ten business days from the date of providing such services and go through the record-filing formalities. The CAC issued the Measures for the Security Assessment of Data Cross-border Transfer, or the Security Assessment of Data Transfer, on July 7, 2022, which requires that any data processor who provides important data collected and generated during operations within the territory of the PRC or personal information that should be subject to security assessment to a recipient outside of the territory of the PRC shall receive an security assessment. As these opinions and the draft measurers were recently issued, official guidance and interpretation of these two remain unclear in several respects at this time.
Our substantial operations are carried out in Hong Kong and the Cayman Islands and all of the data and personal information we collected are stored in servers outside mainland China. We do not hold personal information of more than one million users and we believe that this offering is not subject to PRC cybersecurity review. In addition, as of the date of this prospectus, we have not received any notice of and is not currently subject to any proceedings initiated by the CAC or any other PRC regulatory authority. However, since our apps are available to download in the app stores of China and most of our users are PRC citizens, we are subject to and may be ordered to comply with those regulations. In addition, we may be subject to heightened regulatory scrutiny from PRC governmental authorities in the future. As there remains significant uncertainty in the interpretation and enforcement of the laws and regulations in relation to data security and cross-border transfer of personal information, we cannot assure you that we will comply with such regulations in all respects. Any non-compliance with these laws and regulations may subject us to fines, orders to rectify or terminate any actions that are deemed illegal by regulatory authorities, other penalties, including but not limited to removal of our apps in China market, as well as reputational damage or legal proceedings against us, which may affect our business, financial condition or results of operations.
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We may encounter potential conflicts of interest from time to time, and the failure to identify and address such conflicts of interest could adversely affect our business.
We face the possibility of actual, potential, or perceived conflicts of interest in the ordinary course of our business operations. Conflicts of interest may exist between (i) our different businesses; (ii) us and our clients; (iii) our clients; (iv) us and our employees; and (v) our clients and our employees. As we expand the scope of our business and client base, it is critical for us to be able to timely address potential conflicts of interest, including situations where two or more interests within our businesses naturally exist but are in competition or conflict. We have put in place internal control and risk management procedures that are designed to identify and address conflicts of interest. However, appropriately identifying and managing actual, potential, or perceived conflicts of interest is complex and difficult, and our reputation and our clients’ confidence in us could be damaged if we fail, or appears to fail, to deals appropriately with one or more actual, potential, or perceived conflicts of interest. It is possible that actual, potential, or perceived conflicts of interest could also give rise to client dissatisfaction, litigation, or regulatory enforcement actions. Regulatory scrutiny of, or litigation in connection with, conflicts of interest could have a material adverse effect on our reputation, which could materially and adversely affect our business in a number of ways, including a reluctance of some potential clients and counterparties to do business with us. Any of the foregoing could materially and adversely affect our reputation, business, financial condition, and results of operations.
We derived a substantial portion of revenue from a small number of key clients.
In 2019, 2020, and 2021, we derived a substantial portion of our revenue from a small number of key clients. There are inherent risks whenever a large percentage of revenues are concentrated with a limited number of clients. It is not possible for us to predict the future level of demand for our services that will be generated by these key clients. In addition, revenues from our larger clients have historically fluctuated and may continue to fluctuate based on their trading volume. If these key clients trade less frequently on our platform or suspend or terminate their relationship with us, our business and results of operation will be adversely affected. However, as the trading platform expands and following the Business Combination, we anticipate, but without assurance, that this concentration may possibly be decreasing in the future.
We face intense competition, and if we do not compete effectively, our results of operations and business prospects may be adversely affected.
We primarily compete in CFD trading market and online brokerage market, and both are highly competitive. We compete primarily on the basis of our proprietary trading platform, comprehensive client services, full brokerage licenses, innovative products and services, robust infrastructure and advanced technology, as well as brand equity. We face fierce competition from other online brokerage platforms, other investment and trading platforms as well as traditional brokerage and financial institutions. Our competitors may compete with us in a variety of ways, including (i) providing services that are similar to, or more attractive to clients than ours; (ii) providing products and services we do not offer; (iii) offering more aggressive rebates to gain market share and to promote other businesses; (iv) adapting at a faster rate to market conditions, new technologies and clients’ demands; (v) offering better, faster and more reliable technology; (vi) broadening their client base more cost effectively or faster and (vii) marketing, promoting and providing their services more effectively. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form a strategic alliance with one or more of our competitors. When new competitors seek to enter our target market, or when existing market participants seek to increase their market share, they sometimes undercut the pricing or other terms prevalent in that market, which could adversely affect our market share or our ability to exploit new market opportunities.
Furthermore, since the CFD trading services are relatively new and evolving for PRC residents, our potential clients may not fully understand how our platform works and may not be able to fully appreciate the additional client protections and features that we have invested in and adopted on our platform as compared to others. Our pricing and terms could deteriorate if we fail to act to meet these competitive challenges. Furthermore, to the extent that our competitors are able to offer more attractive terms to our business partners, such business partners may choose to terminate their relationships with us. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our marketplace could stagnate or substantially decline, we could experience reduced revenues and our marketplace could fail to achieve or maintain more widespread market acceptance, any of which could harm our business and results of operations.
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We may fail to implement new business lines, or introduce new products and services to our clients, or we may fail to successfully expand our business.
Our future success is dependent upon on our ability to implement new business lines and offer new products and services, to better respond to market changes and clients’ evolving needs. There are substantial risks and uncertainties associated with these efforts, particularly in instances where the markets are not fully developed. We may invest significant time and resources in developing and marketing new lines of business and/or new products and services. Initial timetables for the introduction and development of new lines of business and/or new products or services may not be achieved and price and profitability targets may not prove feasible. External factors, such as compliance with regulations, competitive alternatives and shifting market preferences, may also impact the successful implementation of a new line of business or a new product or service. In addition, new service offerings may not be accepted by the market or be as profitable as we expect. Furthermore, any new line of business and/or new product or service could have a significant impact on the effectiveness of our system of internal controls. Failure to successfully manage these risks in the development and implementation of new lines of business or new products or services could have a material adverse effect on our business, results of operations and financial condition.
In addition, our strategy to expand business operation and enter into new markets may subject us to additional risks. As we enter into markets that are new to us, we must tailor our services and business model to the unique circumstances of such countries and markets, which can be complex, difficult, costly and divert management and personnel resources. In addition, we may face competition in other countries from companies that may have more experience with operations in such countries or with global operations in general. To continue to expand our services internationally, we may have to comply with the regulatory controls of each country in which we conduct or intend to conduct business, the requirements of which may not be clearly defined. Even if we expand our businesses into new jurisdictions or areas, the expansion may not yield intended profitable results.
Fraud, misconduct or errors by our directors, officers, employees, agents and other third-party service providers could harm our business and reputation.
It is not always possible to identify and deter fraud, misconduct or errors by directors, employees, agents or external service providers, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses. 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.
We are subject to a number of obligations and standards arising from our business. 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, we are required to properly handle confidential 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. Although we have not identified any material fraud or misconduct by our directors, officers, employees, agents, clients, or other third parties since we commenced our current businesses in 2016, if any of these persons or entities were to engage in fraud or misconduct or were to be accused of such fraud or misconduct, our business and reputation could be materially and adversely affected.
A significant decrease in our liquidity could negatively affect our business and financial management as well as reduce client confidence in us.
Maintaining adequate liquidity is crucial to our business operations. We are subject to liquidity and capital adequacy requirements in Hong Kong and Cayman Islands. We meet our liquidity needs primarily through cash generated by operating activities and capital contribution, as well as cash provided by external financing. Fluctuations in client cash or deposit balances, as well as changes in regulatory treatment of client deposits or market conditions, may affect our ability to meet our liquidity needs. A reduction in our liquidity position could reduce our clients’ confidence, which could result in the loss of client trading accounts, or could cause us to fail to satisfy liquidity requirements of regulatory authorities. In addition, failure to meet regulatory capital guidelines can result in investigations and regulatory actions, which may lead to penalties, including reprimands, fines, limitations or prohibitions on our future business activities or suspension or revocation of our licenses or trading rights.
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In addition, our ability to satisfy our liquidity and capital needs may be affected by a variety of factors, some of which are beyond our control, including, macroeconomic and socio-political conditions, fluctuations in cash or deposit balances, increased capital requirements, changes in regulatory guidance or interpretations, or other regulatory changes. If cash generated by client trading activities and operating earnings is not sufficient for our liquidity needs, we may be forced to seek external financing. During periods of disruptions in the credit and capital markets, potential sources of external financing could be reduced, and borrowing costs could increase. Financing may not be available on acceptable terms, or at all, due to market conditions or disruptions in the credit markets. If we experience any significant decrease in our liquidity, our business, financial condition and results of operations could be adversely impacted.
We may not succeed in promoting and sustaining our brand.
We believe that developing and maintaining awareness of our brand effectively is critical to attracting new and retaining existing clients to our platform. This depends largely on the effectiveness of our marketing efforts and the success of the channels we use to promote our marketplace. If any of our current marketing channels become less effective, if we are unable to continue to use any of these channels, if the cost of using these channels were to significantly increase or if we are not successful in generating new channels, we may not be able to attract new investors and borrowers in a cost-effective manner or convert potential investors and borrowers into active investors and borrowers on our marketplace.
Our efforts to build our brand may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
We face risks related to our know-your-customer, or KYC procedures when our clients provide outdated, inaccurate, false or misleading information.
Although we conduct KYC procedure before we approve our client’s account open request, our KYC procedure has some inherent limitations and we may not be able to spot our clients’ outdated, inaccurate, false or misleading information. Our KYC procedures include but not limited to (i) collecting the identification information of our client such as name, gender, email, nationality, date of birth, type of identity document, identity document number, tax identification number and wallet address; (ii) background check on whether the clients’ nationality fall within the scope of US sanction countries; (iii) monitoring our clients’ IP addresses, and etc. Our KYC procedures may not be effective if (i) we fail to identify any fake documents supplied by our clients; or (ii) our clients use a VPN router to circumvent our IP blacklist. We collect client information during the account opening and registration process and screens accounts against public databases or collaborates with external service providers to verify client identity and detecting risks. Although we require our clients to submit documents for proof of their identity and address for completing the account registration and to update such information from time to time, we face risks as the information provided by our clients may be outdated, inaccurate, false or misleading. We cannot fully confirm the accuracy, currency and completeness of such information beyond reasonable effort. For example, to reduce the risk of being subject to complex U.S. laws and regulations, we do not allow U.S. citizens or residents to open an account with us and we require our potential clients to provide their passports or identity cards before account opening. However, if a potential client only provides his PRC identity card, which is usually valid for 10 years or more, and misinforms us that he does not also possess a U.S. passport or permanent resident card, we might not be able to detect such misinformation. In addition, as a client who is not a U.S. citizen or resident at the time of account registration may later obtain U.S. citizenship or residential status and fail to update us in a timely manner, our customer database might not be entirely accurate at all time. Despite our efforts to exclude persons who reside in jurisdictions where we have no license or permit such as the United States, our provision of products and services to such clients could be in violation of the applicable laws and regulations in those jurisdictions, of which we may have no awareness until we are warned by the relevant supervising authorities. Despite our safeguards, we could still be subject to certain legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation resulting from such violations. In particular, following the consummation of the Business Combination, as we become increasingly renown in the United States and worldwide, there is no assurance that we will be able to successfully identify and exclude all persons who resides in jurisdictions where we have no license or permit to operate, including the United States. If U.S. citizens and residents were to register on and begin using our platform, we may be subject to the scrutiny of U.S. regulatory agencies and required to comply with applicable laws and regulations in the United States, including the requirements to obtain relevant licenses and permits for providing our products to U.S. citizens and residents. We currently do not intend to apply for such licenses and permits in the
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United States, and if we determine to do so, there is no guarantee that we will successfully obtain such licenses in a timely fashion, or at all. We could be subject to disciplinary or other actions by the U.S. regulatory agencies due to claimed noncompliance which could have a material adverse effect on our business, financial condition and results of operations.
In addition, although we have strict internal policies for continuing KYC procedures after the activation of accounts and for issues such as anti-corruption, economic sanctions, anti-money laundering, export controls and securities fraud, we mainly rely on our continuing KYC procedures to ensure our compliance with relevant laws and regulations related to anti-corruption, economic sanctions, anti-money laundering, export controls and securities fraud. Although we have trainings for our employees in all of our departments, our KYC system and procedures cannot be foolproof. Any potential flaw in our KYC system or any misconduct in the KYC procedures by any of our employees may lead to our failure of compliance with such relevant laws and regulations, which will further subject us to certain legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation.
Our clients may engage in fraudulent or illegal activities on our platform.
We have implemented stringent internal control policies, insider trading, anti-money laundering and other anti-fraud rules and mechanisms on our platform, for example, we cooperated with third party search system service provider to check if our clients are politically exposed persons or on certain sanction lists (including but not limited to the lists of money laundering, terrorist financing or other crimes). Nevertheless, we remain subject to the risk of fraudulent or illegal activities both on our platform and associated with our clients, funding and other business partners, and third parties handling client information. Our resources, technologies and fraud detection tools may be insufficient to accurately detect and prevent fraudulent or illegal activities.
Any misbehavior of or violation by our clients of applicable laws and regulations could lead to regulatory inquiries and investigations that involve it, which may affect our business operation and prospects. We might also incur higher costs than expected in order to take additional steps to reduce risks related to fraudulent and illegal activities. High-profile fraudulent or illegal activities, for example, money laundering, insider trading and securities fraud, could also lead to regulatory intervention, and may divert our management’s attention and cause us to incur additional regulatory and litigation expenses and costs. Although our client agreements require clients to acknowledge that they will observe all insider trading, money laundering and securities fraud laws and regulations in applicable jurisdictions and to assume liabilities for all restrictions, penalties and other responsibilities arising from conducts suspected to constitute insider trading, money laundering and/or, securities fraud, we cannot verify whether every transaction conducted by our clients is in compliance with such laws and regulations because our clients may circumvent our due diligence measures to commit insider trading and/or money laundering. Significant increases in fraudulent or illegal activities could negatively impact our brand and reputation, reduce the trading volume on our platform and therefore harm our operating and financial results.
In addition, we could also suffer serious harm to our reputation, financial condition, client relationships and even be subject to regulatory sanctions and significant legal liability, if any of our employees engage in illegal or suspicious activities or other misconduct. See “— Fraud, misconduct or errors by our directors, officers, employees, agents and other third-party service providers could harm our business and reputation.” Although we have not experienced any material business or reputational harm as a result of fraudulent or illegal activities in the past, we cannot rule out the possibility that any of the foregoing may occur, causing harm to our business or reputation in the future. If any of the foregoing were to occur, our results of operations and financial conditions could be materially and adversely affected.
Our business depends on the continued efforts of our senior management, particularly our founder and controlling shareholder, Mr. Jian Wang. If one or more of our key executives were unable or unwilling to continue in their present positions, our business may be severely disrupted.
Our business operations depend on the continued services of our senior management. While we provide a variety of attractive incentives to our management, we cannot assure you that we can continue to retain their services. Although there has been no departures of our senior management members in the past, we cannot assure you that our existing senior management members will not terminate their employment with us in the future. In addition, we do not have any key man insurance for our executive officers or key employees. If one or more of our key executives were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations
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may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, there is no assurance that any member of our management team will not join one of our competitors or form a competing business. If any dispute arises between us and our current or former officers, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.
User growth and activity on mobile devices depend upon effective use of mobile operating system, networks and standards, over which we do not have control.
As of the date of this prospectus, majority of our clients access our services through PC, however, we expect to see a growing number of our clients access our services through our mobile apps in the future. As new mobile devices and platforms are released, it is difficult to predict the problems we may encounter in developing applications for these new devices and platforms, and we may need to devote significant resources to the development, support and maintenance of such applications. In April 2020, we launched our newly developed all-in-one Lion Brokers Pro app. There are substantial uncertainties associated with the newly launched app, including compatibility with mobile operating systems, and we cannot assure you we could operate successfully or as we expected.
In addition, our future growth and our results of operations could suffer if we experience difficulties in the future in integrating our services into mobile devices or if problems arise with our relationships with providers of mobile operating systems or mobile app stores, or if we face increased costs to distribute or have users utilize our services on mobile devices. We are further dependent on the interoperability of providing our services on popular mobile operating systems that we do not control, such as iOS and Android, and any changes in such systems that degrade the accessibility of our services or give preferential treatment to competing products could adversely affect the usability of our services on mobile devices. In the event that it is more difficult for our users to access and utilize our services on their mobile devices, or if our users choose not to access or utilize our services on their mobile devices or to use mobile operating systems that do not offer access to our services, our user growth could be harmed and our business, financial condition and operating results may be adversely affected.
We may not be able to prevent others from unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, domain names, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on a combination of intellectual property laws and contractual arrangements, including confidentiality, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. “Business — Intellectual Property.” Despite these measures, any of our intellectual property rights could be challenged, invalidated, circumvented or misappropriated, or such intellectual property may not be sufficient to provide us with competitive advantages.
It is often difficult to maintain and enforce intellectual property rights. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. Confidentiality, invention assignment and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights. Preventing any unauthorized use of our intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, patents, copyrights, know-how or other intellectual property rights held by third parties. We may be from time to time in the future subject to legal proceedings and claims relating to the intellectual property rights of
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others. In addition, there may be third-party trademarks, patents, copyrights, know-how or other intellectual property rights that are infringed by our products, services or other aspects of our business without our awareness. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in Hong Kong, PRC, Singapore, Cayman Islands, the United States or other jurisdictions. If any third-party infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement activities or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected. As the date of this prospectus, the application for one of our trademarks is still pending. If we are unable to complete these registrations, we may not be able to prohibit unauthorized use or prevent other infringements of these trademarks.
We and our directors and officers may from time to time be subject to claims, controversies, lawsuits and legal proceedings.
We and our directors and officers 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.
If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report our results of operations, meet reporting obligations or prevent fraud. As a result, holders of our securities could lose confidence in our financial and other public reporting, which would harm our business and trading price of our securities.
Prior to the Business Combination, we are a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In connection with auditing consolidated financial statements as of and for the year ended December 31, 2019, our independent registered public accounting firm and Lion had identified two material weaknesses in our internal controls. A material weakness is a deficiency, or combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Upon completion of this Business Combination, we became a public company and we are subject to the Sarbanes-Oxley Act of 2002, and the Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with annual report for the fiscal year ended December 31, 2020. During 2020, we have implemented remedial measures to address the material weaknesses identified in 2019. Following the issuance of SEC guidance relating to warrant accounting, on June 11, 2021, our management and our audit committee concluded that, it was appropriate to restate certain of our previously issued financial statements. As part of such process, we identified a material weakness in our internal controls over financial reporting, which has since been remediated.
Although we have already begun implementing remedial measures to address the material weakness, the implementation of these measures may not fully address the deficiencies in our internal control over financial reporting, and we cannot conclude that we have been fully remedied. In the future, we may determine that we have additional control deficiencies, or our independent registered public accounting firm may disagree with our management assessment of the effectiveness of our internal controls. Our failure to correct the material weakness or failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis, which could cause investors to lose confidence in our reported financial information, which may result in volatility in and a decline in the market price of our securities.
Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such accountant might have identified additional material weaknesses. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act and do not
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qualify for the carve-out as defined by SEC’s Accelerated Filer and Large Accelerated Filer Definition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting our own independent testing, may issue a report that is qualified if we are not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, the reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
Lion may not be able to obtain additional capital on favorable terms or at all.
Lion anticipates that our current cash, cash provided by operating activities and funds available through our current and anticipated bank loans and credit facilities will be sufficient to meet our current and anticipated needs for general corporate purposes. However, Lion needs to make continued investments in products development, hardware, software, IT systems, business expansion and to retain talents to remain competitive. Lion may need to raise funds through public or private financings, strategic relationships or other arrangements. There can be no assurance that such funding, will be available on terms acceptable to Lion, or at all. Furthermore, any equity financing will be dilutive to existing shareholders, and debt financing, if available, may involve restrictive covenants that may limit our operating flexibility with respect to certain business matters. If adequate capital is not available to Lion 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.
We may be subject to litigation, arbitration or other legal proceeding risk.
We may be subject to arbitration claims and lawsuits in the ordinary course of our business. As of the date of this prospectus, we are not a party to, and are not aware of any threat of, any legal proceeding that, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or operations. Actions brought against us may result in settlements, awards, injunctions, fines, penalties and other results adverse to us. Predicting the outcome of such matters is inherently difficult, particularly where claims are brought on behalf of various classes of claimants or by a large number of claimants, when claimants seek substantial or unspecified damages or when investigations or legal proceedings are at an early stage. A substantial judgment, settlement, fine or penalty could be material to our operating results or cash flows for a particular period, depending on our results for that period, or could cause us significant reputational harm, which could harm our business prospects. In market downturns, the volume of legal claims and amount of damages sought in litigation and regulatory proceedings against securities brokerage companies have historically increased. The amounts involved in the trades we execute, together with rapid price movements in our currency pairs, can result in potentially large damage claims in any litigation resulting from such trades. Dissatisfied clients may make claims against us regarding the quality of trade execution, improperly settled trades, mismanagement or even fraud, and these claims may increase as our business expands.
In addition, even if we prevail in any litigation or enforcement proceedings against us, we could incur significant legal expenses defending against the claims, even those without merit. Moreover, because even claims without merit can damage our reputation or raise concerns among our clients, we may feel compelled to settle claims at significant cost. The initiation of any claim, proceeding or investigation against us, or an adverse resolution of any such matter could have a material adverse effect on our reputation, business, financial condition and results of operations and cash flows.
Our business, especially the NFT business, is subject to an extensive and highly-evolving regulatory landscape and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition.
Our business, especially the NFT business, is subject to extensive laws, rules, regulations, policies, orders, determinations, directives, treaties, and legal and regulatory interpretations and guidance in the markets in which we operate, including those governing financial services, crypto asset custody, exchange, and transfer, cross-border money and crypto asset transmission, foreign currency exchange, cybersecurity, fraud detection, and competition, bankruptcy, tax, anti-bribery, economic and trade sanctions, anti-money laundering, and counter-terrorist financing. Many of these legal and regulatory regimes were adopted prior to the advent of the internet, mobile technologies, crypto assets,
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and related technologies. As a result, some applicable laws and regulations do not contemplate or address unique issues associated with the cryptoeconomy, are subject to significant uncertainty, and vary widely across local and international jurisdictions. These legal and regulatory regimes, including the laws, rules, and regulations thereunder, evolve frequently and may be modified, interpreted, and applied in an inconsistent manner from one jurisdiction to another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the cryptoeconomy requires us to exercise our judgment as to whether certain laws, rules, and regulations apply to us, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we have not complied with such laws, rules, and regulations, we could be subject to significant fines, revocation of licenses, limitations on our products and services, reputational harm, and other regulatory consequences, each of which may be significant and could adversely affect our business, operating results, and financial condition.
In addition to existing laws and regulations, various governmental and regulatory bodies, including legislative and executive bodies, in the United States and in other countries may adopt new laws and regulations. Furthermore, new interpretations of existing laws and regulations may be issued by such bodies or the judiciary, which may adversely impact the development of the cryptoeconomy as a whole and our legal and regulatory status in particular by changing how we operate our business, how our products and services are regulated, and what products or services we and our competitors can offer, requiring changes to our compliance and risk mitigation measures, imposing new licensing requirements, or imposing a total ban on certain crypto asset transactions, as has occurred in certain jurisdictions in the past. Many regulations are substantial uncertainties on how these requirements would apply in practice, and we may face substantial costs to operationalize and comply with these rules. We may be further subject to administrative sanctions for technical violations or customer attrition if the user experience suffers as a result.
Because we have offered and may continue to offer a variety of innovative products and services to our customers, our offerings are subject to significant regulatory uncertainty and we from time to time face regulatory inquiries regarding our current and planned products. To the extent that we or our employees, contractors, or agents are deemed or alleged to have violated or failed to comply with any laws or regulations, including related interpretations, orders, determinations, directives, or guidance, we or they could be subject to a litany of civil, criminal, and administrative fines, penalties, orders and actions, including being required to suspend or terminate the offering of certain products and services.
We may pursue acquisitions or joint ventures that could present unforeseen integration obstacles, incur unpredicted costs or may not enhance our business as we expected.
We may in the future pursue acquisitions and joint ventures as part of our growth strategy. Any future acquisition or joint venture may result in exposure to potential liabilities of the acquired companies, significant transaction costs and present new risks associated with entering additional markets or offering new products and integrating the acquired companies or newly established joint ventures. Potential liabilities may arise from deficiencies in due diligence findings and deficient past track record results.
Moreover, we may not have sufficient management, financial and other resources to integrate companies we acquire or to successfully operate joint ventures and we may be unable to profitably operate our expanded company structure. Additionally, any new business that we may acquire or joint ventures we may form, once integrated with our existing operations, may not produce expected or intended results.
A sustained outbreak of the COVID-19 pandemic could have a material adverse impact on our business, operating results and financial condition.
Since December 2019, the outbreak of a novel strain of coronavirus, later named COVID-19, spread rapidly throughout China and later to the rest of the world. On January 30, 2020, the International Health Regulations Emergency Committee of the World Health Organization declared the outbreak a “Public Health Emergency of International Concern (PHEIC),” and later on March 11, 2020 a global pandemic. The COVID-19 outbreak 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.
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This outbreak of COVID-19 has caused companies like us and our business partners to implement temporary adjustments to work schedules and travel plans, mandating employees to work from home and collaborate remotely. As a result, we may have experienced lower efficiency and productivity, internally and externally, which may adversely affect our service quality. Moreover, our business depends on our employees and the continued services of these individuals. 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.
Furthermore, our results of operations have been severely affected by the COVID-19 outbreak. CFD trading volumes and futures contract volumes decreased significantly compared to the same period of prior year, which was mainly attributable to economic and financial impact brought about by COVID-19 on our customers, causing a decrease in both their willingness to trade and make investments as well as their disposable income allocated making such transactions. Customers’ concerns about future unpredictability also caused their trading activity to decline, impacting our CFD trading business in particular. In addition, travel restrictions in Hong Kong caused cancellations and prevented management from attending branding, business promotions, and exhibition activities, which limited the opportunities to acquire new customers. Meanwhile, our futures and insurance brokerage businesses were adversely affected as new or existing customers may not be able to travel to Hong Kong to open new futures trading accounts or purchase insurance products. More broadly, the COVID-19 outbreak threatens global economies and has caused significant market volatility and declines in general economic activities. This may have severely dampened the confidence in global markets of investors, including our clients, resulting in decreases in overall trading activities and restraint in their investment decisions.
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. Given the general slowdown in economic conditions globally, volatility in the capital markets as well as the general negative impact of the COVID-19 outbreak on the insurance brokerage, securities and futures brokerage and overall financial service industry, we cannot assure you that we can launch new products and services in a timely manner or that we can maintain the growth rate we have experienced or projected. Because of the uncertainty surrounding it, the financial impact related to the COVID-19 outbreak and the response to it cannot be reasonably estimated at this time, but our financial condition and operating results for 2020 were adversely affected.
We face risks related to natural disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
We are vulnerable to natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins, war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology platform failures or Internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware as well as adversely affect our ability to provide products and services on our marketplace. Moreover, besides COVID-19, our business could also be adversely affected by Ebola virus disease, Zika virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemics.
We maintain offices in Singapore and Hong Kong, where most of our directors and management and a majority of our employees currently reside. In addition, some of our system hardware and back-up systems are hosted in leased facilities located in Hong Kong. Consequently, we are highly susceptible to factors adversely affecting Hong Kong. If any of the abovementioned natural disasters, health epidemics or other outbreaks were to occur in Hong Kong, our operation may experience material disruptions, such as temporary closure of our offices and suspension of services, which may materially and adversely affect our business, financial condition and results of operations.
Our business is sensitive to general economic and political conditions and other factors beyond our control, and our results of operation are prone to significant and unpredictable fluctuations.
Our revenues depend substantially on our clients’ trading volume, which are influenced by the general trading activities in the market. Trading activities are directly influenced by a variety of factors beyond our control, including economic and political conditions, macro trends in business and finance, investors’ interest level in trading and legislative and regulatory changes in the jurisdictions where we operate. Any of these or other factors may cause trading activity levels in our industry to fluctuate and adversely affect our business and results of operations.
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For example, since June 2019, there has been large and frequent riots in Hong Kong following the forfeited extradition bill, many of which have been violent. The sustained riot has already caused a material adverse effect on Hong Kong’s economy and social order, which in turn negatively impacted on our insurance agency business as fewer Chinese clients had come to Hong Kong for insurance purchase. There can be no assurance when these tensions will end or that situation will not escalate in the future. Any future increase in tension or failure to restore public and social order by the Hong Kong government could adversely impact the security and stability of Hong Kong, in particular, Hong Kong’s financial market.
Moreover, following the outbreak and spread of COVID-19 as well as the OPEC-Russia oil price war, on March 9, 2020, all three major U.S. trading indexes, Dow Jones Industrial Average, S&P 500 Index and the NASDAQ-100 dropped significantly, leading to a 15-minute circuit breaker that halted the trading. The circuit breaker was triggered several additional times during the days that followed, which led to multiple large declines in the trading indexes. Other stock markets in the rest of the world have also experienced similar falls in stock prices. The volatility of global stock market may adversely affect our clients’ confidence and willingness in trading and/or investing in the financial market. As a result, our operating results may be subject to significant and unpredictable fluctuations.
Russia’s recent military interventions 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 the value of the Lion’s investments, even though the Lion does 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. The volatility of global stock market may adversely affect our clients’ confidence and willingness in trading and/or investing in the financial market. As a result, our operating results may be subject to significant and unpredictable fluctuations.
The current trade war between the U.S. and China may dampen growth in China and other markets where the majority of our clients reside.
The U.S. government has imposed, and has proposed to impose additional, new or higher tariffs on specified 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 specified products imported from the U.S. Certain tariffs have already been adopted by both sides, and the two countries often meet to negotiate arrangements that would include the decreasing or removal of tariffs, but Lion cannot assure you that the negotiations will be successful in reducing tariffs or that other tariffs will not be imposed, even if an agreement will be reached. On October 11, 2019, the U.S. government announced that the two countries had reached a “Phase 1” agreement, which was signed on January 16, 2020. However, due to various political developments, including a new administration in the U.S. government, it remains to be unclear whether any “Phase 2” agreement will be negotiated and how much economic relief from the trade war it will offer.
Although we are not subject to any of those tariff measures, the proposed tariffs may adversely affect the economic growth in China, Hong Kong and other markets in which we operate, as well as the financial condition of our clients. With the potential decrease in the spending and investment power of our target clients, we cannot guarantee that there will be no negative impact on our operations. In addition, the current and future actions or escalations by either the U.S. or China that affect trade relations may cause global economic turmoil and potentially have a negative impact on our business, financial condition and results of operations, and we cannot provide any assurance as to whether such actions will occur or the form that they may take.
Risk Related to our Corporate Structure
We may rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.
We are a holding company incorporated in the Cayman Islands, and we may 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. If any of our 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.
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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. Shareholders of a Cayman company will not be subject to any income, withholding or capital gains taxes in the Cayman Islands with respect to their shares in the Cayman company and dividends received on those shares, nor will they be subject to any estate or inheritance taxes in the Cayman Islands. There are no exchange controls in the Cayman Islands. Under the Companies Act, a Cayman company may declare and pay a dividend to shareholders from time to time out of the profits or out of the share premium account, provided that the company shall be able to pay its debts as they fall due in the ordinary course of business.
Risks Related to Doing Business in Jurisdictions We Operate
A downturn in the Hong Kong, China or global economy, and economic and political policies of China could materially and adversely affect our business and financial condition.
A substantial part of our operations are located in Hong Kong. Accordingly, our business, prospects, financial condition and results of operations may be influenced to a significant degree by political, economic and social conditions in Hong Kong and China generally and by continued economic growth in Hong Kong and China as a whole. The Chinese economy differs from the economies of most developed countries in many respects, including the amount of government involvement, level of development, growth rate, control of foreign exchange and allocation of resources. While the Chinese economy has experienced significant growth over the past decades, growth has been uneven, both geographically and among various sectors of the economy. The Chinese government has implemented various measures to encourage economic growth and guide the allocation of resources. Some of these measures may benefit the overall Chinese economy, but may have a negative effect on us.
Economic conditions in Hong Kong and China are sensitive to global economic conditions. 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.
The Hong Kong legal system embodies uncertainties which could limit the legal protections available to Lion.
Hong Kong is a Special Administrative Region of the PRC. Following British colonial rule from 1842 to 1997, China assumed sovereignty under the “one country, two systems” principle. The Hong Kong Special Administrative Region’s constitutional document, the Basic Law, ensures that the current political situation will remain in effect for 50 years. Hong Kong has enjoyed the freedom to function in a high degree of autonomy for its affairs, including currencies, immigration and custom, independent judiciary system and parliamentary system. On July 14, 2020, the United States signed an executive order to end the special status enjoyed by Hong Kong post-1997. As the autonomy currently enjoyed were compromised, it 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 business and operation. 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 our ability to enforce our agreements with our clients.
Hong Kong regulatory requirement of prior approval for transfer of shares in excess of 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 company 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 company, 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 new substantial shareholder(s) of the our HKSFC-licensed subsidiaries, which are Lion International Securities Group Limited, Lion Futures Limited and Lion Asset Management Limited, are required to seek prior approval from
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the HKSFC. This regulatory requirement may discourage, delay or prevent a change in control of Lion, which could deprive our shareholders the opportunity to receive a premium for their shares as part of a future sale and may reduce the price of our shares upon the consummation of a future proposed business combination.
Uncertainties with respect to the PRC legal system could adversely affect us.
Although our substantial operations are based in Singapore, Hong Kong and the Cayman Islands, we launched our apps in the app stores of China and most of our users are PRC citizens, which may subject us to certain laws and regulations in China. PRC companies and variable interests entities are generally subject to laws and regulations applicable to foreign investments in China and, in particular, laws and regulations applicable to wholly foreign-owned enterprises. The PRC legal system is based on statutes. Prior court decisions may be cited for reference but have limited precedential value.
Since 1979, PRC legislation and regulations have significantly enhanced the protections afforded to various forms of foreign investments in China. However, China has not developed a fully integrated legal system and recently enacted laws and regulations may not sufficiently cover all aspects of economic activities in China. In particular, because these laws and regulations are relatively new, and because of the limited volume of published decisions and their nonbinding nature, the interpretation and enforcement of these laws and regulations involve uncertainties. In addition, the PRC legal system is based in part on government policies and internal rules (some of which are not published on a timely basis or at all) that may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until sometime after the violation. In addition, any litigation in China may be protracted and result in substantial costs and diversion of resources and management attention.
Changes in the policies, regulations, rules, and the enforcement of laws of the PRC government may be quick with little advance notice and could have a significant impact upon our ability to operate profitably in the PRC.
Although our substantial operations are based in Singapore, Hong Kong and the Cayman Islands, we launched our apps in the app stores of China and most of our users are PRC citizens, which may subject us to certain laws and regulations in China. Accordingly, economic, political and legal developments in the PRC will affect our business, financial condition, results of operations and prospects. Policies, regulations, rules, and the enforcement of laws of the PRC government can have significant effects on economic conditions in the PRC and the ability of businesses to operate profitably. Our ability to operate profitably in the PRC may be adversely affected by changes in policies by the PRC government, including changes in laws, regulations or their interpretation, particularly those dealing with the Internet, including censorship and other restriction on material which can be transmitted over the Internet, security, intellectual property, money laundering, taxation and other laws that affect our ability to operate our business in China.
The Chinese government may exercise significant oversight and discretion over the conduct of business in the PRC and may intervene in or influence our operations at any time, which could result in a material change in our operations and/or the value of our securities.
Although our substantial operations are based in Singapore, Hong Kong and the Cayman Islands, we launched our apps in the app stores of China, most of our users are PRC citizens and we recently established a PRC subsidiary in Hangzhou, which may subject us to certain laws and regulations in China. The Chinese government has exercised and continues to exercise substantial control over virtually every sector of the Chinese economy through regulation and state ownership. Our ability to conduct our current business may be harmed by changes in its laws and regulations, including those relating to taxation, environmental regulations, property and other matters. The central or local governments of these jurisdictions may impose new, stricter regulations or interpretations of existing regulations that would require additional expenditures and efforts on our part to ensure our compliance with such regulations or interpretations. Accordingly, government actions in the future, including any decision not to continue to support recent economic reforms and to return to a more centrally planned economy or regional or local variations in the implementation of economic policies, could have a significant effect on economic conditions in China or particular regions thereof, and could require us to divest ourselves of any interest we then hold in Chinese properties.
The PRC government has recently published new policies that significantly affected certain industries such as the education and internet industries, and we cannot rule out the possibility that it will in the future release regulations or policies regarding our industry that could adversely affect our business, financial condition and results of operations. Furthermore, the PRC government has recently indicated an intent to exert more oversight and control over overseas
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securities offerings and other capital markets activities by, and overseas and/or foreign investment in, companies with operations in mainland China, including enhancing supervision over companies with operations in mainland China that are listed overseas using VIE structure, and that the PRC regulatory authorities could disallow the use of such VIE holding structure. We do not believe that we are directly subject to these regulatory actions or statements, as we do not currently have any VIE or contractual arrangements in mainland China. Our substantial operation is based in Singapore, Hong Kong and the Cayman Islands, and our PRC subsidiary in Hangzhou was established solely for purpose of passive equity investment in China with no substantial business activities of itself. As of the date of this prospectus, Lion Group (Hangzhou) Investment Limited does not have any operations or investment other than holding 25% of the partnership interest in Hangzhou Qianlan Enterprise Management Partnership (Limited Partnership). The Foreign Investment Law of the PRC, or the Foreign Investment Law, adopted by the National People’s Congress in March 2019 and became effective on January 2020, grants pre-establishment national treatment to foreign investors to make investment in China, so long as such investment does not violate the “negative list”. The negative list currently effective is the Special Administrative Measures (Negative List) for the Access of Foreign Investment (2021 Edition), or the Negative List 2021, which became effective on January 1, 2022. Any industry not listed in the Negative List 2021 shall be deemed as permitted industry and generally open to the foreign investment unless specifically prohibited or restricted by the PRC laws and regulations. Pursuant to these regulations, there are no restrictions on foreign investment in establishing subsidiaries and passive equity investment in a limited partnership. As a result, our PRC subsidiary does not require VIE structure or other contractual arrangements for its current operation and the Company holds 100% equity interests in Lion Group (Hangzhou) Investment Limited through Lion Wealth Limited.
While our current corporate structure does not contain any VIEs and our group has no intention establishing any VIEs in the future, if in the future our group’s corporate structure were to contain a VIE, the PRC regulatory authorities could disallow the VIE structure, which would likely result in a material change in our operations and/or a material change in the value of the securities we are registering for sale, including that it could cause the value of such securities to significantly decline or in extreme cases, become worthless. Moreover, the rules and regulations and the enforcement thereof in China can change quickly. The PRC regulatory authorities could change the rules, regulations and policies regarding foreign ownership in the industry in which we operate, which would likely result in material change in our operations and/or a material change in the value of the securities we are registering for sale, including that it could cause the value of the securities to significantly decline, or become worthless.
As such, we could be subject to regulations by various political and regulatory entities, including various local and municipal agencies and government sub-divisions, and these regulations may be interpreted and applied inconsistently by different agencies or authorities. We may incur increased costs necessary to comply with existing and newly adopted laws and regulations or penalties for any failure to comply, 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; and
• subject our Company 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 practices.
Further, it is uncertain when and whether we will be required to obtain any pre-approval from the PRC government to list on U.S. exchanges or to conduct our current business operation, and even when such pre-approval is obtained, whether it will be denied or rescinded. Further, the promulgation of new laws or regulations, or the new interpretation of existing laws and regulations, in each case that restrict or otherwise unfavorably may impact the ability or the way we may conduct our business and could require us to change certain aspects of our business to ensure compliance, which could decrease demand for our products or services, reduce revenues, increase costs, require us to obtain more licenses, permits, approvals or certificates, or subject it to additional liabilities. As such, our operations could be adversely affected, directly or indirectly, by existing or future PRC laws and regulations relating to its business or industry, which could result in a material adverse change in the value of our ADSs, potentially rendering it worthless. As a result, both you and us face uncertainty about future actions by the PRC government that could significantly affect our ability to offer or continue to offer securities to investors and cause the value of our securities to significantly decline or be worthless.
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The PRC government may intervene or influence our business operations at any time or may exert more control over offerings conducted overseas and foreign investment in China based issuers, which could result in a material change in our business operations or the value of our securities. Additionally, the approval or other administration requirements of the CSRC, or other PRC governmental authorities, may be required in connection with this offering under a PRC regulation or any new laws, rules or regulations to be enacted, and if required, we cannot assure you that we will be able to obtain such approval. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.
Recent statements by the Chinese government have indicated an intent to exert more oversight and control over offerings that are conducted overseas and/or foreign investments in China-based issuers. The PRC has recently issued new rules that would require companies collecting or holding large amounts of data or critical data to undergo a cybersecurity review prior to listing in other nations, a move that would significantly tighten oversight over China based companies. In detail, in December 2021, the CAC, together with other authorities, jointly promulgated the Cybersecurity Review Measures, which became effective on February 15, 2022 and replaces its predecessor regulation. Pursuant to the Cybersecurity Review Measures, critical information infrastructure operators that procure internet products and services and network platform operators that carry out data processing activities that affect or may affect national security should be subject to the cybersecurity review. The Cybersecurity Review Measures further stipulates that network platform operators that possess personal information of more than one million users shall apply for cybersecurity review before seeking to list in a foreign stock exchange. Moreover, in November 2021, the CAC released the Administration Regulations on the Cyber Data Security (Draft for Comments), or the Draft Cyber Data Regulations. The Draft Cyber Data Regulations provide that data processors refer to individuals or organizations that, during their data processing activities such as data collection, storage, utilization, transmission, publication and deletion, have autonomy over the purpose and the manner of data processing. In accordance with the Draft Cyber Data Regulations, data processors shall apply for a cybersecurity review for certain activities, including, among other things, (i) the listing abroad of data processors that process the personal information of more than one million users and (ii) any data processing activity that affects or may affect national security. In addition, the Draft Cyber Data Regulations requires that data processors that process “important data” or are listed overseas must conduct an annual data security assessment by itself or commission a data security service provider to do so, and submit the assessment report of the preceding year to the municipal cybersecurity department by the end of January each year. As of the date of this prospectus, the Draft Cyber Data Regulations was released for public comment only, and their respective provisions and anticipated adoption or effective date may be subject to change with substantial uncertainty.
Although the substantial operation of us is based in Singapore, Hong Kong and the Cayman Islands and all of the data and personal information we collected are stored in servers outside mainland China, we launched our apps in the app stores of China and most of our users are PRC citizens, which may subject us to certain laws and regulations in China. As such, we collect certain personal data from our customers in connection with our business and operations and we are subject to various regulatory requirements relating to the security and privacy of data in various jurisdictions. Neither the Cybersecurity Review Measures or the Draft Cyber Data Regulations had been issued or effective before our historic listing and the laws and regulations then effective as of our historic listing did not require any issuer to obtain pre-approval from CAC before listing at a foreign stock exchange. As of the date of this prospectus, no detailed rules or implementation rules of the Cybersecurity Review Measures have been issued by any authority and both the Cybersecurity Review Measures and the Draft Cyber Data Regulations remain unclear as to whether relevant requirements will be applicable to companies that have already been listed in the United States, such as us, for our future offerings. As of the date of this prospectus, we do not hold personal information of more than one million users and our business activities does not involve risk factors regarding national security as stipulated in the Cybersecurity Review Measures. We have not been informed by any government authorities that we are deemed as a critical information infrastructure operator, and we have not received any inquiry or notice of and is not currently subject to any proceedings initiated by the CAC. Based on the foregoing and as advised by our PRC legal counsel, JunHe LLP, we believe that we are not required to apply for pre-approval from CAC before the issuance of the securities being registered for resale under this registration statement and we are not subject to mandatory application requirement for cybersecurity review. However, the exact definition, scope or criteria of “critical information infrastructure operators”, “network platform operators” and “risk factors regarding national security” under the current regulatory regime remains unclear, and the PRC government authorities may have wide discretion in the interpretation and enforcement of the applicable laws. Since our apps are available to download in the app stores of China and most of our users are PRC citizens, we cannot assure you that we would not be deemed by the authority as a critical information infrastructure operator or carrying out data processing activities that affect or may affect national security, which may subject us to order of clearance of cybersecurity review or other specific actions. We face uncertainties as to whether these additional procedures can be completed by us timely, or at all, which may subject us to government
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enforcement actions and investigations, fines, penalties, suspension of our non-compliant operations, or removal of our app from the relevant application stores, and materially and adversely affect our business and results of operations. In addition, we may be subject to heightened regulatory scrutiny from PRC governmental authorities in the future. As there remains significant uncertainty in the interpretation and enforcement of the Data Security Law and the PIPL, we cannot assure you that we will comply with such regulations in all respects. Any non-compliance with these laws and regulations may subject us to fines, orders to rectify or terminate any actions that are deemed illegal by regulatory authorities, other penalties, including but not limited to removal of our apps in China market, as well as reputational damage or legal proceedings against us, which may affect our business, financial condition or results of operations.
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 the July 6 Opinion, to crack down on illegal activities in the securities market and promote the high-quality development of the capital markets, 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. Since this document is relatively new, uncertainties still exist in relation to how soon 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, and the potential impact such modified or new laws and regulations will have on our future offerings.
The M&A Rules adopted by six PRC regulatory agencies requires an overseas special purpose vehicle formed for listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals to obtain the approval of the CSRC, prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. As advised by our PRC legal counsel, JunHe LLP, based on their understanding of the current PRC laws, rules and regulations that the CSRC’s approval is not required for our listing and trading of our securities on Nasdaq, given that our PRC subsidiary was incorporated as wholly foreign-owned enterprises by means of direct investment rather than by merger or acquisition of equity interest or assets of a PRC domestic company owned by PRC companies or individuals as defined under the M&A Rules that are our beneficial owners. However, our PRC counsel has further advised us that there remains some uncertainty as to how the M&A Rules will be interpreted or implemented in the context of an overseas offering and its opinions summarized above are subject to any new laws, rules and regulations or detailed implementations and interpretations in any form relating to the M&A Rules. We cannot assure you that relevant PRC government agencies, including the CSRC, would reach the same conclusion as we do.
On December 24, 2021, the CSRC published the Provisions of the State Council on the Administration of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), and Administrative Measures for the Filing of Overseas Securities Offering and Listing by Domestic Companies (Draft for Comments), or, collectively, the Draft Overseas Listing Regulations. Such Draft Overseas Listing Regulations set out new filing procedures for China-based companies seeking direct or indirect listings and offerings in overseas markets. The Draft Overseas Listing Regulations require that China-based companies seeking to offer and list securities in overseas markets complete certain post-application/post-listing filing procedures with the CSRC. The Draft Overseas Listing Regulations do not require a China-based company including the Company to obtain the CSRC’s pre-approval before it applies for or completes a listing or offering of securities in overseas markets. However, the Draft Overseas Listing Regulations were released only for public comments and their provisions and anticipated adoption date are subject to changes and their interpretation and implementation remain uncertain.
If it is determined that any CSRC approval, filing, cybersecurity review or other governmental authorization is required for our previous and future offering, we may face sanctions by the CSRC, the CAC or other PRC regulatory agencies for failure to do so. These sanctions may include fines and penalties on operations in the PRC, limitations on our operating privileges in the PRC, delays in or restrictions on the repatriation of the proceeds from previous or future offering into the PRC, restrictions on or prohibition of the payments or remittance of dividends by our PRC subsidiary, or other actions that could have a material and adverse effect on our business, financial condition, results of operations, reputation and prospects, as well as the trading price of our ordinary shares. Furthermore, the CSRC or other PRC regulatory agencies may also take actions requiring us, or making it advisable for us, to halt our future offering before the settlement and delivery of the ordinary shares that we are offering. Consequently, if you engage in market trading or other activities in anticipation of and prior to the settlement and delivery of the ordinary shares we are offering, you would be doing so at the risk that the settlement and delivery may not occur. And if our subsidiaries or the holding company were denied permission from PRC authorities to list on U.S. exchanges, we will not be able to continue listing on U.S. exchange, which would materially affect the interest of the investors.
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As of the date of this prospectus, we have not received any inquiry or notice or any objection to this offering from the CSRC, the CAC or any other PRC authorities that have jurisdiction over our operations in mainland China and Hong Kong. However, given the current regulatory environment in the PRC, there remain uncertainty regarding the interpretation and enforcement of PRC laws, which can change quickly with little advance notice subject to any future actions of the PRC authorities. Uncertainties still exist, however, due to the possibility that laws, regulations, or policies in the PRC could change rapidly in the future. Any future action by the PRC government expanding the categories of industries and companies whose foreign securities offerings are subject to review by the CSRC or the CAC could significantly limit or completely hinder our ability to offer or continue to offer securities to investors and could cause the value of such securities to significantly decline or be worthless.
Risks Related to our ADSs, our Securities and this Offering
The price of our ADSs may be volatile.
The price of our ADSs may be volatile due to a variety of factors, including but not limited to:
• actual or anticipated fluctuations in our semi-annual and annual results and those of other public companies in the industry;
• changes in government regulation;
• mergers and strategic alliances in the financial services industry;
• market prices and conditions in the financial services market;
• announcements concerning us or our competitors; and
• the general state of the securities markets.
These market and industry factors may materially reduce the market price of our ADSs, regardless of our operating performance. Volatility in the price of our ADSs may increase volatility in the price of our warrants.
Reports published by analysts, including projections in those reports that differ from our actual results, could adversely affect the price and trading volume of our ADSs.
It is currently expected that securities research analysts will establish and publish their own periodic projections for our business. These projections may vary widely and may not accurately predict the results we actually achieve. Market price of our ADSs may decline if our actual results do not match the projections of these securities research analysts.
Similarly, if one or more of the analysts who write reports on us downgrades our ADSs or publishes inaccurate or unfavorable research about our business, price of our ADSs could decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, our ADSs price or trading volume could decline. While it is expected that research analyst coverage, if no analysts commence coverage of us, the trading price and volume for our ADSs could be adversely affected.
We may issue additional Class A Ordinary Shares or other equity securities, from time to time, without your approval, which would dilute your ownership interests and may depress the market price of our ADSs.
We may issue additional Class A Ordinary Shares or other equity securities of equal or senior rank in the future in connection with, among other things, future acquisitions, repayment of outstanding indebtedness or our equity incentive plan, without shareholder approval, in a number of circumstances.
Our issuance of additional Class A Ordinary Shares or other equity securities of equal or senior rank would have the following effects:
• our existing shareholders’ proportionate ownership interest and your holdings of ADSs in us will decrease;
• the amount of cash available per share, including for payment of dividends in the future, may decrease;
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• the relative voting strength of each previously outstanding ordinary shares may be diminished; and
• the market price of our ADSs may decline.
Holders of our ADSs may not have the same voting rights as our registered shareholders and might not receive voting materials in time to be able to exercise their right to vote.
Except as described in this prospectus and in the deposit agreement, holders of our ADSs will not be able to exercise voting rights attaching to the underlying Class A Ordinary Shares evidenced by the ADSs on an individual basis. Under the deposit agreement, holders of ADSs must vote by giving voting instructions to the depositary, including instructions to give a discretionary proxy to a person designated by us. Upon receipt of such holder’s voting instructions, the depositary will vote the underlying Class A Ordinary Shares in accordance with these instructions. ADSs holders will not be able to directly exercise their right to vote with respect to the underlying Class A Ordinary Shares unless they withdraw the underlying Class A Ordinary Shares. Holders of ADSs may not receive voting materials in time to instruct the depositary to vote, and it is possible that holders of ADSs, or persons who hold their ADSs through brokers, dealers or other third parties, will not have the opportunity to exercise their right to vote.
The voting rights ADSs holders are limited by the terms of the deposit agreement, and ADSs holders may not be able to exercise rights to direct how the Class A Ordinary Shares represented by ADSs are voted.
A holder of our ADSs may only exercise the voting rights with respect to the underlying Class A Ordinary Shares in accordance with the provisions of the deposit agreement. Upon receipt of voting instructions of a holder of ADSs in the manner set forth in the deposit agreement, the depositary will endeavor to vote the underlying Class A Ordinary Shares in accordance with these instructions. When a general meeting is convened, holders of ADSs may not receive sufficient notice of a shareholders’ meeting to permit them to withdraw the Class A Ordinary Shares underlying the ADSs to allow them to cast their votes with respect to any specific matter. In addition, the depositary and its agents may not be able to send voting instructions to holders of ADSs or carry out their voting instructions in a timely manner. We will make all reasonable efforts to cause the depositary to extend voting rights to ADSs holders in a timely manner, but we cannot assure such holders that they will receive the voting materials in time to ensure that they can instruct the depositary to vote their shares. Furthermore, the depositary will not vote on any matter for which voting is conducted on a show of hands basis in accordance with our Amended and Restated Memorandum and Articles of Association and will not have an obligation to demand voting on a poll basis. The depositary and its agents will not be responsible for any failure to carry out any instructions to vote, for the manner in which any vote is cast, or for the effect of any such vote. As a result, holders of ADSs may not be able to exercise their right to vote and may lack recourse if their equity shares are not voted as requested.
We and the depository are entitled to amend the deposit agreement and to change the rights of ADS holders under the terms of such agreement, and we may terminate the deposit agreement, without the prior consent of the ADS holders.
We and the depository are entitled to amend the deposit agreement and to change the rights of the ADS holders under the terms of such agreement, without the prior consent of the ADS holders. We and the depositary may agree to amend the deposit agreement in any way we decide is necessary or advantageous to us. Amendments may reflect, among other things, operational changes in the ADS program, legal developments affecting ADSs or changes in the terms of our business relationship with the depositary. In the event that the terms of an amendment are disadvantageous to ADS holders, ADS holders will only receive 30 days’ advance notice of the amendment, and no prior consent of the ADS holders is required under the deposit agreement. Furthermore, we may decide to terminate the ADS facility at any time for any reason. For example, terminations may occur when we decide to list our ordinary shares on a non-U.S. securities exchange and determine not to continue to sponsor an ADS facility or when we become the subject of a takeover or a going-private transaction. If the ADS facility will terminate, ADS holders will receive at least 90 days’ prior notice, but no prior consent is required from them. Under the circumstances that we decide to make an amendment to the deposit agreement that is disadvantageous to ADS holders or terminate the deposit agreement, the ADS holders may choose to sell their ADSs or surrender their ADSs and become direct holders of the underlying Class A Ordinary Shares, but will have no right to any compensation whatsoever.
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ADSs holders may not be entitled to a jury trial with respect to claims arising under the deposit agreement, which could result in less favorable outcomes to the plaintiff(s) in any such action.
The deposit agreement governing the ADSs representing our Class A Ordinary Shares provides that, to the fullest extent permitted by law, ADS holders waive the right to a jury trial of any claim that they may have against us or the depositary arising out of or relating to our ordinary shares, our ADSs or the deposit agreement, including any claim under the U.S. federal securities laws.
If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable state and federal law. To our knowledge, the enforceability of a contractual pre-dispute jury trial waiver in connection with claims arising under the federal securities laws has not been finally adjudicated by the United States Supreme Court. However, we believe that a contractual pre-dispute jury trial waiver provision is generally enforceable, including under the laws of the State of New York, which govern the deposit agreement, by a federal or state court in the City of New York, which has non-exclusive jurisdiction over matters arising under the deposit agreement. In determining whether to enforce a contractual pre-dispute jury trial waiver provision, courts will generally consider whether a party knowingly, intelligently and voluntarily waived the right to a jury trial. We believe that this is the case with respect to the deposit agreement and our ADSs. It is advisable that you consult legal counsel regarding the jury waiver provision before entering into the deposit agreement.
If you or any other holders or beneficial owners of ADSs bring a claim against us or the depositary in connection with matters arising under the deposit agreement or our ADSs, including claims under federal securities laws, you or such other holder or beneficial owner may not be entitled to a jury trial with respect to such claims, which may have the effect of limiting and discouraging lawsuits against us or the depositary. If a lawsuit is brought against us or the depositary under the deposit agreement, it may be heard only by a judge or justice of the applicable trial court, which would be conducted according to different civil procedures and may result in different outcomes than a trial by jury would have had, including results that could be less favorable to the plaintiff(s) in any such action.
Nevertheless, if this jury trial waiver provision is not permitted by applicable law, an action could proceed under the terms of the deposit agreement with a jury trial. No condition, stipulation or provision of the deposit agreement or ADSs serves as a waiver by any holder or beneficial owner of ADSs or by us or the depositary of compliance with any substantive provision of the U.S. federal securities laws and the rules and regulations promulgated thereunder.
An ADSs holder’s right to participate in any future rights offerings may be limited, which may cause dilution to such holder’s holdings.
We may, from time to time, distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to ADSs holders in the United States unless we register the rights and the securities to which the rights relate under the Securities Act or an exemption from the registration requirements is available. In addition, the deposit agreement provides that the depositary will not make rights available to ADSs holders unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act or exempted from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. Accordingly, ADS holders may be unable to participate in our rights offerings and may experience dilution in their holdings. In addition, if the depositary is unable to sell rights that are not exercised or not distributed, or if the sale is not lawful or reasonably practicable, it will allow the rights to lapse, in which case ADSs holders will receive no value for these rights.
ADSs holders may be subject to limitations on transfer of their ADSs.
ADSs are transferable on the books of the depositary. However, the depositary may close its transfer books at any time or from time to time when it deems necessary in connection with the performance of its duties. The depositary may close its books from time to time for a number of reasons, including in connection with corporate events such as a rights offering, during which time the depositary needs to maintain an exact number of ADS holders on its books for a specified period. The depositary may also close its books in emergencies, and on weekends and public holidays. In addition, the depositary may refuse to deliver, transfer or register transfers of ADSs generally when our books or the books of the depositary are closed, or at any time if we or the depositary deems it advisable to do so because of any requirement of law or of any government or governmental body, or under any provision of the deposit agreement.
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ADSs holders might not receive distributions on our equity shares, or any value for them at all, if it is unlawful or impracticable for us to make them available to such holders.
The depositary of the ADSs has agreed to pay ADSs holders the cash dividends or other distributions it or the custodian for the ADSs receives on our Class A Ordinary Shares or other deposited securities after deducting its fees and expenses in accordance with the deposit agreement. ADSs holders will receive these distributions in proportion to the number of the underlying Class A Ordinary Shares that their ADSs represent. However, the depositary is not responsible if it is unlawful or impracticable to make a distribution available to any ADSs holders. For example, it would be unlawful to make a distribution to a ADSs holder if it consists of securities that require registration under the Securities Act but such securities are not properly registered or distributed pursuant to an applicable exemption from registration. The depositary is not responsible for making a distribution available to any ADSs holders if any government approval or registration is required for such distribution. We have no obligation to take any other action to permit the distribution of our ADSs, equity shares, rights or anything else to ADSs holders. This means that holders of our ADSs might not receive the distributions that we make on our Class A Ordinary Shares or any value for them at all if it is unlawful or impracticable for us to make them available to ADS holders.
Our warrants are speculative in nature.
Our warrants offered hereby do not confer any rights of ordinary share ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire our Class A ordinary shares at a fixed price.
Holders of our warrants will not have any rights of common shareholders until such warrants are exercised.
Our warrants being offered do not confer any rights of common share ownership on their holders, such as voting rights or the right to receive dividends, but rather merely represent the right to acquire common shares at a fixed price
Your right to participate in any future rights offerings may be limited, which may cause dilution to your holdings.
We may from time to time distribute rights to our shareholders, including rights to acquire our securities. However, we cannot make rights available to you in the United States unless we register the rights and the securities to which the rights relate under the Securities Act of 1933, as amended, or the Securities Act, or an exemption from the registration requirements is available. Also, under the deposit agreement, the depositary will not make rights available to you unless the distribution to ADS holders of both the rights and any related securities are either registered under the Securities Act, or exempt from registration under the Securities Act. We are under no obligation to file a registration statement with respect to any such rights or securities or to endeavor to cause such a registration statement to be declared effective. Moreover, we may not be able to establish an exemption from registration under the Securities Act. The depositary may, but is not required to, sell such undistributed rights to third parties in this situation. Accordingly, you may be unable to participate in our rights offerings and may experience dilution in your holdings.
The Series A Convertible Preferred Shares are subordinate to our existing and future debt, and your interests could be diluted by the issuance of additional preferred shares and by other transactions.
The Series A Convertible Preferred Shares will rank junior to all of our existing and future debt and to other non-equity claims on us and our assets available to satisfy claims against us, including claims in bankruptcy, liquidation or similar proceedings. Our future debt may include restrictions on our ability to pay distributions to preferred stockholders. The issuance of additional shares of Series A Convertible Preferred Shares or another series of preferred stock designated as ranking on parity with the Series A Convertible Preferred Shares would dilute the interests of the holders of the Series A Convertible Preferred Shares, and the issuance of shares of any class or series of our capital stock expressly designated as ranking senior to the Series A Convertible Preferred Shares or the incurrence of additional indebtedness could affect our ability to pay distributions on, redeem or pay the liquidation preference on the Series A Convertible Preferred Shares. The Series A Convertible Preferred Shares do not contain any terms relating to or limiting our indebtedness or affording the holders of shares of the Series A Convertible Preferred Shares protection in the event of a highly leveraged or other transaction, including a merger or the sale, lease or conveyance of all or substantially all our assets, that might adversely affect the holders of shares of the Series A Convertible Preferred Shares, so long as the rights, preferences, privileges or voting power of the Series A Convertible Preferred Shares or the holders thereof are not materially and adversely affected.
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The Series A Convertible Preferred Shares have not been rated.
The Series A Convertible Preferred Shares have not been rated by any nationally recognized statistical rating organization, which may negatively affect their market value and your ability to sell such shares. No assurance can be given, however, that one or more rating agencies might not independently determine to issue such a rating or that such a rating, if issued, would not adversely affect the market price of the Series A Convertible Preferred Shares. In addition, we may elect in the future to obtain a rating of the Series A Convertible Preferred Shares, which could adversely impact the market price of the Series A Convertible Preferred Shares. Ratings only reflect the views of the rating agency or agencies issuing the ratings and such ratings could be revised downward or withdrawn entirely at the discretion of the issuing rating agency if, in its judgment, circumstances so warrant. Any such downward revision or withdrawal of a rating could have an adverse effect on the market price of the Series A Convertible Preferred Shares.
As a holder of the Series A Convertible Preferred Shares, you have no voting rights.
Your voting rights as a holder of Series A Convertible Preferred Shares will be limited. Our Ordinary Shares are the only class of our securities carrying full voting rights. See “Description Of American Depositary Shares.”
Our cash available for distributions may not be sufficient to pay distributions on the Series A Convertible Preferred Shares at expected levels, and we cannot assure you of our ability to pay distributions in the future. We may use borrowed funds or funds from other sources to pay distributions, which may adversely impact our operations.
We intend to pay regular monthly distributions to holders of Series A Convertible Preferred Shares. Distributions declared by us will be authorized by our Board of Directors in its sole discretion out of assets legally available for distribution and will depend upon a number of factors, including our earnings, our financial condition, restrictions under applicable law, our need to comply with the terms of our existing financing arrangements, the capital requirements of our company and other factors as our Board of Directors may deem relevant from time to time. We may be required to fund distributions from working capital, proceeds of this offering or a sale of assets to the extent distributions exceed earnings or cash flows from operations. Funding distributions from working capital would restrict our operations. If we are required to sell assets to fund distributions, such asset sales may occur at a time or in a manner that is not consistent with our disposition strategy. If we borrow to fund distributions, our leverage ratios and future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been. We may not be able to pay distributions in the future. In addition, some of our distributions may be considered a return of capital for income tax purposes. If we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally be considered a return of capital for federal income tax purposes to the extent of the holder’s adjusted tax basis in its shares. A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. If distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such stock.
We could be prevented from paying cash dividends on the Series A Convertible Preferred Shares due to prescribed legal requirements.
Holders of Series A Convertible Preferred Shares do not have a right to dividends on such shares unless declared or set aside for payment by our Board of Directors. Under applicable law, immediately following the date on which the distribution or dividend is proposed to be paid out of the Company’s share premium account, the Company shall have to be able to pay its debts as they fall due in the ordinary course of business. Our business may not generate sufficient cash flow from operations to enable us to pay dividends on the Series A Convertible Preferred Shares when payable. Further, even if adequate surplus is available to pay cash dividends on the Series A Convertible Preferred Shares, we may not have sufficient cash to pay dividends on the Series A Convertible Preferred Shares.
Furthermore, no dividends on Series A Convertible Preferred Shares shall be authorized by our Board of Directors or paid, declared or set aside for payment by us at any time when the authorization, payment, declaration or setting aside for payment would be unlawful under applicable law. See “Description of Share Capital — Series A Convertible Preferred Shares — Dividends.”
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We may redeem the Series A Convertible Preferred Shares and you may not receive dividends that you anticipate if we do redeem the Series A Convertible Preferred Shares.
We may, at our option, redeem the Series A Convertible Preferred Shares, in whole or in part, at any time or from time to time. See “Description of Share Capital — Series A Convertible Preferred Shares” for more details on our optional redemption. We may have an incentive to redeem the Series A Convertible Preferred Shares voluntarily if market conditions allow us to issue other preferred stock or debt securities at a rate that is lower than the dividend rate on the Series A Convertible Preferred Shares. If we redeem the Series A Convertible Preferred Shares, then from and after the redemption date, dividends will cease to accrue on the Series A Convertible Preferred Shares, the Series A Convertible Preferred Shares shall no longer be deemed outstanding and all rights as a holder of those shares will terminate, except the right to receive the redemption price plus accumulated and unpaid dividends, if any, payable upon redemption.
In the event of a liquidation, you may not receive the full amount of your liquidation preference.
In the event of our liquidation of the Company, the proceeds will be used first to repay indebtedness and then to pay holders of shares of the Series A Convertible Preferred Shares and any other class or series of our capital stock ranking senior to or on parity with the Series A Convertible Preferred Shares as to liquidation the amount of each holder’s liquidation preference and accrued and unpaid distributions through the date of payment. In the event we have insufficient funds to make payments in full to holders of the Series A Convertible Preferred Shares and any other class or series of our capital stock ranking senior to or on parity with the Series A Convertible Preferred Shares as to liquidation, such funds will be distributed ratably among such holders and such holders may not realize the full amount of their liquidation preference.
We may not be able to generate sufficient cash to service our obligations, including our obligations under the Series A Convertible Preferred Shares.
Our ability to make dividend payments on any outstanding shares of preferred stock, including the Series A Convertible Preferred Shares and any other preferred shares that we may issue in the future, and outstanding indebtedness will depend on our financial and operating performance, which is subject to prevailing economic and competitive conditions and to certain financial, business and other factors beyond our control. We may be unable to maintain a level of cash flows from operating activities sufficient to permit us to pay the liquidation preference and dividends on our preferred stock, including the Series A Convertible Preferred Shares, as well as principal and interest on our outstanding indebtedness. Please also see the risk factor “We had incurred net losses in the past, and we may incur losses again in the future”
We may incur additional indebtedness and obligations to pay dividends on preferred stock, some of which may be senior to the rights of the Series A Convertible Preferred Shares.
We and our subsidiaries may incur additional indebtedness and obligations to pay cumulative dividends on preferred stock, some of which may be senior to the rights of the Series A Convertible Preferred Shares. . Any such indebtedness will in all cases be senior to the rights of holders of Series A Convertible Preferred Shares. We may also issue additional series of preferred stock that contain dividend rights and liquidation preferences that are senior to the rights of holders of Series A Preferred Shares. Our subsidiaries may also incur indebtedness that is structurally senior to the Series A Convertible Preferred Shares, and we and our subsidiaries could incur indebtedness secured by a lien on our assets, entitling the holders of such indebtedness to be paid first from the proceeds of such assets. If we issue any additional preferred stock that ranks senior or pari passu with the Series A Convertible Preferred Shares, the holders of those shares will be entitled to a senior or ratable share with the holders of the Series A Convertible Preferred Shares in any proceeds distributed in connection with our insolvency, liquidation, reorganization or dissolution. This may have the effect of reducing the amount of proceeds paid to the holders of Series A Convertible Preferred Shares.
Our ability to meet our obligations under the Series A Convertible Preferred Shares depends on the earnings and cash flows of our subsidiaries and the ability of our subsidiaries to pay dividends or advance or repay funds to us.
We conduct all of our business operations through our subsidiaries. In servicing dividend payments to be made on the Series A Convertible Preferred Shares, we will rely on cash flows from these subsidiaries, mainly dividend payments and other distributions. The ability of these subsidiaries to make dividend payments and other distributions to us will be affected by, among other factors, the obligations of these entities to their creditors, requirements of corporate and other law, and restrictions contained in agreements entered into by or relating to these entities.
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The IRS may not agree with the position that we should be treated as a foreign corporation for U.S. federal income tax purposes following the Business Combination.
Although we were incorporated under the laws of the Cayman Islands, the IRS may assert that we should be treated as a U.S. corporation (and, therefore, a U.S. tax resident) for U.S. federal income tax purposes pursuant to section 7874 of the Code. For U.S. federal income tax purposes, a corporation is generally considered a tax resident in the jurisdiction of its organization or incorporation. Because we were incorporated under the laws of the Cayman Islands, we would generally be classified as a foreign corporation (and, therefore, a non-U.S. tax resident) for U.S. federal income tax purposes. Section 7874 provides an exception pursuant to which a foreign incorporated entity may, in certain circumstances, be treated as a U.S. corporation for U.S. federal income tax purposes. These rules are complex and require analysis of all relevant facts and circumstances, and there is limited guidance and significant uncertainties as to their application. If it were determined that we should be taxed as a U.S. corporation for U.S. federal income tax purposes under section 7874, we would be liable for U.S. federal income tax on our income like any other U.S. corporation and certain distributions made by us to non-U.S. holders of our securities would be subject to U.S. withholding tax. Taxation as a U.S. corporation could have a material adverse effect on our financial position and results from operations.
As more fully described under “Taxation — Material U.S. Federal Income Tax Considerations — Tax Treatment — Our Tax Residence for U.S. Federal Income Tax Purposes,” section 7874 is currently expected to apply in a manner such that we should not be treated as a U.S. corporation for U.S. federal income tax purposes. However, holders are cautioned that the application of section 7874 to us is extremely complex and the applicable Treasury regulations are subject to significant uncertainty and there is limited guidance regarding their application. Moreover, the application of section 7874 to the facts and circumstances of the Business Combination are uncertain. In addition, there could be a future change in law under section 7874 of the Code, the Treasury Regulations promulgated thereunder or otherwise that could have an effect on the application of section 7874 to us. No IRS ruling has been requested or will be obtained regarding the U.S. federal income tax consequences of the Business Combination or any other matter described in this prospectus/proxy statement. There can be no assurance that the IRS will not challenge the U.S. federal income tax treatment described above or that, if challenged, such treatment will be sustained by a court.
We and/or our non-U.S. subsidiaries could be controlled foreign corporations, or CFCs, which could result in adverse U.S. federal income tax consequences.
If we or any of our subsidiaries is a CFC for any taxable year, then any U.S. person who is a 10% U.S. Shareholder as to such CFC may be subject to adverse U.S. tax consequences. A U.S. person is a “10% U.S. Shareholder” with respect to a foreign corporation if such person owns directly, indirectly or constructively at least 10% of the voting power or value of stock of such corporation. If 10% U.S. Shareholders, in the aggregate, own more than 50% of the voting power or value of the stock of such corporation, the foreign corporation will be classified as a CFC. Additionally, as a result of changes introduced by the Tax Cuts and Jobs Act, even absent 10% U.S. Shareholders with downward direct or indirect interests in a foreign corporation, a U.S. subsidiary of ours alone may cause certain related foreign corporations to be treated as CFCs by reason of “downward attribution.” Given that we are publicly held, the constructive ownership rules under section 318 of the Code makes it difficult to determine whether any U.S. person is a 10% U.S. Shareholder of ours and our non-U.S. subsidiaries and whether we or any of our non-U.S. subsidiaries is a CFC.
Please see the section entitled “Taxation — Material U.S. Federal Income Tax Considerations — U.S. Holders — Controlled Foreign Corporation Rules” for a more detailed discussion with respect to these CFC issues. U.S. holders are urged to consult their tax advisors regarding the possible application of the CFC rules to holders of our securities.
We may be a Passive Foreign Investment Company (“PFIC”), which could result in adverse U.S. federal income tax consequences to U.S. investors.
If we or any of our subsidiaries is a PFIC for any taxable year, or portion thereof, that is included in the holding period of a beneficial owner of the shares of our ADSs and/or Class A Ordinary Shares or our warrants or our 2021 Registrable Warrants who or that is for U.S. federal income tax purposes (i) an individual who is a citizen or resident of the United States, (ii) a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized in or under the laws of the United States, any state thereof or the District of Columbia, (iii) an estate the income of which is includible in gross income for U.S. federal income tax purposes regardless of its source or (iv) a trust if (1) a U.S. court can exercise primary supervision over the administration of such trust and one or more U.S. persons
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has authority to control all substantial decisions of the trust or (2) the trust has a valid election in place to be treated as a U.S. person (a “U.S. holder”), such U.S. holder may be subject to certain adverse U.S. federal income tax consequences and may be subject to additional reporting requirements. Whether we or any of our subsidiaries is treated as a PFIC for U.S. federal income tax purposes is a factual determination that must be made annually at the close of each taxable year and, thus, is subject to significant uncertainty. Accordingly, we are unable to determine whether we or any of our subsidiaries will be treated as a PFIC for the taxable year of the Business Combination or for future taxable years, and there can be no assurance that we or any of our subsidiaries will not be treated as a PFIC for any taxable year. Moreover, we do not expect to provide a PFIC annual information statement for 2021 or going forward. Please see the section entitled “Taxation — Material U.S. Federal Income Tax Considerations — U.S. Holders — Passive Foreign Investment Company Rules” for a more detailed discussion with respect to our PFIC status. U.S. holders are urged to consult their tax advisors regarding the possible application of the PFIC rules to our ADSs and/or Class A Ordinary Shares, 2021 Registrable Warrants and our warrants.
We may or may not pay cash dividends in the foreseeable future.
Any decision to declare and pay dividends in the future will be made at the discretion of our board of directors and will depend on, among other things, applicable law, regulations, restrictions, our results of operations, financial condition, cash requirements, contractual restrictions, our future projects and plans and other factors that the board of directors may deem relevant. In addition, our ability to pay dividends depends significantly on the extent to which we receive dividends from Lion and there can be no assurance that Lion will pay dividends. As a result, capital appreciation, if any, of our ADSs will be an investor’s sole source of gain for the foreseeable future.
We are a Cayman Islands exempted company and, because judicial precedent regarding the rights of shareholders is different under Cayman Islands law than under U.S. law, you could have less protection of your shareholder rights than you would under U.S. law.
Our corporate affairs is 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 the directors, actions by non-controlling shareholders and the fiduciary responsibilities of our directors to us law are to a large extent governed by the common law of the Cayman Islands. The common law of the Cayman Islands is derived in part from comparatively limited judicial precedent in the Cayman Islands as well as from English common law, which has persuasive, but not binding, authority on a court in the Cayman Islands. Your rights as a shareholders and the fiduciary responsibilities of our directors under Cayman Islands law are different from under statutes or judicial precedent in some jurisdictions in the United States. In particular, the Cayman Islands has a different body of securities laws from the United States and may provide significantly less protection to investors.
We have been advised by our Cayman Islands legal counsel, Ogier, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United States predicated upon the civil liability provisions of the securities laws of the United States or any State and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the securities laws of the United States or any State, so far as the liabilities imposed by those provisions are penal in nature. Subject to the foregoing, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive, given by a court of competent jurisdiction (The courts of the Cayman Islands will apply the rules of Cayman Islands private international law to determine whether the foreign court is a court of competent jurisdiction), and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and/or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.
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You will have limited ability to bring an action against us or against our directors and officers, or to enforce a judgment against us or them, because we are incorporated in the Cayman Islands, because we conduct all of our operations in Hong Kong and the Cayman Islands and most of our directors and officers reside outside the United States.
We are incorporated in the Cayman Islands and conduct all of operations in Hong Kong and the Cayman Islands. All of our assets are located outside the United States. Most of our officers and directors are expected to reside outside the United States and a substantial portion of the assets of those persons are located outside of the United States. As a result, it could be difficult or impossible for you to bring an action against us or against these individuals in the United States in the event that you believe that your rights have been infringed under the applicable securities laws or otherwise. Even if you are successful in bringing an action of this kind, the laws of the Cayman Islands and of the Hong Kong could render you unable to enforce a judgment against our assets or the assets of our directors and officers.
Shareholders of Cayman Islands exempted companies such as us have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders of these companies. Our directors have discretion under Cayman Islands law to determine whether or not, and under what conditions, our corporate records could be inspected by our shareholders, but are not obliged to make them available to our shareholders. This could 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.
As a result of all of the above, our shareholders might 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 U.S. company.
Provisions in our Amended and Restated Memorandum and Articles of Association may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our securities and could entrench management.
Our currently effective Amended and Restated Memorandum and Articles of Association contain provisions that may discourage unsolicited takeover proposals that our shareholders may consider to be in their best interests. Among other provisions, the ability of our board of directors to issue preferred shares with preferences and voting rights determined by the board without shareholder approval may make it more difficult for our shareholders to remove incumbent management and accordingly discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our securities.
Moreover, our board of directors is divided into two classes, namely Class I and Class II. Class I consists of four directors, and Class II consists of four directors. Directors assigned to Class I shall initially serve until the first annual general meeting of shareholders following the effectiveness of our Amended and Restated Memorandum and Articles of Association, or the Articles Effectiveness Date. Directors assigned to Class II shall initially serve until the second annual general meeting of shareholders following the Articles Effectiveness Date.
Furthermore, our ordinary shares consist of Class A Ordinary Shares and Class B Ordinary Shares. In respect of matters requiring the votes of shareholders, holders of Class A Ordinary Shares will be entitled to one vote per share, while holders of Class B Ordinary Shares will be entitled to twenty five votes per share. Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time by the holder thereof, while Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. Upon any sale of Class B Ordinary Shares by a holder thereof to any person other than an affiliate of such holder, such Class B Ordinary Shares shall be automatically and immediately converted into the same number of Class A Ordinary Shares. Due to the disparate voting powers associated with our dual-class share structure, as of the date of this prospectus, the Class B Ordinary Shares constitute 21.31% of our total issued and outstanding share capital, and 86.91% of the aggregate voting power of and total issued and outstanding share capital.
Other anti-takeover provisions in our Amended and Restated Memorandum and Articles of Association include the indemnification of our officers and directors, the requirement that directors may only be removed from our board of directors for cause and the requirement for a special resolution to amend provisions therein that affect shareholder rights. These provisions could also make it difficult for our shareholders to take certain actions and limit the price investors might be willing to pay for our securities.
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As a “foreign private issuer” under the rules and regulations of the SEC, we are permitted to, and will, file less or different information with the SEC than a company incorporated in the United States or otherwise subject to these rules, and will follow certain home-country corporate governance practices in lieu of certain Nasdaq requirements applicable to U.S. issuers.
As a “foreign private issuer” under the Exchange Act, we are exempt from certain rules under the Exchange Act, including the proxy rules, which impose certain disclosure and procedural requirements for proxy solicitations for U.S. and other issuers. Moreover, we are not required to file periodic reports and financial statements with the SEC as frequently or within the same time frames as U.S. companies with securities registered under the Exchange Act. We are not required to comply with Regulation FD, which imposes restrictions on the selective disclosure of material information to shareholders. In addition, our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions of Section 16 of the Exchange Act and the rules under the Exchange Act with respect to their purchases and sales of our securities.
In addition, as a “foreign private issuer”, we are permitted to follow certain home-country corporate governance practices in lieu of certain Nasdaq requirements. A foreign private issuer must disclose in its Annual Reports filed with the SEC each Nasdaq requirement with which it does not comply followed by a description of its applicable home country practice. We currently intend to follow some, but not all of the corporate governance requirements of Nasdaq. With respect to the corporate governance requirements we do follow, we cannot make any assurances that we will continue to follow such corporate governance requirements in the future, and may therefore in the future, rely on available Nasdaq exemptions that would allow us to follow our home country practice. Unlike the requirements of Nasdaq, we are not required to, under the corporate governance practice and requirements in the Cayman Islands, have our board consisting of a majority of independent directors, nor are we required to have a compensation committee or a nomination or corporate governance committee consisting entirely of independent directors, or have regularly executive sessions with only independent directors each year. Such Cayman Islands home country practices may afford less protection to holders of our securities. For additional information regarding the home country practices we follow in lieu of Nasdaq requirements, see “Management — Corporate Governance Practices”.
We will lose our status as a “foreign private issuer” under current SEC rules and regulations if more than 50% of our outstanding voting securities become directly or indirectly held of record by U.S. holders and one of the following is true: (i) the majority of our directors or executive officers are U.S. citizens or residents; (ii) more than 50% of our assets are located in the United States; or (iii) our business is administered principally in the United States. If we lose our status as a foreign private issuer in the future, we will no longer be exempt from the rules described above and, among other things, will be required to file periodic reports and annual and quarterly financial statements as if we were a company incorporated in the United States. If this were to happen, we would likely incur substantial costs in fulfilling these additional regulatory requirements and our management would likely have to divert time and resources from other responsibilities to ensuring these additional regulatory requirements are fulfilled.
We are an “emerging growth company,” and any decision to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our securities less attractive to investors.
We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). We expect to remain an “emerging growth company” until December 31, 2024. As an emerging growth company, we are not required to comply with, among other things, the auditor attestation requirements of the Sarbanes-Oxley Act. Further, the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt-out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt-out is irrevocable. We have elected not to opt-out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, may not adopt the new or revised standard until the time private companies are required to adopt the new or revised standard. This may make comparison of our financial statements with other public companies difficult or impossible because of the potential differences in accountant standards used. Investors may find our securities less attractive because we rely on these provisions. If investors find our securities less attractive as a result, there may be a less active trading market for our securities and prices of the securities may be more volatile.
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If we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting, which would harm our business and the trading price of our securities.
Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations. Any testing by us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that may require prospective or retroactive changes in our financial statements or identify other areas for further attention or improvement. In addition, for as long as we are an “emerging growth company,” our independent registered public accounting firm will not be required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s assessment might not. Undetected material weaknesses in our internal controls could lead to restatements of our financial statements and require us to incur the expense of remediation. Inferior internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our securities.
The Public Company Accounting Oversight Board (“PCAOB”) inspection of our independent accounting firm could lead to findings in our auditors’ reports and challenge the accuracy of our published audited consolidated financial statements.
Auditors of U.S. public companies are required by law to undergo periodic PCAOB inspections that assess their compliance with U.S. law and professional standards in connection with performance of audits of financial statements filed with the SEC. These PCAOB inspections could result in findings in our auditors’ quality control procedures, question the validity of the auditor’s reports on our published consolidated financial statements and cast doubt upon the accuracy of our published audited financial statements.
We are a “controlled company” within the meaning of Nasdaq Stock Market LLC listing rules and, as a result, can rely on exemptions from certain corporate governance requirements that provide protection to shareholders of other companies.
As of the date of this prospectus, Jian Wang, our chairman of the board and Chunning Wang, our chief executive officer collectively hold approximately 86.91% of our voting power total issued and outstanding share capital. As a result, we are considered as a “controlled company” within the meaning of the Nasdaq Stock Market LLC listing rules. Under these rules, a listed company of which more than 50% of the voting power is held by an individual, group, or another company is a “controlled company” and will be permitted to elect to not comply with certain corporate governance requirements, including the requirement that a majority of the board of directors consist of independent directors, the requirement that the nominating and corporate governance committee is composed entirely of independent directors, and the requirement that the compensation committee is composed entirely of independent directors. We currently do not intend to rely on exemptions available to us.
The recent joint statement by the SEC and PCAOB, proposed rule changes submitted by Nasdaq, and the Holding Foreign Companies Accountable Act all call for additional and more stringent criteria to be applied to emerging market companies upon assessing the qualification of their auditors, especially the non-U.S. auditors who are not inspected by the PCAOB. These developments could add uncertainties to our offering.
On April 21, 2020, SEC Chairman Jay Clayton and PCAOB Chairman William D. Duhnke III, along with other senior SEC staff, released a joint statement highlighting the risks associated with investing in companies based in or have substantial operations in emerging markets including China. The joint statement emphasized the risks associated with lack of access for the PCAOB to inspect auditors and audit work papers in China and higher risks of fraud in emerging markets.
On May 18, 2020, Nasdaq filed three proposals with the SEC to (i) apply minimum offering size requirement for companies primarily operating in “Restrictive Market”, (ii) adopt a new requirement relating to the qualification of management or board of director for Restrictive Market companies, and (iii) apply additional and more stringent criteria to an applicant or listed company based on the qualifications of the company’s auditors.
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On May 20, 2020, the U.S. Senate passed the Holding Foreign Companies Accountable Act requiring a foreign company to certify it is not owned or controlled by a foreign government if the PCAOB is unable to audit specified reports because the company uses a foreign auditor not subject to PCAOB inspection. If the PCAOB is unable to inspect the company’s auditors for three consecutive years, the issuer’s securities are prohibited to trade on a national securities exchange or in the over the counter trading market in the U.S. On December 2, 2020, the U.S. House of Representatives approved the Holding Foreign Companies Accountable Act. On December 18, 2020, the Holding Foreign Companies Accountable Act was signed into law.
On March 24, 2021, the SEC announced that it had adopted interim final amendments to implement congressionally mandated submission and disclosure requirements of the Act. On December 2, 2021, the SEC adopted 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. We will be required to comply with these rules if the SEC identifies us as having a “non-inspection” year under a process to be subsequently established by the SEC. The final amendments require any identified registrant to submit documentation to the SEC establishing that the registrant is not owned or controlled by a government entity in the public accounting firm’s foreign jurisdiction, and also require, among other things, disclosure in the registrant’s annual report regarding the audit arrangements of, and government influence on, such registrants. Under the HFCA Act, our securities may be prohibited from trading on the Nasdaq if our auditor is not inspected by the PCAOB for three consecutive years, and this ultimately could result in our ADSs or warrants being delisted.
On June 22, 2021, the U.S. Senate passed a bill which, if passed by the U.S. House of Representatives and signed into law, would reduce the number of consecutive non-inspection years required for triggering the prohibitions under the HFCA Act from three years to two years, which would consequently reduce the time before our securities may be prohibited from trading or delisted. 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 China Securities Regulatory Commission, or CSRC, the Ministry of Finance of the PRC, and PCAOB signed a Statement of Protocol, or the Protocol, governing inspections and investigations of audit firms based in China and Hong Kong. Pursuant to the Protocol, the PCAOB has independent discretion to select any issuer audits for inspection or investigation and has the unfettered ability to transfer information to the SEC. However, uncertainties still exist whether this new framework will be fully complied with.
Our auditor, the independent registered public accounting firm that issues the audit report included elsewhere in this prospectus, a public accounting firm registered with the PCAOB, is subject to laws in the United States pursuant to which the PCAOB conducts regular inspections to assess our auditor’s compliance with the applicable professional standards. The PCAOB currently has access to inspect the working papers of our auditor. Our auditor is not headquartered in China or Hong Kong and was not identified in this report as a firm subject to the PCAOB’s determination.
However, the recent developments 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. It remains unclear what the SEC’s implementation process related to the March 2021 interim final amendments 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 the PRC and have securities listed on a U.S. stock exchange (including a national securities exchange or over-the-counter stock market). In addition, the March 2021 interim final amendments, the December 2021 final rules 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 ADSs and warrants could be adversely affected, and our securities 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.
Our controlling shareholders have substantial influence over and our interests may not be aligned with the interests of our other shareholders.
As of the date of this prospectus, Jian Wang, our chairman of the board and Chunning Wang, our chief executive officer collectively hold a total of 9,843,096 Class B Ordinary Shares and a total of 200,000 Class A Ordinary Shares, representing approximately more than 75% of our voting power total issued and outstanding share capital. Jian Wang and
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Chunning Wang have substantial influence over our business, including decisions regarding mergers, consolidations, the sale of all or substantially all of our assets, election of directors, declaration of dividends and other significant corporate actions. As the controlling shareholders, Jian Wang and Chunning Wang may take actions that are not in the best interests of our other shareholders. These actions may be taken in many cases even if they are opposed by our other shareholders. In addition, this concentration of ownership may discourage, delay or prevent a change in control which could deprive you of an opportunity to receive a premium for your securities as part of a sale of our company.
Risks Related to Our Cryptocurrency Mining Operations
We have a limited operating history in cryptocurrency mining operations, with operating losses as the business has grown. it may be difficult to evaluate our business and future prospects, and we may not be able to achieve or maintain profitability in any given period.
We began Bitcoin mining in May 2021. We have a limited operating history upon which an evaluation of the business and its prospects can be based. We may be subject to many risks common to new and growing businesses, including under-capitalization, cash shortages, limitations with respect to personnel, financial and other resources and lack of revenues. In addition, we noticed that government agencies from different countries are contemplating new rules and laws to regulate cryptocurrency mining operations, which may be even harder to evaluate our cryptocurrency mining operations. There is no assurance that we will be successful in achieving a return on your investment or meeting other metrics of success.
Our future business plan requires substantial expenses in the establishment and operation of our business and there can be no assurance that subsequent operational objectives will be achieved. Our success will ultimately depend on our ability to generate cash from our business. If we do not achieve our operational objectives, and to the extent that we do not generate cash flow and income, our financial performance and long-term viability may be materially and adversely affected. An investment in our securities must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stage of development.
We and our third-party service providers, including mining pool service providers, may fail to adequately secure or maintain the confidentiality, integrity or availability of the data we hold or detect any related threats, which could disrupt our normal business operations and our financial performance and adversely affect our business.
Our business operations and reputation depend on our ability to maintain the confidentiality, integrity and availability of data, digital assets and systems related to our business, customers, proprietary technologies, processes and intellectual property. We and our business and commercial partners, such as mining pools, digital asset exchanges and other third parties with which we interact, rely extensively on third-party service providers’ information technology (“IT”) systems, including renewable energy infrastructure, cloud-based systems and on-premises servers (i.e. data centers), to record and process transactions and manage our operations, among other matters.
We and our third-party service providers, partners and collaborators, may in the future experience failures of, or disruptions to, IT systems and may be subject to attempted and successful security breaches or data security incidents. Security breaches or data security incidents experienced by us or our third-party service providers, manufacturers, joint collaborators, or other business or commercial partners, can vary in scope and intent from economically-driven attacks to malicious attacks targeting our key operating systems with the intent to disrupt, disable or otherwise cripple our operations and service offerings. This can include any combination of phishing attacks, malware, ransomware attacks, insider threats or viruses targeted at our key systems and IT systems as well as those of our third-party service providers. In addition, certain types of attacks could harm us even if our systems are left undisturbed. For example, certain threats are designed to remain dormant or undetectable, sometimes for extended periods of time, or until launched against a target, and we may not be able to implement adequate preventative measures. Unauthorized parties may attempt to gain access to our systems and facilities, as well as those of our partners and third-party service providers, through various means. A successful security breach or security incident may target us directly, or indirectly target or impact us through our third-party service providers, manufacturers, joint collaborators, or other business or commercial partners. A security breach or other security incident at a third-party service provider’s location or ours, or within a third-party service provider’s systems or ours, could affect our control over personal or confidential information or negatively impact our operations and ability to earn revenue.
The inadvertent disclosure of or unauthorized access to IT systems, networks and data, including personal information, confidential information and proprietary information, may adversely affect our business or our reputation and could have a material adverse effect on our financial conditions. In addition, undiscovered vulnerabilities in our products,
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equipment or services could expose us to hackers or other unscrupulous third parties who develop and deploy viruses and other malicious software programs that could attack our products, equipment services and business. In the case of such a security breach, security incident or other IT failure, we may suffer damage to our key systems and experience (i) interruption in our services, (ii) loss of ability to control or operate our equipment; (iii) misappropriation of personal data and (iv) loss of critical data that could interrupt our operations, which may adversely impact our reputation and brand and expose us to increased risks of governmental and regulatory investigation and enforcement actions, private litigation and other liability, any of which could adversely affect our business. A security breach may also trigger mandatory data breach notification obligations under applicable privacy and data protection laws, which, if applicable, could lead to widespread negative publicity and a loss in confidence regarding the effectiveness of our data security measures. Furthermore, mitigating the risk of future attacks or IT systems failures have resulted, and could in the future result, in additional operating and capital costs in systems technology, personnel, monitoring and other investments. In addition, insurers are currently reluctant to provide cybersecurity insurance for digital assets and cryptocurrency assets and we do not currently hold cybersecurity insurance, therefore, in the event of any such actual or potential incidents, our costs and resources devoted and any impacted assets may not be partially or fully recoverable. Most of our sensitive and valuable data, including digital assets, are stored with third-party custodians and service providers. Therefore, we rely on the digital asset community to optimize and protect sensitive and valuable data, confidential information and identify vulnerabilities. There can be no guarantee that these measures and the work of the digital asset developer community will identify all vulnerabilities, errors and defects, or will identify and resolve all vulnerabilities, errors and defects, prior to a malicious actor being able to utilize them. Any actual or perceived data security breach at any of those third-party custodians and service providers could lead to theft or irretrievable loss of our fiat currencies or digital assets, which may or may not be covered by insurance maintained by us or our third-party custodians or service providers.
We may be subject to material litigation, including individual and class action lawsuits, as well as investigations and enforcement actions by regulators and governmental authorities.
We may from time to time become subject to claims, arbitrations, individual and class action lawsuits, government and regulatory investigations, inquiries, actions or requests, and other proceedings alleging violations of laws, rules and regulations, both foreign and domestic. The scope, determination and impact of claims, lawsuits, government and regulatory investigations, enforcement actions, disputes and proceedings to which we are subject cannot be predicted with certainty, and may result in:
• substantial payments to satisfy judgments, fines or penalties;
• substantial outside counsel legal fees and costs;
• additional compliance and licensure requirements;
• loss or non-renewal of existing licenses or authorizations, or prohibition from or delays in obtaining additional licenses or authorizations, required for our business;
• loss of productivity and high demands on employee time;
• criminal sanctions or consent decrees;
• termination of certain employees, including members of our executive team;
• barring of certain employees from participating in our business in whole or in part;
• orders that restrict or suspend our business or prevent us from offering certain products or services;
• changes to our business model and practices;
• delays and/or interruptions to planned transactions, product launches or improvements; and
• damage to our brand and reputation.
Any such matters can have an adverse impact, which may be material, on our business, operating results or financial condition because of legal costs, diversion of management resources, reputational damage and other factors.
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We may acquire new mining machines in the future. The price of new miners may be linked to the market price of Bitcoin, and, if the market price of Bitcoin increases, our costs of obtaining new and replacement miners may increase, which may have a material and adverse effect on our financial condition and results of operations.
We may acquire new mining machines in the future. The price of new miners may potentially be adjusted according to the price of Bitcoin (e.g. either directly through pricing mechanisms from manufacturers linking hardware prices with the price of Bitcoin or indirectly through increased demand). As a result, the cost of new machines can be unpredictable, and could also be significantly higher than our historical cost for new miners.
As we incurred significant up-front capital costs when we acquired the miners, and, if future prices of Bitcoin are not sufficiently high, we may not realize the benefit of these capital expenditures. If this occurs, our business, results of operations, and financial condition could be materially and adversely affected, which may have a negative impact on the trading price of our ADSs.
We are subject to an extensive and highly-evolving regulatory landscape and any adverse changes to, or our failure to comply with, any laws and regulations could adversely affect our brand, reputation, business, operating results, and financial condition.
Although our NFT trading platform, Lion NFT (f/k/a/Meta World) does not accept U.S. users or U.S. citizens, our business may still subject to extensive laws, rules, regulations, policies, orders, determinations, directives, treaties, and legal and regulatory interpretations and guidance in the markets in which we operate, including those governing financial services and banking, trust companies, securities, commodities, credit, crypto asset custody, exchange, and transfer, cross-border and domestic money and crypto asset transmission, consumer and commercial lending, usury, foreign currency exchange, privacy, data governance, data protection, cybersecurity, fraud detection, payment services (including payment processing and settlement services), consumer protection, escheatment, antitrust and competition, bankruptcy, tax, anti-bribery, economic and trade sanctions, anti-money laundering, and counter-terrorist financing. Many of these legal and regulatory regimes were adopted prior to the advent of the internet, mobile technologies, crypto assets, and related technologies. As a result, they do not contemplate or address unique issues associated with the cryptoeconomy, are subject to significant uncertainty, and vary widely across U.S. federal, state, and local and international jurisdictions. These legal and regulatory regimes, including the laws, rules, and regulations thereunder, evolve frequently and may be modified, interpreted, and applied in an inconsistent manner from one jurisdiction to another, and may conflict with one another. Moreover, the complexity and evolving nature of our business and the significant uncertainty surrounding the regulation of the cryptoeconomy requires us to exercise our judgement as to whether certain laws, rules, and regulations apply to us, and it is possible that governmental bodies and regulators may disagree with our conclusions. To the extent we have not complied with such laws, rules, and regulations, we could be subject to significant fines, revocation of licenses, limitations on our products and services, reputational harm, and other regulatory consequences, each of which may be significant and could adversely affect our business, operating results, and financial condition.
In addition to existing laws and regulations, various governmental and regulatory bodies, including legislative and executive bodies, in the United States and in other countries may adopt new laws and regulations, or new interpretations of existing laws and regulations may be issued by such bodies or the judiciary, which may adversely impact the development of the cryptoeconomy as a whole and our legal and regulatory status in particular by changing how we operate our business, how our products and services are regulated, and what products or services we and our competitors can offer, requiring changes to our compliance and risk mitigation measures, imposing new licensing requirements, or imposing a total ban on certain crypto asset transactions, as has occurred in certain jurisdictions in the past. For example, under recommendations from the Financial Crimes Enforcement Network, or FinCEN, and the Financial Action Task Force, or FATF, the United States and several foreign jurisdictions are likely to impose the Funds Travel Rule and the Funds Transfer Rule (commonly referred to collectively as the Travel Rule) on financial service providers in the cryptoeconomy. We may face substantial compliance costs to operationalize and comply with the Travel Rule and may be further subject to administrative sanctions for technical violations or customer attrition if the user experience suffers as a result. More recently, in December 2020, FinCEN released a proposed rule that would require us to collect personal information from the owners of self-custodied wallets that transfer cryptocurrencies to or receive cryptocurrencies from Coinbase, and report certain transactions to the federal government. There are substantial uncertainties on how these requirements would apply in practice, and we may face substantial compliance costs to operationalize and comply with these rules. As another example, the recent extension of anti-money laundering requirements to certain crypto-related activities by the E.U. Fifth Money Laundering Directive has increased the regulatory compliance burden for our business in Europe and, as a result of the fragmented approach to the implementation of its provisions, resulted in distinct and divergent national licensing and registration regimes for us in different E.U. member
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states. Further E.U.-level legislation imposing additional regulatory requirements in relation to crypto-related activities is also expected in the intermediate term which, among other things, may impose new or additional regulatory requirements on both crypto service providers and issuers of certain crypto assets, which may impact the our operations in the E.U. Although our current cryptocurrency mining activities are not in the U.S. or the E.U., there is no assurance that we will not subject to the regulations of the U.S. or the E.U. governments in the future due to the highly-evolving regulation environment.
Our transactions in digital assets may expose us to countries, territories, regimes, entities, organizations and individuals that are subject to sanctions and other restrictive laws and regulations.
The Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”) and the U.S. Department of State administer and enforce economic sanctions programs based on foreign policy and national security goals against targeted countries, territories, regimes, entities, organizations and individuals. In the UK: the Foreign, Commonwealth and Development Office is responsible for the UK’s international sanctions policy, including all international sanctions regimes and designations; the Office of Financial Sanctions Implementation (“OFSI”), which is a part of HM Treasury, is responsible for ensuring that financial sanctions are properly understood, implemented and enforced (as well as maintaining OFSI’s Consolidated List of Financial Sanctions Targets); the Department for International Trade is responsible for implementing trade sanctions and embargoes, HM Revenue & Customs is responsible for enforcing breaches of trade sanctions; and the National Crime Agency is responsible for investigating and enforcing breaches of financial sanctions. In Canada, Global Affairs Canada, Public Safety Canada and the Department of Justice administer and enforce Canada’s sanctions regime. In Australia, the Department of Foreign Affairs and Trade (“DFAT”) is the primary department that both administers and enforces the sanctions regime in Australia. These laws and regulations may be implicated by a number of digital assets activities, including investing or trading. Because of the anonymous nature of blockchain transactions, we may not be able to determine the ultimate identity of the individuals with whom we transact when buying or selling digital assets or receive Bitcoin through mining (e.g. transaction fees, or rewards from mining pool), and thus may inadvertently engage in transactions with persons, or entities or territories that are the target of sanctions or other restrictions. Moreover, U.S. federal law prohibits any U.S. person from knowingly or unknowingly possessing any visual depiction commonly known as child pornography. Recent media reports have suggested that persons have imbedded such depictions on one or more blockchains. To the extent government enforcement authorities enforce these and other laws and regulations that are impacted by blockchain technology, we may be subject to investigation, administrative or court proceedings, and civil or criminal monetary fines and penalties, all of which could harm our reputation and affect the value of our Ordinary shares.
Regulatory actions in one or more countries could severely affect the right to acquire, own, hold, sell or use Bitcoin or to exchange them for fiat currency.
One or more countries, such as Russia, may take regulatory actions in the future that could severely restrict the right to acquire, own, hold, sell or use Bitcoin or to exchange them for fiat currency. In some nations, including China, it is illegal to accept payment in Bitcoin for consumer transactions and banking institutions are barred from accepting deposits of cryptocurrencies. Such restrictions may adversely affect us as the large-scale use of Bitcoin as a means of exchange is presently confined to certain regions. Furthermore, in the future, foreign governments may decide to subsidize or in some other way support certain large-scale Bitcoin mining projects, thus adding hashrate to the overall network. Such circumstances could have a material adverse effect on the amount of Bitcoin we may be able to mine, the value of Bitcoin and any other cryptocurrencies we may potentially acquire or hold in the future and, consequently, our business, prospects, financial condition and operating results.
The nature of our business requires the application of complex financial accounting rules, and there is limited guidance from accounting standard setting bodies. If financial accounting standards undergo significant changes, our operating results could be adversely affected.
The accounting rules and regulations that we must comply with are complex and subject to interpretation by the Financial Accounting Standards Board, or the FASB, the SEC, and various bodies formed to promulgate and interpret appropriate accounting principles. A change in these principles or interpretations could have a significant effect on our reported financial results, and may even affect the reporting of transactions completed before the announcement or effectiveness of a change. Recent actions and public comments from the FASB and the SEC have focused on the integrity of financial reporting and internal controls. In addition, many companies’ accounting policies are being subject to heightened scrutiny by regulators and the public. Further, there has been limited precedents for the financial accounting of cryptocurrencies and related valuation and revenue recognition, and no official guidance has been provided by the FASB or the SEC. As such, there remains significant uncertainty on how companies can account for cryptocurrencies transactions, cryptocurrencies
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and related revenue. Uncertainties in or changes to regulatory or financial accounting standards could result in the need to change our accounting methods and restate our financial statements and impair our ability to provide timely and accurate financial information, which could adversely affect our financial statements, result in a loss of investor confidence, and more generally impact our business, operating results and financial condition.
Acceptance and/or widespread use of digital assets is uncertain.
Currently, there is a relatively limited use for digital assets in retail and commercial marketplaces, which we believe has contributed to price volatility and could therefore adversely affect an investment in our securities. Banks and other established financial institutions may, and do, refuse to process funds for digital asset transactions, process wire transfers to or from digital asset trading platforms, cryptocurrency-related companies or service providers, and maintain accounts for persons or entities transacting in digital assets. Conversely, a significant portion of digital asset demand is generated by investors seeking a long-term store of value or speculators seeking to profit from the short- or long-term holding of the asset. Price volatility undermines digital assets’ role as a medium of exchange, as retailers are much less likely to accept it as a form of payment. Use of digital assets as a medium of exchange and payment method may never achieve widespread adoption. Any such failure or a decline in acceptance and adoption could have an adverse effect on the value of Bitcoin or any other digital assets we mine or otherwise acquire or hold for our own account, which in turn could have a material adverse effect on our ability to continue as a going concern or to pursue our new strategy at all, which could have a material adverse effect on our business, prospects or operations.
The loss or destruction of any private keys required to access our digital assets may be irreversible. If we or any of our custodians are unable to access our private keys (whether due to a security incident or otherwise), it could cause direct financial loss, regulatory scrutiny, and reputational harm.
Digital assets are generally controllable only by the possessor of the unique private key relating to the digital wallet in which the digital assets are held. While blockchain protocols typically require public addresses to be published when used in a transaction, private keys must be safeguarded and kept private in order to prevent a third party from accessing the digital assets held in such a wallet. To the extent that any of the private keys relating to any cold wallets containing our digital assets is lost, destroyed, or otherwise compromised or unavailable, and no backup of the private key is accessible, we will be unable to access the digital assets held in the related wallet and, in most cases, the private key will not be capable of being restored. The loss or destruction of a private key required to access digital assets may be irreversible. Further, we cannot provide assurance that any wallet holding our digital assets, either maintained directly by us or by a custodian on our behalf, will not be hacked or compromised. Digital assets, related technologies, and digital asset service providers such as custodians and trading platforms have been, and may in the future be, subject to security breaches, hacking, or other malicious activities. As such, any loss or misappropriation of the private keys used to control our digital assets due to a hack, employee or service provider misconduct or error, or other compromise by third parties could result in significant losses, hurt our brand and reputation, and potentially the value of any Bitcoin or other digital assets we mine or otherwise acquire or hold for our own account, and adversely impact our business.
Incorrect or fraudulent digital asset transactions may be irreversible.
Digital asset transactions are not, from an administrative perspective, reversible without the consent and active participation of the recipient of the digital assets from the transaction. In theory, digital asset transactions may be reversible with the control or consent of a majority of the processing power on the network, however, we do not now, nor is it feasible that we could in the future, possess sufficient processing power to effect this reversal, nor is it likely that sufficient consensus on the relevant network could or would be achieved to enable such a reversal. Once a transaction has been verified and recorded in a block that is added to a blockchain, an incorrect transfer of digital assets or a theft thereof generally will not be reversible, and we may not have sufficient recourse to recover our losses from any such transfer or theft. It is possible that, through computer or human error, or through theft or criminal action, our digital assets could be transferred in incorrect amounts or to unauthorized third parties, or to uncontrolled accounts. In the past, hackers have successfully employed a social engineering attack against one of our service providers and misappropriated our digital assets, although, to date, such events have not been material to our financial condition or operating results. To the extent that we are unable to recover our losses from such action, error or theft, such events could result in significant losses, hurt our brand and reputation, and adversely impact our business.
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The decentralized governance and open-source nature of digital asset networks may cause them to be slow to react to challenges, which could adversely affect the value of the digital asset, and in turn, adversely affect our business.
The networks underlying several digital assets, such as Bitcoin, operate based on an open-source protocol maintained by a group of uncompensated volunteer developers. Consequently, there may be a lack of financial incentive for developers to maintain or develop the network, and the developers may lack the resources to adequately address emerging issues with the relevant digital asset protocol. There can be no assurance that the core developers of a digital asset network will continue to be involved in the network, or that new volunteer developers will emerge to replace them. To the extent that material issues arise with a digital asset protocol and the developers are unable or unwilling to address the issues adequately or in a timely manner, the digital asset may diminish in value or become worthless. In addition, several digital assets, including Bitcoin and other digital assets we may mine or hold, rely on decentralized participants to operate the digital asset network through verifying transactions in digital assets on an ongoing basis. The failure of decentralized participants to continue to maintain a network by verifying digital asset transactions may result in the relevant digital asset losing value or becoming worthless. The occurrence of any failures or malfunctions above could lead to substantial losses for us and, accordingly, adversely impact an investment in our securities.
Digital asset trading platforms may be subject to varying levels of regulation, which exposes our digital asset holdings to risks.
While certain digital assets may be traded through one or more exchanges or trading platforms of varying quality, digital assets as a class do not have a central marketplace for exchange. Digital asset platforms on which digital assets may trade pose special risks, as these platforms are generally new and the rules governing their activities are unsettled and their activities may be largely unregulated or under-regulated, and may therefore be more exposed to theft, fraud, and failure than established, regulated exchanges for other products. Digital asset platforms may be start-up businesses with limited institutional backing, limited operating history, and no publicly available financial information.
Digital assets traded on a blockchain do not rely on a trusted intermediary or depository institution. The participation in trading platforms requires users to take on credit risk by transferring digital assets from a personal account to a third party’s account. Accordingly, we are exposed to credit risk with respect to our counterparties in each transaction, including transactions directly with a counterparty sourced through an exchange or over the counter trading desk, as well as transactions directly with such an exchange. Digital asset exchanges may impose daily, weekly, monthly, or customer-specific transaction or distribution limits or suspend withdrawals entirely, rendering the exchange of digital assets for fiat currency difficult or impossible. Additionally, digital asset prices and valuations on exchanges have been volatile and subject to influence by many factors, including the levels of liquidity on particular platforms and operational interruptions and disruptions. The prices and valuation of digital assets remain subject to any volatility experienced by trading platforms, and any such volatility can adversely affect our digital asset holdings and the value of the digital assets we mine. It is possible that while engaging in transactions with various digital asset platforms located throughout the world, any such platform may cease operations voluntarily or involuntarily due to theft, fraud, security breach, liquidity issues, or government investigation without any recourse available to us.
Digital asset platforms are appealing targets for cybercrime, hackers, and malware and have been shut down or experienced losses of assets placed on the exchange as a result of cybercrime, and any such event is likely to result in the complete loss of assets placed on such a platform. Any governmental or regulatory action against such a digital asset trading platform may cause assets on such exchange to become frozen for a substantial period of time or forfeited, and could result in material opportunity costs or even in the total loss of such assets. In addition, banks may refuse to process or support wire transfers to or from digital asset trading platforms.
There are a limited number of digital asset trading platforms in operation, and many operate in jurisdictions outside of the United States. Trading on digital asset platforms outside of the United States may involve certain risks not applicable to trading on digital asset exchanges that operate in the United States. Foreign markets may be subject to instability, temporary closures due to fraud, business failure, local capital requirements or government-mandated regulations. Digital asset platforms located outside the United States may not be subject to regulatory, investigative, or prosecutorial authority through which an action or complaint regarding missing or stolen digital assets may be brought. Additionally, due to lack of globally consistent treatment and regulation of digital assets, certain platforms located outside the United States may not be currently available to, or may in the future become unavailable to, certain persons or entities based on their country of domicile, including the United States. While we perform diligence on our counterparties and any digital asset trading platforms that we may use, it may be difficult, or even impossible, to sufficiently verify the ultimate ownership and
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control of a digital asset trading platform and other information for evaluating the risks associated with such counterparty or platform. Any of our digital assets that reside on a trading platform that shuts down may be permanently unrecoverable, misapplied or otherwise lost. Additionally, to the extent that the digital asset platforms representing a substantial portion of the trading volume in particular digital asset are involved in fraud or experience security failures or other operational issues, such failures may result in loss or less favorable prices of the digital assets and may adversely affect our business and our operations.
We may face risks of internet disruptions, which could have an adverse effect on both the price of digital assets and our ability to operate our business, including Lion NFT platform.
Digital asset networks, and our business of mining cryptocurrencies and operations of our Lion NFT platform, are dependent upon the internet. A significant disruption in internet connectivity could disrupt a digital asset network’s operations until the disruption is resolved and have an adverse effect on the price of cryptocurrencies and our ability to mine cryptocurrencies. A broadly accepted and widely adopted decentralized network is necessary for most digital assets networks to function as intended. Features of digital asset networks, such as decentralization, open source protocol, and reliance on peer-to-peer connectivity, are essential to preserve the stability of the network and decrease the risk of fraud or cyber-attacks. A disruption of the internet or a digital asset network would affect the ability to transfer digital assets, and consequently, their value, as well as our ability to mine digital assets. A significant disruption of internet connectivity (e.g., affecting large numbers of users or geographic regions) could prevent a digital asset network’s functionality and operations until the internet disruption is resolved. A disruption of the internet may affect the functioning of digital asset networks and the use of digital assets.
We may not be able to realize the benefits of forks, and forks in the Bitcoin network may occur in the future that may affect our operations and financial performance.
The future development and growth of Bitcoin is subject to a variety of factors that are difficult to predict and evaluate. As Bitcoin is built on an open-source protocol without a centralized governing authority, there is a possibility Bitcoin develops in ways which are not foreseeable. An example is modification of the Bitcoin protocol by a sufficient number of users (known as a “fork”).
The Bitcoin protocol has been subject to “forks” that resulted in the creation of new networks, including Bitcoin Cash, Bitcoin Cash SV, Bitcoin Diamond, Bitcoin Gold and others. Some of these forks have caused fragmentation among trading platforms as to the correct naming convention for the forked digital assets. Due to the lack of a central registry or rulemaking body, no single entity has the ability to dictate the nomenclature of forked digital assets, causing disagreements and a lack of uniformity among platforms on the nomenclature of forked digital assets, which results in further confusion to individuals as to the nature of assets they hold on digital asset trading platforms. In addition, several of these forks were contentious and, as a result, participants in certain digital asset user and developer communities may harbor ill will toward other communities. As a result, certain community members may take actions that adversely impact the use, adoption and price of Bitcoin or any of its forked alternatives.
Furthermore, hard forks can lead to new security concerns. For instance, when the Bitcoin Cash and Bitcoin Cash SV network split in November 2018, “replay” attacks, in which transactions from one network were rebroadcast on the other network to achieve “double-spending,” plagued platforms that traded Bitcoin, resulting in significant losses to some digital asset trading platforms. Another possible result of a hard fork is an inherent decrease in the level of security due to the splitting of some mining power across networks, making it easier for a malicious actor to exceed 50% of the mining power of that network, thereby making digital asset networks that rely on proof-of-work more susceptible to attack in the wake of a fork.
Historically, speculation over a new “fork” in the Bitcoin protocol has resulted in Bitcoin price volatility and future forks may occur at any time. A fork can lead to a disruption of networks and our IT systems could be affected by cybersecurity attacks, replay attacks, or security weaknesses, any of which can further lead to temporary or even permanent loss of our assets. Such disruption and loss could cause us to be exposed to liability, even in circumstances where we have no intention of supporting an asset compromised by a fork. Additionally, a fork may result in a scenario where users running the previous protocol will not recognize blocks created by those running the new protocol, and vice versa. This may render our Bitcoin mining hardware incompatible with the new Bitcoin protocol. Such changes may have a material effect on our operations, financial position and financial performance.
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Shareholders may not receive the benefits of any “airdrops” because we will not be engaged in initial coin offering.
In addition to forks, a digital asset, including Bitcoin, may become subject to a similar occurrence known as an “airdrop.” In an airdrop, the promotors of a new digital asset announce to holders of another digital asset that such holders will be entitled to claim a certain amount of the new digital asset for free, based on the fact that they hold such other digital asset. Such airdrops are common on the Ethereum network, but have also occurred (and may continue to occur) on the Bitcoin network. Airdrops may be conducted by sending a token to the holders of set amounts of Bitcoin or to particular public addresses on the Bitcoin network. Or airdrops may involve a user being entitled to claim tokens on a decentralized application, second-layer network or entirely separate digital asset network. As such, a user entitled to receive airdrops may be required to take little or significant actions in order to receive such airdropped tokens. Shareholders may not receive the benefits of any forks.
We have not conducted an initial coin offering and have no plan to be engaged in initial coin offering, therefore, shareholders may not receive the benefits of any “airdrops.”
There is a lack of liquid markets in digital assets, and these markets are subject to possible manipulation.
Cryptocurrencies that are represented and trade on a ledger-based platform may not necessarily benefit from viable trading markets. Stock exchanges have rules and regulations regarding marketplace conduct, and monitor investors transacting on such platform for fraud and other improprieties.
These conditions may not necessarily be replicated on a digital assets trading platform, depending on the platform’s controls and other policies, and there are no controls regarding transactions that take place outside of organized exchanges. Although some digital assets trading platforms are subject to regulation and monitor for illegal activity, because the Bitcoin market itself is unregulated, there are few means to prevent manipulation of prices for the overall market. These factors may decrease liquidity or volume or may otherwise increase volatility of Bitcoin, which may have a material adverse effect on our ability to monetize the Bitcoin we mine.
Ownership of Bitcoin is pseudonymous, and the supply of accessible Bitcoin is unknown. Individuals or entities with substantial holdings in Bitcoin may engage in large-scale sales or distributions, either on non-market terms or in the ordinary course, which could disproportionately and negatively affect the cryptocurrency market, result in a reduction in the price of Bitcoin and materially and adversely affect the price of our capital shares.
There is no registry showing which individuals or entities own Bitcoin or the quantity of Bitcoin that is owned by any particular person or entity. It is possible, and in fact, reasonably likely, that a small group of early Bitcoin adopters hold a significant proportion of the Bitcoin that has been created to date. There are no regulations in place that would prevent a large holder of Bitcoin from selling Bitcoin it holds. To the extent such large holders of Bitcoin engage in large-scale sales or distributions, either on non-market terms or in the ordinary course, it could negatively affect the cryptocurrency market and result in a reduction in the price of Bitcoin. This, in turn, could materially and adversely affect the price of our shares, our business, prospects, financial condition and operating results.
We may be affected by price fluctuations in the wholesale and retail power markets.
Our power arrangements may vary depending on the markets in which we operate, and comprise fixed and variable power prices, including arrangements that may contain certain price adjustment mechanisms in case of certain events. Furthermore, some portion of our power arrangements may be priced by reference to published index prices and, thus, reflect market movements outside of our control.
A substantial increase in electricity costs or a fall in Bitcoin exchange values could render Bitcoin mining ineffective or not viable for us. Market prices for power, generation capacity and ancillary services, are unpredictable. An increase in market prices for power, generation capacity, and ancillary services may adversely affect our business, prospects, financial condition, and operating results. Long- and short-term power prices may fluctuate substantially due to a variety of factors outside of our control, including, but not limited to:
• increases and decreases the quantity and type of generation capacity;
• changes in network charges;
• fuel costs;
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• new generation technologies;
• changes in power transmission constraints or inefficiencies;
• climate change and volatile weather conditions, particularly unusually hot or mild summers or unusually cold or warm winters;
• technological shifts resulting in changes in the demand for power or in patterns of power usage, including the potential development of demand-side management tools, expansion and technological advancements in power storage capability and the development of new fuels or new technologies for the production or storage of power;
• federal, state, local and foreign power, market and environmental regulation and legislation;
• changes in capacity prices and capacity markets; and
• power market structure (e.g. energy-only vs. energy and capacity markets).
If we are unable to secure power supply at prices or on terms acceptable to us, it would potentially have a material adverse effect on our business, prospects, financial condition and operating results.
Bitcoin miners and other necessary hardware are subject to malfunction, obsolescence, and supply chain risks.
The Bitcoin mining industry has historically seen periodic improvements in the hardware technology used to mine Bitcoin. There is a risk that our current hardware will be superseded by more powerful technology, including Application-specific Integrated Circuits (“ASICs”) with a materially higher hashrate (relative to power consumption), which would make Bitcoin mining with our current hardware less commercially viable.
Further, if we seek to update our existing hardware in response to significant improvements in available Bitcoin mining technology or to replace underperforming or malfunctioning hardware, there is no guarantee that such technology will be available to us, available on commercially acceptable terms, successfully implemented in our operations, or achieve the expected operational performance.
Given the long production period to manufacture and assemble Bitcoin mining hardware and the current global semiconductor chip shortage, there can be no assurance that we can acquire enough Bitcoin mining hardware or replacement parts on a cost-effective basis – or at all – for the maintenance and expansion of our Bitcoin mining operations. We rely on third parties to supply us with Bitcoin mining hardware and shortages of Bitcoin mining hardware or their component parts, material increases in Bitcoin mining hardware costs, or delays in delivery of our hardware orders could significantly interrupt our plans for expanding our Bitcoin mining capacity. We face competition in acquiring mining machines from major manufacturers and, at a given time, mining machines may only be available for pre-order months in advance. For example, the lead time for new mining hardware from our manufacturers currently varies from three to 12 months depending on a number of factors, including: the manufacturer, type of hardware and technology, and market conditions. When mining conditions are favorable, the lead time usually increases from all suppliers and manufacturers in the industry and could exceed 12 months. If we are unable to acquire new mining machines, or if our cost for new mining machines is excessively high, we may not be able to keep up with our competitors, which may materially and adversely affect our business and results of operations. In some periods the industry has experienced, and we expect may experience again in the future, a scarcity of advanced mining machines, as few manufacturers are capable of producing a sufficient number of mining machines of adequate quality to meet demand. It is necessary for us to establish and maintain relationships with mining machine manufacturers, and we may face competition from larger or other preferred customer relationships. As a result of intense competition for the latest generation mining machines, or if we unexpectedly need to replace our mining machines due to a faulty shipment or other failure, we may not be able to secure replacement machines at reasonable costs on a timely basis.
Failure to secure appropriate Bitcoin mining hardware and/or technology could have a significant adverse impact on our ability to operate our business and on our financial position.
Our Bitcoins may be subject to loss, theft or restriction on access.
There is a risk that some or all of our Bitcoins could be lost or stolen. Cryptocurrencies are stored in Bitcoin sites commonly referred to as “wallets” by holders of Bitcoins which may be accessed to exchange a holder’s Bitcoin assets. Cold storage refers to any Bitcoin wallet that is not connected to the Internet. Cold storage is generally more secure than
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hot storage but is not ideal for quick or regular transactions and we may experience lag time in our ability to respond to market fluctuations in the price of our Bitcoin assets. We hold all of our cryptocurrencies in cold storage to reduce the risk of malfeasance, but the risk of loss of our bitcoin assets cannot be wholly eliminated.
Hackers or malicious actors may launch attacks to steal, compromise or secure cryptocurrencies, such as by attacking the Bitcoin network source code, exchange miners, third-party platforms, cold and hot storage locations or software, or by other means. We may be in control and possession of one of the more substantial holdings of Bitcoins. As we increase in size, we may become a more appealing target of hackers, malware, cyber-attacks or other security threats. Any of these events may adversely affect our operations and, consequently, our investments and profitability. The loss or destruction of a private key required to access our digital wallets may be irreversible and we may be denied access for all time to our bitcoin holdings or the holdings of others held in those compromised wallets. Our loss of access to our private keys or our experience of a data loss relating to our digital wallets could adversely affect our investments and assets.
Cryptocurrencies are controllable only by the possessor of both the unique public and private keys relating to the local or online digital wallet in which they are held, which wallet’s public key or address is reflected in the network’s public blockchain. To the extent such private keys are lost, destroyed or otherwise compromised, we will be unable to access our Bitcoin rewards and such private keys may not be capable of being restored by any network. Any loss of private keys relating to digital wallets used to store our cryptocurrencies could have a material adverse effect on our ability to pursue our business strategy at all, which could have a material adverse effect on our business, prospects or operations and potentially the value of any Bitcoin we mine or otherwise acquire or hold for our own account.
Risks due to hacking or adverse software event.
In order to minimize risk, we have established processes to manage wallets that are associated with our Bitcoin holdings. There can be no assurances that any processes we have adopted or will adopt in the future are or will be secure or effective, and we would suffer significant and immediate adverse effects if we suffered a loss of our Bitcoin due to an adverse software or cybersecurity event. We utilize several layers of threat reduction techniques, including: (i) the use of hardware wallets to store sensitive private key information; (ii) performance of transactions offline; and (iii) offline generation storage and use of private keys.
Human error and the constantly evolving state of cybercrime and hacking techniques may render present security protocols and procedures ineffective in ways which we cannot predict. If our security procedures and protocols are ineffectual and our Bitcoin assets are compromised by cybercriminals, we may not have adequate recourse to recover our losses stemming from such compromise and we may lose much of the accumulated value of our Bitcoin mining activities. This would have a material adverse impact on our business and operations.
Any change in the interpretive positions of the SEC or its staff with respect to cryptocurrencies or digital asset mining firms could have a material adverse effect on us.
We intend to conduct our operations so that we are not required to register as an investment company under the 1940 Act. Specifically, we do not believe that Bitcoin is a security. The SEC staff has not provided guidance with respect to the treatment of these assets under the 1940 Act. To the extent the SEC staff publishes new guidance with respect to these matters, we may be required to adjust our strategy or assets accordingly. There can be no assurance that we will be able to maintain our exclusion from registration as an investment company under the 1940 Act. In addition, continuously seeking to avoid the need to register under the 1940 Act may limit our ability to engage in cryptocurrency mining operations or otherwise make certain investments, and these limitations could result in our holding assets we may wish to sell or selling assets we may wish to hold, which could materially and adversely affect our business, financial condition and results of operations.
The legal test for determining whether any given crypto asset is a security is a highly complex, fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular crypto asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. For example, Chair Gary Gensler has repeatedly remarked on the need for further regulatory oversight on crypto assets, crypto trading, and lending platforms by the SEC. Public statements by senior officials at the SEC indicate that the SEC does not intend to take the position that Bitcoin or Ethereum are securities (in their current form). Bitcoin and Ethereum are the only crypto assets as to which senior officials at the SEC have publicly expressed such a view. Moreover, such statements are not official policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot be generalized to any other crypto asset. With respect to all other crypto assets, there
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is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security” under applicable laws.
Several foreign jurisdictions have taken a broad-based approach to classifying crypto assets as “securities,” while other foreign jurisdictions have adopted a narrower approach. As a result, certain crypto assets may be deemed to be a “security” under the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations, or directives that affect the characterization of crypto assets as “securities.”
The classification of a crypto asset as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading, and clearing of such assets. For example, a crypto asset that is a security in the United States may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in crypto assets that are securities in the United States may be subject to registration with the SEC as a “broker” or “dealer.” Platforms that bring together purchasers and sellers to trade crypto assets that are securities in the United States are generally subject to registration as national securities exchanges, or must qualify for an exemption, such as by being operated by a registered broker-dealer. Persons facilitating clearing and settlement of securities may be subject to registration with the SEC as a clearing agency. Foreign jurisdictions may have similar licensing, registration, and qualification requirements.
Furthermore, the SEC and its staff have taken the position that certain digital assets, including certain stablecoins, fall within the definition of a “security” under the U.S. federal securities laws. We began mining Bitcoins in May 2021, and there were no activities in our mining operations since October 31, 2021. We converted all of the Bitcoins into tether (also known as “USDT”), all of which have been liquidated as of December 31, 2021. We acquired the tether on the Huobi Global exchange, which is not open to U.S. residents, and paid all of the tether (instead of fiat currency) to service providers located in Hong Kong. Accordingly, we believe that the Securities Act does not apply to these transactions. If it is determined that these transactions involved in unregistered offers and sales of securities in the U.S. without an applicable exemption from registration, we may be subject to governmental enforcement actions, litigations, fines and penalties or adverse publicity. If such claims, actions, and litigations are successful, our business and operating results could be harmed, and even if the claims, actions, and litigations are resolved in our favor, these claims, actions, and litigations and the time and resources necessary to resolve them, could divert the resources of our management and adversely affect our business, brand and reputation and results of operations. The digital assets we hold or plan to hold may have been created by an issuer as an investment contract under the Howey test, SEC v. Howey Co., 328 U.S. 293 (1946), and may be deemed to be securities by the SEC. Should the SEC state that USDT that we held or plan to hold should be deemed to be securities, we may no longer be able to hold any of these digital assets. It would then likely become difficult or impossible for such digital asset to be traded, cleared or custodied in the U.S. through the same channels used by non-security digital assets, which in addition to materially and adversely affecting the trading value of the digital asset is likely to cause substantial volatility and significantly impact its liquidity and market participants’ ability to convert the digital asset into U.S. dollars. Our inability to exchange bitcoin for fiat or other digital assets (and vice versa) and to administer our treasury management objectives may decrease our earnings potential and have an adverse impact on our business and financial condition.
Our business and financial condition may be materially adversely affected if we are required to register as an investment company under the 1940 Act.
We believe that we are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities. However, under the 1940 Act, a company may fall within the definition of an investment company under section 3(a)(1)(C) thereof if it is engaged or proposes to engage in business of investing, reinvesting, owning, holding, or trading in securities, and owns or proposes to acquire “investment securities” (as defined therein) having a value exceeding 40% of its total assets (exclusive of government securities and cash items) on an unconsolidated basis.
Although the SEC and courts are providing increasing guidance on the treatment of digital assets for purposes of federal securities law, this continues to be an evolving area of law. To date the SEC and its staff have treated Bitcoin as a commodity, but it is possible that the SEC may deem Bitcoin constitutes an investment security for purposes of the 1940 Act, which might require us to register as an investment company in the future, although we do not believe any of the cryptoassets we will mine are securities. Furthermore, the SEC and its staff have taken the position that certain digital assets, including certain stablecoins, fall within the definition of a “security” under the U.S. federal securities laws. The
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legal test for determining whether any given digital asset is a security is a highly complex, fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular digital asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. If we were required to register as an investment company but failed to do so, the consequences could be severe. Among the various remedies it may pursue, the SEC may seek an order of a court to enjoin us from continuing to operate as an unregistered investment company. In addition, all contracts that we have entered into in the course of our business, including securities that we have offered and sold to investors, will be rendered unenforceable except to the extent of any equitable remedies that might apply. An affected investor in such case may pursue the remedy of rescission. If we were to register as an investment company, we may be forced to significantly change our structure and operations in order to comply with the substantive requirements of the 1940 Act.
An inadvertent investment company can avoid being classified as an investment company if it can rely on one of the exclusions under the Investment Company Act. One such exclusion, Rule 3a-2 under the Investment Company Act, allows an inadvertent investment company a grace period of one year from the earlier of (a) the date on which an issuer owns securities and/or cash having a value exceeding 50% of the issuer’s total assets on either a consolidated or unconsolidated basis and (b) the date on which an issuer owns or proposes to acquire investment securities having a value exceeding 40% of the value of such issuer’s total assets (exclusive of government securities and cash items) on an unconsolidated basis. At this time, we do not believe we are an inadvertent investment company. If we do become an inadvertent investment company in the future, we may take actions to cause the investment securities held by us to be less than 40% of our total assets, which may include acquiring assets with our cash and cryptoasset on hand or liquidating our investment securities or cryptoasset or seeking a no-action letter from the SEC if we are unable to acquire sufficient assets or liquidate sufficient investment securities in a timely manner. Liquidating our investment securities or cryptoasset could result in losses. As the Rule 3a-2 exception is available to a company no more than once every three years, and assuming no other exclusion were available to us, we would have to keep within the 40% limit for at least three years after we cease being an inadvertent investment company. This may limit our ability to make certain investments or enter into joint ventures that could otherwise have a positive impact on our earnings. In any event, we do not intend to become an investment company engaged in the business of investing and trading securities.
Compliance with the requirements of the 1940 Act applicable to registered investment companies may make it difficult for us to continue our current operations or our operations as a company that is engaged in the business of providing trading services and in activities related to Bitcoin mining.
We began mining Bitcoins in May 2021, and there were no activities in our mining operations since October 31, 2021. We converted all of the Bitcoins into tether on the Huobi Global exchange, which is not open to U.S. residents, and paid all of the tether (instead of fiat currency) to service providers located in Hong Kong. We may mine additional Bitcoins in future periods, though we may also sell Bitcoin in future periods as needed to generate cash assets. As of December 31, 2021, we do not hold Bitcoins or tether. Therefore, we believe that we are not engaged in the business of investing, reinvesting, or trading in securities, and we do not hold ourselves out as being engaged in those activities.
Risks Related to Our Non-fungible Token Trading and Community Platform
Our failure to safeguard and manage our customers’ fiat currencies and crypto assets could adversely impact our business, operating results, and financial condition.
We launched a non-fungible token (“NFT”) trading and community platform called the Lion NFT platform in the first quarter of 2022. As we expect to expand our product and service offerings, we must continue to strengthen our associated internal controls and ensure that our service providers do the same. The success of Lion NFT platform requires significant public confidence in our ability, or our service providers, if any, to properly manage customers’ balances and assets and handle large transaction volumes and amounts of customer funds. In addition, we may be dependent on our service providers’ operations, liquidity, and financial condition for the proper maintenance, use, and safekeeping of these customer assets. Although the Lion NFT platform does not provide digital wallet services to its users, the Lion NFT platform allows its users to connect and link their own digital wallets, such as Metamask, to the Lion NFT platform, therefore, any failure by us or our service providers to maintain the necessary controls or to manage customers’ crypto assets and funds appropriately and in compliance with applicable regulatory requirements could result in reputational harm, significant
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financial losses, lead customers to discontinue or reduce their use of our and our service providers’ products, and result in significant penalties and fines and additional restrictions, which could adversely impact our business, operating results, and financial condition.
For example, NFTs raise various intellectual property law considerations, including adequacy and scope of assignment, licensing, transfer, copyright, and other right of use issues. The creator of an NFT will often have all rights to the content of the NFT and can determine what rights to assign to a buyer, such as the right to display, modify, or copy the content. To the extent we are directly or indirectly involved in a dispute between creators and buyers on our NFT platform, it could materially and adversely affect the success of our NFT platform and harm our business and reputation. NFTs, and our NFT platform, may also be an attractive target for cybersecurity attacks. For example, a perpetrator could seek to obtain the private key associated with a digital wallet holding an NFT to access and sell the NFT without valid authorization, and the owner of the NFT may have limited recourse due to the nature of blockchain transactions and of cybercrimes generally. NFT marketplaces, including our NFT platform, may also be vulnerable to attacks where an unauthorized party acquires the necessary credentials to access user accounts. The safeguards we have implemented or may implement in the future to protect against cybersecurity threats may be insufficient. If our NFT platform were to experience any cyberattacks, it could negatively impact our reputation and market acceptance of our platform.
We, or our service providers, may deposit, transfer, and custody customer’s NFT in multiple jurisdictions. In each instance, we are required to safeguard customers’ assets using high-level security standards applicable to our or service providers’ hot and cold wallet and storage systems, as well as our financial management systems. Our security technology will be designed to prevent, detect, and mitigate inappropriate access to our systems, by internal or external threats. We believe we have developed and maintained administrative, technical, and physical safeguards designed to comply with applicable legal requirements and industry standards. However, it is nevertheless possible that hackers, employees or service providers acting contrary to our policies, or others could circumvent these safeguards to improperly access our systems or documents, or the systems or documents of our business partners, agents, or service providers, and improperly access, obtain, misuse customers’ crypto assets and funds. The methods used to obtain unauthorized access, disable, or degrade service or sabotage systems are also constantly changing and evolving and may be difficult to anticipate or detect for long periods of time. Additionally, transactions undertaken through our platform or other electronic channels may create risks of fraud, hacking, unauthorized access or acquisition, and other deceptive practices. Any security incident resulting in a compromise of customer assets could result in substantial costs to us and require us to notify impacted individuals, and in some cases regulators, of a possible or actual incident, expose us to regulatory enforcement actions, including substantial fines, limit our ability to provide services, subject us to litigation, significant financial losses, damage our reputation, and adversely affect our business, operating results, financial condition, and cash flows.
Although we have our know-your-customer, or KYC procedures to prevent offers and sales of digital assets in the U.S. or to U.S. persons, we face the risks related to our KYC procedures when our clients provide outdated, inaccurate, false or misleading information or use virtual private network to visit the Lion NFT platform.
The Lion NFT platform established a IP blacklist to block the users from U.S. sanctioned countries and the U.S. We also collect client information during the account opening and registration process and screen accounts against public databases or collaborates with external service providers to verify client identity and detecting risks. We have two separate teams conduct our KYC procedure on new clients’ backgrounds and identify manually. We will reject all account applications if there is any U.S. exposure. For example, we will not allow U.S. citizens or residents to open an account with us and we will require our potential clients to provide copies of their passports or identity cards in connection with their account applications. Although we will require our clients to submit documents for proof of their identity for completing the account registration and to update such information from time to time, we face risks as the information provided by our clients may be outdated, inaccurate, false or misleading. We cannot fully confirm the accuracy, currency and completeness of such information beyond reasonable effort. For instance, if a potential client only provides his or her PRC identity card, which is usually valid for 10 years or more, and misinforms us that he or she does not also possess a U.S. passport or permanent resident card, we might not be able to detect such misinformation. In addition, as a client who is not a U.S. citizen or resident at the time of account registration may later obtain U.S. citizenship or residential status and fail to update us in a timely manner, our customer database might not be entirely accurate at all time. Despite our efforts to exclude persons who reside in jurisdictions where we have no license or permit such as the United States, our provision of products and services to such clients could be in violation of the applicable laws and regulations in those jurisdictions, of which we may have no awareness until we are warned by the
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relevant supervising authorities. In addition, anonymous accounts are generally not allowed to be opened, heightened scrutiny measures are imposed on accounts opened on behalf of third parties and additional verification measures are conducted before we accept third party payments against the accounts of our clients.
Despite our safeguards, we could still be subject to certain legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation resulting from such violations. In particular, following the listing on Nasdaq, as we become increasingly renown in the United States and worldwide, there is no assurance that we will be able to successfully identify and exclude all persons who resides in jurisdictions where we have no license or permit to operate, including the United States. If U.S. citizens and residents were to register on and begin using our platform, we may be subject to the scrutiny of U.S. regulatory agencies and required to comply with applicable laws and regulations in the United States, including the requirements to obtain relevant licenses and permits for providing our products to U.S. citizens and residents. In addition, we may not be able to prevent users from using virtual private network or other high technology measures to circumvent our IP blacklist to visit our websites. We currently do not intend to apply for such licenses and permits in the United States, and if we determine to do so, there is no guarantee that we will successfully obtain such licenses in a timely fashion, or at all. We could be subject to disciplinary or other actions by the U.S. regulatory agencies due to claimed noncompliance which could have a material adverse effect on our business, financial condition and results of operations.
In addition, although we have strict internal policies for continuing KYC procedures after the activation of accounts and for issues such as anti-corruption, economic sanctions, anti-money laundering, export controls and securities fraud, we mainly rely on our continuing KYC procedures to ensure our compliance with relevant laws and regulations related to anti-corruption, economic sanctions, anti-money laundering, export controls and securities fraud. Although we have trainings for our employees in all of our departments, our KYC system and procedures cannot be foolproof. Any potential flaw in our KYC system or any misconduct in the KYC procedures by any of our employees may lead to our failure of compliance with such relevant laws and regulations, which will further subject us to certain legal or regulatory sanctions, fines or penalties, financial loss, or damage to reputation.
Risks associated with our recently launched NFT platform, including the regulatory, legal, reputational, commercial, technical, marketing, operational, and other risks related to successfully launching and profitably operating our NFT platform.
In January 2022, we announced the launch of our NFT platform where collectors will be able to purchase MetaWords NFTs and resell the MetaWords NFTs. In the future, the creators on the Lion NFT platform may be able to make blockchain-encrypted design items, such as artwork, available as NFTs for digital purchase through the Lion NFT platform, utilizing BNB. NFTs are digital assets recorded on a blockchain ledger for verification of authenticity and ownership of a unique digital asset, such as artwork. Given the increased scrutiny of digital assets as well as cryptocurrencies for regulatory and anti-money laundering purposes, it is possible that the U.S. and other jurisdictions will engage in increased scrutiny and regulation of NFTs and our business. While NFTs and cryptocurrencies are similar in that both are based on blockchain technology, unlike cryptocurrency units, which are fungible, NFTs have unique identification codes and represent content on the blockchain. The record of ownership of the NFT, which establishes authenticity and may also carry other rights, cannot be duplicated. As NFTs are a relatively new and emerging type of digital asset, the regulatory, commercial, and legal framework governing NFTs is likely to evolve both in the United States and internationally and implicates issues regarding a range of matters, including, but not limited to, intellectual property rights, privacy and cybersecurity, fraud, anti-money laundering, sanctions, and currency, commodity, and securities law implications.
NFTs, and our NFT platform (including our facilitation of transactions in BNB), may also be subject to regulations of the Financial Crimes Enforcement Network (“FinCEN”) of the U.S. Department of Treasury and the Bank Secrecy Act. The nature of many NFT transactions also involve circumstances which present higher risks for potential violations, such as anonymity, subjective valuation, use of intermediaries, lack of transparency, and decentralization associated with blockchain technology. However, we require our users to provide their identity cards to verify their identities and citizenship at registration. In addition, the Commodity Futures Trading Commission has stated that cryptocurrencies, with which NFTs have some similarities, fall within the definition of “commodities.” If NFTs were deemed to be a commodity, NFT transactions could be subject to prohibitions on deceptive and manipulative trading or restrictions on manner of trading (e.g., on a registered derivatives exchange), depending on how the transaction is conducted. Moreover, if NFTs were deemed to be a “security,” it could raise federal and state securities law implications, including exemption or registration requirements for marketplaces for NFT transactions, sellers of NFTs, and the NFT transactions themselves, as well as liability issues, such as insider trading or material omissions or misstatements, among others. NFT transactions may also be subject to laws governing virtual currency or money transmission. For example, New York has legislation
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regarding the operation of virtual currency businesses. NFT transactions also raise issues regarding compliance with laws of foreign jurisdictions, many of which present complex compliance issues and may conflict with one another. Our launch and operation of our NFT platform (including our facilitation of transactions in BNB, in connection therewith) expose us to the foregoing risks, among others, any of which could materially and adversely affect the success of our NFT platform and harm our business, financial condition, results of operations, reputation, and prospects. However, the Lion NFT platform establishes a IP blacklist to block the users from U.S. sanctioned countries and the U.S. and does not allow U.S. citizens or residents to open an account with us.
As the market for NFTs is relatively nascent, it is difficult to predict how the legal and regulatory framework around NFTs will develop and how such developments will impact our business and our NFT platform. Further, market acceptance of NFTs is uncertain as buyers may be unfamiliar or uncomfortable with digital assets generally, how to transact in digital assets, or how to assess the value of NFTs. The launch of our NFT platform also subjects us to risks similar to those associated with any new platform offering, including, but not limited to, our ability to accurately anticipate market demand and acceptance, our ability to successfully launch our new NFT platform offering, creator and buyer acceptance, technical issues with the operation of our new NFT platform, and legal and regulatory risks as discussed above. We believe these risks may be heightened with respect to our NFT platform, as NFTs are still considered a relatively novel concept. If we fail to accurately anticipate or manage the risks associated with our NFT platform or with our facilitation of cryptocurrency transactions, or if we directly or indirectly become subject to disputes, liability, or other legal or regulatory issues in connection with our NFT platform or cryptocurrency transactions, our NFT platform may not be successful and our business, financial condition, results of operations, reputation, and prospects could be materially harmed.
A particular crypto asset’s status as a “security” in any relevant jurisdiction is subject to a high degree of uncertainty and if we are unable to properly characterize a crypto asset, we may be subject to regulatory scrutiny, inquiries, investigations, fines, and other penalties, which may adversely affect our business, operating results, and financial condition.
The SEC and its staff have taken the position that certain crypto assets fall within the definition of a “security” under the U.S. federal securities laws. The legal test for determining whether any given crypto asset is a security is a highly complex, fact-driven analysis that evolves over time, and the outcome is difficult to predict. The SEC generally does not provide advance guidance or confirmation on the status of any particular crypto asset as a security. Furthermore, the SEC’s views in this area have evolved over time and it is difficult to predict the direction or timing of any continuing evolution. It is also possible that a change in the governing administration or the appointment of new SEC commissioners could substantially impact the views of the SEC and its staff. For example, Chair Gary Gensler has repeatedly remarked on the need for further regulatory oversight on crypto assets, crypto trading, and lending platforms by the SEC. Public statements by senior officials at the SEC indicate that the SEC does not intend to take the position that Bitcoin or Ethereum are securities (in their current form). Bitcoin and Ethereum are the only crypto assets as to which senior officials at the SEC have publicly expressed such a view. Moreover, such statements are not official policy statements by the SEC and reflect only the speakers’ views, which are not binding on the SEC or any other agency or court and cannot be generalized to any other crypto asset. With respect to all other crypto assets, there is currently no certainty under the applicable legal test that such assets are not securities, notwithstanding the conclusions we may draw based on our risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security” under applicable laws.
Several foreign jurisdictions have taken a broad-based approach to classifying crypto assets as “securities,” while other foreign jurisdictions have adopted a narrower approach. As a result, certain crypto assets may be deemed to be a “security” under the laws of some jurisdictions but not others. Various foreign jurisdictions may, in the future, adopt additional laws, regulations, or directives that affect the characterization of crypto assets as “securities.”
The classification of a crypto asset as a security under applicable law has wide-ranging implications for the regulatory obligations that flow from the offer, sale, trading, and clearing of such assets. For example, a crypto asset that is a security in the United States may generally only be offered or sold in the United States pursuant to a registration statement filed with the SEC or in an offering that qualifies for an exemption from registration. Persons that effect transactions in crypto assets that are securities in the United States may be subject to registration with the SEC as a “broker” or “dealer.” Platforms that bring together purchasers and sellers to trade crypto assets that are securities in the United States are generally subject to registration as national securities exchanges, or must qualify for an exemption. Persons facilitating clearing and settlement of securities may be subject to registration with the SEC as a clearing agency. Foreign jurisdictions may have similar licensing, registration, and qualification requirements.
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We have procedures to analyze whether crypto assets that we seek to facilitate trading on our platform could be deemed to be a “security” under applicable laws. Before we expanded our business into the NFT business, the management determined not to initiate any initial coin offering which is likely to be deemed as securities offering. The management also decided not to offer its NFTs to any U.S. persons and therefore, the company has established its KYC procedures and IP blacklist to avoid selling any NFTs to U.S. persons. Our policies and procedures do not constitute a legal standard, but rather represent a framework for our analysis, which permits us to make a risk-based assessment regarding the likelihood that a particular crypto asset could be deemed a “security” under applicable laws. Regardless of our conclusions, we could be subject to legal or regulatory action in the event the SEC, a state or foreign regulatory authority, or a court were to determine that a supported crypto asset currently offered, sold, or traded on our platform is a “security” under applicable laws. Because our NFTs issued on our Lion NFT platform were not registered with the SEC, we only permit trading on our core platform of those crypto assets for which we determine there are reasonably sound arguments to conclude that the crypto asset is not a security. We believe that our process reflects a comprehensive and thoughtful analysis and is reasonably designed to facilitate consistent application of available legal guidance to crypto assets to facilitate informed risk-based business judgment. However, we recognize that the application of securities laws to the specific facts and circumstances of crypto assets may be complex and subject to change, and that a listing determination does not guarantee any conclusion under the U.S. federal securities laws. We expect our risk assessment policies and procedures to continuously evolve to take into account case law, facts, and developments in technology.
There can be no assurances that we will properly characterize any given crypto asset as a security or non-security for purposes of determining whether our platform will support trading of the crypto asset, or that the SEC, foreign regulatory authority, or a court, if the question was presented to it, would agree with our assessment. If the SEC, state or foreign regulatory authority, or a court were to determine that a supported crypto asset currently offered, sold, or traded on our platform is a security, we would not be able to offer such crypto asset for trading until we are able to do so in a compliant manner. A determination by the SEC, a state or foreign regulatory authority, or a court that an asset that we currently support for trading on our Lion NFT platform constitutes a security may also result in us determining that it is advisable to remove assets from our Lion NFT platform that have similar characteristics to the asset that was determined to be a security. In addition, we could be subject to judicial or administrative sanctions for failing to offer or sell the crypto asset in compliance with the registration requirements, or national securities exchange without appropriate registration. Such an action could result in injunctions, cease and desist orders, as well as civil monetary penalties, fines, and disgorgement, criminal liability, and reputational harm. Customers that traded such supported crypto asset on our Lion NFT platform and suffered trading losses could also seek to rescind a transaction that we facilitated as the basis that it was conducted in violation of applicable law, which could subject us to significant liability. We may also be required to cease facilitating transactions in the supported crypto asset other than via our licensed subsidiaries, which could negatively impact our business, operating results, and financial condition. Furthermore, if we remove any assets from trading on our platform, our decision may be unpopular with users and may reduce our ability to attract and retain customers, especially if such assets remain traded on unregulated exchanges, which includes many of our competitors.
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USE OF PROCEEDS
We will not receive any proceeds from the sale of our ADSs by the selling shareholder except for proceeds from the exercise of the 2021 Registrable Warrants. We will bear all other costs, fees and expenses incurred by us, or by the selling shareholder, in effecting the registration of the shares covered by this prospectus. The selling shareholder, however, will pay any other expenses incurred in selling its common stock, including any brokerage commissions or costs of sale.
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CORPORATE HISTORY AND STRUCTURE
Lion Group Holding Ltd. was incorporated under the laws of the Cayman Islands as an exempted company on February 11, 2020, solely for the purpose of effectuating the Business Combination. Prior to the Business Combination, Lion Group Holding Ltd. owned no material assets and did not operate any business. On June 16, 2020, we consummated the Business Combination pursuant to the terms of the Business Combination Agreement, upon which Lion Group Holding Ltd. became the ultimate parent company of Lion and it has no operating assets other than its ownership of interests in Lion.
The following diagram illustrates our corporate structure as of the date of this prospectus.
In June 2015, Lion Financial Group Limited (previously known as BC Financial Holdings Limited) was incorporated under the laws of the British Virgin Islands, as a holding company of our businesses
In May 2016, Lion International Securities Group Limited, Lion Futures Limited, Lion Capital Management Limited and Lion Foreign Exchange Limited in Hong Kong, were incorporated, to engage in securities and futures brokerage business and forex trading business, respectively.
In October 2014, BC Wealth Management Limited was incorporated in Hong Kong, through which we started to carry out our insurance brokerage business. In May 2016, BC Wealth Management Limited became a wholly owned subsidiary of the Group.
In February 2017, Lion Wealth Management Limited was incorporated under the laws of British Virgin Islands as a holding company of BC Wealth Management Limited.
In March 2017, Lion Brokers Limited was incorporated under the laws of Cayman Islands as a wholly owned subsidiary of Lion Financial Group Limited.
In October 2018, Lion Wealth Limited was incorporated in Hong Kong as our Asia head office.
In June 2019, Lion Investment Fund SPC was incorporated under the laws of Cayman Islands as a wholly owned subsidiary of Lion Capital Management Limited. As of the date of this prospectus, we have not provided any financial services through this entity.
In July 2019, Lion International Financial (Singapore) Pte. Ltd. was incorporated in Singapore. As of the date of this prospectus, we have not provided financial services through this entity.
In December 2019, Lion Capital Management Limited was changed name to Lion Asset Management Limited.
In June 2020, we restructured pursuant to the Business Combination Agreement, by which Lion Group Holding Ltd. became our parent company and listed on Nasdaq.
In January 2021, the Proficient Alpha Acquisition Corp. was renamed to Lion Group North America Corp.
In April 2021, Lion Financial Group Limited acquired Lion Fintech Group Limited from Jian Wang. Lion Fintech Group Limited was incorporated under the laws of British Virgin Islands in February 2017, as a holding company of
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Royal Lion Investment Limited, a Cayman Islands company, in which we hold 70% voting rights of the shareholders. Royal Lion Middle East DMCC is a wholly-owned subsidiary of Royal Lion Investment Limited. As of May 12, 2022, both Royal Lion Investment Limited and Royal Lion Middle East DMCC are dormant.
In May 2021, Lion NFT Limited was incorporated under the laws of British Virgin Islands in which we hold 90% equity interest, as a holding company of Flying Lion Limited, a Cayman Islands company, in which we hold 70% equity interest through Lion NFT Limited. Flying Lion Lab is a team of independent contractors engaged by Flying Lion Limited and is the workshop which designs the NFT products. We conducted our NFT business through Lion NFT Limited. All the products designed by Flying Lion Lab are to be sold at Lion NFT Platform.
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this prospectus. In addition to historical information, the following discussion contains forward-looking statements, such as statements regarding our expectation for future performance, liquidity and capital resources that involve risks, uncertainties and assumptions that could cause actual results to differ materially from those contained in or implied by any forward-looking statements. Factors that could cause such differences include those identified below and those described in the sections entitled “Cautionary Note Regarding Forward-Looking Statements,” “Risk Factors” and “Unaudited Pro Forma Condensed Combined Financial Information.”
In this section, the information for the years ended December 31, 2020, 2019 and 2018 are derived from Lion’s audited combined financial statements and the notes thereto included elsewhere in this prospectus.
Overview
We are one of the few Chinese investor-focused trading platforms that offer a wide spectrum of products and services. Currently, our business lines include (i) total return swap (TRS) trading business, (ii) contracts for difference (CFD) trading services, (iii) futures and securities brokerage services, and (iv) insurance brokerage services. We provide these services through our all-in-one Lion Brokers Pro app and a variety of other apps available on iOS, Android, PC and Mac platforms. Our clients are mostly well-educated and affluent Chinese investors residing both inside and outside the PRC (excluding the United States), as well as institutional clients in Hong Kong that use our futures trading service.
Our trading platform allows users to trade more than 100 futures products on major futures exchanges worldwide (excluding the PRC), including the Chicago Mercantile Exchange (CME), Singapore Exchange (SGX), the Hong Kong Futures Exchange (HKFE) and Eurex Exchange (Eurex), as well as stocks listed on the New York Stock Exchange (NYSE), Nasdaq and Hong Kong Stock Exchange (HKSE), and PRC stocks listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) that are eligible for the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs (together, the “Stock Connect”). Our customers may also use our platform to trade various financial products, such as stock indices, commodities, futures, forex, ETFs, warrants and callable bull/bear contracts, on global exchanges or OTC markets.
Additionally, Lion has developed a professional, experienced SPAC sponsorship team to help guide private companies through their listing journey while creating value for Lion and its shareholders. Lion is also committed to building the world’s leading one-stop, cross-chain, high-expansion non-fungible token (NFT) marketplace and entering the metaverse space through blockchain technology.
Recent Developments
COVID-19 Impact
In December 2019, COVID-19 emerged and has subsequently spread worldwide. In March 2020, the World Health Organization declared COVID-19 as a pandemic. In the fiscal year of 2021, some instances of COVID-19 infections emerged in various regions worldwide. Governments around the globe have taken measures to contain the spread of the COVID-19 virus, including quarantining individuals infected with or suspected of having COVID-19, prohibiting residents from free travel, encouraging employees of enterprises to work remotely from home and cancelling public activities, among others. The COVID-19 has also resulted in temporary closure of many corporate offices and factories around the world. In addition, as the outbreak continues to threaten global economies, it may continue to cause significant market volatility and declines in general economic activities. Since December 2021, there has been a recurrence of COVID-19 outbreaks in China and Hong Kong due to the Delta and Omicron variants. Like most companies, our various business lines have been adversely impacted by COVID-19. CFD trading volume and futures contract volumes decreased significantly since the beginning of 2020, which was mainly attributable to economic and financial impact brought about by COVID-19 on our customers, causing a decrease in both their willingness to trade and make investments as well as their disposable income allocated to making such transactions. Meanwhile, our insurance brokerage businesses were negatively affected as new or existing customers may not be able to travel to
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Hong Kong to open new futures trading accounts or purchase insurance products. We cannot reasonably estimate the related financial impact to our future financial results given the uncertainties surrounding the duration of the outbreak. We continue to closely monitor the impact and navigate the significant challenges created by the COVID-19 pandemic.
Granted Trading License in Singapore
On October 4, 2021, our subsidiary, Lion International Financial (Singapore) Pte. Ltd. (“Lion Singapore”), was granted a Capital Markets Service License (“CMS License”) from the Monetary Authority of Singapore. The CMS License allows Lion Singapore to deal in exchange-traded derivatives contracts, over-the-counter derivatives contracts and spot foreign exchange contracts for the purposes of leveraged foreign exchange trading. Due to Singapore’s COVID resurgence in the fourth quarter of 2021 and the beginning of 2022, we have not started operations in Singapore yet.
Cryptocurrency Mining and Our Cryptocurrency Holdings
We commenced Bitcoin mining operations in China in late May 2021 and have temporarily ceased our Bitcoin mining operations at the end of October 2021. We plan to resume our Bitcoin mining activities in the future. We operated a fleet of 5,000 Bitmain’s model S9 Hydro Antminers, with a theoretical maximum total hash rate capacity of 90 PH/s (petahash) deployed as of today. For the year ended December 31, 2021, we recognized revenue of US$1.7 million from Bitcoin mining business. Subsequently we have been and will continue to actively seek for low-cost electricity and sustainable energy mining facilities in different regions worldwide. We closely monitor our Bitcoin mining operation on a daily basis. All the mined Bitcoins have been distributed by Antpool to our cold wallets. We stored the mined Bitcoins in hardware wallets (or known as cold wallets), which were safeguarded in the safety boxes in our office. The keys and passwords of the safety boxes are separately held by our different staff. We held the mined Bitcoins and converted into USDT when it is commercially justified.
In the context of the China’s continuous and greater efforts on energy conservation and emission reduction, the large amount of electricity required for mining is becoming increasingly inaccessible. Lately in September 2021, China’s National Development and Reform Commission, People’s Bank of China and several other ministerial departments jointly issued administrative notices on restricting the development of mining activities and preventing the derived financial risks related to cryptocurrency trading hype. The administrative measures included in the notices are aimed at restraining the supply of electricity to the mining business, and ultimately prompting existing mining facilities to gradually withdraw from the mining business. We voluntarily ceased our Bitcoin mining operations at the end of October 2021, in response to the hiked electricity cost as well as to the change of the regulatory environment in the PRC. We did not receive any penalty or notice from the PRC governments as a result of the recent development of the PRC crackdown on cryptocurrency mining activities. Currently, we are actively seeking low-cost electricity and sustainable energy mining facilities in different regions around the world (outside China) with a stable regulatory environment to conduct cryptocurrency mining activities. Once we locate a region that our management believes that it will meet our criterion, we will move our bitcoin mining units and resume bitcoin mining activities there.
As of December 31, 2021, we have no Bitcoin and no USDT on our balance sheet. We began mining Bitcoin in May 2021 and there were no activities in our mining operations since October 31, 2021. From May 2021 to October 2021, we mined approximately 37.884 Bitcoins, and we converted all of our mined Bitcoin at an average price of USDT 45,567 per Bitcoin. As of December 31, 2021, we have liquidated all the USDT. We expect to mine additional Bitcoin in future periods, though we may also sell Bitcoin in future periods as needed to generate cash assets. As of the date of this prospectus, our Bitcoin mining operations is immaterial to our operations and the cryptocurrency that we hold is less than 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.
While senior SEC officials have stated their view that bitcoin is not a “security” for purposes of the federal securities laws, the SEC has so far refused to permit the listing of any bitcoin-based exchange traded funds, citing, among other things, concerns regarding bitcoin market integrity and custodial protections. It is possible that the SEC could take a contrary position to the one taken by its senior officials or a federal court could conclude that bitcoin is a security. Such a determination could lead to our classification as an “investment company” under the Investment Company Act of 1940, which would subject us to significant additional regulatory controls that could have a material adverse effect on our business and operations and also may require us to substantially change the manner in which we conduct our business. In addition, if Bitcoin is determined to constitute a security for purposes of the federal securities laws, the additional regulatory restrictions imposed by those laws could adversely affect the market price of bitcoin and in turn adversely affect the market price of our ADSs. Furthermore, the SEC and its staff have taken the position that certain digital assets, including certain stablecoins, fall within the definition of a “security” under the U.S. federal securities laws.
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Launch of NFT Marketplace and Entry into Metaverse Space
In January 2022, we launched our NFT business through Flying Lion Limited, including (i) issuance of MetaWords character NFTs and MetaWords work NFTs (collectively, the “MetaWords NFTs”), and (ii) the establishment of our NFT trading platform, namely the Lion NFT platform (f/k/a/ Meta World). Lion NFT platform aims to become one of the world’s top one-stop full service, cross-chain, high-expansion NFT marketplace, allowing users to connect and trade with their digital currency. From exploration and creation to pricing, buying and selling, the platform establishes a comprehensive industry chain that uses blockchain to encrypt artworks such as photographs, videos, audios and 3D pieces, as well as other relevant information to generate NFTs. Our deployment into the NFT industry lays a solid foundation to enter the metaverse field. We have performed KYC check on the identity of the registered users since the launch and have blocked all U.S. persons from accessing the platform. We did not issue or sell MetaWords NFTs to U.S. persons in January 2022 and blocked U.S. persons from registering on the Lion NFT platform. We will also keep tracking users’ IP addresses and block visitors with a U.S. IP address.
The Lion NFT platform is an online marketplace where user customers can mint, buy, and sell their own NFT assets. Users who mint original NFT assets are called the creator, who is the initial owner of the NFT assets. After minting, the NFT assets are automatically transferred into the creator’s digital wallet through blockchain network. The transaction is proved by the blockchain technology and network. The creator can sell his/her NFT assets to other users on our platform, called buyers. After the transaction, the NFT assets will be transferred to the buyer’s wallet and the buyer pays the price listed on the marketplace.
The Lion NFT platform does not provide digital wallet services or NFT assets storage services to its users, but the Lion NFT platform allows the users to connect and link their own digital cryptocurrency wallets, such as Metamask, to the Lion NFT platform. For example, the users store the NFT assets, including the MetaWords NFTs issued by us in January 2022, in their cryptocurrency wallets. The third-party digital cryptocurrency wallets normally have two main components: a public key and a private key. The ownership of any digital asset is linked to a public key. A digital cryptocurrency wallet’s public key is considered to be a wallet address, an identifier of the wallet that can be shared like a traditional account number. By contrast, a digital cryptocurrency wallet private key is similar to a personal identification number (PIN-code) that secures the wallets. The private key is used to execute transactions and decrypt data, and at all times must be stored offline and kept private. The security of a wallet depends on how much access is granted to a private key. If a private key is forgotten, lost, or compromised by a third party such as crypto custodians, all crypto assets and NFTs in the wallet can potentially be stolen. On the Lion NFT platform, a wallet owner complete control of the safety of the crypto assets by storing the private key. A wallet grants all access to funds and operations to a user. Particularly, a private key is stored by the user and not accessible by a third party. Thus, the responsibility to save and protect passwords, also known as mnemonic phrases, lies entirely with wallet owners. If a user loses or forgets the password, access to a wallet will be permanently unavailable.
In August 2021, Lion announced its strategic partnership with Dawa Technology, one of China’s largest communities for VR, AR, XR developers and content creators, to jointly innovate and develop the Metaverse AI tool — “Cloud Production Platform”, and establish a new form of digital market in Metaverse. The Metaverse AI tool will facilitate the creation of the virtual world, making it faster and more convenient.
Revenue from the Lion NFT Platform
We created and minted the MetaWords NFTs by converting Xu Bing’s characters in his artwork Book from the Ground and sold MetaWords NFTs to the NFT collectors. The sales were conducted through an online auction and blind boxes direct sell on the Lion NFT platform in January 2022. We sold in an aggregate of six MetaWords NFTs created by us by the auction in the amount of 197 wrapped BNB, and 2,742 blind-boxes which includes MetaWords NFTs at 0.40 BNB per unit for a total amount of 749 BNB, net of the consideration paid to customers of 348 BNB in form of incentive credits. We record revenue on a gross basis of the sale price, net of considerations paid to the users as the incentive, and collected in an aggregate of approximately US$438,000 at the spot token price upon the completion of the sale of character NFTs and blind boxes (the “MetaWords Primary Sale”). We entered into a licensing agreement dated as of September 8, 2021 with Xu Bing Studio, copyrights owner of Book from the Ground. Pursuant to the licensing agreement, Flying Lion Limited has exclusive rights to use the copyrights of Book from the Ground globally for the development, dissemination, sales, and distribution of Metaverse and NFT-related art derivatives and other related products. Flying Lion Limited has the rights to redesign and recreate the authorized work. The authorization period of the licensing agreement is effective for long without a termination date.
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The users can resell the MetaWords NFTs to other users on the Lion NFT platform, or MetaWords Resale. For the MetaWords Resale conducted on the Lion NFT platform, we charge 5% of the purchase price as the authorization fee for Xu Bing’s artwork; 5% of the purchase price as the licensing fee for the author; and 2.5% of the purchase price as the transaction fee. Lion is the author for MetaWords NFTs. The commissions are collected in the form of BNB tokens when the users buy and sell MetaWords NFTs on the Lion NFT platform. We may record three types of fees abovementioned when applicable on a net basis, and earned revenue based on a specific percentage of the gross sale value as the subsequent sales occur. As of the date of this prospectus, the fees abovementioned we are entitled to such MetaWords Resale were de minimis. In addition, we will launch a MetaWords NFT creation tool in APP version, giving users the ability to create their own MetaWords character NFTs. Once approved by the Lion NFT platform, the MetaWords NFT created by the users can be traded on the Lion NFT platform. We will charge 2.5% of the purchase price as the transaction fee and 5% of the purchase price as the authorization fee for Xu Bing’s artwork. The author of the MetaWords will be able to receive 5% of the purchase price as the licensing fee for future resale.
Due to the lack of physical substance, we consider MetaWords NFTs that we created meet the definition of intangible assets and would generally be accounted for under ASC 350 Intangibles — Goodwill and Other. The useful life is indefinite according to ASC 350-30-35-4. On the other hand, for NFTs held by users, Lion NFT platform neither provides custody services directly or indirectly, nor do we have control of these digital assets or any related liability. They are off-balance sheet to our financial statements.
As of the date of this prospectus, besides the suspended crypto mining operations and NFTs, we do not have other revenue-generating activities in digital assets. As of December 31, 2021, we have liquidated all the Bitcoins and USDT and held no digital assets on hand.
The author (creator) creates MetaWords characters or MetaWords works and are entitled for licensing fee. The owner (holder) of Metawards characters owns the NFT assets and are entitled for licensing fee when the MetaWords characters he/she owns (holds) are being used by other users to build MetaWords works. In the initial sales of MetaWords character NFTs conducted on the Lion NFT platform, Flying Lion Limited charges 5% of the purchase price as the authorization fee for Xu Bing’s artwork, and the creator (author) collects 5% of the purchase price as the licensing fee as the author; and Lion NFT Platform charges 2.5% of the purchase price as the transaction fee. In the initial sales, the author of the MetaWords characters is the Flying Lion Limited. In the future, any users could create MetaWords characters. Once approved by Flying Lion Lab, the created character could be traded on the platform. Buyer pays the purchase price and becomes the holder (owner) of the MetaWords character NFTs. In the scenario where Flying Lion Limited is the creator (author) of the MetaWords character NFTs, we are receiving 100% of the purchase price; in the scenario where a user is the creator (author) of the MetaWords character NFTs, the user is receiving the 87.5% of purchase price plus 5% licensing fee as the author, and we are receiving 7.5% of the purchase price including 5% authorization fee and 2.5% transaction fee. Smart contract calculate and charge the fees allocation and transfer.
In the resales of MetaWords character NFTs conducted on the Lion NFT platform, Flying Lion Limited is entitled for 5% of the purchase price as the authorization fee for Xu Bing’s artwork, and the creator (author) is entitled for 5% of the purchase price as the licensing fee as the author; and Lion NFT Platform charges 2.5% of the purchase price as the transaction fee. Buyer pays the purchase price and becomes the holder (owner) of the MetaWords character NFTs. Seller is receiving 87.5% of the purchase price, we are receiving 7.5% of the purchase price including 5% authorization fee and 2.5% transaction fee, and the original creator (author) is receiving 5% licensing fee. Smart contract does the fees allocation and transfer.
The users can build MetaWords work NFTs by using the MetaWords character NFTs. The holders of MetaWords work NFTs can sell the MetaWords work NFTs. In the sale or resale of the MetaWords work NFTs conducted on the Lion NFT platform, Flying Lion Limited charges 5% of the purchase price as the authorization fee for Xu Bing’s artwork, and the creator (author) of each MetaWords characters used in the MetaWords work collects 5% of the purchase price as the licensing fee for the author, Lion NFT Platform charges 2.5% of the purchase price as the transaction fee, and 5% of the purchase price is charged by the holders (owners) of any characters that are used in the MetaWords work. Buyer pays the purchase price. Regardless the seller is the creator (author) of the MetaWords work NFTs or not, seller is receiving 82.5% of the purchase price, we are receiving 7.5% of the purchase price including 5% authorization fee and 2.5% transaction fee, the holders (owners) of the Metawords character NFTs are receiving an aggregate of 5% licensing fee, and the creator (author) of MetaWords characters collects 5% of the purchase price. Smart contract does the fees allocation and transfer.
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BNB is the native currency built on the Binance Smart Chain. WBNB is “wrapped BNB”. One of the most significant differences between BNB and wBNB is that BNB typically is not related to the standard of BEP 20. On the other hand, the wrapped BNB tokens obey the rules of this specific standard (BEP 20). As of the date of the this registration statement, we held 3,700 pieces of NFTs on hand. We consider the value of the NFTs is immaterial.
Factors Affecting Our Performance
As of December 31, 2021, besides the suspended crypto mining operations and NFTs, we do not have other business activities in digital assets. As of December 31, 2021, we have liquidated all the Bitcoins and USDT and held no digital assets on hand.
We believe that our results of operations are affected by the following factors.
The demand for our services and the economic and political conditions in global markets
Our principal businesses are providing CFD trading, TRS trading and futures brokerage services to our clients. Our results of operations are directly affected by the demand for such services of our existing and potential clients, which are predominantly Chinese investors living both in and outside of China. Their demand for our services arises from the progressive increases of their investable assets and willingness to allocate more of these assets into global financial markets.
The economic and political conditions in major jurisdictions, such as the U.S., China and Hong Kong, could affect our clients’ perception of the market sentiment, which may change their investment decisions. For instance, as a result of the social unrest in Hong Kong in 2019 and 2020, a significant amount of our potential insurance brokerage clients chose not to purchase insurance products in Hong Kong, which adversely impacted our insurance commission income.
Our financial performance is prone to changing global market conditions, especially the fluctuation and volatility of trading activities on major exchanges worldwide. Since the first half of 2020, global market reacted to a series of unpredictability such as COVID-19, oil price, and heightened trade and geopolitical tensions with fluctuation and volatility, repeatedly triggering market wide circuit breaker. Recently, eruptions of regional tensions, such as the ongoing military conflict involving Ukraine and Russia, and the related sanctions against Russia have resulted in major economic shocks worldwide and substantial volatility across global financial markets. These and other economic factors could materially and adversely affect demand for our products and services.
Number of users and transaction volumes
We historically derive our revenue mainly from commissions, bid/offer spreads, trading profit and difference in interest rates for transactions on our platform. Generally speaking, the larger the number of transactions carried out on our platform, and the larger the size of those transactions, the greater will be our revenue. We generated a substantial portion of our revenue from a small number of key clients and revenues from our larger clients have historically fluctuated and may continue to fluctuate based on their trading volume. Our total revenue-generating client accounts increased from 1,722 as of December 31, 2017 to 4,047 as of December 31, 2019, and continued to increase to 5,010 as of December 31, 2020 and 5,261 as of December 31, 2021. Among our total 5,261 revenue-generating client accounts, 54% of accounts are CFD trading accounts which increased from 1,843 in 2019, 2,668 in 2020 to 2,866 in 2021.
If we can effectively attract new users, retain existing users particularly larger users and engage our users to more frequently trade larger transactions on our platform, our transaction volumes and revenues will grow along with the expansion of our user base. We believe our branding and marketing efforts contribute to customer retention and engagement, and that our ability to cross sell products to our clients also helps drive the growth of our revenue.
Product and service offerings and user experience
Our ability to remain competitive in the industry largely depends on the diversity of our product and service offerings and the user experience provided through our desktop and mobile applications. We began our CFD trading services in May 2019, and we generated a significant portion of our revenues through it since then, which by its nature requires constant product monitoring, innovation and development.
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We officially began offering total return swap (TRS) trading services to customers in July 2020, currently offering A-shares (shares that are denominated in Renminbi and traded in the Shanghai Stock Exchange and Shenzhen Stock Exchange) and Hong Kong stock basket linked TRS, which provides international investors seeking to invest in China stock market with higher leverage compared with buying A-share stocks directly. We earn income from the spread on interest rate loans provided to TRS trading clients and loans borrowed from its business partners. In addition, we also receive commission and fees from customers for trades made through the TRS trading service.
As our client base diversifies, the needs for new products and services will further intensify. We strive to continually develop new products and services to keep up with customer demand and industry trends.
New Geographic expansion plans
We plan to strengthen our leading position in key markets, such as Greater China, by retaining active users, reactivating dormant accounts, obtaining new customers and enhancing service quality. We hope to increase our market share by penetrating into new geographic areas, such as Southeast Asia.
We obtained the official approval from the Monetary Authority of Singapore for the Capital Markets Services (CMS) license application in October 2021 and relocated our headquarter to Singapore in the first quarter of 2022, representing the next tranche of its strategic plan to expand in Southeast Asia.
Investment in technology and talent
We invest heavily in technology. Before 2021, we outsourced our research and development to a dedicated team based in Hangzhou, China which has made great efforts in building an integrated internet trading platform that is accessible through our all-in-one Lion Brokers Pro app. In December 2020 and September 2021, we entered into two asset acquisition agreements with Hangzhou Lanlian Technology Co., Ltd, to acquire various copyrighted trading software programs including market quotes system, operation and trading system and risk management system. We believe that the fast and reliable order execution and smooth user experience will enhance our customer stickiness and stimulate our revenue growth.
In addition, there is a strong demand in Hong Kong and China’s online trading service industry for talented and experienced personnel. We must recruit, retain and motivate talented employees by offering competitive compensation, including share-based compensation.
Effectiveness of cost control measures
Our results of operations depend on our ability to manage our costs and expenses. The commission expenses and interest rates we pay to our business partners, such as prime brokers and clearing houses, have historically constituted a significant portion of our total expenses. For us to maintain and expand our profitability, we must make sure that our commission expenses remain at a reasonable or reduced level while our own commissions and fees stay at comparable or higher rates. This will depend on going market rates and our ability to successfully negotiate with our partners. We believe that as our user base and our platform continue to grow, that we will have greater leverage in dealing with our business partners, allowing us to negotiate improved commission rates and interest rates.
We have incurred substantial research and development expenses, and expect to incur additional significant expenses relating to future development, maintenance and operation of our technology infrastructure and project-based expenditures.
Regulatory environment and compliance
We operate in highly regulated industries across multiple jurisdictions, especially in the Cayman Islands and Hong Kong. If any of the relevant regulatory authorities, such as the Cayman Islands Monetary Authority (CIMA), the Hong Kong Securities and Futures Commission (HKSFC), and Monetary Authority of Singapore, introduce new regulations or impose greater restrictions on us, we may incur additional compliance costs. Certain changes could further cause us to change our business model or transactional processes to comply with these new requirements. We may also be subject to new taxes or cumbersome reporting obligations, which will bring heavier financial burden to us. If we fail to comply with any of the applicable regulations, we may be subject to monetary penalties, which would also affect our results of operations. Further, if we expand into new markets such as Southeast Asia, our operations in those
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markets will be subject to local regulations which could also prove burdensome. In addition, governmental policies and regulatory environment such as any capital control measures that impose restrictions on cross-border transfer also affect our business and results of operations.
Factors Specific to Bitcoin Mining Business
— Market Value of Bitcoin
We derived a portion our revenues from Bitcoin mining. We commenced Bitcoin mining operations in southwest China in late May 2021 and have temporarily ceased our Bitcoin mining operations at the end of October 2021. We may resume our Bitcoin mining activities in the future. While we liquidated all of the mined Bitcoins, our operating and financial results could be affected by the fluctuations in the value of Bitcoin. In periods of rising Bitcoin price, we may increase our capital expenditures in mining machines and related infrastructure to take advantage of potentially faster return on investments.
As Bitcoin price increases, additional mining machines are deployed by miners, leading to increased hashrate in the overall network. Because the number of blocks mined are relatively fixed over time, increased hashrate increases mining difficulty and adversely affects our revenue and margins. Further, the rewards for each Bitcoin mined is subject to “halving” adjustments at predetermined intervals as described below. These adjustments have had and will continue to have material effects on our operating and financial results.
While the supply of Bitcoin is capped, the price of Bitcoin fluctuates not just because of traditional notions of supply and demand but also because of the dynamic nature of the market for Bitcoin. Having been created in just a little over a decade as of the date of this prospectus the market for Bitcoin is rapidly changing and subject to global regulatory, tax, political, environmental, cybersecurity, and market factors beyond our control. Further, a large portion of Bitcoins are currently held in a concentrated number of wallets by so-called “whales” and they can disrupt market order and cause fluctuations in Bitcoin price.
As noted, there are various factors at play that could lead to material adverse changes in the market value of Bitcoin, which could in turn result in substantial damage to or even the failure of our business. See “Risk Factors — Risks Related to Our Cryptocurrency Mining Operations.”
— Halving
Further affecting the digital asset mining industry, and particularly relevant to the Bitcoin blockchain, is the fact that the cryptocurrency reward for solving a block is subject to periodic incremental halving. Halving is a process designed to control the overall supply and reduce the risk of inflation in cryptocurrencies using a proof-of-work consensus algorithm. At a predetermined block, the mining reward is cut in half, hence the term “halving.” The halving mechanism results in an ever-decreasing issuance rate of bitcoin.
For bitcoin, the reward was initially set at 50 bitcoin currency rewards per block. The bitcoin blockchain has undergone halving three times since its inception as follows: (1) on November 28, 2012 at block 210,000; (2) on July 9, 2016 at block 420,000; and (3) on May 11, 2020 at block 630,000, when the reward was reduced to its current level of 6.25 bitcoin per block. The next three halving events for Bitcoin are expected to take place in 2024 at block 840,000 (when the reward will reduce to 3.125), in 2028 at block 1,050,000 (when the reward will reduce to 1.5625), and in 2032 at block 1,260,000 (when the reward will reduce to 0.78125). This process will reoccur until the total amount of bitcoin currency rewards issued reaches 21 million and the theoretical supply of new bitcoin is exhausted, which is expected to occur around 2140. Many factors influence the price of bitcoin, and potential increases or decreases in prices in advance of or following a future halving are unknown. While bitcoin price has had a history of price fluctuations around the halving of its rewards, there is no guarantee that the price change will be favorable or would compensate for the reduction in mining reward.
— Efficiency of Mining Machines
The Bitcoin mining industry is ushering in an era of digital gold rush. To mine Bitcoins more efficiently and profitably, miners are racing to secure the best mining technology, the largest mining capacity, and the cheapest source of energy. As mining capacity increases, we will have to correspondingly increase our own mining capacity relative to the overall network — all else being equal — to maintain the same amount of revenue.
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While we are focused on expanding our capacity, we are also committed to mining sustainably and efficiently with an eye towards return on investments. The majority of our historical capital expenditures have been directed to acquiring the miners including Bitmain’s model S9 Hydro Antminers, which feature industry-leading efficiency.
In certain periods, there may be disruption in global supply chain leading to shortage of advanced mining machines that meet our standard of quality. To maintain our competitive edge over the long term, we strive to maintain strong relationships with suppliers and vendors across the supply chain to ensure that our fleet of miners is competitive.
We believe that we will continue to operate efficient mining machine fleets as we maintain and upgrade our miners when practical to do so when we resume our Bitcoin mining activities, but our operating and financial results will fluctuate not only based on what we do but also based on what our peers do.
— Ability to Secure Low-Cost Renewable Power
Bitcoin mining consumes extensive energy for both the mining and cooling aspects of the operation. We believe the combination of factors, including the increasing difficulty of the network driven by more miners and higher hashrates and the periodic halving adjustments of Bitcoin reward rates, will drive the increasing importance of power efficiency in Bitcoin mining over the long term.
— Competitive Environment
Bitcoin is mined all over the world. We compete with a variety of miners, including individual hobbyists, mining pools and public and private companies of all shapes and sizes. These miners come in all flavors and forms, including those that mine within certain jurisdictions or have a global footprint, those that mine with renewable sources or otherwise, those that are vertically integrated or have an edge in certain portions of the value chain, those that governments or cross-border organizations back, etc. We believe that as Bitcoin price increases, the market will inevitably draw new miners and increase the scale and sophistication of competition in the Bitcoin mining industry.
Key Components of Results of Operations for the Years Ended December 31, 2021, 2020, and 2019
Revenue
Our revenues consist of commissions, trading gains (losses), interest income, Crypto mining income and others. The following table sets forth the breakdown of our revenues by nature in dollar amount and as percentages of total revenues for the periods indicated.
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
US$ |
% |
US$ |
% |
US$ |
% |
|||||||
|
Commissions |
||||||||||||
|
Market making commissions and fees |
4,324,650 |
16.0 |
4,940,623 |
48.3 |
11,056,431 |
59.7 |
||||||
|
Futures and securities brokerage commissions |
3,188,684 |
11.7 |
1,890,502 |
18.4 |
2,210,915 |
11.9 |
||||||
|
Insurance brokerage commissions |
542,795 |
2.0 |
959,299 |
9.3 |
2,648,119 |
14.3 |
||||||
|
Trading gains/(losses) |
15,444,919 |
57.0 |
1,833,875 |
18.0 |
1,782,750 |
9.6 |
||||||
|
Crypto mining income |
1,708,753 |
6.4 |
— |
— |
— |
— |
||||||
|
Interest income |
1,351,318 |
5.0 |
138,799 |
1.4 |
757,677 |
4.0 |
||||||
|
Other income |
497,366 |
1.9 |
467,037 |
4.6 |
70,958 |
0.5 |
||||||
|
Total |
27,058,485 |
100.0 |
10,230,135 |
100.0 |
18,526,850 |
100.0 |
||||||
Commissions
We earn commissions from our (i) insurance brokerage services, (ii) securities and futures brokerage services (including commissions from TRS trading services) and (iii) CFD trading services when we act as market maker. We receive commissions from the insurance companies based on a percentage of the premium paid by insurance purchasers. Unlike commissions from insurance brokerage services, we charge securities brokerage commissions
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and market making commissions based on amount of transaction volume, or the number of shares, lots of contracts executed in each order, which generally vary in accordance with the type of products or services we offer, eligibility for discounts and other factors. See “Business — Our Business Lines”.
Trading gains/(losses)
Trading gains, offset by losses, are derived as showed in the following table. The line of CFD trading gains/(losses) is derived from (i) our managed flow portfolio trading positions where we act as counterparty to our clients’ trades from our CFD trading services, and (ii) our dealing bid/offer spreads on our clients’ CFD transactions. The line of TRS trading gains/(losses) is derived from our proprietary TRS trading activities on our own accounts. The line of Other trading gains/(losses) is derived from other business, for the year ended December 31, 2021 it included trading losses of US$50,000 realized from OTC call options we sold to our customers and trading gains of US$596,000 realized from exchange-traded stock. Trading gains/(losses) is recorded on a trade date basis.
|
Year ended December 31, |
||||||||||||||||
|
2021 |
2020 |
2019 |
||||||||||||||
|
US$ |
% |
US$ |
% |
US$ |
% |
|||||||||||
|
CFD trading gains/(losses) |
4,374,807 |
28.3 |
1,883,958 |
|
102.7 |
|
1,793,810 |
|
100.6 |
|
||||||
|
TRS trading gains/(losses) |
10,523,974 |
68.1 |
13,157 |
|
0.7 |
|
— |
|
— |
|
||||||
|
Other trading gains/(losses) |
546,138 |
3.6 |
(63,240 |
) |
(3.4 |
) |
(11,060 |
) |
(0.6 |
) |
||||||
|
Total |
15,444,919 |
100.0 |
1,833,875 |
|
100.0 |
|
1,782,750 |
|
100.0 |
|
||||||
Bitcoins mining income
For the period from late May 2021 to October 2021, we generated revenue from bitcoin mining operation.
Interest income
Interest income primarily consist of interest income earned on loans provided to TRS trading customers, interests earned on short-term loans we extend to unrelated third parties and bank deposit, and also include interest rate difference between currency pairs we hold resulting from rolling over foreign exchange positions from CFD trading services.
Other income
Other income primarily includes advisory service fee, gain from forgiveness of debts, and dividend income etc.
Our revenues are generated from our main business lines, TRS trading business, CFD trading services, futures and securities brokerage services and others. Insurance brokerage services was combined in others from 2021 as it is not a material operating segment, and the prior periods were revised to be comparable. The following table sets forth the breakdown of our revenues by business lines in absolute amounts and as percentages of total revenues for the periods indicated.
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
US$ |
% |
US$ |
% |
US$ |
% |
|||||||
|
CFD trading services |
8,700,009 |
32.1 |
6,823,677 |
66.7 |
12,843,574 |
69.3 |
||||||
|
TRS trading services |
13,132,833 |
48.5 |
210,770 |
2.0 |
— |
— |
||||||
|
Futures and securities brokerage services |
2,800,543 |
10.4 |
2,029,669 |
19.9 |
2,215,867 |
12.0 |
||||||
|
Others |
2,425,100 |
9.0 |
1,166,019 |
11.4 |
3,467,409 |
18.7 |
||||||
|
Total |
27,058,485 |
100.0 |
10,230,135 |
100.0 |
18,526,850 |
100.0 |
||||||
83
CFD trading services income
Revenues generated from CFD trading services are trading gains and losses from our market making activities where we serve as the counterparty to our clients in CFD transactions. It primarily consists of (i) commissions we charge our clients based on amount of transaction volume, or the number of shares, lots of contracts executed in each order, which generally vary in accordance with the type of products we offer, eligibility for discounts and other factors, (ii) dealing bid/offer spreads on our clients’ CFD transactions, (iii) trading gains/(losses) derived from our managed flow portfolio trading positions where we act as counterparty to our clients’ trades, and (iv) interest rate difference between currency pairs we hold resulting from our rolling over forex positions. See “Business — Our Business Lines — CFD Trading Services.”
Our CFD trading income consisting of (i) commissions, (ii) bid/offer spreads and trading gains/(losses), and (iii) difference in interest rates, were US$4.3 million, US$4.4 million, and nil, respectively for the year ended December 31, 2021, and were US$4.9 million, US$1.8 million, and US$0.1 million, respectively for the year ended December 31, 2020, and were US$11.0 million, US$1.8 million, and US$0.1 million, respectively for the year ended December 31, 2019. Our total CFD products trading volume was 453,687 lots, 223,018 lots and 806,111 lots for the years ended December 31, 2021, 2020 and 2019, respectively.
The amount of our commissions we charge is largely based on the trading volume, with commission rates varying between US$2.25 to US$50 per lot, based on the per-lot value and the types of different products traded, as well as discounts offered to different clients. Of our commission revenues derived from CFD trading services in 2021, approximately 80% related to stock indices and near 20% related to commodities, with a remaining insignificant proportion relating to other CFD products. In 2020 and 2019, these two percentages were 68.5% and 31.5%, respectively, and were 60% and 40%, respectively.
TRS trading services income
We officially began offering total return swap (TRS) trading services to customers in July 2020. Revenue generated from TRS trading services includes (i) trading gains/(losses) from our proprietary TRS trading activities; (ii) interest income earned on loans provided to TRS trading customers and (iii) commissions and other income resulting from TRS trading services.
Our TRS trading income consisting of (i) trading gains/(losses) from our proprietary TRS trading activities, (ii) interest income earned on loans provided to TRS trading customers, and (iii) commissions and other income resulting from TRS trading services, were US$11.1 million, US$1.3 million and US$0.7 million, respectively for the year ended December 31, 2021, and were nil, US$0.1 million and US$0.1 million, respectively for the year ended December 31, 2020. Our TRS trading volume was $1,074 million in 2021.
Futures and securities brokerage income
We charge commissions for our futures and securities brokerage services when using our trading platform, which is based on the trading volume of securities or the number of futures contracts executed. Our total number of executed futures contracts was 1,124,805 lots, 738,444 lots and 911,693 lots for the years ended December 31, 2021, 2020 and 2019.
Others
Others include the revenue generated from insurance brokerage services, bitcoin mining operations, gain from forgiveness of debts, and interests earned on short-term loans we extend to unrelated third parties and bank deposit etc.
84
Expenses
The following table sets forth the breakdown of our expenses in dollar amounts and as percentages of total revenues for the periods indicated:
|
Year ended December 31, |
||||||||||||||||
|
2021 |
2020 (as restated) |
2019 |
||||||||||||||
|
US$ |
% |
US$ |
% |
US$ |
% |
|||||||||||
|
Commission and fees expenses |
3,317,692 |
|
13.0 |
|
1,845,994 |
|
18.1 |
|
3,355,205 |
18.1 |
||||||
|
Compensation expenses |
4,069,203 |
|
15.0 |
|
3,802,793 |
|
37.2 |
|
2,430,636 |
13.1 |
||||||
|
Communication and technology expenses |
1,929,981 |
|
7.1 |
|
1,454,050 |
|
14.3 |
|
823,433 |
4.4 |
||||||
|
Cost of crypto mining |
1,163,846 |
|
4.3 |
|
— |
|
— |
|
— |
— |
||||||
|
General and administrative |
2,016,582 |
|
7.4 |
|
2,264,318 |
|
22.1 |
|
692,648 |
3.7 |
||||||
|
Professional fees |
3,836,817 |
|
14.1 |
|
1,565,834 |
|
15.4 |
|
761,238 |
4.1 |
||||||
|
Services fees |
3,574,579 |
|
13.2 |
|
833,864 |
|
8.2 |
|
384,840 |
2.1 |
||||||
|
Research and development |
1,205,040 |
|
4.4 |
|
— |
|
— |
|
— |
— |
||||||
|
Occupancy expenses |
778,881 |
|
2.8 |
|
683,160 |
|
6.6 |
|
591,936 |
3.2 |
||||||
|
Interest expense |
1,608,100 |
|
5.9 |
|
183,157 |
|
1.8 |
|
731,812 |
4.0 |
||||||
|
Depreciation |
916,916 |
|
3.3 |
|
40,556 |
|
0.3 |
|
52,852 |
0.3 |
||||||
|
Marketing |
913,675 |
|
3.3 |
|
651,324 |
|
6.3 |
|
55,378 |
0.2 |
||||||
|
Payment service charge |
(181,249 |
) |
(0.6 |
) |
245,030 |
|
2.3 |
|
355,585 |
2.0 |
||||||
|
Unrealized loss on equity |
1,916,033 |
|
7.0 |
|
— |
|
— |
|
— |
— |
||||||
|
Change in fair value of option liabilities |
149,740 |
|
0.5 |
|
— |
|
0.0 |
|
— |
— |
||||||
|
Change in fair value of warrant liabilities |
470,804 |
|
1.7 |
|
(777,266 |
) |
(7.5 |
) |
— |
— |
||||||
|
Other expenses |
144,175 |
|
0.5 |
|
11,464 |
|
0.1 |
|
10,463 |
0.1 |
||||||
|
Total |
27,830,815 |
|
102.9 |
|
12,804,278 |
|
125.2 |
|
10,246,026 |
55.3 |
||||||
Commission and fees expenses
Our commission expenses consist of (i) the commissions and fees we paid to third-party market makers in certain CFD and TRS trading transactions, (ii) referral fees we paid to our insurance referral agents, and (iii) the commissions and fees we paid to prime brokers and clearing houses in certain futures and securities trading transactions. Commission expenses accounted for 13.0%, 18.1% and 18.1% of our revenues in 2021, 2020 and 2019, respectively.
Compensation expenses
Our compensation expenses include salaries, wages, bonuses, medical insurance expenses, contribution to employee retirement plans and other benefits as well as share-based compensation for our employees. Compensation expenses accounted for 15.0%, 37.2% and 13.1% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Communication and technology expenses
Our communication and technology expenses primarily consist of subscription fees and system fees we paid to stock exchanges and third parties trading system vendors, to subscribe for trading systems, market data and news, as well as bandwidth fees and other expenses relating to the telecommunication infrastructure. Communication and technology expenses accounted for 7.1%, 14.3% and 4.4% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
85
Cost of crypto mining
Our cost of crypto mining consists primarily of direct costs of earning bitcoins related to mining operations, including electric power costs and other service charges, also including depreciation of mining equipment. Cost of crypto mining accounted for 4.3% of our revenues for the year ended December 31, 2021.
General and administrative expenses
Our general and administrative expenses mainly consist of license and registration fees, insurance expenses, utility expenses, travel expenses and bank charges, which accounted for 7.4%, 22.1% and 3.7% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Professional fees
Our professional fees primarily consist of service fees for legal, accounting, consulting, and other professional services which are needed during the ordinary course of our business operation, representing 14.1%, 15.4% and 4.1% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Service fees
Our service fees primarily consist of service fees charged by independent contractors and outside consultants we hired in our normal business course and one-off special incentive scheme awarded to them, accounting for 13.2%, 8.2% and 2.1% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Research and development
Research and development expenses consist primarily of designing, coding, project management, and other IT services related to developing and enhancing our Metaverse project. The R&D services were provided by third parties, representing 4.4%, nil and nil of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Interest expenses
Our interest expenses primarily consist of amortization of convertible debenture discounts, interest relating to our one-time bridge loans facilitated by us to unrelated third parties, as well as interest we paid for loans borrowed from our TRS trading service business partners, accounting for 5.9%, 1.8% and 4.0% of our revenue for the years ended December 31, 2021, 2020 and 2019, respectively.
Occupancy expenses
Our occupancy expenses mainly consist of office rental expenses, which accounted for 2.8%, 6.6% and 3.2% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Depreciation
Our depreciation primarily consists of the depreciation of copyrighted trading software programs which were acquired in 2021, and other miscellaneous depreciation of office furniture and computers, accounting for 3.3% 0.3% and 0.3% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Marketing expenses
Our marketing expenses mainly consist of expenses spent in branding, promoting our business, which accounted for 3.3%, 6.3% and 0.2% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Payment service charges
Our payment service charges consist of the fees we paid to external payment service providers who facilitate our customers’ payment procedures for trading and transactions through our platform. The negative amount was due to foreign currency transaction gains and losses related to this line item. Our payment service charges accounted for (0.6)%, 2.3% and 2.0% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
86
Unrealized loss on equity securities
Unrealized loss on equity securities represents the unrealized loss from subscribing and holding 64,500,000 shares of Grandshores (HKEX: 01647) in 2021.
Change in fair value of options liabilities
Change in fair value of options liability represents the fair value adjustments at each reporting period to the open OTC call options we sold to our customers.
Change in fair value of warrant liabilities
Change in Fair Value of Warrant Liabilities represents the mark-to-market fair value adjustments to the outstanding Public Warrants and Private Warrants issued in connection with the IPO of PAAC.
Other expenses
Our other expenses primarily consist of other miscellaneous expenses. Our other expenses accounted for 0.5%, 0.1% and 0.1% of our revenues for the years ended December 31, 2021, 2020 and 2019, respectively.
Taxation
Cayman Islands and British Virgin Islands
Under the current laws of the Cayman Islands and British Virgin Islands, we are not subject to tax on income or capital gains. Neither Cayman Islands nor British Virgin Islands withholding tax will be imposed upon payments of dividends from Lion to its shareholders.
Hong Kong
Our wholly-owned Hong Kong subsidiaries are subject to Hong Kong profit tax on their activities conducted in Hong Kong. Effective for tax years ending on or after December 31, 2018, the applicable tax rate was 8.25% on the first HK$2 million (US$0.3 million) of assessable profits and 16.5% on any assessable profits above that threshold. In addition, the 8.25% tax rate can only be utilized by one entity in a controlled group, whereas all other entities in the controlled group utilize the 16.5% tax rate. Dividends from our Hong Kong subsidiaries to Lion are exempt from Hong Kong withholding tax.
Singapore
Our wholly-owned Singapore subsidiary is subject to a corporate tax rate of 17.0%. It has not generated revenue yet since establishment.
United States
Our wholly-owned U.S. subsidiary is subject to a federal tax rate of 21.0%. It has been dormant since we acquired it in June 2020.
Results of Operations for the Years Ended December 31, 2021, 2020, and 2019
The following table sets forth a summary of our consolidated results of operations for the periods indicated, both in absolute amount and as a percentage of our revenues for the periods indicated. This information should be read together with our consolidated financial statements and related notes included elsewhere in this prospectus. Our limited operating history makes it difficult to predict our future operating results. We believe that the period-to-period
87
comparison of operating results should not be relied upon as being indicative of our future performance. Our results for the year ended December 31, 2020 have been restated as a result of the discussion included in the Company’s Current Report on Form 6-K, filed with the SEC on June 11, 2021.
|
Year ended December 31, |
||||||||||||||||||
|
2021 |
2020 (as restated) |
2019 |
||||||||||||||||
|
US$ |
% |
US$ |
% |
US$ |
% |
|||||||||||||
|
Revenues |
|
|
|
|
|
|
||||||||||||
|
CFD trading services |
8,700,009 |
|
32.1 |
|
6,823,677 |
|
66.7 |
|
12,843,574 |
|
69.3 |
|
||||||
|
TRS trading services |
13,132,833 |
|
48.5 |
|
210,770 |
|
2.0 |
|
— |
|
— |
|
||||||
|
Futures and securities brokerage services |
2,800,543 |
|
10.4 |
|
2,029,669 |
|
19.9 |
|
2,215,867 |
|
12.0 |
|
||||||
|
Others |
2,425,100 |
|
9.0 |
|
1,166,019 |
|
11.4 |
|
3,467,409 |
|
18.7 |
|
||||||
|
Total revenues |
27,058,485 |
|
100.0 |
|
10,230,135 |
|
100.0 |
|
18,526,850 |
|
100.0 |
|
||||||
|
|
|
|
|
|
|
|||||||||||||
|
Expenses |
|
|
|
|
|
|
||||||||||||
|
Commission and fees expenses |
(3,317,692 |
) |
(13.0 |
) |
(1,845,994 |
) |
(18.1 |
) |
(3,355,205 |
) |
(18.1 |
) |
||||||
|
Compensation expenses |
(4,069,203 |
) |
(15.0 |
) |
(3,802,793 |
) |
(37.2 |
) |
(2,430,636 |
) |
(13.1 |
) |
||||||
|
Communication and technology expenses |
(1,929,981 |
) |
(7.1 |
) |
(1,454,050 |
) |
(14.3 |
) |
(823,433 |
) |
(4.4 |
) |
||||||
|
Cost of crypto mining |
(1,163,846 |
) |
(4.3 |
) |
— |
|
— |
|
— |
|
— |
|
||||||
|
General and administrative expenses |
(2,016,582 |
) |
(7.4 |
) |
(2,264,318 |
) |
(22.1 |
) |
(692,648 |
) |
(3.7 |
) |
||||||
|
Professional fees |
(3,836,817 |
) |
(14.1 |
) |
(1,565,834 |
) |
(15.4 |
) |
(761,238 |
) |
(4.1 |
) |
||||||
|
Service fees |
(3,574,579 |
) |
(13.2 |
) |
(833,864 |
) |
(8.2 |
) |
(384,840 |
) |
(2.1 |
) |
||||||
|
Research and development |
(1,205,040 |
) |
(4.4 |
) |
— |
|
— |
|
— |
|
— |
|
||||||
|
Interest expenses |
(1,608,100 |
) |
(5.9 |
) |
(183,157 |
) |
(1.8 |
) |
(731,812 |
) |
(4.0 |
) |
||||||
|
Occupancy expenses |
(778,881 |
) |
(2.8 |
) |
(683,160 |
) |
(6.6 |
) |
(591,936 |
) |
(3.2 |
) |
||||||
|
Marketing |
(913,675 |
) |
(3.3 |
) |
(651,324 |
) |
(6.3 |
) |
(55,378 |
) |
(0.2 |
) |
||||||
|
Depreciation |
(916,916 |
) |
(3.3 |
) |
(40,556 |
) |
(0.3 |
) |
(52,852 |
) |
(0.3 |
) |
||||||
|
Payment service charge |
181,249 |
|
0.6 |
|
(245,030 |
) |
(2.3 |
) |
(355,585 |
) |
(2.0 |
) |
||||||
|
Unrealized loss on equity securities |
(1,916,033 |
) |
(7.0 |
) |
— |
|
— |
|
— |
|
— |
|
||||||
|
Change in fair value of option liabilities |
(149,740 |
) |
(0.5 |
) |
— |
|
0.0 |
|
— |
|
0.0 |
|
||||||
|
Change in fair value of warrant liabilities |
(470,804 |
) |
(1.7 |
) |
777,266 |
|
7.5 |
|
— |
|
— |
|
||||||
|
Other expenses |
(144,175 |
) |
(0.5 |
) |
(11,464 |
) |
(0.1 |
) |
(10,463 |
) |
(0.1 |
) |
||||||
|
Total expenses |
(27,830,815 |
) |
(102.9 |
) |
(12,804,278 |
) |
(125.2 |
) |
(10,246,026 |
) |
(55.3 |
) |
||||||
|
(Loss)/income before income taxes |
(772,330 |
) |
(2.9 |
) |
(2,574,143 |
) |
(25 |
) |
8,280,824 |
|
45 |
|
||||||
|
Income tax expenses |
(54,367 |
) |
(0.2 |
) |
(1,316 |
) |
(0.0 |
) |
(64,472 |
) |
(0.3 |
) |
||||||
|
Net (loss)/income |
(826,697 |
) |
(3.1 |
) |
(2,575,459 |
) |
(25.2 |
) |
8,216,352 |
|
44.4 |
|
||||||
|
Non-controlling interests |
|
|
|
|
|
|
||||||||||||
|
Net loss attributable to non-controlling interests |
849,479 |
|
3.1 |
|
— |
|
0.0 |
|
— |
|
0.0 |
|
||||||
|
Net income (loss) attributable |
22,782 |
|
0.0 |
|
(2,575,459 |
) |
(25.2 |
) |
8,216,352 |
|
44.8 |
|
||||||
88
Non-GAAP Financial Results
The following Non-GAAP financial results, both in absolute amount and as a percentage of our revenues for the periods indicated, are used by management to evaluate our financial performance prior to the deduction of change in fair value of warrant liabilities, stock-based compensation expenses, amortization of debt discounts and depreciation expenses (see Non-GAAP Financial Measures).
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
US$ |
% |
US$ |
% |
US$ |
% |
|||||||
|
Non-GAAP income attributable to LGHL before change in fair value of warrant liabilities, stock-based compensation, amortization of debt discounts and depreciation expenses |
2,954,850 |
10.9 |
357,919 |
3.5 |
8,269,204 |
44.6 |
||||||
Year ended December 31, 2021 Compared to Year ended December 31, 2020
Revenues
Our total revenues increased by 164.5% from US$10.2 million for the year ended December 31, 2020 to US$27.1 million for the year ended December 31, 2021, due to an increase in each segment.
TRS Trading Services Income. We officially began offering TRS trading services to customers in July 2020. Revenue generated from TRS trading services for in the year of 2021 includes (i) trading gains/(losses) of US$11.1 million from our proprietary TRS trading activities; (ii) interest income of US$1.3 million earned on loans provided to TRS trading customers, and (iii) commissions and other income of US$ 0.7 million resulting from TRS trading services. In the corresponding period of 2020, revenue from TRS trading services was US$0.2 million in aggregate.
CFD Trading Services Income. Lion derives a substantial portion of income from CFD trading services from a small number of key clients. As a result, earnings generated from our CFD trading services have demonstrated volatility historically. CFD trading gains/(losses) increased by US$2.6 million from trading gains of US$1.8 million for the year ended December 31, 2020 to trading gains of US$4.4 million for the year ended December 31, 2021. Market making commission income decreased by US$0.6 million from $4.9 million for the year ended December 31, 2020 to $4.3 million for the year ended December 31, 2021, which was mainly attributable to China’s strengthened restrictions on the promotion and advertisements related to internet financial products and services which has led to a significant decrease in the number of new accounts opened through online advertising. As a result, we began to target Southeast Asian market as our main strategic direction of the CFD trading services business, however, our expansion plans have been delayed due to the sustained impact of COVID-19 in that region. In addition, the rise of crypto currency trading activities in 2021 has diverted potential CFD trading customers.
Futures and Securities Brokerage Income. Revenues from futures and securities brokerage services increased by 38.0% from US$2.0 million for the year ended December 31, 2020 to US$2.8 million for the year ended December 31, 2021, primarily due to Hong Kong’s economy rebounded rapidly from the first quarter of 2021 as the global economy improved and the local pandemic subsided in 2021. In addition, we invited existing and potential customers and held seminars of Investment Opportunities under Global Economic Recovery, and promoted our futures trading business.
Others. Other income (loss) increased by US$1.2 million from US$1.2 million for the year ended December 31, 2020, to US$2.4 million for the year ended December 31, 2021. The increase in other income was primarily attributed to crypto mining revenue of US$1.7 million generated in 2021.
89
Expenses
Our total expenses increased by 117.4% from US$12.8 million for the year ended December 31, 2020 to US$27.8 million for the year ended December 31, 2021, primarily due to increases in commission expenses, cost of crypto mining, service fees, professional fees, research and development, communication and technology, unrealized loss on equity securities, amortization of debt discounts and depreciation.
Commission Expenses. Our commission expenses increased by 79.7% from US$1.8 million for the year ended December 31, 2020 to US$3.3 million for the year ended December 31, 2021, primarily due to an increase in TRS trading commission expenses by US$1.0 million and an increase in our futures brokerage commission expenses of US$0.7 million, partially offset by a decrease in our insurance brokerage commission expenses of US$0.2 million, which is in line with the overall trench of such businesses.
Compensation Expenses. Our compensation expenses increased by 7.0% from US$3.8 million for the year ended December 31, 2020 to US$4.1 million for the year ended December 31, 2021, primarily due to the increase in average compensation and discretionary bonus paid out in 2021.
Communication and Technology Expenses. Our communication and technology expenses increased by 32.7% from US$1.5 million for the year ended December 31, 2020 to US$1.9 million for the year ended December 31, 2021 primarily due to an increase in trading service fees and market data fees, which was in line with the launch of our TRS trading services.
Cost of crypto mining. Our cost of crypto mining was US$1.2 million for the year ended December 31, 2021, which is in line of the launch of our crypto mining operations in May 2021 ran through October 2021.
General and Administrative Expenses. Our general and administrative expenses decreased by 10.9% from US$2.3 million for the year ended December 31, 2020 to US$2.0 million for the year ended December 31, 2021, primarily due to a portion of share-based compensation granted in 2020 charged into general and administrative expenses.
Professional Fees. Our professional fees increased by 145.0% from US$1.6 million for the year ended December 31, 2020 to US$3.8 million for the year ended December 31, 2021, primarily due to the accounting, legal, investor relations, and consulting services fees we additionally incurred after we became a public company in June 2020, compared to the corresponding period of 2020, professional fees of US$2.4 million directly associated with our reverse acquisition with SPAC were charged to equity, instead of earnings.
Services Fees. Our services fees for independent contractors and consultants increased from US$0.8 million for the year ended December 31, 2020 to US$3.6 million for the year ended December 31, 2021, as a result of an increased number of contracted service providers needed due to the growth of our business lines such as TRS trading and NFT, as well as a one-off special inventive scheme for the year ended December 31, 2021.
Research and Development. We incurred R&D expenses of US$1.2 million in connection with developing and enhancing our Metaverse project for the year ended December 31, 2021.
Interest Expenses. Our interest expenses increased from US$0.2 million for the year ended December 31, 2020 to US$1.6 million for the year ended December 31, 2021, mainly attributable to the amortization of debt discounts of US$0.8 million from convertible debenture, as well as interest of US$0.8 million we paid for loans borrowed from our TRS trading service business partners.
Occupancy Expenses. Our occupancy expenses increased from US$0.7 million for the year ended December 31, 2020 to US$0.8 million for the year ended December 31, 2021, primarily due to the new office spaces we rented for our subsidiary in Singapore, partially offset by the rental reduction for our subsidiaries in Hong Kong as a result of COVID-19.
Marketing Expenses. Marketing expenses increased from US$0.7 million for the year ended December 31, 2020 to US$0.9 million for the year ended December 31, 2021, mainly due to marketing expenses incurred to maintain existing customers and develop new customers, and promote our businesses and branding activities.
90
Depreciation. Our depreciation expenses increased from US$40,000 for the year ended December 31, 2020 to US$917,000 for the year ended December 31, 2021, mainly attributable to the depreciation of newly acquired copyrighted trading software programs related to CFD and TRS trading services from March 2021.
Payment service charges. Our payment service charges decreased from an expense of US$245,000 for the year ended December 31, 2020 to an income of US$181,000 for the year ended December 31, 2021, mainly due to the foreign currency transaction gains and losses related to payment service charges.
Unrealized loss on equity securities. In February 2021, we purchased 64,500,000 shares of Grandshores (HKEX: 01647) at a total subscription price of approximately US$3.5 million. Unrealized loss of holding these shares was US$1.9 million in 2021.
Change in fair value of options liabilities. We started to sell OTC call options to our customers in 2021. The change in fair value of the open call options sold to our customers for the year ended December 31, 2021 was a loss of US$150,000.
Change in fair value of warrant liabilities. The change in fair value of the outstanding Public and Private Warrants for the year ended December 31, 2021 was a loss of US$0.5 million, compared to a gain of $0.8 million in the corresponding period of 2020. The change in fair value is the result of changes in market prices deriving the value of the financial instruments.
Other Expenses. Other expenses increased from US$11,000 for the year ended December 31, 2020 to US$144,000 for the year ended December 31, 2021.
Income Tax Expenses
Our income tax expenses increased from US$1,000 for the year ended December 31, 2020 to US$54,000 for the year ended December 31, 2021, primarily due to the taxes paid as a result of IRS examination of PAAC’s tax return for the period ended September 30, 2019.
Net (loss)/Income
As a result of the foregoing, we had net losses of US$0.8 million for the year ended December 31, 2021 compared to a net loss of US$2.6 million for the year ended December 31, 2020.
Net (loss)/Income attributable to LGHL
After allocating net (loss)/income to non-controlling interest, net (loss)/income attributable to parent company was an income of US$23,000 for the year ended December 31, 2021, compared to a net loss of US$2.6 million for the year ended December 31, 2020.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Revenues
Our total revenues decreased by 44.8% from US$18.5 million for the year ended December 31, 2019 to US$10.2 million for the year ended December 31, 2020, primarily due to (i) a decrease in market marking commission income, (ii) a decrease in futures and securities brokerage income and (iii) a decrease in insurance brokerage income, slightly offset by an increase in trading profits.
CFD Trading and Other Services Income. Market making commission income decreased by 45.2% from US$12.8 million for the year ended December 31, 2019 to US$7.0 million for the year ended December 31, 2020, primarily due to the decrease in CFD trading volume from 806,111 lots to 223,018 lots, which was mainly attributable to economic and financial impact brought about by COVID-19 on our customers, causing a decrease in both their willingness to trade and make investments as well as their disposable income allocated making such transactions. Furthermore, our customers’ concerns about future unpredictability also caused a decline in their trading activity, which impacted our CFD trading business in particular. Specifically, a small number of key clients from whom we
91
derived a substantial portion of CFD trading service income, traded significantly less in 2020 compared to prior year. In addition, travel restrictions in Hong Kong caused cancellations and prevented management from attending branding, business promotion, and exhibition activities, thereby limiting our opportunities to acquire new customers.
Insurance Brokerage Income. Revenues from insurance brokerage services decreased by 63.8% from US$2.6 million in for the year ended December 31, 2019 to US$0.9 million for the year ended December 31, 2020, primarily due to travel restrictions to Hong Kong stemming from COVID-19 outbreak and the unstable political environment in Hong Kong, which has discouraged our Chinese clients from purchasing insurance products in Hong Kong.
Futures and Securities Brokerage Income. Revenues from futures and securities brokerage services decreased by 8.4% from US$2.2 million for the year ended December 31, 2019 to US$2.0 million for the year ended December 31, 2020, primarily due to a decrease of US$0.4 million in futures brokerage commission income resulting from a decrease in the number of executed futures contracts from 911,693 lots in 2019 to 738,444 lots in 2020, brought on by the economic and financial challenges stemming from COVID-19, partially offset by government subsidy income of US$0.2 million.
Others. We had US$0.2 million revenues generated from others for the year ended December 31, 2020, as compared to US$0.8 million for the year ended December 31, 2019. The decrease in revenue was primarily attributed to the decrease in interest income as we earned the interest spread on a bridge loan of US$19.1 million facilitated by us to unrelated third parties in 2019.
Expenses
Our total expenses increased by 25.5% from US$10.2 million for the year ended December 31, 2019 to US$12.8 million for the year ended December 31, 2020, primarily due to increases in G&A expenses, compensation expenses, communication and technology, professional fees, marketing expenses and service expenses, partially offset by a decrease in commission expenses and interest expenses.
Commission Expenses. Our commission expenses decreased by 45.0% from US$3.4 million for the year ended December 31, 2019 to US$1.8 million for the year ended December 31, 2020, primarily due to a decrease in our insurance brokerage commission expenses and futures and securities brokerage commission expenses, which is in line with the overall decrease of our insurance brokerage business and futures and securities brokerage services.
Compensation Expenses. Our compensation expenses increased significantly by 56.5% from US$2.4 million for the year ended December 31, 2019 to US$3.8 million for the year ended December 31, 2020, primarily due to our share-based compensation granted, growing number of employees in line with our business growth, as well as the increase in average compensation.
Communication and Technology Expenses. Our communication and technology expenses increased significantly by 76.6% from US$0.8 million for the year ended December 31, 2019 to US$1.4 million for the year ended December 31, 2020 primarily due to an increase in trading systems service fees and market data fees, which was in line with the growth of our CFD trading services and the launch of our TRS trading services.
General and Administrative Expenses. Our general and administrative expenses increased significantly by 226.9% from US$0.7 million for the year ended December 31, 2019 to US$2.3 million for the year ended December 31, 2020, primarily as a result of share-based compensation granted in 2020 and charged into general and administrative expenses.
Professional Fees. Our professional fees increased significantly by 105.7% from US$0.8 million for the year ended December 31, 2019 to US$1.6 million for the year ended December 31, 2020, primarily due to the legal, and the consulting services fees we additionally incurred after we became a public company in 2020.
Services Fees. Our services fees for independent contractors and consultants increased significantly by 116.7% from US$385,000 for the year ended December 31, 2019 to US$834,000 for the year ended December 31, 2020, as a result of an increased number of contracted service providers needed due to the growth of our business as well as our share-based compensation granted to service providers.
92
Interest Expenses. Our interest expenses decreased significantly by 75.0% from US$732,000 for the year ended December 31, 2019 to US$183,000 for the year ended December 31, 2020, mainly attributable to our short-term borrowings and a bridge loan facilitated by us to unrelated third parties in 2019.
Occupancy Expenses. Our occupancy expenses increased by 15.4% from US$592,000 for the year ended December 31, 2019 to US$683,000 for the year ended December 31, 2020, primarily due to the new office spaces we rented for our subsidiary in Singapore, partially offset by the rental reduction for our subsidiaries in Hong Kong as a result of COVID-19.
Marketing Expenses. Marketing expenses increased from US$55,000 for the year ended December 31, 2019 to US$651,000 for the year ended December 31, 2020, mainly due to marketing expenses incurred to promote our businesses and branding activities in connection with our listing event, as well as share-based compensation granted to marketing consultants.
Other Expenses. Other expenses increased by 9.6% from US$10,463 for the year ended December 31, 2019 to US$11,464 for the year ended December 31, 2020, mainly due to a decrease in payment service fees which is in line with our customers’ reduced trading activities.
Change in Fair Value of Warrant Liabilities
Change in Fair Value of Warrant Liabilities represents the mark-to-market fair value adjustments to the outstanding Public Warrants and Private Warrants issued in connection with the IPO of PAAC. The change in fair value of the outstanding Public and Private Warrants during 2020 was US$0.8 million. The change in fair value is the result of changes in market prices deriving the value of the financial instruments.
Income Tax Expenses
BC Wealth Management Limited, our Hong Kong subsidiary engaging in the insurance brokerage business, is the only entity within our Group that is subject to income taxes. Our income tax expenses decreased from US$64,000 for the year ended December 31, 2019 to US$1,000 for the year ended December 31, 2020, primarily due to the decreased profit before income taxes in current period, resulting from a significant decrease in commission income for insurance brokerage services.
Net (loss)/Income
As a result of the foregoing, we had a net loss of US$2.6 million for the year ended December 31, 2020 compared to a net income of US$8.2 million for the year ended December 31, 2019.
Liquidity and Capital Resources
To date, our principal sources of liquidity have been cash generated from our operations, capital injections by our shareholder, and debt or equity financing activities. The following table presents the Company’s unrestricted cash and short-term investments as of the years ended December 31, 2021, 2020 and 2019. Our unrestricted cash primarily consist of cash on hand and cash deposited with banks which are unrestricted for withdrawal or use. The short-term investments we held are mainly equity securities listed on Hong Kong Stock Exchange. The Company did not have available and unused external source of liquidity as of the years ended December 31, 2021, 2020 and 2019.
|
Year ended December 31, |
|||||||||
|
2021 |
2020 |
2019 |
|||||||
|
US$ |
US$ |
US$ |
|||||||
|
Unrestricted cash |
$ |
15,098,151 |
$ |
3,426,467 |
$ |
6,388,978 |
|||
|
Short-term investments |
|
15,900,369 |
|
17,622 |
|
180,201 |
|||
|
$ |
30,998,520 |
$ |
3,444,089 |
$ |
6,569,179 |
||||
We have been able to meet our working capital needs in the past, and based on our current operating plan, we expect that our existing unrestricted cash and short-term investments and our anticipated cash flows from operations will be sufficient to meet our anticipated cash needs for the next 12 months. In the long term, our working capital needs will depend on many factors, including the rate of our business and revenue growth, the timing of our various expenditures and cash provided by and used in operating, investing and financing activities and capital expenditures.
93
To the extent our unrestricted cash, short-term investments and cash flow from operating activities are insufficient to satisfy its liquidity needs in accordance with our strategic plan in the future, we may determine to raise additional funds through the sale of equity or convertible debt securities. If additional funding is necessary or desirable, however, we may not be able to effect an equity or debt financing in amounts or on terms acceptable to us or at all. If we are unable to raise additional capital when needed, its results of operations and financial condition would be materially and adversely impacted.
The following table presents our cash and cash equivalents held in various currencies as of the years ended December 31, 2021, 2020 and 2019. We closely monitor our cash balance and future payments obligations by preparing monthly cash balance and fund requirement reports to provide a timely overview of our overall cash position and liquidity and risk control measurements. Such reports are reviewed by our chief financial officer and chief executive officer.
|
Year ended December 31, |
|||||||||
|
2021 |
2020 |
2019 |
|||||||
|
US$ |
US$ |
US$ |
|||||||
|
Held in USD |
$ |
9,195,207 |
$ |
1,878,055 |
$ |
2,212,350 |
|||
|
Held in HKD |
|
5,781,609 |
|
1,424,879 |
|
4,096,460 |
|||
|
Held in RMB |
|
12,477 |
|
1,610 |
$ |
311 |
|||
|
Held in SGD and other currencies |
|
108,858 |
|
121,923 |
|
79,857 |
|||
|
Total cash and cash equivalents |
$ |
15,098,151 |
$ |
3,426,467 |
$ |
6,388,978 |
|||
As of December 31, 2021, 2020 and 2019, 0.07%, nil and nil of our cash and cash equivalents were held in China. See “Transfers of Cash from Our Subsidiaries to the Company” below for the ability of subsidiaries to transfer funds to the holding company.
Regulatory Capital Requirements
We are required to hold sufficient regulatory capital at both group and individual entity level to cover our risk exposures, among other financial obligations imposed by regulatory authorities in the multiple jurisdictions where our subsidiaries operate. The following table illustrates the minimum regulatory capital as established by the HKSFC, the Insurance Association (Hong Kong), the CIMA and MAS that our subsidiaries were required to maintain as of December 31, 2021, 2020 and 2019 and the actual amounts of capital that were maintained.
|
As of December 31, 2019 |
As of December 31, 2020 |
As of December 31, 2021 |
||||||||||||||||||||||
|
Minimum Regulatory Capital Requirements |
Capital Levels Maintained |
Minimum Regulatory Capital Requirements |
Capital Levels Maintained |
Minimum Regulatory Capital Requirements |
Capital Levels Maintained |
Excess Net Capital |
Percent of Requirement Maintained |
|||||||||||||||||
|
Operating Subsidiaries |
|
|
|
|
|
|
|
|
||||||||||||||||
|
Lion International Securities Group Limited |
$ |
385,245 |
$ |
1,107,110 |
$ |
386,927 |
$ |
1,043,803 |
$ |
384,736 |
|
1,231,361 |
|
846,625 |
320 |
% |
||||||||
|
Lion Futures Limited |
|
385,245 |
|
895,077 |
|
386,927 |
|
948,872 |
|
384,736 |
|
1,241,548 |
|
856,812 |
323 |
% |
||||||||
|
Lion Asset Management Limited |
|
12,842 |
|
54,185 |
|
12,898 |
|
27,770 |
|
12,825 |
|
53,199 |
|
40,374 |
415 |
% |
||||||||
|
BC Wealth Management Limited |
|
12,842 |
|
206,430 |
|
12,898 |
|
468,279 |
|
12,825 |
|
285,086 |
|
272,261 |
2223 |
% |
||||||||
|
Lion International Financial (Singapore) Pte. Ltd. |
|
|
|
— |
|
— |
|
739,694 |
|
1,073,516 |
|
333,822 |
145 |
% |
||||||||||
|
Lion Brokers Limited |
|
840,267 |
|
3,616,599 |
|
537,164 |
|
8,426,049 |
|
5,821,258 |
|
19,632,458 |
|
13,811,200 |
337 |
% |
||||||||
|
Total |
$ |
1,636,441 |
$ |
5,879,401 |
$ |
1,336,814 |
$ |
10,914,773 |
$ |
7,356,074 |
$ |
23,517,168 |
$ |
16,161,094 |
320 |
% |
||||||||
Lion International Securities Group Limited (“LISGL”), Lion’s Hong Kong subsidiary, is licensed by the HKSFC to carry out regulated activities of Type 1, dealing in securities, and it provides securities margin financing, and Type 4, advising on securities, and it is not subject to specified licensing condition. LISGL is subject to the requirements of section 145 of the Security and Future Ordinance (Cap.571) (“SFO”). Under the rule, LISGL is required to maintain a minimum liquid capital of approximately US$386,000 (HK$3 million).
Lion Futures Limited (“LFL”), Lion’s Hong Kong subsidiary, is licensed by the HKSFC to carry out regulated activities of Type 2, dealing in future contracts, and Type 5, advising on futures contracts, and it is not subject to specified licensing condition. LFL is subject to the requirements of section 145 of the SFO. Under the rule, LFL is required to maintain a minimum liquid capital of approximately US$386,000 (HK$3 million).
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Lion Asset Management Limited (“LAML”), Lion’s Hong Kong subsidiary, is licensed by the HKSFC to carry out regulated activities of Type 4, advising on securities, and it is subject to specified licensing condition, and Type 9, assets management and it is subject to specified licensing condition. LCML is subject to the requirements of section 145 of the SFO. Under the rule, LAML is required to maintain a minimum liquid capital of approximately US$13,000 (HK$100,000).
BC Wealth Management Limited (“BCWML”), Lion’s Hong Kong subsidiary, is a member of the Professional Insurance Brokers Association Limited (“PIBA”) and is engaged in the business of insurance brokerage services. BCWML is subject to the minimum requirements specified by the Insurance Authority (“IA”) under section 70(2) of the Ordinance. Under the rule, BCWML is required to maintain a minimum capital and net assets of approximately US$13,000 (HK$100,000).
Lion International Financial (Singapore) Pte. LTD. (“LIFSL”), Lion’s Singapore subsidiary, is licensed by the MAS to conduct the regulated activities of dealing in capital markets products and it is subject to specified licensing condition. LIFSL is subject to the requirements of Securities and Futures Act (Cap. 289) (“SFA”). Under the rule, LIFSL is required to maintain a minimum liquid capital of approximately US$740,000 (SGP 1,000,000).
Lion Broker Limited (“LBL”), Lion’s Cayman Island subsidiary, is registered Securities-Full license holder with the CIMA including Broker-dealer and Market Maker. LBL is subject to the requirements of the SIBL. Under the rule, LBL is required to maintain a capital level in excess of the financial resources’ requirement, which is defined as the sum of (i) counterparty requirement, (ii) position risk requirement, and (iii) the base requirement, which is the greater of (a) one quarter of relevant annual expenditure or (b) approximately US$120,000 (CI$100,000).
As of December 31, 2021, 2020 and 2019, all of our operating subsidiaries were in compliance with their respective regulatory capital requirements.
The following table sets forth a summary of our cash flows for the periods indicated:
|
Year ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
Net cash (used in) provided by operating activities |
$ |
(20,482,499 |
) |
$ |
105,675 |
|
$ |
7,976,995 |
|
|||
|
Net cash used in investing activities |
|
(12,104,687 |
) |
|
(6,549,514 |
) |
|
(27,254,283 |
) |
|||
|
Net cash provided by (used in) financing activities |
|
43,578,397 |
|
|
2,640,316 |
|
|
20,664,343 |
|
|||
|
Effect of exchange rate changes on cash |
|
(33,833 |
) |
|
16,441 |
|
|
85,966 |
|
|||
|
Net increase in cash and restricted cash |
|
10,957,378 |
|
|
(3,787,082 |
) |
|
1,473,021 |
|
|||
|
Cash and restricted cash at beginning of period |
|
4,794,097 |
|
|
8,581,179 |
|
|
7,108,158 |
|
|||
|
Cash and restricted cash at end of period |
$ |
15,751,475 |
|
$ |
4,794,097 |
|
$ |
8,581,179 |
|
|||
Operating Activities
Net cash used in operating activities for the year ended December 31, 2021 was US$20.5 million, primarily attributable to our net losses of US$0.8 million, as adjusted by (i) an increase of US$79.8 million in receivables from broker-dealers and clearing organizations including customer accounts, (ii) an increase of US$15.9 million in securities owned, and (iii) an increase of US$7.0 million in prepaid and other assets. These were partially offset by (i) an increase of US$30.7 million in payables to customers and (ii) an increase of US$49.2 million in payables to broker-dealers and clearing organizations.
Net cash provided by operating activities for the year ended December 31, 2020 was US$0.1 million, primarily attributable to our net loss of US$2.6 million, as adjusted by (i) change in fair value of warrant liabilities of US$0.8 million and share-based compensation charge of US$3.6 million; and (ii) an increase of US$6.4 million in receivables from broker-dealers and clearing organizations. These were partially offset by an increase of US$1.4 million in payables to customers and an increase of US$3.8 million in payables to broker-dealers and clearing organizations.
Net cash provided by operating activities for the year ended December 31, 2019 was US$8.0 million, primarily attributable to our net income of US$8.2 million, as adjusted by a decrease of US$5.7 million in payables to customers. These were partially offset by a decrease of US$4.7 million in receivables from broker-dealers and clearing organizations.
95
Investing Activities
Net cash used in investing activities for the year ended December 31, 2021 was US$12.1 million, primarily attributable to (i) US$2.6 million paid for acquisition of mining machines, (ii) US$7.6 million paid for acquisition of copyrighted trading software programs, (iii) US$1.5 million of investment in private equity and (iii) short-term loans receivable to an unrelated party in an aggregate of US$1 million, partially offset by US$0.7 million of collection of such loans.
Net cash used in investing activities for the years ended December 31, 2020 was US$6.6 million, primarily attributable to the advance payments of US$6.0 million for the purchase of copyrighted software assets. In addition, short-term loans receivable to unrelated parties were in a net aggregate of US$595,000.
Net cash used in investing activities for the years ended December 31, 2019 was US$27.3 million, primarily attributable to a one-off bridge loan facilitated by us to unrelated third parties (see “— Borrowings”), advance to the then shareholder of US$6.5 million, as well as short-term loans receivable to an unrelated party in an aggregate of HK$12.8 million (US$1.6 million).
Financing Activities
Net cash provided by financing activities for the year ended December 31, 2021 was US$43.6 million, primarily attributable to (i) US$33.0 million of proceeds from the exercise of warrants and options, (ii) US$10.0 million of proceeds from issuance of preferred shares and warrants, and (iii) US$0.8 million of proceeds from issuance of ordinary shares, partially offset by US$0.3 million of repayment of short term loans.
Net cash provided by financing activities for the years ended December 31, 2020 was US$2.6 million, primarily attributable to, (i) cash acquired of US$2.5 million in connection with our reverse recapitalization, (ii) net proceeds of US$2.0 million from August 2020 PIPE and (iii) net proceeds of US$1.5 million from convertible debenture, partially offset by (i) payments for reverse recapitalization and ordinary shares issuance costs of US$1.9 million; (ii) repayment on short-term borrowings of US$1.3 million and (iii) dividends of US$0.4 million paid to Mr. Jian Wang, our then sole shareholder prior to Business Combination. We also received US$1.6 million advances from Mr. Jian Wang, our principal shareholder and director, for our working capital needs in 2020 and repaid US$1.5 million in 2020.
Net cash provided by financing activities for the years ended December 31, 2019 was US$20.7 million, primarily attributable to short-term borrowings of US$21.0 million, US$20.4 million of which was obtained from an unrelated party in connection with a one-off bridge loan facilitated by us (see “— Borrowings”), partially offset by repayment on short-term borrowings of US$0.4 million. We also received US$7.7 million advances from Mr. Jian Wang, our then sole shareholder, for our working capital needs in 2019 and repaid it in full in 2019.
Transfers of Cash from Our Subsidiaries to the Company
Lion Group Holding Ltd. is incorporated in Cayman Islands on February 11, 2020, to be the ultimate parent company of the Group upon the consummation of a business combination on June 16, 2020. As a holding company with no material operations of our own, we conduct our substantial operations through our subsidiaries in Hong Kong and the Cayman Islands and our apps are available to download in the app stores of China and most of our users are PRC citizens, which may subject us to certain laws and regulations in China. Lion Group Holding Ltd is permitted under the laws of Cayman Islands to provide funding to our subsidiaries in Hong Kong and Cayman Islands through loans or capital contributions without restrictions on the amount of the funds. Lion Group Holding Ltd. can distribute earnings from its businesses, including subsidiaries, to the U.S. investors. Our operations in Hong Kong and the Cayman Islands were in loss position since the second half of 2020, and the Company has raised capital through financing transactions and provided funding to our operations in Hong Kong and the Cayman Islands.
Our operating subsidiaries are permitted under the laws of Hong Kong, Cayman Islands, Singapore, and British Virgin Islands, respectively, to provide funding to Lion Group Holding Ltd, the holding company incorporated in the Cayman Islands through dividend distributions, loans or advances. Our Group currently intend to retain all available funds and future earnings, if any, for the operation and expansion of our business and do not anticipate declaring or paying any dividends in the foreseeable future. We currently do not have any dividend policy, any future determination 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.
96
Currently, we conduct our substantial operations through our subsidiaries in Hong Kong and the Cayman Islands. We do not have or intend to set up any subsidiary or enter into any contractual arrangements to establish a VIE structure with any entity in China. Since 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, providing 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”. We are dependent on our customers in the PRC, the laws and regulations of the PRC currently have restrictions on currency conversion, cross-border remittance and offshore investment for PRC citizens. See “Risk Factors — Risks Related to Our Business and Industry — PRC governmental control of currency conversion, cross-border remittance and offshore investment could have a direct impact on the trading volume on our platform, and the PRC government could further tighten restrictions on converting Renminbi to foreign currencies and/or deems our practices to be in violation of PRC laws and regulations.” for more information on the risk of PRC governmental control of currency conversion, cross-border remittance and offshore investment with respect to our operations. However, the laws and regulations of the PRC do not currently have any material impact on transfer of cash from the Company to our Cayman Islands and Hong Kong subsidiaries to or from Cayman Islands and Hong Kong subsidiaries to the Company and the investors in the U.S.. As a result, cash can be transferred freely between the Company and its operating subsidiaries, across borders, and to U.S. investors.
Subject to the Companies Act 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. There is no further Cayman Islands statutory restriction on the amount of funds which may be distributed by us in the form of dividends.
The following are the aggregate transfers from its subsidiaries to the Company for the period from June 16, 2020 to December 31, 2020 and for the year ended December 31, 2021:
|
Subsidiary |
From June 16 |
2021 |
||||
|
Lion Broker Limited |
$ |
— |
$ |
4,508,885 |
||
|
Lion Futures Limited |
$ |
— |
$ |
130,000 |
||
|
Lion International Securities Group Limited |
$ |
— |
$ |
64,271 |
||
|
Lion Wealth Limited |
$ |
— |
$ |
50,000 |
||
|
BC Wealth Management Limited |
$ |
— |
$ |
81,960 |
||
|
Total |
|
|
|
4,835,116 |
||
On December 5, 2019 and December 31, 2019, we declared dividends of US$2.6 million and US$2.4 million, respectively, to the then sole shareholder, which were utilized to reduce the amount due from shareholder by US$4.6 million to nil, resulting in dividends payable of US$0.4 million included in the consolidated balance sheet as of December 31, 2019. In 2020, dividends paid to the individual shareholder were US$386,000. For the year ended December 31, 2021, we did not pay any dividends to our shareholders. If we determine to pay dividends on any of our ADSs in the future, as a holding company, we will be dependent on receipt of funds from our operating subsidiaries in Hong Kong and Cayman Islands. Under the current practice of the Inland Revenue Department of Hong Kong, no tax is payable in Hong Kong in respect of dividends paid by us, and under the current laws of the Cayman Islands, we are also not subject to tax on income or capital gains and withholding tax is not imposed upon payments of dividends from the Company to its shareholders.
There are no restrictions or limitations under the laws of Hong Kong imposed on the conversion of HK dollar into foreign currencies and the remittance of currencies out of Hong Kong, nor is there any restriction on any foreign exchange to transfer cash between the Company and its subsidiaries, across borders and to investors outside of PRC, nor is there any restrictions and limitations to distribute earnings from the subsidiaries, to the Company and investors outside of PRC and amounts owed. There are no exchange controls in Cayman Islands.
See “Risk Factors — Risk Related to Our Corporate Structure — We may rely on dividends and other distributions on equity paid by our subsidiaries to fund any cash and financing requirements we may have, and any limitation on the ability of our subsidiaries to make payments to us could have a material adverse effect on our ability to conduct our business.” for more information.
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Financing Arrangements
The following is a summary of our borrowings and redeemable securities as of December 31, 2021, 2020 and 2019, which were obtained for working capital purpose.
|
Year ended December 31, |
Interest |
Maturity |
|||||||||||
|
2021 |
2020 |
2019 |
|||||||||||
|
Outstanding principal amount |
US$ |
US$ |
US$ |
||||||||||
|
Short-term borrowings |
$ |
— |
$ |
293,905 |
$ |
1,412,570 |
12%, 13% |
February 2021 |
|||||
|
Short-term borrowings from related party |
|
— |
|
— |
|
128,415 |
12% |
February 2020 |
|||||
|
Minority shareholder loan |
|
110,000 |
|
— |
|
— |
0% |
None |
|||||
|
Convertible debenture(1) |
|
— |
|
1,600,000 |
|
— |
9% |
June 2023 |
|||||
|
Series B Convertible Preferred Shares(1) |
|
4,000,000 |
|
— |
|
— |
8% |
December 2024 |
|||||
|
$ |
4,100,000 |
$ |
1,893,905 |
$ |
1,540,985 |
||||||||
____________
(1) The securities are convertible into ADSs since the issuance at the holder’s election.
Operating Lease Commitments
The following table sets forth our operating lease commitments as of December 31, 2021. Our lease obligations primarily comprise future aggregate minimum lease payments in respect of office premises under non-cancellable lease agreements.
|
Payments Due by Period |
|||||||||
|
Total |
Short-term |
Long-term |
|||||||
|
Operating lease obligations |
$ |
1,531,370 |
$ |
664,583 |
$ |
866,787 |
|||
Other than the Financing Arrangements and Operating Lease Commitments above, we did not have any significant capital and other commitments, long-term obligations, or guarantees as of December 31, 2021.
Capital Expenditures
Our capital expenditures are primarily incurred for purchase of property, equipment and copyrighted trading software programs. Our capital expenditures were US$10.2 million in 2021, US$6.0 million in 2020 and US$25,000 in 2019. Although we did not have significant commitments for capital expenditures as of December 31, 2021 and subsequently, we will continue to make capital expenditures to meet the growth of our business when needed. We intend to fund our future capital expenditures with our existing cash balance and proceeds from our debt or equity financing activities.
Internal Control Over Financial Reporting
Prior to the Business Combination, we are a private company with limited accounting personnel and other resources with which to address our internal controls and procedures. Our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In connection with auditing consolidated financial statements as of and for the year ended December 31, 2019, our independent registered public accounting firm and Lion had identified two material weaknesses in our internal controls. A material weakness is a deficiency, or combination of deficiencies, in internal controls, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.
Upon completion of this Business Combination, we became a public company and we are subject to the Sarbanes-Oxley Act of 2002, and the Section 404 of the Sarbanes-Oxley Act, or Section 404, requires us include a report from management on the effectiveness of our internal control over financial reporting in our annual report on Form 20-F beginning with annual report for the fiscal year ended December 31, 2020. During 2020, we have implemented remedial measures to address the material weaknesses identified in 2019. Following the issuance of SEC guidance
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relating to warrant accounting, on June 11, 2021, our management and our audit committee concluded that, it was appropriate to restate certain of our previously issued financial statements. As part of such process, we identified a material weakness in our internal controls over financial reporting, which has since been remediated.
In 2021, we made the following changes to our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) which have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting and which resulted in our determination that we did not have a material weakness in our internal controls over financial reporting for the year ended December 31, 2021:
• We hired experienced talents with relevant experience, skills and knowledge in accounting and financial reporting under the requirements of U.S. GAAP and rules set forth by the SEC and they came onboard in charge of preparing our financial statements and related disclosures in accordance with U.S. GAAP.
• Our financial reporting team received additional training in U.S. GAAP through self-study and webinar courses, and periodically review major accounting standards updates provided by a major accounting firm which provide an overview of recent U.S. accounting pronouncements.
Although we have already begun implementing remedial measures to address the material weakness, the implementation of these measures may not fully address the deficiencies in our internal control over financial reporting, and we cannot conclude that we have been fully remedied. In the future, we may determine that we have additional control deficiencies, or our independent registered public accounting firm may disagree with our management assessment of the effectiveness of our internal controls. Our failure to correct the material weakness or failure to discover and address any other control deficiencies could result in inaccuracies in our financial statements and could also impair our ability to comply with applicable financial reporting requirements and related regulatory filings on a timely basis, which could cause investors to lose confidence in our reported financial information, which may result in volatility in and a decline in the market price of our securities.
Furthermore, it is possible that, had our independent registered public accounting firm conducted an audit of our internal control over financial reporting, such accountant might have identified material weaknesses and deficiencies. In addition, once we cease to be an “emerging growth company” as such term is defined in the JOBS Act and do not qualify for the carve-out as defined by SEC’s Accelerated Filer and Large Accelerated Filer Definition, our independent registered public accounting firm must attest to and report on the effectiveness of our internal control over financial reporting. Our management may conclude that our internal control over financial reporting is not effective. Moreover, even if our management concludes that our internal control over financial reporting is effective, our independent registered public accounting firm, after conducting our own independent testing, may issue a report that is qualified if we are not satisfied with our internal controls or the level at which our controls are documented, designed, operated or reviewed, or if it interprets the relevant requirements differently from us. In addition, the reporting obligations may place a significant strain on our management, operational and financial resources and systems for the foreseeable future. We may be unable to timely complete our evaluation testing and any required remediation.
Quantitative and Qualitative Disclosures about Market Risk
We are exposed to market risk in the ordinary course of our business. Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in foreign currency exchange rate risk.
Market Value of Bitcoin
Our revenue for the year ended December 31, 2022 was comprised of the value of Bitcoin rewards and transaction fees we earn by mining. As such, our operating results and financial condition are affected by fluctuations and long-term trends in the value of Bitcoin. Bitcoin has its own unique dynamic in terms of valuation, reward rates and similar factors. Any of these factors could lead to material adverse changes in the market for Bitcoin, which could in turn result in substantial damage to or even the failure of our business.
We started Bitcoin mining operations in May 2021. For the year ended December 31, 2021, our revenue derived from Bitcoin mining was approximately $1.7 million. A 10% increase or decrease in the market value of Bitcoin over the course of the year ended December 31, 2021, would not have material impact on our operations. However, given
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we sell Bitcoin to generate revenue and cover operating expenses, including capital expenditures, during the year, increases or decreases in the market value of Bitcoin would have resulted in increased or decreased total revenue. See “— Factors Affecting our Performance — Market Value of Bitcoin.”
Recent Operational and Financial Updates
Our Bitcoin Mining Operations
We commenced Bitcoin mining operations in late May 2021 and have temporarily ceased our Bitcoin mining operations and all related operations at the end of October 2021. We may resume our Bitcoin mining activities in the future.
Our Cryptocurrency Holdings
As of December 31, 2021, we have no Bitcoin and no USDT on our balance sheet. We began mining Bitcoin in May 2021 and there were no activities in our mining operations since October 31, 2021. From May 2021 to October 2021, we mined approximately 37.884 Bitcoins, and we converted all of our mined Bitcoin at an average price of USDT 45,567 per Bitcoin. As of December 31, 2021, we have liquidated all the USDT. We expect to mine additional Bitcoin in future periods, though we may also sell Bitcoin in future periods as needed to generate cash assets. As at the date of this prospectus, our Bitcoin mining operations is immaterial to our operations and the cryptocurrency that we hold is less than 40% of the value of our total assets (exclusive of U.S. government securities and cash items) on an unconsolidated basis.
While senior SEC officials have stated their view that bitcoin is not a “security” for purposes of the federal securities laws, the SEC has so far refused to permit the listing of any bitcoin-based exchange traded funds, citing, among other things, concerns regarding bitcoin market integrity and custodial protections. It is possible that the SEC could take a contrary position to the one taken by its senior officials or a federal court could conclude that bitcoin is a security. Such a determination could lead to our classification as an “investment company” under the Investment Company Act of 1940, which would subject us to significant additional regulatory controls that could have a material adverse effect on our business and operations and also may require us to substantially change the manner in which we conduct our business. In addition, if Bitcoin is determined to constitute a security for purposes of the federal securities laws, the additional regulatory restrictions imposed by those laws could adversely affect the market price of bitcoin and in turn adversely affect the market price of our ADSs. Furthermore, the SEC and its staff have taken the position that certain digital assets, including certain stablecoins, fall within the definition of a “security” under the U.S. federal securities laws.
NFT Platform Operating Entities
In April 2021, Lion Financial Group Limited acquired Lion Fintech Group Limited from Jian Wang. Lion Fintech Group Limited was incorporated under the laws of British Virgin Islands in February 2017, as a holding company of Royal Lion Investment Limited, a Cayman Islands company, in which we hold 70% voting rights of the shareholders. Royal Lion Middle East DMCC is a wholly-owned subsidiary of Royal Lion Investment Limited. As of May 12, 2022, both Royal Lion Investment Limited and Royal Lion Middle East DMCC are dormant.
In May 2021, Lion NFT Limited was incorporated under the laws of British Virgin Islands in which we hold 90% equity interest, as a holding company of Flying Lion Limited, a Cayman Islands company, in which we hold 70% equity interest through Lion NFT Limited. Flying Lion Lab is a team of independent contractors engaged by Flying Lion Limited and is the workshop which designs the NFT products. We conducted our NFT business through Lion NFT Limited. All the products designed by Flying Lion Lab are to be sold at Lion NFT Platform.
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INDUSTRY
The following summary is qualified in its entirety by, and should be read in conjunction with, the more detailed information and financial statements appearing elsewhere in this prospectus. In addition to this summary, we urge you to read the entire prospectus carefully, especially the risks of investing in the securities discussed under “Risk Factors,” before deciding whether to invest in the securities. The information presented in this section have been derived from an industry report commissioned by us and prepared by iResearch, an independent research firm, to provide information regarding our industry and our market position in China and globally. iResearch report, data and information referenced herein (the “iResearch Materials”) are the copyrighted property of iResearch and its subsidiaries (“iResearch”). The iResearch Materials are from sources considered reliable; however, the accuracy and completeness thereof are not warranted, nor are the opinions and analyses published by iResearch representations of fact. The iResearch Materials speak as of the original publication date thereof and are subject to change without notice. iResearch and other trademarks appearing in the iResearch Materials are the property of iResearch or their respective owners.
Overview of Chinese Individual Overseas Asset Allocation
China’s pool of investable financial assets is the second largest in the world and the largest in Asia. Between 2014 and 2019, total individual investable financial assets held by PRC nationals increased from US$12.9 trillion to US$24.4 trillion, and is projected to grow steadily and reach US$35.3 trillion by 2023. The last five years show a tendency that the percentage of deposits among overall investable financial assets continued to decrease, while both bank financial products and trust products became increasingly popular. Other financial instruments, such as higher risk futures and derivatives, are more favored by individual investors and their share of the investable financial assets market is expected to further increase in the future.
The following drivers are expected to propel the increase in overseas investable assets of PRC nationals.
Expanding Overseas Sources of Wealth
Expanding overseas sources of wealth bolster offshore financial assets and lead to an increasing need for overseas asset allocation. In 2019, over 140 companies with principal place of business in mainland China were listed on Hong Kong and the U.S. stock exchanges, and many of them are “new economy” companies, which refer to businesses that realize rapid growth mainly through technology advancement, entrepreneurship, and Internet-based innovative business models. Many of these Chinese state-owned or private companies offer employee stock option programs and have employees placed overseas, increasing the demand for offshore asset management. These expanded sources of overseas income for PRC nationals, most of whom prefer not to repatriate a significant portion of their earnings back to China, have substantially increased the amount of overseas assets held by PRC nationals.
Growing Awareness of Risk Diversification
With growing awareness of wealth preservation and risk diversification strategies, an increasing number of Chinese investors choose to allocate their assets globally. Overseas asset now accounts for 8.6% of total investable financial asset held by PRC Nationals, compared to only 4.8% in 2015. As Chinese investors become more sophisticated, they increasingly seek to build a diversified investment portfolio for wealth accumulation and appreciation through a variety of overseas assets and services.
Openness and Globalization of the Chinese Economy
The opening-up of China has contributed significantly to the overseas asset allocation of Chinese investors. The “Doing Business 2020” report released by the World Bank Group shows that China’s business environment ranked 31st in the world in 2020, which improved by 15 places from 2019. This was mainly driven by a series of structural reform policies implemented by the PRC government, such as the establishment of free trade zones in certain provinces. In addition, the continued globalization of the Chinese economy, led by the “Belt and Road Initiative”, has further raised Chinese investors’ awareness of overseas assets and services.
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Analysis of Major Financial Service Markets
Contract for Differences
Contracts for Differences, or CFD, is an agreement between a buyer and a seller to exchange the difference between the current price of an underlying asset (e.g. shares, currencies, commodities and indices) and its price when the contract is closed. CFD makes it possible for investors to trade in live movements of the market price of an instrument that they do not actually own.
CFDs have proliferated rapidly since they were first introduced to retail investors. Global CFD trading volume grew from US$4.7 trillion in 2015 to US$9.1 trillion in 2021, representing a compound annual growth rate (CAGR) of 11.7%, and is estimated to grow to US$13.1 trillion by 2025, which would be a CAGR of 9.6%, depending in part on enthusiasm in CFD trading and shifts in risk preferences.
Exchange-traded Futures and Derivatives Brokerage
The annual trading activity in the global exchange-traded derivatives markets reached a record high in 2021. The following diagrams illustrate the global contract volumes of exchange traded futures and options from 2009 to 2021, as well as their breakdowns by regions and categories in 2021.
Source Futures Industry Association, iResearch
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The Asia-Pacific region and the equity index category each accounted for the largest share in 2021. Exchanges in the Asia-Pacific and Latin American regions witnessed rapid growth of futures and options trading in 2021. The futures and options trading volumes on Asia-Pacific exchanges grew 51.63% to 30.6 billion contracts, while they grew 37.51% to 8.9 billion contracts on Latin American exchanges in 2021. Equity-related derivatives were main drivers for the overall increase in trading in 2021. Global equity-related derivatives volumes jumped 46.7% to 41.6 billion contracts in 2021.
HKFE, SGX, CME and Eurex are the major exchanges for global futures and derivatives trading and their products have become the most common product offerings among Hong Kong futures and derivatives brokerage firms. In 2021, total trading volume of these four exchanges accounted for approximately 11.7% among all 82 exchanges worldwide, according to data from the Futures Industry Association.
Securities Brokerage
HKSE market value surged in 2017 and then declined in 2018 due to global market fluctuations. However, market value has rebounded by 27.6% in 2019, reaching HK$38.2 trillion (US$4.9 trillion), and increased to HK$47.5 trillion in 2020 and then slightly decreased to HK$42.3 trillion in 2021. Through Stock Connect, a securities trading and clearing link scheme allowing mutual market access between Mainland China and Hong Kong run by HKSE, SSE, SZSE and China Securities Depository and Clearing Corporation Limited, an increasing number of investors to access offshore investment opportunities and boost awareness of global asset allocation.
Stock Connect has witnessed rapid growth in terms of trading turnover since its inception in November 2014. Southbound Stock Connect (PRC investing in Hong Kong) turnover has increased at a CAGR of 51.3% from 2015 to 2021, while Northbound Stock Connect (Hong Kong investing in the PRC) turnover has increased at a CAGR of 63.0% during the same period. In 2021, the trading turnover reached RMB27.6 trillion (US$4.2 trillion) for Northbound Stock Connect, and HK$9.3 trillion (US$1.2 trillion) for Southbound Stock Connect.
Source: HKEX, iResearch
Note: It is assumed that the daily quota does not change from 2019 to 2023. The accuracy of estimation is subject to any social, economic, and political change that could result in otherwise.
Total Return Swaps (TRS)
A total return swap is an OTC derivative agreement in which one party (TRS receiver) makes payments based on a set rate, either fixed or variable, while the other party (TRS payer) makes payments based on the return of an underlying asset, which includes both the income it generates and any capital gains. An International Swaps and Derivatives Association (ISDA) master agreement and related supplementary agreements are usually entered by both parties in a TRS transaction.
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For international investors seeking to invest in PRC stock market, A-share (shares that denominated in Renminbi and traded in the SSE and SZSE) and Hong Kong stock basket linked TRS provides investors with higher leverage compared with buying A-share stocks directly. Chinese domestic securities companies and emerging international financial institutions have been major providers of such TRS.
The outstanding notional amounts of equity-linked forwards and swaps for derivative counterparty in Asian countries except for Japan has been rising steadily despite some fluctuations from 2012 to 2019 and reached US$270.2 trillion in the first half of 2021.
Note: Other Asian countries exclude Japan.
Source: BIS, iResearch
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International capital has been building up positions in A-share through Stock Connect with an average daily turnover of HKD186 billion (USD 24.2 billion) in YTD Q4 2021, 34% higher than YTD Q4 2020 (HKD139 billion, USD 18.1 billion). Average daily turnover, especially the total Northbound trading, increased over years.
Since regulations have put limitations on Chinese-based financial institutions leveraging through OTC derivatives, China-based financial institutions have the motive to partner with qualified international financial institutions from less restricted jurisdictions, such as the Cayman Islands, in order to expand exposure to international investors with leveraged trading needs.
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BUSINESS
Overview
We are one of the few Chinese investor-focused trading platforms that offer a wide spectrum of products and services. Currently, our business lines include (i) total return swap (TRS) trading business, (ii) contracts for difference (CFD) trading services, (iii) futures and securities brokerage services, and (iv) insurance brokerage services. We provide these services through our all-in-one Lion Brokers Pro app and a variety of other apps available on iOS, Android, PC and Mac platforms. Our clients are mostly well-educated and affluent Chinese investors residing both inside and outside the PRC (excluding the United States), as well as institutional clients in Hong Kong that use our futures trading service.
Our trading platform allows users to trade more than 100 futures products on major futures exchanges worldwide (excluding the PRC), including the Chicago Mercantile Exchange (CME), Singapore Exchange (SGX), the Hong Kong Futures Exchange (HKFE) and Eurex Exchange (Eurex), as well as stocks listed on the New York Stock Exchange (NYSE), Nasdaq and Hong Kong Stock Exchange (HKSE), and PRC stocks listed on the Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) that are eligible for the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs (together, the “Stock Connect”). Our customers may also use our platform to trade various financial products, such as stock indices, commodities, futures, forex, ETFs, warrants and callable bull/bear contracts, on global exchanges or OTC markets.
Additionally, Lion has developed a professional, experienced SPAC sponsorship team to help guide private companies through their listing journey while creating value for Lion and its shareholders. Lion is also committed to building the world’s leading one-stop, cross-chain, high-expansion non-fungible token (NFT) marketplace and entering the metaverse space through blockchain technology.
Recent Development
In January 2022, we launched our NFT business through Flying Lion Limited, including (i) issuance of MetaWords character NFTs and MetaWords work NFTs (collectively, the “MetaWords NFTs”), and (ii) the establishment of our NFT trading platform, namely the Lion NFT platform (f/k/a/ Meta World). We created and minted the MetaWords NFTs by converting Xu Bing’s characters in his artwork Book from the Ground and sold MetaWords NFTs to the NFT collectors. MetaWords characters serve as the basic units of the MetaWords language system. MetaWords works are excerpts drawn from Mr. Xu’s artwork Book from the Ground. The sales were conducted through an online auction and blind boxes direct sell on the Lion NFT platform in January 2022. We sold in an aggregate of six MetaWords NFTs created by us by the auction in the amount of 197 wrapped BNB, and 2,742 blind-boxes which includes MetaWords NFTs at 0.40 BNB per unit for a total amount of 749 BNB, net of the consideration paid to customers of 348 BNB in form of incentive credits. Total sales of character NFTs and blind boxes were approximately $438,000 USD at the spot token price upon the completion of the sale. In addition, we launched a MetaWords NFT creation tool, giving users the ability to create their own MetaWords NFTs. The profits generated from the Lion NFT platform will be retained by Flying Lion Limited, a Cayman Islands company, one of our subsidiaries, as working capital. We conduct our NFT business through Flying Lion Limited. We hold 70% equity interest in Flying Lion Limited through Lion NFT Limited, a British Virgin Islands company, in which we hold 90% equity interest.
The users can resell the MetaWords NFTs to other users on the Lion NFT platform, or MetaWords Resale. For the MetaWords Resale conducted on the Lion NFT platform, we charge 5% of the purchase price as the authorization fee for Xu Bing’s artwork; 5% of the purchase price as the licensing fee for the author; and 2.5% of the purchase price as the transaction fee. Lion is the author for MetaWords NFTs. The commissions are collected in the form of BNB tokens when the users buy and sell MetaWords NFTs on the Lion NFT platform. As of the date of this prospectus, the fees abovementioned we are entitled to such MetaWords Resale were de minimis. We will charge 2.5% of the purchase price as the transaction fee and 5% of the purchase price as the authorization fee for Xu Bing’s artwork. The author of the MetaWords will be able to receive 5% of the purchase price as the licensing fee for future resale.
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Our Strengths
We believe that the following strengths contribute to our success and differentiate us from our competitors:
We are well positioned in a fast-growing trillion-dollar segment with substantial growth potential.
We are one of the few Chinese investor-focused trading platforms that provide a wide spectrum of product and service offerings. We believe our fast-growing trillion-dollar segment has substantial growth potential in the near term. The total investable financial assets held by overseas Chinese citizens (including those residing in Hong Kong, Macau and Taiwan) were US$8.3 trillion in 2019 and are expected to reach US$9.5 trillion in 2023, according to iResearch. The percentage of financial assets allocated to overseas investment by Chinese citizens was 8.6% of their total financial assets in 2019, which was significantly lower than the amount from citizens of other developed countries, such as the United States and the United Kingdom, and iResearch projects that overseas investment by Chinese citizens will increase to 10.5% of their total financial assets by 2023. With our existing leadership in this segment, we are well positioned to capture the opportunities arising from this growth.
We will be providing superior user experience to our clients through our industry-leading Internet platform.
We provide services through an industry-leading Internet platform accessible through our all-in-one Lion Brokers Pro app and a variety of other apps available on iOS, Android and PC platforms. Our Lion Brokers app will allow users to remotely open accounts with our Cayman Islands licensed subsidiary and conveniently trade in a wide variety of derivative products. Our Lion Brokers app is designed to be secure and easy to use and will provide a superior user experience through fast and reliable order execution.
We offer a diversified product portfolio for trading in global financial markets.
Our trading platform allows users to trade approximately 100 futures products on major futures exchanges worldwide (excluding the PRC), including the CME, SGX, HKFE and Eurex, as well as stocks listed on the NYSE, Nasdaq and the Hong Kong Stock Exchange, and PRC stocks listed on the SSE and SZSE that are eligible for Stock Connect. In addition, our customers may also use our platform to trade various derivative products, such as forex, commodities, futures, stock indices, ETFs, warrants and callable bull/bear contracts, on global exchanges or OTC markets.
We have an experienced management team supported by industry talents.
Our management team is led by our founder and chairman of the board, Mr. Jian Wang, who has more than 15 years of experience in trading futures, securities and derivatives and dealing in interbank markets. Our core management team members have in aggregate more than 60 years of experience with conglomerates in the financial sector and fintech startups. Our management team is supported by a strong and talented team of experts in the financial and information technology industries. Our experienced management team and strong industry team enable us to drive innovation, improve our operational efficiency and expand our client base.
Our Strategies
We plan to implement the following strategies:
Strengthen our leading position in key markets and expand our demographic and geographic coverages in new markets.
We plan to strengthen our leading position in key markets, such as Greater China, by retaining active users, reactivating dormant accounts, obtaining new customers and enhancing service quality. We hope to increase our market share by penetrating into new geographic areas, such as Southeast Asia, though we currently have no specific plans to enter any new markets. We further intend to expand our user base from predominantly overseas Chinese to other ethnic groups through optimized digital marketing.
107
Enhance technological infrastructure and cybersecurity.
We expect to continue investing heavily in research and development to further improve our technology infrastructure and integrate different systems into our platform. Striving to provide our users with the most user-friendly interface and smooth transaction experience, we plan to optimize our trading system, increase system concurrent accesses, and enhance the system’s reliability and security. We also plan to expand the scope of cooperation with worldwide exchanges to provide our clients with more real-time, accurate and stable market quotation services. In addition, we plan to strengthen our cooperation with Microsoft Azure, making full use of the Microsoft Cloud infrastructure and security services and improve our system efficiency and cybersecurity.
Drive product innovation and explore other complementary services.
We are offering A-share (shares that denominated in Renminbi and traded in the SSE and SZSE) and Hong Kong stock basket linked TRS to our clients since early 2020 and officially launched it in July 2020. See “— Our Business Lines — TRS Trading Business.” Based on our analysis of our clients’ trading behavior and feedback, we expect to develop new derivative products to meet their shifting demands. We may also explore other complementary services, including CRM equipment and data services, overseas investment consulting services, deep financial technology development, digital asset management, industry research services, and overseas mergers and acquisitions.
Attract and retain key talent.
We believe that our employees are essential to our continued development. We strive to attract and retain talented individuals with management, financial and technological experience to our company with competitive compensation packages.
Our Business Lines
Our business lines include our (i) CFD trading services, (ii) insurance brokerage services, (iii) futures and securities brokerage services, (iv) TRS trading business and (v) asset management services. We provide these services through our all-in-one Lion Brokers Pro app and a variety of other apps available on iOS, Android and PC platforms. See “— Our Technology.” Our relevant subsidiaries possess a full securities investment business license in the Cayman Islands as relevant to acting as a broker dealer and market maker and various types of licenses to conduct our business in Hong Kong. See “— Licenses”.
CFD Trading Services
We began our CFD trading services in May 2019. Our trading platform allows users to trade various financial products, such as stock indices, commodities, futures, forex, ETFs, warrants and callable bull/bear contracts, on global exchanges or OTC markets. Through our platform, users can buy and sell stock indices, including the Dow Jones Industrial Average, Hang Seng Index, Nikkei 225 and Standard & Poor’s 500, commodities, including gold, silver, copper, soy beans and crude oil (Brent and WTI), and 33 currency pairs, including EUR/USD, USD/JPY, GBP/USD and USD/CHF currency pairs. Our Cayman Islands subsidiary, Lion Brokers Limited, holds the CIMA Full Securities Investment Business License, which allows us to act as broker dealer and market maker in facilitating CFD trading in the Cayman Islands. All of our CFD trades are conducted on the platform of Lion Brokers Limited within the scope granted by the CIMA Full Securities Investment Business License.
For example in a forex trade in the spot market, a participant will simultaneously buy one currency and sell another, with the two currencies together referred to as a currency pair. The investor is speculating that one currency will appreciate in relation to the counter currency in the currency pair, and it will make a profit or suffer a loss depending on the difference between the exchange rates at which the investor opens and closes its position. In response to a request for a quotation, market makers will quote the bid and ask prices simultaneously and the client will decide whether to enter into a contract to buy (long) or sell (short) an asset at that price.
Our trading platform matches the client’s order request with the spot currency pairs offered by market makers. We do not normally intervene in the trade, other than to apply our mark-up, which is based on market conditions and risk exposure regardless of how a trade is executed or the client’s profitability. This same process is used when a client liquidates a position. Our platform processes the trade by applying a uniform spread to the mid-price calculated from the preferred data feed. Forex traders can also engage in customizable forward transactions or futures speculation prior
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to the expiration of currency futures contracts. In addition, traders can amplify their profits or losses by leveraging their trades, and we offer up to 100:1 leverage to certain of our clients. See “Risk Factors — Risks Related to Our Business and Industry — We may incur material trading losses from our market making activities.”
The diagram below illustrates the order execution process for our CFD trading business:
We facilitate a client’s CFD trading in three different ways.
1. If the trade of a client can be used to naturally hedge against and offset the trades of another client, we will act as a market maker to offer liquidity and pricing for both clients. This type of transactions allows us to generate predictable revenues from commissions (other than forex transactions, for which we typically do not charge any commissions) without assuming any risks caused by market fluctuations. Less than half of our CFD trades in 2020 were of this type. We expect to have more frequent naturally hedged trades in the future as our user base grows and the number of transactions transacted over our platform increases.
2. When an offsetting transaction from another client is not available, we may choose to act as a principal (i.e. market maker) to trade with the client. This type of transactions gives us the potential to generate significant revenues from trading profit if the market develops in favor of our position. Although we would assume risks caused by market fluctuations, our risk management system constantly monitors the market and limits our risk exposure. See “Risk Management — Business Model Risk — Market Risk.” More than half of our CFD trades in 2020 were of this type.
3. When an offsetting transaction from another client is not available, we may also act as a broker in arranging trades between the client and third-party market makers. We maintain cooperative relationships with established market makers, including international wholesale forex trading partners, which give us access to a pool of potential liquidity and ensure that we are able to execute our clients’ desired trades at competitive rates while hedging our net positions and limiting our exposure. This type of transaction allows us to transfer the risks associated with riskier trades to established market makers that have greater risk tolerance, although we would incur additional costs charged by our cooperative market makers. Less than half of our CFD trades in 2020 were of this type.
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We generate CFD trading revenue from (i) commissions, (ii) bid/offer spreads, (iii) trading profit and (iv) difference in interest rates.
i. We charge commissions for all CFD transactions, except for forex transactions. The amount of commissions we charge is largely based on the trading volume, with commission rates varying between US$2.25 to US$50 per lot, based on the per-lot value and the type of product traded, as well as discounts offered to different clients. For instance, our commission rates for stock indices, such as the Dow Jones Industrial Average and the Hang Seng Index, range from US$2.25 to US$50 per lot, while our commission rates for commodities, such as gold, soy beans and crude oil, range from US$3 to US$50 per lot.
ii. We mark up the bid/offer spreads for CFD products on top of the prices offered by our clients, exchanges or third-party market makers, as the case may be. Our price mark-ups over the price offered by an exchange vary depending on the underlying product.
iii. We act as a trading principal in certain derivative transactions by taking the position opposite to our clients. In such cases, we are exposed to changes in the value of the underlying product, and the clients’ losses are our gain.
iv. We automatically roll-over currency positions each day and provide either a credit or debit for the interest rate difference between the two currencies in the pairs being held. The clients’ debits are our gains.
Our total CFD products trading volume in the year ended December 31, 2019, 2020 and 2021 was 806,111 lots, 223,018 lots and 453,687 lots, respectively, all of which were leveraged CFD products. As of December 31, 2021, we had 2,866 CFD trading clients, most of which were retail investors.
TRS Trading Business
We also officially began offering total return swap (TRS) trading services to clients in July 2020 and expect it to a main growth driver in future years. We have entered into ISDA master agreements and related supplementary agreements with two of the top five swap traders in China. The top five swap traders in aggregate account for 93.6% of China’s swap trading in terms of addition of notional principal in December 2020, according to iResearch. The top five swap traders are very selective in choosing business partners and have entered into ISDA master agreements with only a very limited number of companies.
We compiled and maintained a list of stock eligible for clients’ trading (called “Share Basket Report”). The list currently consists of the shares listed on Hong Kong Stock Exchange, shares listed on Shanghai Stock Exchange eligible for trading through northbound trading of Shanghai-Hong Kong Stock Connect and shares listed on Shen Zhen Stock Exchange eligible for trading through northbound trading of Shenzhen-Hong Kong Stock Connect as provided by the Hong Kong Exchanges and Clearing Limited from time to time (collectively “Stock Connect A Shares”). We selected certain eligible stock to include in the Share Basket Report based on certain criteria, such as market cap, daily average trading volume and financial performance etc.
When our clients placed an order for TRS trades on certain stock selected from the Share Basket Report, we placed the same order back-to-back with our TRS counterparties for execution. The clients are entitled for all the gains or losses and dividends arising from the underlying stock. We did not generate gains or losses from the clients’ trading positions. On the other hand, when the clients placed a trade order and made margin deposits with us, we provided them with leverage by borrowing funds from our counterparties. We charged our clients a higher interest rate and generated revenue from the interest spread.
We serve as a broker in clients’ TRS trades and the trades are executed over the counter. We recognized the receivables arising from the TRS trading service in an amount generally equal to the market value of the shares in the line item of “Receivables from broker-dealers and clearing organizations”. On the liabilities side, net loans borrowed from TRS counterparties are included in the line item of “payables to broker-dealers and clearing organizations”, and clients’ margin deposits and holding gains and losses on the underlying stock are included in the line item of “Payable to customers”.
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The total rate of return of a portfolio of the underlying assets on which a swap is based may exhibit substantial volatility and may be positive or negative in any given period. In the event that the total rate of return is negative and Lion is receiving the total rate of return of that portfolio of underlying assets in its part of a swap agreement, we would be required to make a payment to our counterparty in addition to that required on the other part of the swap agreement. We closely monitor the market value fluctuation of the underlying shares in our clients’ trades and set our market risk limit in accordance with our risk management policies, and require additional margin from our clients when the risk is above our market risk limit.
Below is a diagram illustrating the Company’s TRS trading business.
Our TRS trading volume was $1,074 million in 2021. As of December 31, 2021, we had 180 TRS trading clients, all of which were retail investors.
Futures Brokerage Services
We began our futures brokerage services in March 2017. Our trading platform allows users to trade approximately 100 futures products on major futures exchanges worldwide (excluding the PRC), including the CME, SGX, HKFE and Eurex. We cooperate with G. H. Financials (Hong Kong) Limited and INTL FCStone Limited, which are major service providers for global clearing solutions for exchange traded futures and options contracts, to execute and settle futures transactions. We charge commission fees to clients for trades made using our trading platform based on the number of contracts executed. Our commission rate is US$1.20 – 40.00 per contract depending on the types of futures products, subject to various discounts that we offer. Our total number of executed futures contracts was 911,693 lots, 738,444 lots and 1,124,805 lots in 2019, 2020 and 2021, respectively. Our futures brokerage service is primarily used by Chinese clients in Greater China and Southeast Asia, although it is available for users all over the world. As of December 31, 2020, we had 140 futures trading accounts opened with our Hong Kong subsidiary Lion Futures Limited, most of which were retail investors.
Securities Brokerage Services
We began our securities brokerage services in November 2017. Our trading platform allows users to trade stocks listed on the NYSE, Nasdaq and the HKSE, as well as PRC stocks listed on the SSE and SZSE that are eligible for Stock Connect. We charge commission fees to clients for trades made using our trading platform based on the transaction amount, subject to a minimum charge per transaction. To better serve the individual needs of our clients, we vary the commissions we charge based on the types of products or services, eligibility for discounts and other factors.
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The table below summarizes the current pricing of our securities brokerage services for securities traded on different stock exchanges.
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Stock Exchanges on Which |
Our Pricing Terms |
Other Fees and Expenses |
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|
Nasdaq and NYSE-Traded Stocks |
Commissions: 0.2% of the transaction amount, subject to a minimum charge of US$20 per transaction |
Applicable regulatory fees charged by SEC and transaction fees charged by other third-parties |
||
|
HKEX-Traded Stocks |
Commissions: 0.25% of the transaction amount, subject to a minimum charge of HK$100 (US$12.8) per transaction |
Applicable transaction fees charged by HKEX, HKSFC, Computershare and stamp duty charged by the Hong Kong government |
||
|
Shanghai-Hong Kong Stock Connect Stocks |
Commissions: 0.01% of the transaction amount, subject to a minimum charge of RMB5 (US$0.7) per transaction |
Applicable transaction fees charged by SSE, CSRC, Hong Kong and PRC clearing agencies, and stamp tax charged by the PRC government |
||
|
Shenzhen-Hong Kong Stock Connect Stocks |
Commission: 0.01% of the transaction amount, subject to a minimum charge of RMB5 (US$0.7) per transaction |
Applicable transaction fees charged by SZSE, CRSC, Hong Kong and PRC clearing agencies, and stamp tax charged by the PRC government |
Our securities brokerage service is primarily used by Chinese clients in Greater China and Southeast Asia, although it is available for users all over the world. As of December 31, 2021, there were 96 securities trading accounts opened on our platform, most of which were retail investors.
Insurance Brokerage Services
We also engage in insurance brokerage services mainly for high-net-worth Chinese individuals purchasing insurance policies in Hong Kong. We focus on critical illness insurance and life insurance products, while also offering various other insurance products such as health insurance, savings insurance, annuity and mandatory provident fund pension scheme. Our insurance company partners include renowned multinational insurance companies such as Prudential, AIA, Manulife, MassMutual, BOC Life and AXA. Our clients, who largely rely on offline channels, are now also able to compare various insurance products through our all-in-one Lion Brokers Pro app that launched in April 2020 and sign the insurance policies during face-to-face meetings with our insurance agents located in Hong Kong.
We receive commissions from the insurance companies based on a percentage of the premium paid by insurance purchasers. We source some of our clients from referral agents located in major Chinese cities and we pay them referral fees that are usually a negotiated percentage of the insurance premium.
Our total number of newly-executed insurance policies was 269, 2, and 15 in 2019, 2020, and 2021 and our total number of renewed policies was 2,607, 2,623, 2,357, respectively. We generated commission income of US$2.6 million, US$1.0 million, and US$0.5 in the same periods, respectively. Our insurance commission income has decreased over the past few years largely due to a significant decrease in PRC residents purchasing insurance policies in Hong Kong. This is caused by more stringent enforcement of foreign exchange controls in China, such as more cumbersome procedures for PRC residents to convert Renminbi into U.S. dollars or Hong Kong dollars to pay insurance premiums in Hong Kong and the imposition of daily limits on electronic payments, as well as the unstable political environment in Hong Kong in 2019 and travel restrictions imposed due to COVID-19 since 2020, which discouraged PRC residents from purchasing insurance in Hong Kong.
Asset Management Services
We provide asset management and investment advisory services for our clients. Based on our clients’ different needs, we provide personalized investment strategies to optimize their asset allocations. Our clients can purchase a wide variety of investment portfolios, which include assets such as stocks, bonds, ETFs, investment funds and derivatives. We charge management fees based on their assets under management as well as commissions for certain transactions.
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NFT Business
In January 2022, we launched our NFT business through Flying Lion Limited, including (i) issuance of MetaWords character NFTs and MetaWords work NFTs (collectively, the “MetaWords NFTs”), and (ii) the establishment of our NFT trading platform, namely the Lion NFT platform (f/k/a/ Meta World). We created and minted the MetaWords NFTs by converting Xu Bing’s characters in his artwork Book from the Ground and sold MetaWords NFTs to the NFT collectors. MetaWords characters serve as the basic units of the MetaWords language system. MetaWords works are excerpts drawn from Mr. Xu’s artwork Book from the Ground. The sales were conducted through an online auction and blind boxes direct sell on the Lion NFT platform in January 2022. We sold in an aggregate of six MetaWords NFTs created by us by the auction in the amount of 197 wrapped BNB, and 2,742 blind-boxes which includes MetaWords NFTs at 0.40 BNB per unit for a total amount of 749 BNB, net of the consideration paid to customers of 348 BNB in form of incentive credits. Total sales of character NFTs and blind boxes were approximately $438,000 USD at the spot token price upon the completion of the sale. The profits generated from the Lion NFT platform will be retained by Flying Lion Limited, a Cayman Islands company, one of our subsidiaries, as working capital. We conduct our NFT business through Flying Lion Limited. We hold 70% equity interest in Flying Lion Limited through Lion NFT Limited, a British Virgin Islands company, in which we hold 90% equity interest.
The users can resell the MetaWords NFTs to other users on the Lion NFT platform, or MetaWords Resale. For the MetaWords Resale conducted on the Lion NFT platform, we charge 5% of the purchase price as the authorization fee for Xu Bing’s artwork; 5% of the purchase price as the licensing fee for the author; and 2.5% of the purchase price as the transaction fee. Lion is the author for MetaWords NFTs. The commissions are collected in the form of BNB tokens when the users buy and sell MetaWords NFTs on the Lion NFT platform. As of March 31, 2022, the fees abovementioned we are entitled to such MetaWords Resale were de minimis. In addition, we also launched a MetaWords NFT creation tool, giving users the ability to create their own MetaWords character NFTs. Once approved by the Lion NFT platform, the MetaWords character NFT created by our users can be traded on the Lion NFT platform. We will charge 2.5% of the purchase price as the transaction fee and 5% of the purchase price as the authorization fee for Xu Bing’s artwork. The author of the MetaWords NFTs will be able to receive 5% of the purchase price as the licensing fee for future resale.
Pursuant to an industry report of iResearch, by February 21, 2022, the business volume of NFT has accumulated to USD25.15 billion. Axie Infinity ranks the first with total sales volume of USD4 billion, which composes 15.9% of NFT sales volume. It is followed by CryptoPunks, Bored Ape Yacht Club, Art blocks and NBA Top Shot. Top 5 collections capture nearly 50% market share.
SPAC Sponsorship
In March 2021, we commenced the sponsorship of two SPAC companies, in cooperation with other parties. As of March 31, 2022 the SPAC companies are in the process of IPOs. We intend to build a professional SPAC sponsorship team, evolve and develop SPAC sponsorship into a key business segment with plans to sponsor at least one more SPAC by the end of 2022. We expect to derive gain from the appreciation of founder shares upon each SPAC’s initial public offering, and derive gains or losses from the further appreciation or depreciation of founder shares following each SPAC’s merger transaction, at the cost of sponsor’s risk investment.
Cryptocurrency Mining
We commenced Bitcoin mining operations in China in late May 2021 and have temporarily ceased our Bitcoin mining operations at the end of October 2021. We may resume our Bitcoin mining activities in the future. We operated a fleet of 5,000 Bitmain’s model S9 Hydro Antminers, with a theoretical maximum total hash rate capacity of 90 PH/s (petahash) deployed as of today. For the six months ended June 30, 2021, we recognized revenue of US$0.2 million from cryptocurrency mining business. Subsequently we have been and will continue to actively seek for low-cost electricity and sustainable energy mining facilities in different regions worldwide. We closely monitor our Bitcoin mining operation on a daily basis. All the mined Bitcoins have been distributed by Antpool to our cold wallets. We stored the mined Bitcoins in hardware wallets (or known as cold wallets), which were safeguarded in the safety boxes in our office. The keys and passwords of the safety boxes are separately held by our different staffs. We held the mined Bitcoins and converted into USDT when it is commercially justified.
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In the context of the China’s continuous and greater efforts on energy conservation and emission reduction, the large amount of electricity required for mining is becoming increasingly inaccessible. Lately in September 2021, China’s National Development and Reform Commission, People’s Bank of China and several other ministerial departments jointly issued administrative notices on restricting the development of mining activities and preventing the derived financial risks related to cryptocurrency trading hype. The administrative measures included in the notices are aimed at restraining the supply of electricity to the mining business, and ultimately prompting existing mining facilities to gradually withdraw from the mining business. We voluntarily ceased our Bitcoin mining operations at the end of October 2021, in response to the hiked electricity cost as well as to the change of the regulatory environment in the PRC. We did not receive any penalty or notice from the PRC governments as a result of the recent development of the PRC crackdown on cryptocurrency mining activities. Currently, we are actively seeking low-cost electricity and sustainable energy mining facilities in different regions around the world (outside China) with a stable regulatory environment to conduct cryptocurrency mining activities. Once we locate a region that our management believes that it will meet our criterion, we will move our bitcoin mining units and resume bitcoin mining activities there.
Pursuant to an industry report of iResearch, from the summer of 2021, the U.S. is the number one consumer of Bitcoin energy, making up over a third at 35% with China’s share crashing to 0%. As a result of China’s recent crackdown on bitcoin mining, Canada is the second largest producer of hydroelectricity in the world. Hydroelectricity accounts for 59.3 per cent of the country’s electricity supply.
Our Technology
We strive to provide our users with a user-friendly interface, a smooth transaction experience and reliable functionalities. Over the past few years, we outsourced our research and development to a dedicated information technology team in Hangzhou, China, which has made great efforts in building an integrated trading platform and enhancing user experience. We provide our services through this integrated Internet platform, which is accessible by mobile apps and desktop apps. The mobile apps are easy to use and preferred by most users, while the desktop apps are designed for professional investors who prefer working on a larger interface.
User Interface
Mobile Apps
As of December 31, 2020, we had five mobile apps, including “Lion Brokers”, “MetaTrader”, “Lion International Transactions App 狮子国际交易宝” and “易星 Estar”, that allowed our users with different preferences to trade stocks, futures and CFDs in an efficient, secure, reliable and user-friendly manner. The table below sets forth our various apps and their respective products or service offerings and operating entities.
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Mobile App/Tool |
Products/Services |
Operating Entity |
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|
“Lion Broker Elite” |
TRS (Total Return Swap) Trading |
Lion Brokers Limited |
||
|
“Lion Brokers” |
CFD (Futures and Derivatives) and Securities |
Lion Brokers Limited |
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|
“MetaTrader” |
CFD (Foreign Exchange) |
|||
|
“Lion International Transactions App 狮子国际交易宝” |
Securities |
Lion International Securities Group Limited |
||
|
“易星Estar” |
Futures |
Lion Futures Limited |
We have recently consolidated “Lion Brokers” and “MetaTrader” into an all-in-one Lion Brokers Pro app, which launched in April 2020, and allow users to remotely open accounts with our Cayman Islands licensed subsidiary and trade all of the products that are carried by our Hong Kong and Cayman licensed subsidiaries. The original mobile apps “Lion Brokers” and “MetaTrader” will gradually be phased out once most users transition to the new Lion Brokers Pro app, which is still being improved. The mobile apps “狮子国际交易宝” and “易星Estar” will remain available for users who wish to maintain their securities and futures brokerage trading accounts in Hong Kong.
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The modern and integrated interface of our all-in-one Lion Brokers Pro app will provide a straightforward and inviting user experience, that we believe will differentiate us from many other trading platforms whose interfaces are often cumbersome and disjointed. The user interface of our all-in-one Lion Brokers Pro app contains five major tabs: home, quotes, watchlists, trading and me.
Home. The home tab (which is demonstrated in the graphic above) contains quick access to different products such as securities, futures, derivatives, funds and insurance, as well as popular functions such as account opening, fund deposit and rewards shopping mall. This tab also contains aggregated investment-related news feeds and educational sources for the users that are from our media partners, contributing authors and in-house editors.
Quotes. The quotes tab streams the current market information for various investment products, such as real-time prices and trading volume for stocks and futures, contract terms and deposit requirements for futures, bid and ask prices for currency derivatives, and net value of funds.
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Watchlists. The watchlists tab contains real-time prices, historical prices, company profiles, business news and third-party analysis for the particular investment products that the users select.
Trading. The trading tab enables our clients to place orders fast and conveniently. Our clients can place several types of orders, such as conditional order, limited price order, market order, and follow bid/ask order. We also allow our clients to trade NYSE and NASDAQ-listed securities during pre-market and post-market hours.
Me. The me tab allows users to review and revise their personal information, manage their funds, access the account statements and communicate with client representatives.
Desktop Apps
We offer corresponding Windows versions of our mobile apps and are developing Mac-OS versions of these apps. These desktop apps allow professional users to view market information and trade stocks, futures and CFDs on larger screens.
Back End System
Our mobile apps and desktop apps all interact with our back end system, which is an integrated infrastructure supporting a wide variety of functions, including account opening and management, market updates, order routing, securities trading and risk management. Our back end system contains multiple servers designated for different usages, such as stock quotes, order placing and risk alerts. These servers are also connected with public and private cloud services such as Alibaba Cloud and Azure, as well as with external databases such as those of major stock exchanges. Our back-end system, which employs big data, high-speed instant cache and distributed ledger technologies, features the following advantages.
• Extreme Speed Trading. We limit the system delay time of the trading process (from the receipt of order from the client to submission of the order) to within 10 milliseconds. Our system retrieves real-time data from external databases, including major stock exchanges, in a matter of milliseconds. This reduces end-to-end latency and provides our clients with a smooth and reliable transaction experience, and also gives our market making business a significant advantage over many of our competitors.
• High Concurrency. We are able to support millions of simultaneous online users and can process more than 10,000 transactions per second. With a modular architecture, our platform can easily expand as data storage requirements and client visits increase.
• Consistent Availability. We support 24-7 trading through our micro service infrastructure and distributed cluster deployment (virtually or geographically separated system).
• High Sensitivity. We monitor risks on a real time basis and respond to issues with client accounts promptly. We can stop trading gains or losses within seconds.
• High Security. We have designed our data security system in accordance with PRC National Information System Protection Standards. Our system can discover major security loopholes, resist sophisticated malicious attacks and protect against natural disasters, and it can also recover most functionalities after damage. We employ a distributed infrastructure as the foundation of our trading system, which includes a number of isolated servers with intensive security protocols. We maintain an advanced cyber security system to monitor and manage the traffic to our platform on a real-time basis. Our system is designed to automatically detect suspicious activities and automatically send an alert to our IT team. Our system also features strong encryption and two-factor authentication, in addition to disaster recovery and business continuity plans.
Our Blockchain Technology
Our Lion NFT Platform is a decentralized marketplace for trading and exchange of NFTs, including the MetaWords. The NFT smart contracts are deployed on Binance Smart Chain (“BSC”), which is compatible with Ethereum. The smart contracts are based on the ERC721 and ERC1155 protocol, which contains the functions of selling and auction and adds the fee collection model. The Lion NFT Platform is connected with our KYC system, which allow us to verify the identity of the users before they trade in Lion NFT Platform.
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Risk Management
Our business activities expose us to various risks, including regulatory environment risk, commercial risk, business model risk and operational risk. Risk management is critical to our business operations. We have put in place procedures and controls to identify, measure and manage each of these risks. We have established a risk management team, comprised of five members, which meets at least once every month to review our risk management status.
Regulatory Environment Risk
We operate in highly regulated industries across multiple jurisdictions. Regulatory environment risk is the risk that the regulatory environment in any of the jurisdictions in which we operate will change in a way that is materially detrimental to our business. We (in particular, Lion Brokers Limited) are regulated by the Cayman Islands Monetary Authorities (CIMA) in the Cayman Islands, the Hong Kong Securities and Futures Commission (HKSFC), the Hong Kong Insurance Authority and Hong Kong Customs and Excise Department in Hong Kong. See “— Compliance.”
Change of Regulations
The regulatory environment is constantly evolving, and different regulators may introduce new regulations or modify existing requirements. For instance, CIMA is contemplating to impose additional restrictions on market making activities and as a result, we may need to change our transactional procedures to comply with the new requirements. It is also possible that regulators will increase the capital and liquidity requirements or roll out other financial ratio requirements. The changing regulatory environment may subject us to heavier financial burden and cause adverse effects on our results of operations. We strive to maintain close relationships with regulators and actively seek conversation with them in an effort to keep abreast of impending regulatory developments.
Change of Tax Treatment
The evolving tax regimes in the various jurisdictions where we operate may change the basis on which we are taxed. We also face the risk of additional taxes, such as the financial transaction tax, which if imposed could severely impact the economics of trading. We may need to re-examine the various types of trades of our clients in order to cope with the tax-related risks.
Commercial Risk
We define commercial risk as the risk that our performance is affected by commercial factors, such as business strategies, market conditions, competition and supplier restrictions.
Business Strategy Risk
We face the risk of failure to formulate or implement an appropriate business strategy. Our board is responsible for formulating our global business strategies, while our senior management is responsible for implementing such strategies. Our board evaluates macro-economic conditions in key jurisdictions, such as the United States, the PRC, the Cayman Islands, Hong Kong and Singapore and formulates strategic plans accordingly. Our senior management initiates strategic movement and convenes regularly to discuss the ongoing implementation of such strategies. For instance, considering the recent turmoil in Hong Kong, we established a branch in Singapore in July 2019 as a back-up office. We carefully review the performance of each of our business lines and decide which segment or area we will continue to invest in. We also engage external consultants with proper expertise to assist with our strategic planning and market research.
Market Condition Risk
Our futures, securities and CFD products trading clients may be sensitive to adverse market conditions. Our ability to attract new clients and the willingness of our clients to trade partially depend on the level of trading opportunities that our clients perceive to be available to them in the markets. Our revenue stream could therefore be affected by market conditions.
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We constantly monitor market conditions and our clients’ sensitivity towards the changing market conditions through a detailed review of daily revenue analysis reports, monthly financial information and other key performance indicators. When market conditions become adverse, our risk management team may call a meeting to discuss our strategies as necessary. We mitigate the market condition risk by regularly forecasting market developments and managing our financial performance.
Competition Risk
We mainly operate in the online futures and securities brokerage market and CFD trading market for global Chinese investors, which are both highly competitive and rapidly evolving. See “— Competition.” We may lose our clients if there are new or existing competitors offering more attractive products, services or pricing. We pay close attention to our competitors’ activities and performance and ensure that our product offerings and pricing remain attractive to the clients.
Supplier Restriction Risk
Our business operations depend on a variety of services from third parties including banks, brokers, stock exchanges, information technology service providers and electronic payment service providers. For instance, in providing certain of our CFD trading services, we rely heavily on a small number of established third-party market makers. If any third party that we rely on ceases its cooperation with us, we may be unable to execute certain trades and our results of operations will be materially and adversely affected. We regularly interact with our suppliers and strive to maintain cooperative relationships with them. We also periodically review engagements with major suppliers to make sure the terms are satisfactory to both sides.
Business Model Risk
We define business model risk as the risk arising from the nature of our business and the way we conduct business. Our business model risk includes market risk, credit risk, liquidity risk and capital adequacy risk.
Market Risk
When we facilitate instant execution of client trades, we may be subject to market risk if the trade of one client cannot be naturally offset by the trade of another client, in which case we may act as a principal in trading with the client and take a position. We constantly monitor our exposure to the market against our pre-determined market risk limit. When our exposure exceeds the limit, we hedge our position to bring our exposure back to the limit. The market risk limit represents the maximum (long or short) net exposure we will hold without any hedging. In accordance with the methodology in our risk management policy, we set our market risk limit based on our risk appetite with reference to the expected liquidity and volatility of the underlying financial products, aiming to achieve an optimal balance among facilitating client’s trades, controlling our cost of hedging and maximizing our daily revenue.
We may also be subject to residual market risk caused by market gaps, which may occur when a product price changes suddenly in a single large movement, often at the opening of a trading day, rather than in small incremental steps. In this situation, we may have difficulty adjusting our hedging in a timely manner and thereby incur a potential loss. We conduct regular scenario-based stress tests that analyze the impact of potential market gap events and take preventive actions to mitigate the impact caused by residual market risk.
Credit Risk
We have a credit risk management system in place to evaluate our credit risk. We regularly review our credit policies and set appropriate credit limits for our clients. In determining the credit limit of a particular client, we consider its investment pattern, the history of its daily closing positions, the types of products it has previously invested in and the security it has placed with us. We only allow a client to place purchase orders within its trading limit using cash deposited in its designated account with us. We require the client selling shares to provide necessary documents evidencing that the shares are deposited with a securities clearing and settlement system of a recognized securities exchange.
We set pre-trade quantity limits and price collars on individual orders. Our system will detect and reject orders that exceed the specified quantity limits or fall outside of the current acceptable price range. We also impose intra-day net long or short position limits on our clients to prevent their accumulated positions from exceeding the clearing company’s financially comfortable levels, as well as to halt potentially errant algorithms.
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We also measure the pre-settlement credit exposure and the settlement risk of all our clients to manage our overall credit exposure. We take into account the number of clients with open positions, the products for which clients have open positions, the concentration of open positions on any given securities and other relevant factual circumstances. Whenever our overall pre-settlement credit exposure is unusually high on any given day, we investigate the causes and may reduce the limit on each client in order to control our overall credit exposure.
We have forced liquidation policies for our clients. For futures trading, we force clients to liquidate when their equity to occupied margin ratio falls below 80%; for CFD trading, we force clients to liquidate when their net worth to occupied margin ratio falls below 50%.
Liquidity Risk
We closely monitor our liquidity position. Our account department prepares a daily cash position summary and our directors and senior management review this summary to ensure that there are no cash flow mis-matches. We may arrange for credit facilities when necessary.
Capital Adequacy Risk
We operate in highly regulated industries across multiple jurisdictions including the Cayman Islands and Hong Kong. We are required to hold sufficient regulatory capital at both group and individual entity level to cover our risk exposures, among other financial obligations imposed by regulatory authorities. We are required to at all times hold sufficient capital to meet regulatory requirements in all relevant jurisdictions. We assess our capital requirements through financial projections and stress tests frequently. We also check internal warning indicators and timely escalate potential capital inadequacy to our senior management for prompt preventive or remedial action.
Operational Risk
We define operational risk as the risk of loss resulted from operational matters, such as failure of technology systems, fraud, and human error. We regularly review our operations to ensure that our operational risk is properly managed.
Technology Risk
Our electronic trading system applies various pre-order checks, such as a “fat finger” check that examines the notional value, per order quantity and price validation. Our system also checks order frequency, max net position on each instrument and max number of open orders per instrument, and automatically rejects orders if our preset limits are exceeded.
We have set up and implemented contingency plans to ensure business continuity during interruptive events. In case our main trading system is down, the control can be switched to the backup system almost instantaneously to continue trading and position monitoring. All of our electronic databases are backed up and kept in a virus-free environment.
People Risk
People risk is the risk of loss caused by employees, whether intentionally or negligently, such as employee fraud, error or omission, or involving employees, such as labor disputes, health and safety issues, and human resource practices. We strive to create an employee-friendly working environment to retain talents and impose procedural controls to prevent the violation of work ethics.
Our Clients and Users
Our Trading Platform
Our clients are mostly well-educated and affluent Chinese investors living in or outside the PRC. These individuals are usually sophisticated investors with relatively high risk tolerance. We also had one active institutional client in Hong Kong that use our futures trading service as of December 31, 2021.
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We have experienced significant growth in the number of clients in the past few years. Our total revenue-generating client accounts increased from 1,722 as of December 31, 2017 to 5,261 as of December 31, 2021. As of December 31, 2021, we had 5,261 active revenue-generating accounts in total, including 149 accounts for futures trading, 96 accounts for securities trading, 2,866 accounts for CFD trading, 180 accounts for TRS trading and 1,970 accounts for insurance products.
Our Lion NFT Platform
As of March 31, 2022, the Lion NFT platform has 198 verified users.
Marketing
To attract clients, we conduct marketing mainly through search engines, social media, app stores and third-party websites. These various online resources detect potential clients and display our logo, name, hyperlink to our website and QR code for our apps. For these services, we contract with advertisement placement agencies and pay them on a monthly or quarterly basis. We may also use traditional marketing channels, such as participating industry exhibits organized by industry associations or media in large Chinese population centers including Shanghai, Shenzhen and Taipei.
Client Services
Our client service team strives to respond to our clients’ inquiries promptly in accordance with our procedures. If any of our staff member receives a complaint, whether oral or in writing, from the client or other third parties, the staff member must immediately notify our compliance with details of the complaint. When possible, our compliance officer will respond to the complainant on the same day as the complaint is made, and then explore with staff members the validity of and reasons for the complaint. In each case, we will respond to the complaint with a clear explanation and take all appropriate steps to remedy the situation.
Intellectual Property
We rely on a combination of trademarks, software copyrights and trade secrets, as well as confidentiality procedures and contractual provisions with our employees and others, to protect our intellectual properties. As of December 31, 2021, we had obtained one trademark in Singapore and one in Hong Kong, and acquired 11 copyrights related to our trading software programs Our intellectual properties are essential for us to establish our brand recognition, enhance our reputation and distinguish our services from the competitors in the market. As our brand name becomes increasingly recognized among the general public, we will further enhance the protection of our intellectual properties.
Competition
Our Trading Platform
We mainly operate in the online CFD trading market and the futures and securities brokerage market and for global Chinese investors, which are both highly competitive and rapidly evolving. Our primary competitors are CMC Markets, IG, Forex.com and Interactive Broker in the CFD trading market, and Tiger Securities and Futu Holdings Ltd in the online futures and securities brokerage market for global Chinese investors. Although some of our competitors may have greater financial resources or a larger client base than we do, we believe that our full service licenses, strong brand name, diverse service offerings, efficient trade execution, smooth capital flows and advanced technology infrastructure together make us one of the top performers in this market.
Our Lion NFT Platform
We created and minted the MetaWords NFTs by converting Xu Bing’s characters in his artwork Book from the Ground and sold MetaWords NFTs to the NFT collectors. The deployment at BSC charges a lower gas fee for our users when compared to other NFT projects deployed at Ethereum.
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Employees
We had a total of 38 employees in Hong Kong and Singapore as of December 31, 2021. We enter into individual employment contracts with selected employees to cover matters including non-competition and confidentiality arrangements. Our employees’ remuneration packages generally include salary, bonus and social security benefits in accordance with all applicable laws and regulations.
Facilities
Our headquarters are located in Singapore, where we leased one principal executive office. We also have offices in Hong Kong and the Cayman Islands. All of our offices are leased from independent third parties. As of December 31, 2021, our leased office space was 13,991 square feet in aggregate, including 12,780 square feet in Hong Kong, 1,175 square feet in Singapore and 36 square feet in the Cayman Islands. We believe that we will be able to obtain adequate facilities, principally through leasing, to accommodate our future expansion plans.
Seasonality
While seasonal fluctuations are not likely to affect our business in the future, historically, we have experienced fluctuations based on trading volume of our key clients, see “Risk Factor — We derived a substantial portion of revenue from a small number of key clients.” Our revenue also depend substantially on our client’s trading volume, which are influenced by the general trading activities of the market, see “Risk Factor — Our business is sensitive to general economic and political conditions and other factors beyond our control, and our results of operation are prone to significant and unpredictable fluctuations.”
Insurance
We maintain business interruption insurance for equipment and data processing devices, professional indemnity insurance and directors’ and officers’ liability insurance. We also maintain proper insurances required by the Securities Investment Business Act (SIBA) of the Cayman Islands and the regulations promulgated under the SIBA. Our directors consider that the insurance policies we carry are adequate for our business operations and in line with customary industry practice.
Licenses
We must obtain various licenses to conduct our business. The table below sets forth the licenses we possess in the Cayman Islands and Hong Kong.
|
Jurisdiction |
License Type |
Entity Name |
||
|
Cayman Islands |
CIMA Full Securities Investment Business License(1) (as relevant to broker dealer and market maker) |
Lion Brokers Limited |
||
|
Singapore |
Capital Markets Services (CMS) License |
Lion International Financial (Singapore) Pte. Ltd. |
||
|
Hong Kong |
HKSFC Type 1 License for Dealing in Securities |
Lion International Securities Group Limited |
||
|
HKSFC Type 2 License for Dealing in Futures Contracts |
Lion Futures Limited |
|||
|
HKSFC Type 4 License for Advising on Securities |
Lion International Securities Group Limited and Lion Asset Management Limited |
|||
|
HKSFC Type 5 License for Advising on Futures Contracts |
Lion Futures Limited |
|||
|
HKSFC Type 9 License for Asset Management |
Lion Asset Management Limited |
|||
|
Hong Kong Insurance Broker License by the Professional Insurance Brokers Association |
BC Wealth Management Limited |
____________
(1) Only includes regulatory permissions to act as a “broker dealer” and “market maker”.
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Compliance
We operate in highly-regulated industries and must comply with all applicable regulatory requirements in the jurisdictions in which we operate. We (in particular Lion Brokers Limited) are regulated by the CIMA in the Cayman Islands, the HKSFC, the Hong Kong Insurance Authority and Hong Kong Customs and Excise Department in Hong Kong. We (in particular Lion Brokers Limited) must submit annual audit reports to the CIMA and HKSFC and are subject to their periodic inspections. There has been no material non-compliance issue identified in any of the regulatory inspections that has not been appropriately rectified. We have not been subject to any administrative penalty or fine that, individually or in the aggregate, would be reasonable expected to have a material adverse effect on our results of operations or financial condition.
While our directors are ultimately responsible for supervising our compliance, our compliance officer is responsible for continually monitoring our compliance status and implementing compliance policies. We maintain a compliance manual, which contains detailed procedures for corporate government, know-your-client (KYC), trade execution, records keeping, anti-money laundering (AML), and risk management, among others. We provide training to our employees and require them to strictly adhere to our compliance manual. We have also adopted specific compliance measures for KYC, asset protection, insurance, and back office and accounting.
KYC
We employ various measures to ascertain the identity and understand the background of each of our prospective clients before establishing business relationships with them. These measures include, among others, checking potential clients, passports or identity cards, maintaining a robust file management system in which client files are retained and corresponding reference numbers and relevant details are recorded to the extent practicable, interviewing prospective clients personally as appropriate and needed and verifying the identities of the directors or partners of our prospective institutional clients. To reduce the risk of being subject to complex U.S. laws and regulations, we do not allow U.S. citizens or residents to open an account with us. We have two separate teams conduct our KYC procedure on new clients’ backgrounds and identify manually and will reject all account applications if there is any U.S. exposure. However, our KYC procedures may not be able to effectively identify all U.S. citizens and residents at all time. See “Risk Factors — Risks Related to Our Business and Industry — We face risks related to our know-your-customer, or KYC procedures when our clients provide outdated, inaccurate, false or misleading information.” In addition, anonymous accounts are generally not allowed to be opened, heightened scrutiny measures are imposed on accounts opened on behalf of third parties and additional verification measures are conducted before we accept third party payments against the accounts of our clients. Besides that, we have explicitly excluded the U.S. market and the U.S. residents from our scope of business and services at the application of CIMA Full Securities Investment Business License with the CIMA. We shall reapply the CIMA Full Securities Investment Business License with the CIMA provided that we have any change in our business scope.
We also use the GRADA Platform to facilitate our AML compliance process. The GRADA Platform was developed by Global Risk and Data Authority Ltd. and is a simple online solution for financial service providers to address complex issues relating to AML and other global compliance and regulatory initiatives. The GRADA platform integrates with third party confirmation service providers to crosscheck and ensure the authenticity of the documentation provided, and we ask our clients to upload their information and relevant materials onto the GRADA platform for verification and validation. The GRADA Platform will then assess the risk level of the prospective clients opening an account with us and sort them into high-risk, medium-risk or low-risk clients based on the information in their database. The applications from prospective clients in the low-risk or medium-risk categories will be approved automatically, while additional procedures, including human intervention, will be carried out before applications from prospective clients in the high-risk category can be approved.
Asset Protection
We have comprehensive procedures in place to properly safeguard our clients’ assets that are in our possession. For example, we arrange for a custodian to manage our clients’ assets in segregated accounts, and strict guidelines are required to be followed every time a client’s money flows into or out of the segregated accounts. Such transactions take place in a manner that is in accordance with the authority and the specific instructions our clients give us. We will not deploy a client’s money in any way that will be deemed unconscionable, and we are prohibited from paying any client’s money to any of our officers, employees or related parties.
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Back Office and Accounting
We reconcile all account balances of our general ledger accounting system to those on the stockbroker management system, perform procedures to ensure the total amount from all pay-in slips match with the total amount deposited into the bank and clear any errors identified on a daily basis. Our senior staff members also conduct regular reconciliation of our internal records to those kept by other third parties, such as clearing houses and our counterparties, to identify and resolve any possible accounting issues.
Data Privacy
We collect certain personal data from our customers in connection with our business and operations and may be subject to data privacy laws in various jurisdictions such as the Cayman Islands, Hong Kong and the PRC. The relevant data privacy laws may require the data owner to consent to the data collection and agree to its usage. When a customer registers an account on our online portal, they are required to confirm that they have read and agreed to the terms and conditions of the portal, including the terms set out in our data privacy statement. Our data privacy statement states that the personal data being collected can be used for purposes of data analysis and supporting us to develop and to improve our products. We believe that we are in compliance with all relevant laws and regulations in all material respects with respect to data privacy.
Legal Proceedings
As the date of this prospectus, we are not a party to, and we are not aware of any threat of, any legal proceeding that, in the opinion of our management, is likely to have a material adverse effect on our business, financial condition or operations.
Regulations
We are subject to laws and regulations in the jurisdictions where we conduct our business. The following is a summary of certain rules and regulations that significantly affect our business activities.
Cayman Islands
Securities Investment Business Act (2020) of the Cayman Islands (as amended from time to time, SIBA)
Lion Brokers Limited (LBL), an exempted company incorporated under the laws of the Cayman Islands, conducts market-making and broker dealer activities in relation to securities including contracts for differences. As such activities constitute “securities investment businesses” in particular, dealing in securities under SIBA, LBL is subject to the licensing requirements under SIBA and on 23 August 2018 LBL received from the CIMA a full license to conduct broker dealer and market maker businesses. LBL must submit an annual renewal fee for the licenses (US$9,756.10 for broker-dealer and US$9,756.10 for market maker) by 15 January of each year.
A licensed company is subject to various requirements in SIBA, the regulations promulgated under SIBA and any statement of guidance issued by CIMA (or such other Cayman Islands competent authority) as relevant to financial services business and any condition that may be placed on the SIBA license at the time the entity is licensed by CIMA.
Among other things, any issue or transfer of shares or any change to the underlying beneficial owners of a licensed company must receive CIMA’s prior approval. However, CIMA may exempt from this requirement a licensed company whose shares are publicly traded on a recognized securities exchange, subject to certain conditions.
A licensee must have its accounts audited annually or at such other time as CIMA may require by an auditor approved by CIMA. Within 6 months of the end of a licensee’s financial year, the licensee must submit its audited accounts for the financial year to CIMA along with a certificate of compliance with provisions of SIBA and any regulations made under SIBA and the Monetary Authority Act (2020 Revision) of the Cayman Islands, signed by the licensee or a director of the licensee (if it is a company). A person who signs such certificate knowing or believing that such certificate is false commits an offence and is liable on summary conviction to a fine of US$6,097.56 and such person (a) may have his/her license or the license held by the company of which he/she is a director revoked; and (b) may not be granted a further license, nor be permitted to be a director of a licensed company.
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A licensed company cannot change its auditor without CIMA’s prior written approval and the licensed company shall explain the circumstances giving rise to such change prior to such approval being given.
A licensed company must have at least 2 natural directors. No change of directors or senior officers can be made without CIMA’s prior written approval. Any director or senior officer convicted in any country of an offence involving dishonesty must be removed upon conviction.
A licensed company cannot open a subsidiary, branch, agency or representative office outside the Cayman Islands or change its name without CIMA’s prior written approval. A licensed company must notify CIMA immediately of any change of its business address.
A licensed company must separately account for the funds and property of each client and its own funds and property.
Under the Securities Investment Business (Conduct of Business) Regulations, 2003 promulgated under SIBA (the Conduct Regulations), a licensed company must, among other things, comply with the following requirements.
General
Maintenance of insurance. A licensed company must at all times maintain insurance to cover professional indemnity, professional liability of senior officers and corporate secretaries and business interruption. Details of the insurance must be filed with CIMA before renewal of the license.
Disclosure of regulator. A licensed company must disclose the fact that it is regulated by CIMA in all correspondence, advertisements and other documents relating to its securities investment business.
Conduct of senior officers and employees. Each senior officer and employee of a licensed company must enter into a written undertaking to observe the relevant requirements in the Conduct Regulations relating to dealing with their own account.
Gifts. A licensed company must establish and maintain compliance procedures designed to ensure that no senior officer accepts any gift or inducement that is likely to conflict with his/her duties to any client.
Record keeping. A licensed company must maintain sufficient records in relation to advertisements, clients, senior officers and employees, the company itself and securities investment business transactions for at least 5 years from the relevant date.
Notification. A licensed company must notify CIMA immediately in writing of any matter material to CIMA’s supervision of the company including and not limited to a petition for winding up, investigation by other regulatory authorities and fraud involving a senior officer.
Advertising
The contents and format of the advertisement directed at private clients (i.e. persons who are not a licensed company’s market counterparties or professional clients) must comply with certain specific requirements as stipulated in the Conduct Regulations. A “professional client” is defined under the Conduct Regulations to include (a) a public authority; (b) a securities investment business intermediary; (c) a person regulated by CIMA or a recognized regulatory authority of another jurisdiction; (d) a person (other than individuals) with total assets of not less than US$4,878,049; (e) an unregulated mutual fund; (f) a person whose securities are listed on recognized securities exchanges; or (g) a private client classified as a professional client under the Conduct Regulations (e.g. certain high net worth individuals or sophisticated persons whom a licensee may classify as professional clients if certain conditions are met including the client’s informed consent to being so classified). A “market counterparty” means (a) a government; (b) a central bank or other national monetary authority; (c) a supranational; (d) a state investment or public debt management body; or (e) a professional client where classified as a market counterparty under the relevant provisions of the Conduct Regulations.
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Standards for Dealing with Clients
Required standards. A licensed company must act in accordance with the standards stipulated in the Conduct Regulations, including high standards of market conduct, integrity and fair dealing, due skill, care and diligence in providing any service, timely and sufficient disclosure, the duty to treat clients fairly in conflict of interests and the duty to take reasonable steps to ensure that, in relation to a private client, any investment strategy recommended to or executed for the client is suitable (except for execution-only services).
Classification of clients. The classification of an individual as a professional client and the classification of a professional client as a market counterparty is subject to certain conditions as set out in the Conduct Regulations. Classifications relating to professional client and market counterparty must be reviewed at least annually to ensure that the classifications remain appropriate.
Lending to private clients. A licensed company should not knowingly lend money to private clients unless certain conditions are met (e.g. assessment of client’s financial standing and client consent).
Client agreement. A licensed company must have a written agreement with each client, which shall include certain items stipulated in the Conduct Regulations (e.g. nature of services, fee calculation and handling of client money etc.). The agreement relating to a contingent liability investment for a private client and the agreement for discretionary portfolio management shall include additional items (e.g. minimum margin or extent of discretion, as applicable).
Contract note. After each transaction, a licensed company must send the client a contract note (unless the client has requested in writing that it should not be issued) with essential features of the transaction.
Complaints procedure. A licensed company must have an effective system to handle complaints, under which the relevant records (including a central register) are kept and all complaints are responded to within 14 days.
Access to records. During the statutory period during which a licensed company must keep records, a licensed company shall make available to any client within a reasonable period of time upon request the relevant records relating to that client which a licensed company has sent or is required to send to that client under the regulations and correspondence received from that client.
Periodic statements. If it manages a portfolio for a client, a licensed company shall provide the client with a written statement, (i) annually at the request of the client unless (iii) applies; (ii) quarterly unless (i) or (iii) applies; or (iii) monthly if the portfolio has an uncovered position in a contingent liability investment. The statement must contain adequate information on the value and composition of the portfolio as at the end of the period covered by the statement.
Client Asset and Money
Records relating to collateral. If a licensed company has exercised the right to treat collateral assets as its own, it must maintain adequate records to enable it to meet any future obligations including the return of equivalent assets to the client.
Custody of assets. Where client assets are held by a custodian, a licensed company shall ensure that the custodian’s records clearly show that the assets belong to the client. A licensed company must effect appropriate registration or recording of legal title to client assets and ensure that the arrangements for physical custody of documents of title are appropriate to the value and risk of loss of the assets.
Stock lending. A licensed company shall not engage in stock lending with or for a private client or professional client unless the activity is covered in the appropriate client agreement.
Reconciliation. A licensed company shall perform a reconciliation every five weeks or every six months with CIMA’s permission of its records of client assets which are not in its physical custody, with statements from the custodians of such assets.
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Further reconciliation. A licensed company shall, every six months, carry out a count of all client assets it physically holds and a reconciliation with its records of such holdings; and a reconciliation between its records of holdings of client assets and the records of the location of such holdings. The reconciliation shall be performed by the total count method or another method approved by CIMA.
Correction of discrepancies. A licensed company shall promptly correct any discrepancies revealed by reconciliations or provide unreconciled shortfall for which there are reasonable grounds for including that the licensed company is responsible.
Client statements. A licensed company shall as often as necessary or on at least one date during its financial year and not less than 6 months after the previous statement date, provide all active clients within 5 weeks of the date as at which the statement is made with a statement listing all clients assets for which a licensed company is responsible. Such statement shall identify separately assets registered in the client’s name; identify separately client assets being used as collateral; show the market value of the collateral as at that date; and in respect of a private client, base the statement on either the trade date or the settlement date and notify the client which basis has been used. The statement should include client money unless a licensed company provides this information in a separate statement within 1 month.
Client bank accounts. A licensed company, upon receipt of client money, shall either pay it into a client bank account as soon as possible and in any event no later than the next business day or pay it out properly. A licensed company shall take reasonable steps to confirm that the banks used for client bank accounts remain appropriate no less than once a year.
Holding client money with group company. If a licensed company holds client money with a bank that is a group company, it shall disclose such fact and the name of the bank to the client. If the client does not want this arrangement, a licensed company must either deposit the client money with another bank or return the money to the client.
Transfer client money to a securities investment business intermediary. This is allowed for the purpose of a transaction through that intermediary or meeting a collateral obligation, provided that in the case of a private client a licensed company must notify the client.
Confirmation from banks. A licensed company shall ensure that the approved bank at which client money is held confirms in the custody agreement or otherwise in writing that such money is held by a licensed company as trustee and that the bank shall not combine any money in such account with any other account of the licensed company or exercise any lien or similar right against a client bank account in respect of any debt owed by the licensed company.
Reconciliation of client money balances. A licensed company shall at least once every 5 weeks perform reconciliation on (i) the balance on each client bank account recorded by the licensed company with the balance on that account recorded by the relevant bank; (ii) the balance, currency by currency, on each client transaction account with intermediaries recorded by the licensed company with the balance as recorded by the relevant intermediaries; and (iii) its records of collateral received from clients within 10 business days of the date to which the reconciliation relates. The licensed company shall correct any discrepancy and cover any shortfall.
Under the Securities Investment Business (Financial Requirements and Standards) Regulations, 2003 promulgated under SIBA (the Financial Regulations), a licensed company must, among other things, comply with the following requirements.
Adequate financial resources. A licensed company must maintain adequate financial resources to meet its securities investment business commitments and to withstand the risks to which its business is subject.
Reporting currency. A licensed company’s reporting currency shall be CI$ or US$ unless otherwise approved by CIMA.
Accounting records, internal systems and controls, risk management. A licensed company must maintain adequate and current accounting records and maintain internal systems and controls and risk management processes that are adequate for the size, nature and complexity of its activities. The company must also maintain accounting records which provide accounting information for any period during the 5 years immediately preceding the date on which it was first granted the licences.
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Reconciliations. A licensed company shall perform reconciliations (i) every 5 weeks on all balances with banks or building societies; (ii) every 5 weeks on all balances and positions with intermediaries; and (iii) once every business day on its own margin accounts with intermediaries. The Company shall correct any differences.
Financial reporting. A licensed company must submit to CIMA an opinion from the auditor on its internal controls at the same time as audited accounts are submitted. The company must also submit (if a broker-dealer) a monthly report and (in all other cases) a quarterly report on a CIMA-mandated form within 15 business days of the end of the relevant month or quarter, as applicable. The company must also submit to CIMA an annual reconciliation between the balance sheet figures on the annual audited accounts and the monthly or quarterly reports prepared at the same date, and an explanation of any differences, when it submits the audited accounts.
Financial resources requirements. A licensed company shall at all times maintain financial resources in excess of its financial resources requirement (base requirements for broker-dealers and market makers being the greater of ¼ of relevant annual expenditure and US$121,951).
Transactions affecting financial resources. CIMA’s written consent is required before a licensed company can reduce or change the nature of its issued capital, or the rights and obligations of shareholders, or enter into any agreement to sell or merge the whole or part of its business to or with a third party. The company must report to CIMA its acquisition of 10% or more of the voting shares of another company.
In addition, a licensee under SIBA is also subject to CIMA’s rules, statement of guidance, regulatory policies and regulatory procedures governing the licensees’ activities including the licensing, business conduct of the licensee, prudential standards and reporting (in particular, Anti-Money Laundering and Combating the Financing of Terrorism and Proliferation Financing).
CIMA is responsible for supervision and enforcement in relation to SIBA. If at any time it appears to CIMA that a licensee has failed to comply with any requirement under SIBA, any regulation made under SIBA, any guidance note or regulatory condition, CIMA may by written notice direct the licensee to ensure that the requirement is complied with within such period and on such terms and conditions as CIMA may specify and the licensee must comply with the notice.
If CIMA knows or has reasonable ground to believe that a licensee (a) is or appears likely to become unable to meet its obligations as they fall due; (b) is carrying on business fraudulently or otherwise in a manner detrimental to the public interest, to the interest of its clients or creditors; (c) has contravened any provision of SIBA or any regulations made under SIBA, or of the Anti-Money Laundering Regulations of the Cayman Islands (Revised) (the AML Regulations); (d) has failed to comply with a condition of its license; (e) has not conducted the direction and management of its business in a fit and proper manner, or has senior officers, managers or persons who have acquired ownership or control who are not fit and proper persons; or (f) has failed to comply with any lawful direction from CIMA, CIMA may take a broad range of enforcement actions including and not limited to: (i) revoking the license; (ii) imposing conditions or further conditions on the license or amending or revoking such conditions; (iii) applying to the court for an order which is necessary to protect the interests of the clients or creditors of the licensee including an injunction or restitution or disgorgement order; (iv) publishing the breach by the licensee in official publications; (v) at the expense of the licensee, requiring that an auditor’s report be submitted to CIMA on the licensee’s AML systems and procedures for compliance with the AML Regulations; (vi) requiring the substitution of any director or officer of the licensee, or the divestment of ownership or control; (vii) at the expense of the licensee, appointing a person to advise the licensee on the proper conduct of its affairs and to report to CIMA thereon; (viii) at the expense of the licensee, appointing a person to assume control of the licensee’s affairs who shall have all the powers necessary to administer the affairs of the licensee including the power to terminate the securities investment business of the licensee; (ix) in the case of a reasonable belief that the licensee has materially contravened the AML Regulations, reporting the same to the Director of Public Prosecutions; or (x) requiring such action to be taken by the licensee as CIMA reasonably believes necessary for dealing with the circumstances set out in (a) to (f) of this paragraph.
In addition, CIMA may cancel a license if the licensee has ceased, or wishes to cease, to carry on securities investment business, or has not commenced business within one year of the date of the grant of the license.
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Hong Kong
Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong)
The Securities and Futures Ordinance, or the SFO, including its subsidiary legislation, is the principal legislation to regulate the securities and futures industry in Hong Kong, including the regulation of securities, futures and leveraged foreign exchange markets, the offering of investments to the public in Hong Kong, and intermediaries and any regulated activities conducted by them in such capacity. Part V of the SFO particularly deals with licensing and registration matters.
Types of Regulated Activities
The SFO promulgates a single licensing regime where a person only needs one license or registration to carry on different types of regulated activities as defined in Schedule 5 to the SFO for which it is licensed. The regulated activities defined in the SFO are as follows:
|
License |
||
|
Type 1: |
dealing in securities |
|
|
Type 2: |
dealing in futures contracts |
|
|
Type 3: |
leveraged foreign exchange trading |
|
|
Type 4: |
advising on securities |
|
|
Type 5: |
advising on futures contracts |
|
|
Type 6: |
advising on corporate finance |
|
|
Type 7: |
providing automated trading services |
|
|
Type 8: |
securities margin financing |
|
|
Type 9: |
asset management |
|
|
Type 10: |
providing credit rating services |
As the date of this prospectus, the following Hong Kong subsidiaries were licensed under the SFO to carry on the following regulated activities:
|
Company |
Type of license |
|
|
Lion International Securities Group Limited |
Type 1, Type 4 |
|
|
Lion Futures Limited |
Type 2, Type 5 |
|
|
Lion Asset Management Limited |
Type 4, Type 9 |
Overview of Licensing Requirements under the SFO
Under the SFO, any person who (a) carries on a business in a regulated activity or (b) holds itself out as carrying on a business in a regulated activity, must be licensed under the relevant provisions of the SFO to carry on that regulated activity, unless one of the exemptions under the SFO applies. It is an offense for a person to conduct any regulated activity without the appropriate license issued by the HKSFC.
In order for a licensed corporation to carry on regulated activities, it must designate no less than two persons, one of which must be its executive director, to oversee the regulated activities. An “executive director” of a licensed corporation is defined as a director of the corporation who (a) actively participates in; or (b) is responsible for directly supervising, any business of the regulated activities for which the corporation is licensed. Each such executive director who is an individual must be approved by the HKSFC to serve as the responsible officer of such regulated activities of the corporation.
In addition to the licensing requirements on corporations that carry on regulated activities, any individual who (a) performs any regulated function for his principal which is a licensed corporation in relation to a regulated activity carried on as a business; or (b) holds himself out as performing such regulated function, must separately be licensed under the SFO as a licensed representative accredited to his principal. Persons applying for licenses under the SFO must satisfy and continue to satisfy after the grant of such licenses by the HKSFC that they are fit and proper persons to be so licensed.
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Continuing Obligations of Licensed Corporations
Licensed corporations, licensed representatives and responsible persons must remain fit and proper at all times. They are required to comply with all applicable provisions of the SFO and its subsidiary rules and regulations, as well as the codes and guidelines issued by the HKSFC.
Outlined below are some of the key continuing obligations of licensed corporations:
• maintenance of minimum paid-up share capital and liquid capital, and submission of financial returns to the HKSFC in accordance with the requirements under the Securities and Futures (Financial Resources) Rules (Chapter 571N of the Laws of Hong Kong);
• maintenance of segregated account(s), and custody and handling of client securities in accordance with the requirements under the Securities and Futures (Client Securities) Rules (Chapter 571H of the Laws of Hong Kong);
• maintenance of segregated account(s), and holding and payment of client money in accordance with the requirements under the Securities and Futures (Client Money) Rules (Chapter 5711 of the Laws of Hong Kong);
• issue of contract notes, statements of account and receipts in accordance with the requirements under the Securities and Futures (Contract Notes, Statements of Account and Receipts) Rules (Chapter 571Q of the Laws of Hong Kong);
• maintenance of proper records in accordance with the requirements prescribed under the Securities and Futures (Keeping of Records) Rules (Chapter 5710 of the Laws of Hong Kong);
• submission of audited accounts and other required documents in accordance with the requirements under the Securities and Futures (Accounts and Audit) Rules (Chapter 57IP of the Laws of Hong Kong);
• maintenance of insurance against specific risks for specified amounts in accordance with the requirements under the Securities and Futures (Insurance) Rules (Chapter 571AI of the Laws of Hong Kong);
• payment of annual fees and submission of annual returns to the HKSFC within one month after each anniversary date of the license;
• notification to the HKSFC of certain changes and events in accordance with the requirements under Securities and Futures (Licensing and Registration) (Information) Rules (Chapter 57IS of the Laws of Hong Kong);
• complying with the continuous professional training requirements under the Guidelines on Continuous Professional Training issued by the HKSFC; and
• implementation of appropriate policies and procedures relating to client acceptance, client due diligence, record keeping, identification and reporting of suspicious transactions and staff screening, education and training in accordance with the requirements under the Guideline on Anti-Money Laundering and Counter-Terrorist Financing issued by the HKSFC in July 2012 (the “AMLCTF Guideline”).
Anti-money Laundering and Counter-terrorist Financing
Licensed corporations are required to comply with the applicable anti-money laundering and counter-terrorist financing laws and regulations in Hong Kong as well as the AMLCTF Guideline and the Prevention of Money Laundering and Terrorist Financing Guideline issued by the HKSFC for Associated Entities published by the HKSFC in April 2012.
The AMLCTF Guideline assists licensed corporations and their senior management in formulating and implementing appropriate and effective policies, procedures and controls in order to meet applicable legal and regulatory requirements. Under the AMLCTF Guideline, licensed corporations must, among other things:
• assess the risks of any new products and services before they are launched and ensure that appropriate additional measures and controls are implemented to mitigate and manage the risks associated with money laundering and terrorist financing;
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• identify the client and verify the client’s identity by reference to any documents, information or data from reliable and independent sources, and take steps from time to time to ensure that the client information obtained is up-to-date and relevant;
• conduct on-going monitoring of activities of the clients to ensure that they are consistent with the nature of business, the risk profile and source of funds, as well as identify transactions that are complicated, large or unusual, or patterns of transactions that have no apparent economic or lawful purpose and may indicate money laundering and terrorists financing;
• maintain a database of names and particulars of terrorist suspects and designated parties which consolidates the information from various lists that have been made known to them, as well as conduct comprehensive on-going screening of the client database; and
• conduct on-going monitoring for identification of suspicious transactions and ensure compliance with their legal obligations of reporting funds or property known or suspected to be proceeds of crime or terrorist property to the Joint Financial Intelligence Unit, a unit jointly run by the Hong Kong Police Force and the Hong Kong Customs & Excise Department to monitor and investigate suspected money laundering.
We set out below a brief summary of the principal legislation in Hong Kong that is concerned with the regulatory system of anti-money laundering and counter-terrorist financing.
Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (Chapter 615 of the Laws of Hong Kong) (“AMLO”)
Among other things, the AMLO imposes requirements relating to client due diligence and maintenance of records of specific financial institutions and empowers competent authorities to supervise compliance with the requirements under the AMLO. In addition, the competent authorities are empowered to (1) ensure that proper safeguards exist to prevent contravention of specified provisions in the AMLO and (2) mitigate money laundering and terrorist financing risks.
Drug Trafficking (Recovery of Proceeds) Ordinance (Chapter 405 of the Laws of Hong Kong) (“DTROP”)
Among other things, the DTROP empowers competent authorities to investigate assets suspected to be derived from drug trafficking activities, the freezing of assets on arrest and the confiscation of the proceeds from drug trafficking activities. It is an offense under the DTROP if a person deals with any property knowing or having reasonable grounds to believe it to be the proceeds from drug trafficking. The DTROP requires a person to report to an authorized officer if he/she knows or suspects that any property (directly or indirectly) is the proceeds from drug trafficking or is intended to be used or was used in connection with drug trafficking, and failure to make such disclosure constitutes an offense under the DTROP.
Organized and Serious Crimes Ordinance (Chapter 455 of the Laws of Hong Kong) (“OSCO”)
Among other things, the OSCO empowers officers of the Hong Kong Police Force and the Hong Kong Customs & Excise Department to investigate organized crime and triad activities, and gives the courts jurisdiction to confiscate the proceeds of organized and serious crimes, to issue restraint orders and charging orders in relation to the property of defendants of specified offences. The OSCO extends the money laundering offense to cover the proceeds from all indictable offences in addition to drug trafficking.
United Nations (Anti-terrorism Measures) Ordinance (Chapter 575 of the Laws of Hong Kong) (“UNATMO”)
Among other things, the UNATMO provides that it would be a criminal offense to: (1) provide or collect funds (by any means, directly or indirectly) with the intention or knowledge that the funds will be used to commit, in whole or in part, one or more terrorist acts; or (2) make any funds or financial (or related) services available, directly or indirectly, to or for the benefit of a person knowing that, or being reckless as to whether, such person is a terrorist or terrorist associate. The UNATMO also requires a person to report his knowledge or suspicion of terrorist property to an authorized officer, and failure to make such disclosure constitutes an offense under the UNATMO.
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Insurance Ordinance (Chapter 41 of the Laws of Hong Kong) (“IO”)
The licensing regime under the IO prescribes two types of licensed insurance brokers: licensed insurance broker companies and licensed technical representatives (broker). Licensed insurance broker companies give advice on insurance policies to clients and act as agents of clients (serving as both their trusted professional advisors and their representatives) in the course of dealing with matters relating to insurance policies (including procurement, negotiation and arrangement of insurance policies with insurers, and, in some cases, making and settling claims). Licensed technical representatives (broker) act as representatives of (i.e. on behalf of) the licensed insurance broker companies which appoint them. In this capacity, they give advice on insurance policies to clients and represent their appointing licensed insurance broker companies to deal with matters relating to insurance policies on behalf of clients.
Licensed insurance brokers can approach insurers across the market to source the most suitable insurance products for clients and licensed insurance broker companies owe fiduciary duties to clients when acting as agents of the clients. In view of this, the IO imposes requirements (set out in rules made under section 129 of the IO) on licensed insurance broker companies in relation to the following aspects:
• capital and net assets;
• professional indemnity insurance;
• keeping of separate client accounts;
• keeping of proper books and accounts.
The IO (and rules, regulations, codes and guidelines administered or issued by the Insurance Authority) also includes requirements, which focus on the interactions which licensed insurance brokers have with policy holders and potential policy holders when carrying on regulated activities. These requirements include:
• the statutory conduct requirements, with which licensed insurance brokers must comply in carrying on regulated activities, in sections 90 and 92 of the IO;
• the relevant requirements set out in the rules, regulations, codes and guidelines made or issued under the IO; and
• the general principles, standards and practices set out in the Code of Conduct For Licensed Insurance Brokers.
Singapore
As we provide online brokerage services in Singapore through our subsidiary, Futu Singapore Pte. Ltd., our business operations are subject to the laws of Singapore. The key laws and regulations which relate to our business and operations in Singapore are summarized as follows:
Regulatory Requirements under the Securities and Futures Act
The Securities and Futures Act 2001, or the SFA, is the principal legislation regulating activities and institutions in the securities and derivatives industry in Singapore.
The SFA is administered by the Monetary Authority of Singapore, or the MAS, which is Singapore’s central bank and integrated financial regulator. As an integrated financial supervisor, the MAS has oversight of all financial institutions in Singapore, including banks, insurers, capital market intermediaries, and financial advisors. To this end, the MAS also establishes rules for such financial institutions which are implemented through legislation, regulations, directions and notices. MAS guidelines are also formulated and published to encourage best practices among financial institutions in Singapore.
In particular, Part 4 of the SFA provides for the licensing and regulation of certain regulated activities typically carried out by capital markets intermediaries.
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Types of Regulated Activities under Part 4 of the SFA
Part 4 of the SFA governs the conduct of regulated activities typically carried out by capital market intermediaries. Under Section 82(1) of the SFA, a person carrying on business in a regulated activity is required to hold a Capital Markets Services License, or CMSL, issued by the MAS, unless an exemption applies. The CMSL system is a modular licensing system, in that an entity will hold one single CMSL covering the different types of regulated activities under the SFA which it engages or intends to engage in.
The categories of activities regulated under the SFA are set out under Part 1 of the Second Schedule to the SFA as follows:
(1) dealing in capital markets products;
(2) advising on corporate finance;
(3) fund management;
(4) real estate investment trust management;
(5) product financing;
(6) providing credit rating services; and
(7) providing custodial services.
It is an offense for a person to carry on business, or hold himself out as carrying on business, in any regulated activity without the appropriate license issued by the MAS.
In addition, where a CMSL has been granted by the MAS, the grant may be subject to such conditions and restrictions as the MAS thinks fit. It is an offence for a person to contravene any such condition or restriction in the license.
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MANAGEMENT
Our board of directors are divided into two classes, namely Class I and Class II. Class I consists of four directors, and Class II consists of four directors. Directors assigned to Class I shall initially serve until the first annual general meeting of shareholders following the effectiveness of our Amended and Restated Memorandum of Articles of Association upon consummation of the Business Combination, or the Articles Effectiveness Date. Directors assigned to Class II shall initially serve until the second annual general meeting of shareholders following the Articles Effectiveness Date.
The following sets forth certain information concerning our directors and executive officers as of the date of this prospectus:
|
Directors and Executive Officers |
Age |
Position/Title |
||
|
Jian Wang |
40 |
Chairman of the Board (Class II) |
||
|
Chunning Wang |
43 |
Director and Chief Executive Officer (Class II) |
||
|
Yan Zhang |
41 |
Director and President (Class I) |
||
|
Hua Luo |
37 |
Director and Chief Operating Officer (Class I) |
||
|
Zhixiang Zhang |
53 |
Director (Class I) |
||
|
Chi Fai Choi |
44 |
Independent Director (Class I) |
||
|
Walter Cook |
68 |
Independent Director (Class II) |
||
|
Chi-yang Chen |
35 |
Independent Director (Class II) |
||
|
Sze Hau Lee |
36 |
Chief Financial Officer |
Jian Wang is our chairman of the board. Mr. Wang has been the co-founder of Lion and has been its chairman, chief executive officer and chief financial officer since its inception in 2015. Mr. Wang also serves as a director of all of Lion’s subsidiaries other than Lion Brokers Limited and Lion Wealth Limited. His entrepreneurship traces back to 2014 when he founded and served as the chief executive officer at Forwin Financial Group (Hong Kong) Limited, a financial service company. From 2014 to 2016, Mr. Wang also served as the responsible officer at Forwin Capital Management Limited. Prior to that, from 2010 to 2014, Mr. Wang served as the chairman of Shanghai Yuangun Investment Management Limited, a Shanghai-based private equity fund management company. From 2005 to 2010, Mr. Wang was a chief manager at Shanghai Shengqi Corporate Management and Consulting Limited, a company offering corporate consulting services. Previously, from 2004 to 2005, he was an investment banking manager at a trust company, Tinhtic Trust Co., Limited. Mr. Wang received his bachelor’s degree in law from East China University of Political Science and Law in 2005 and later earned his MBA from Cheung Kong Graduate School of Business in 2013.
Chunning Wang is our Chief Executive Officer. Mr. Wang joined Lion in May 2019 and has been responsible for Lion’s fund raising activities. Prior to joining Lion, Mr. Wang held positions of chief executive officer, director and vice chairman of the board at Carnival Group International Holdings Limited (0996.HK), one of China’s leading operators of large-scale integrated tourism, hospitality and retail attractions, from 2017 to 2019. Mr. Wang has more than a decade of experience in the banking industry. From 2016 to 2017, Mr. Wang served as an assistant chief executive officer at Hengfeng Bank Co., Ltd. (Shanghai branch), where he was responsible for corporate business. Previously, Mr. Wang worked at China Minsheng Banking Corporation Limited for around six years, where he started as a product manager in the bank’s head office in the PRC in 2006, and later ended up serving as a general manger in the bank’s Hong Kong branch in 2015, primarily responsible for the bank’s overseas mergers and acquisition and other large-scale projects. Mr. Wang received his bachelor’s degree in Industrial Foreign Trade from International Business School of Hunan University in 2000, and obtained a master’s degree in management from The Faculty of Commerce and Business Administration of The University of British Columbia in 2005.
Hua Luo serves on our board since October 6, 2020 and is our Chief Operating Officer. Mr. Luo joined Lion in September 2017 and has since served as the director, the responsible officer and the chief risk officer in a number of Lion’s subsidiaries. Prior to joining Lion, Mr. Luo has extensive working experience in financial service industry. From 2016 to 2017, Mr. Luo served as a director of institutional sales at HGNH International Financial Corporation Limited, a Hong Kong based financial service company offering comprehensive financial products and services. From 2015 to 2016, Mr. Luo served as the chief marketing officer at China Maike Futures International Limited, a company provides global futures trading services. Previously, from 2010 to 2015, Mr. Luo served as a deputy trading manager at HGNH International Futures Co., Limited. Mr. Luo received his bachelor’s degree in business administration from Chongqing University in 2007 and his master’s degree in e-commerce from The Hong Kong Polytechnic University in 2008.
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Zhixiang Zhang serves on our board. Mr. Zhang has been the chief executive officer of China Ruifeng Renewable Energy Holdings Limited (“China Ruifeng”) (0527.HK), an integrated company of wind power operation, wind power equipment manufacturing, power grid construction and diodes manufacturing, since August 2010 and was appointed as an executive Director since July 2010. He is also an authorized representative of China Ruifeng, a member of each of the remuneration committee and nomination committee of China Ruifeng. In addition, Mr. Zhang is a director of Diamond Era Holdings Limited (“Diamond Era”), a substantial shareholder of China Ruifeng. Prior to that, Mr. Zhang worked at Hexigten Qi Langcheng Ruifeng Electric Development Co., Ltd., a subsidiary of China Ruifeng, where he started as a vice general manager in December 2005. Mr. Zhang received his bachelor’s degree in economics from the School of Taxation of the Central Institute of Finance (currently known as the Central University of Finance and Economics) in 1991.
Yan Zhang serves on our board and is our President. From July 2020 to April 2021, Ms. Zhang conducted her own financial consulting services for her own clients from July 2020 to April 2021. From September 2009 to June 2020, Ms. Zhang served as a manager, senior manager, and subsequently, principal of UHY Advisors NY, Inc., with her last role being a principal. From 2004 to 2007, Ms. Zhang served as a senior accountant of PricewaterhouseCoopers LLP in Beijing, China. Ms. Zhang received her bachelor’s degree and master’s degree both in Economics from Central University of Finance and Economics in Beijing China, and obtained a second master’s degree in information assurance from The State University of New York at Albany in June 2009. Ms. Zhang has been a member of The New York State Society of Certified Public Accountants since November 2010 and also a member of the New York Institute of Internal Auditors since September 2011.
Chi Fai Choi is our independent director. Mr. Choi has served as the investment management department consultant of OCI International Holdings Limited (0329.HK), an investment holding company principally engaged in securities trading and investments, trading of wines and provision of financial advisory services in the PRC, since November 2018. Mr. Choi is responsible for fund raising for general corporate purposes, setting up fund, and originating new potential investment opportunities to the company. Prior to that, Mr. Choi served as an executive director of Rentian Technology Holdings Limited (0885.HK), a Hong Kong-based investment holding company principally engaged in Internet of Things (IoT) businesses, from March 2015 to December 2017, the chief investment officer of Carnival Group International Holdings Limited (0996.HK) from May 2012 to March 2018, an independent non-executive director of Energy International Investments Holdings Limited (0353.HK) from July 2011 to July 2014, an associate director of CCB International Asset Management Limited (“CCBIAM”) from November 2007 to May 2012. CCBIAM is ultimately controlled by China Construction Bank Corporation (0939.HK and CH.601939). From September 2000 to October 2007, Mr. Choi was a senior officer of Hutchison Whampoa Limited and a senior accountant of Ernst & Young. Mr. Choi received his bachelor’s degree of business administration in accounting from The Hong Kong University of Science and Technology in August 2000. Mr. Choi is a member of Hong Kong Institute of Certified Public Accountants and a fellow member of the Association of Chartered Certified Accountants. Mr. Choi has over 10 years of experience in internal and external auditing, merger and acquisition, and direct investment.
Walter R. Cook serves on our board. Mr. Cook has been serving as a director of Proficient since its inception and is a proven executive and expert in the banking and financial Sector with a strong leadership history of commercial banks and securities firms. He has extensive experience in turnarounds, acquisitions, and start-up financial institutions. Since August 2016, Mr. Cook has been a Managing Director at Tangent Capital Partners, LLC, an investment bank serving investment advisors and asset managers, and provided critical expertise in roll out of The Community Development Fund (CDCDX), a CRA-qualified mutual fund for commercial banks to Dr. Kenneth H. Thomas, CDCDX’s adviser. He was an independent consultant from January 2015 to July 2016, and an expert witness providing expert opinions and trial testimony on lending and banking practices in Florida State Court and Federal bankruptcy Court in Boston, Massachusetts from January 2014 to December 2015. Mr. Cook served as the CEO and the chairman of the board of the Republic Federal Bancorp, Inc. from 2003 to 2010. Mr. Cook received a Master’s degree in business administration specializing in finance and marketing from Harvard University in 1982, a Master’s degree in law and diplomacy from Tufts University in 1978 and a Bachelor’s degree in political science & psychology from Duke University.
Chi-yang Chen serves on our board. Mr. Chen has been serving as a Senior Financial Executive in XLD Group N.A. Real Estate Development, Inc., a private hospitality company, since March 2020, and responsible to work with executive management and offer analytical insight on critical financial and operational risks, as well as to resolve complex accounting and financial reporting matters. Prior to that, Mr. Chen was a senior manager in ASAM, LLP, a public accounting firm from September 2013 to February 2020 and his responsibilities included in consulting, financial
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due diligence and business valuation. Mr. Chen received his Bachelor of Science degree in Industrial Engineering from National University of Kaohsiung, Taiwan, an MBA degree from University of St. Thomas and a Master’s degree in accounting from Golden Gate University. Mr. Chen is a Certified Public Accountant licensed in California.
Sze Hau Lee is our Chief Financial Officer. Mr. Lee joined Lion as a corporate finance director in May 2019, mainly responsible for Lion’s fund-raising activities. Prior to that, Mr. Lee worked in Carnival Group International Holdings Limited (0996.HK) as a corporate finance director from September 2017 to February 2019. While working there, Mr. Lee was primarily responsible for leading, originating, structuring and executing financing transaction and providing investment advice to the management. Before that, Mr. Lee had years of experience in banking industry. He worked as a manager of syndicated finance department at China Minsheng Banking Corporation Hong Kong Branch from February 2017 September 2017, a vice president of structured and leveraged finance department in Hengfeng Bank Shanghai Branch from April 2016 to February 2017, an assistant manager of structured and leveraged finance department in China Minsheng Banking Corporation Hong Kong Branch from January 2014 to April 2016. He had been primarily responsible for the origination, structure and execution of syndicated facilities as well as financing arrangements in mega transactions. Mr. Lee started his first few years of career in accounting firms. He worked as a senior associate in Ernst & Young from October 2012 to December 2013. Before that, he worked in PricewaterhouseCoopers for approximately five years, where he started as an associate in September 2007 and left in October 2012 as a senior associate. Mr. Lee received his bachelor’s degree in professional accountancy from The Chinese University of Hong Kong in August 2007. He is a member of Hong Kong Institute of Certified Public Accountants since 2011.
Committees of the Board of Directors
As of the date of this prospectus, we have three committees, namely, audit committee, compensation committee and nominating and corporate governance committee. We have adopted a charter for each of the three committees.
Audit Committee
Our audit committee comprises of Chi Fai Choi, Walter Cook and Chi-yang Chen, and is chaired by Chi Fai Choi. All of the directors satisfy the “independence” requirement of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market and meets the independence standards under Rule 10A-3 under the Exchange Act. Our audit committee is responsible for, among other things, appointing, retaining, setting compensation of, and supervising our independent accountants, reviewing the results and scope of the audit and other accounting related services and reviewing our accounting practices and systems of internal accounting and disclosure controls.
The audit committee will at all times be composed exclusively of “independent directors,” as defined for audit committee members under the Nasdaq listing standards and the rules and regulations of the SEC, who are “financially literate,” as defined under Nasdaq’s listing standards. Nasdaq’s listing standards define “financially literate” as being able to read and understand fundamental financial statements, including a company’s balance sheet, income statement and cash flow statement. In addition, we are required to certify to Nasdaq that the committee has, and will continue to have, at least one member who has past employment experience in finance or accounting, requisite professional certification in accounting, or other comparable experience or background that results in the individual’s financial sophistication. Chi Fai Choi serves as a financial expert on our audit committee.
Compensation Committee
Our compensation committee consists of Jian Wang, Chunning Wang and Chi Fai Choi, and is chaired by Jian Wang. Chi Fai Choi satisfies the “independence requirement” of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market and meets the independence standards under Rule 10A-3 under the Exchange Act. As a foreign private issuer, we have elected to not have our compensation committee consist of entirely independent directors. The compensation committee is responsible for reviewing and approving compensation paid to our officers and directors and to administer our incentive compensation plans, including authority to make and modify awards under such plans. It assists the board in determining its responsibilities in relation to remuneration, including, amongst other matters, making recommendations to the Board on policy on executive compensation, determining the individual remuneration and benefits package of each of the executive directors and recommending and monitoring the remuneration of senior management below board level.
135
Nominating and Corporate Governance Committee
Our nominating and corporate governance committee consists of Jian Wang, Chunning Wang and Chi Fai Choi, and is chaired by Jian Wang. Chi Fai Choi satisfies the “independence requirement” of Rule 5605(a)(2) of the Listing Rules of the Nasdaq Stock Market and meets the independence standards under Rule 10A-3 under the Exchange Act. As a foreign private issuer, we have elected to not have our nominating and corporate governance committee consist of entirely independent directors. The nominating and corporate governance committee assists the board of directors in selecting individuals qualified to become our directors and in determining the composition of the board and its committees.
Code of Ethics
Our board of directors adopted a code of ethics and business conduct that applies to all of our executive officers, directors and employees. The code of ethics and business conduct codifies the business and ethical principles that will govern all aspects of our business.
Corporate Governance Practices
As a Cayman Islands exempted company listed on the Nasdaq Global Select Market, we are subject to Nasdaq corporate governance listing standards. However, Rule 5615(a)(3) of The Listing Rules of the Nasdaq Stock Market (the “Nasdaq Rules”) permits foreign private issuers like us to follow certain home country corporate governance practices in lieu of certain provisions of the Rule 5600 Series of the Nasdaq Rules. A foreign private issuer that elects to follow a home country practice instead of such provisions, must disclose in its annual reports each requirement that it does not follow and describe the home country practice followed by it.
Our current corporate governance practices differ from Nasdaq corporate governance requirements for U.S. companies in certain respects, as summarized below:
• Executive Sessions. IM5605-2 of Nasdaq Rules requires independent directors of a Nasdaq listed company must meet regularly in executive session (without members of management present), and such executive sessions should occur at least twice a year. In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which practices which do not require independent directors to meet regularly in executive sessions separate from the full board of directors.
• Nomination of Directors. Rule 5605(e)(2) of Nasdaq Rules requires director nominations of a Nasdaq listed company to be made or recommended solely by independent directors and the director nominations process be addressed by a formal written charter or board resolution. We follow Cayman Islands practice which does not require us to have a formal written charter or board resolution addressing the director nominations process.
• Composition of Board. Rule 5605(b)(1) of the Nasdaq Rules requires a Nasdaq listed company to have a majority of the board be independent. In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which practices do not require a majority independent board.
• Composition of Committees. Rule 5605(d)(2) of the Nasdaq Rules requires a Nasdaq listed company to have a compensation committee composed solely of independent directors to determine or recommend the compensation of the executive officers of the company. In this regard we have elected to adopt the practices of our home country, the Cayman Islands, which practices do not require that any of the members of a company’s compensation committee be independent directors.
• Shareholder Approval. Rule 5635(c) requires shareholder approval for certain issuances of securities. In this regard we have elected to adopt the practices of our home country. In accordance with the provisions of our Amended and Restated Memorandum and Articles of Association, our board of directors is authorized to issue securities, including ordinary shares, warrants and convertible notes.
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Employment Agreements and Indemnification Agreements
We entered into employment agreements with each of our executive officers. Each executive officers is employed for a continuous term, or a specified time period which will be automatically extended, unless either we or the executive officer gives prior notice to terminate such employment. We may terminate the employment for cause, at any time, without notice or remuneration, for certain acts of the executive officer, including the commitment of any serious or persistent breach or non-observance of the terms and conditions of the employment, conviction of a criminal offense other than one which in the opinion of the board does not affect the executive’s position, willful, disobedience of a lawful and reasonable order, misconduct being inconsistent with the due and faithful discharge of the executive officer’s material duties, fraud or dishonesty, or habitual neglect of his or her duties. An executive officer may terminate his or her employment at any time with a three- to six-month prior written notice.
Each executive officer has agreed to hold, both during and after the employment agreement expires or is earlier terminated, in strict confidence and not to use or disclose to any person, corporation or other entity without written consent, any confidential information or trade secrets. Each executive officer has also agreed to disclose in confidence to us all inventions, intellectual and industry property rights and trade secrets which they made, discover, conceive, develop or reduce to practice during the executive officer’s employment with us and to assign to our company all of his or her associated titles, interests, patents, patent rights, copyrights, trade secret rights, trademarks, trademark rights, mask work rights and other intellectual property and rights anywhere in the world which the executive officer may solely or jointly conceive, invent, discover, reduce to practice, create, drive, develop or make, or cause to be conceived, invented, discovered, reduced to practice, created, driven, developed or made, during the period of the executive officer’s employment with us that are either related to our business, actual or demonstrably anticipated research or development or any of our products or services being developed, manufactured, marketed, sold, or are related to the scope of the employment or make use of our resources. In addition, all executive officers have agreed to be bound by non-competition and non-solicitation restrictions set forth in their agreements. Each executive officer has agreed to devote all his or her working time and attention to our business and use best efforts to develop our business and interests. Moreover, each executive officer has agreed not to, for a certain period following termination of his or her employment or expiration of the employment agreement: (i) carry on or be engaged, concerned or interested directly or indirectly whether as shareholder, director, employee, partner, agent or otherwise carry on any business in direct competition with us, (ii) solicit or entice away any of our customer, client, representative or agent, or (iii) employ, solicit or entice away or attempt to employ, solicit or entice away any of our officers, managers, consultants or employees.
In addition, we also entered into indemnification agreements with each of our directors and executive officers, pursuant to which we will agree to indemnify our directors and executive officers against certain liabilities and expenses incurred by such persons in connection with claims made by reason of their being such a director or executive officer.
Executive Officer and Director Compensation
Our policies with respect to the compensation of our executive officers following the Business Combination are administered by our board of directors in consultation with our compensation committee (as described above). We intend to be competitive with other similarly situated companies in the industry. Our compensation committee will be charged with performing an annual review of our executive officers’ cash compensation and equity holdings to determine whether they provide adequate incentives and motivation to executive officers and whether they adequately compensate the executive officers relative to comparable officers in other companies.
For the fiscal year ended December 31, 2020, we paid an aggregate of US$0.8 million in cash to our executive officers and directors, and an aggregate of US$0.035 million in cash to our non-executive directors. For share incentive grants to our directors and executive officers, see “— 2020 Share Incentive Plan.” We have not set aside or accrued any amount to provide pension, retirement or other similar benefits to our executive officers and directors. Our Hong Kong subsidiaries are required by the Hong Kong Mandatory Provident Fund Schemes Ordinance to make monthly contributions to the mandatory provident fund scheme in an amount equal to 5% of an employee’s salary subject to the statutory maximum at HK$1,500.
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2020 Share Incentive Plan
In connection with the consummation of the Business Combination, we adopted the 2020 Share Incentive Plan (“Plan”). Under this Plan, up to 4,632,449 of our ordinary shares outstanding immediately after the Business Combination are available for Awards. Each vested RSU (as reported) entitles the participant of the Plan to receive one ADS, subject to adjustments for dividend payments. As of the date of this prospectus, we have granted 1,486,504 deferred shares under this Plan.
The following paragraphs summarize the terms of the Plan:
Plan administration. Our compensation committee or executive officers delegated by our compensation committee acts as the plan administrator.
Type of Awards. The Plan permits the award of Options, restricted shares, dividend equivalents, deferred shares, share payments and RSUs singly, in combination or in tandem.
Award Agreement. Each Award is evidenced by an Award agreement between the Award recipient and our Company.
Eligibility. All of our employees are eligible for the grant of Awards under the Plan at the discretion of the compensation committee. A grant of Awards to any member of the compensation committee requires Board approval.
Vesting Schedule and Other Restrictions. The plan administrator has discretion in making adjustment in the individual vesting schedules and other restrictions applicable to the Awards granted under the Plan. The vesting period is set forth in each Award agreement.
Exercise price. The plan administrator has discretion in determining the price of the Awards, subject to a number of limitations. The plan administrator has absolute discretion in making adjustments to the exercise price of Options.
Payment. The plan administrator determines the methods by which payments by any recipient of any Awards under the Plan are made.
Transfer Restrictions. Except as permitted by the plan administrator, and subject to all the transfer restrictions under the applicable laws and regulations and restrictions set forth in the applicable award agreement, all Awards are not transferable or assignable.
Term of the Options. The term of any Option granted under the Plan cannot exceed ten years from its effective date.
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BENEFICIAL OWNERSHIP OF SECURITIES
The following table sets forth information regarding the beneficial ownership based on a total number of 47,120,039 ordinary shares outstanding as of the date of this prospectus, including 37,276,943 Class A Ordinary Shares and 9,843,096 Class B Ordinary Shares (excluding 7,000 preferred shares issued and held by our selling shareholder pursuant to the February Private Placement), with respect to the beneficial ownership of our shares by:
• each person known by us to be the beneficial owner of more than 5% of our outstanding shares;
• each of our officers and directors; and
• all our officers and directors as a group.
Beneficial ownership is determined in accordance with the rules and regulations of the SEC. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, we have included shares that the person has the right to acquire within 60 days, including through the exercise of any option, warrant, or other right or the conversion of any other security. These shares, however, are not included in the computation of the percentage ownership of any other person.
|
Name and Address of Beneficial Owner |
Number of |
Number of |
% of |
% of |
||||||
|
Directors and Executive Officers |
|
|
||||||||
|
Jian Wang |
* |
7,911,956 |
17.00 |
% |
69.84 |
% |
||||
|
Chunning Wang(1) |
* |
1,931,140 |
4.31 |
% |
17.07 |
% |
||||
|
Hua Luo |
* |
— |
|
* |
|
|||||
|
Guandong (Gordon) Wang |
— |
— |
|
— |
|
|||||
|
Zhixiang Zhang |
* |
— |
|
* |
|
|||||
|
Chi Fai Choi |
* |
— |
|
* |
|
|||||
|
Walter Cook |
* |
— |
|
* |
|
|||||
|
Chi-yang Chen |
* |
— |
|
* |
|
|||||
|
Sze Hau Lee |
* |
— |
|
* |
|
|||||
|
Yan Zhang |
* |
— |
|
* |
|
|||||
|
All executive officers and directors as a group |
410,000 |
9,843,096 |
21.76 |
% |
86.99 |
% |
||||
|
|
|
|||||||||
|
Five Percent or Greater Shareholders |
|
|
||||||||
|
Legend Success Ventures Limited(1) |
* |
1,931,140 |
4.31 |
% |
17.07 |
% |
||||
____________
* Beneficially owns less than 1% of our Class A Ordinary Shares
(1) Represents 1,931,140 Class B Ordinary Shares held by Legend Success Ventures Limited. Mr. Chunning Wang, the sole shareholder and sole director of Legend Success Ventures Limited, may be deemed to beneficially own shares held by Success Ventures Limited and has sole voting and dispositive control over such securities.
(2) Each Class B Ordinary Share is entitled to 25 votes per share.
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RELATED PARTY TRANSACTIONS
Registration Rights Agreement
Selling Shareholder Registration Rights Agreement
We and the selling shareholder entered into a Registration Rights Agreement on the date of the consummation of the Securities Purchase Agreement. Under the Registration Rights Agreement, the selling shareholder shall have registration rights that obligate us to register for resale under the Securities Act all or any portion of their 2,333,333 convertible Class A Exchange Shares, represented by ADSs, pursuant to the Series A Convertible Preferred Shares and an aggregate of 29,311,110 ADSs including (i) 13,333,333 ADSs issuable upon exercise of the Series E Warrant to purchase ADSs, (ii) 2,800,000 ADSs issuable upon exercise of the Series D Warrant to purchase ADSs, and (iii) 13,333,333 ADSs issuable upon exercise of the Series F Warrant to purchase ADSs, except that Registrable Securities that are subject to transfer restrictions in the Securities Purchase Agreement Lock-Up Agreements may not be requested to be registered or registered until the end of the Lock-Up Period.
The selling shareholder holding a majority-in-interest of the Registrable Securities (based on the number of shares and not voting rights) will be entitled under the Registration Rights Agreement to make a written demand for registration under the Securities Act of all or part of the Registrable Securities. Subject to certain exceptions, if any time after the closing of the Securities Purchase Agreement, we propose to file a registration statement under the Securities Act with respect to 2,333,333 ADSs pursuant to the Series A Convertible Preferred Shares and 29,311,110 Class A Ordinary Shares represented by ADSs, under the Selling Shareholder Registration Rights Agreement, we shall give notice to the selling shareholder holding Registrable Securities as to the proposed filing and offer them an opportunity to register the sale of such number of Registrable Securities as requested by them in writing, subject to customary cut-backs. In addition, subject to certain exceptions, the selling shareholder holding Registrable Securities will be entitled under the Selling Shareholder Registration Rights Agreement to request in writing that we register the resale of any or all of such Registrable Securities on Form F-1 and any similar short-form registration that may be available at such time. Under the Selling Shareholder Registration Rights Agreement, we will indemnify the holders of Registrable Securities and certain persons or entities related to them, such as their officers, directors, employees, agents and representatives, against any losses or damages resulting from any untrue statement or omission of a material fact in any registration statement or prospectus pursuant to which they sell Registrable Securities, unless such liability arose from their misstatement or omission, and the holders of Registrable Securities, will agree to indemnify us and certain persons or entities related to us, such as our officers and directors and underwriters, against all losses caused by their misstatements or omissions in those documents.
Business Combination Registration Rights Agreement
We and the Sellers entered into the Seller Registration Rights Agreement on the date of the consummation of the Business Combination. Under the Seller Registration Rights Agreement, the Sellers shall have registration rights that obligate us to register for resale under the Securities Act all or any portion of their Class A Exchange Shares, the Class A Ordinary Shares issuable upon the exercise of the Class B Exchange Shares (including, any shares held as Escrow Shares pursuant to the Escrow Agreement and any additional Exchange Shares (which with respect to the Class B Exchange Shares shall include only the underlying Class A Ordinary Shares) issued as a result of the post-Closing purchase price adjustment) (together with any warrants, capital shares or other securities issued as a dividend or distribution with respect thereto or in exchange therefor, the “ Business Combination Registrable Securities”), except that Business Combination Registrable Securities that are subject to transfer restrictions in the Lock-Up Agreements may not be requested to be registered or registered until the end of the Lock-Up Period and the Escrow Shares may not be requested to be registered or registered while they are held in the Escrow Account in accordance with the Escrow Agreement.
Sellers holding a majority-in-interest of the Business Combination Registrable Securities (based on the number of shares and not voting rights and excluding Escrow Shares held under the Escrow Agreement) will be entitled under the Registration Rights Agreement to make a written demand for registration under the Securities Act of all or part of the their Registrable Securities, and other Sellers holding Business Combination Registrable Securities will be entitled to join in such demand registration. Subject to certain exceptions, if any time after the Closing, we propose to file a registration statement under the Securities Act with respect to its securities, under the Seller Registration Rights Agreement, we shall give notice to the Sellers holding Business Combination Registrable Securities as to the
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proposed filing and offer them an opportunity to register the sale of such number of Business Combination Registrable Securities as requested by them in writing, subject to customary cut-backs. In addition, subject to certain exceptions, Sellers holding Business Combination Registrable Securities will be entitled under the Seller Registration Rights Agreement to request in writing that we register the resale of any or all of such Business Combination Registrable Securities on Form S-3 or F-3 and any similar short-form registration that may be available at such time. Under the Seller Registration Rights Agreement, we will indemnify the holders of Business Combination Registrable Securities and certain persons or entities related to them, such as their officers, directors, employees, agents and representatives, against any losses or damages resulting from any untrue statement or omission of a material fact in any registration statement or prospectus pursuant to which they sell Registrable Securities, unless such liability arose from their misstatement or omission, and the holders of Registrable Securities, including Business Combination Registrable Securities in any registration statement or prospectus, will agree to indemnify us and certain persons or entities related to us, such as our officers and directors and underwriters, against all losses caused by their misstatements or omissions in those documents.
Founders Registration Rights Agreement
Under the Founder Registration Rights Agreement, certain founders of Proficient have certain registration rights that are pari passu to the Seller Registration Rights Agreement with respect to any underwriting cut-backs.
2021 Securities Purchase Agreement Lock-up Agreements
Simultaneously with the execution of the Securities Purchase Agreement, the directors, officers, and 10% or greater shareholders of the Company save except for Greentree Financial Group, Inc. entered into a lock-up agreement (each a “Lock-Up Agreement”) with the selling shareholder. In such Lock-Up Agreement, the directors, officers, and 10% or greater shareholders of the Company save except for Greentree Financial Group, Inc. agreed that they will not, during the period commencing from February 18, 2021 and ending on until thirty (30) days after the earliest of the date that (a) this Registration Statement has been declared effective by the SEC, (b) all of the underlying shares pursuant to the February Private Placement have been sold pursuant to Rule 144 or may be sold pursuant to Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 and without volume or manner-of-sale restrictions, (c) following the one year anniversary of the closing date of the February Private Placement (being February 18, 2021), provided that a holder of the underlying shares pursuant to the February Private Placement is not an Affiliate of the Company, or (d) all of the underlying shares pursuant to the February Private Placement may be sold pursuant to an exemption from registration under Section 4(a)(1) of the Securities Act without volume or manner-of-sale restrictions and Company Counsel has delivered to such holders a standing written unqualified opinion that resales may then be made by such holders of the Underlying Shares pursuant to such exemption which opinion shall be in form and substance reasonably acceptable to such holders (the “Lock-Up Period”), (i) offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the undersigned or any affiliate of the undersigned or any person in privity with the undersigned or any affiliate of the undersigned), directly or indirectly, including the filing (or participation in the filing) of a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act with respect to, any ordinary shares or ordinary shares equivalents beneficially owned, held or hereafter acquired by the undersigned during the Lock-Up Period.
2020 Securities Purchase Agreement Lock-up Agreements
Simultaneously with the execution of the securities purchase agreement dated December 11, 2020, the directors, officers, and 10% or greater shareholders of the Company save except for Greentree Financial Group, Inc. entered into a lock-up agreement (each a “Lock-Up Agreement”) with the selling shareholder. In such Lock-Up Agreement, the directors, officers, and 10% or greater shareholders of the Company save except for Greentree Financial Group, Inc. agreed that they will not, during the period commencing from December 14, 2020 and ending on until thirty (30) days after the earliest of the date that (a) this Registration Statement has been declared effective by the SEC, (b) all of the underlying shares pursuant to the December Private Placement have been sold pursuant to Rule 144 or may be sold pursuant to Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 and without volume or manner-of-sale restrictions, (c) following the one year anniversary of the closing date of the December Private Placement (being December 14, 2020), provided that a holder of the
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underlying shares pursuant to the December Private Placement is not an Affiliate of the Company, or (d) all of the underlying shares pursuant to the December Private Placement may be sold pursuant to an exemption from registration under Section 4(a)(1) of the Securities Act without volume or manner-of-sale restrictions and Company Counsel has delivered to such holders a standing written unqualified opinion that resales may then be made by such holders of the Underlying Shares pursuant to such exemption which opinion shall be in form and substance reasonably acceptable to such holders (the “Lock-Up Period”), (i) offer, sell, contract to sell, hypothecate, pledge or otherwise dispose of (or enter into any transaction which is designed to, or might reasonably be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise) by the undersigned or any affiliate of the undersigned or any person in privity with the undersigned or any affiliate of the undersigned), directly or indirectly, including the filing (or participation in the filing) of a registration statement with the Commission in respect of, or establish or increase a put equivalent position or liquidate or decrease a call equivalent position within the meaning of Section 16 of the Exchange Act with respect to, any ordinary shares or ordinary shares equivalents beneficially owned, held or hereafter acquired by the undersigned during the Lock-Up Period.
Business Combination Lock-up Agreements
Simultaneously with the execution of the Business Combination Agreement, each Jian Wang and Chunning Wang (collectively, the “Class B Seller”) entered into a lock-up agreement (each a “Lock-Up Agreement”) with regard to the Exchange Shares to be received by such Class B Seller. In such Lock-Up Agreement, each Class B Seller agreed that such Seller will not, during the period commencing from the Closing and ending on the earlier of the six month anniversary of the Closing (or if earlier, the date on which we consummate a liquidation, merger, share exchange or other similar transaction with an unaffiliated third party that results in all of our shareholders having the right to exchange their equity holdings in us for cash, securities or other property) ( the “Lock-Up Period”) (i) lend, offer, pledge (except as provided below), hypothecate, encumber, donate, assign, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any of such Class B Seller’s Exchange Shares, (ii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of any of such Class B Seller’s Exchange Shares, or (iii) publicly announce any intention to effect any transaction specified in clause (i) or (ii). Each holder also agreed that the Escrow Shares will continue to be subject to such transfer restrictions until they are released from the Escrow Account. However, each Class B Seller is allowed to transfer any of its Exchange Shares (other than the Escrow Shares while they are held in the Escrow Account) by gift, will or intestate succession or to any immediate family member (or related trust), trustor or trust beneficiary, as a distribution to equity holders upon liquidation or to an affiliate or pursuant to a court order or settlement agreement in divorce; provided in each such case that the transferee thereof agrees to be bound by the restrictions set forth in the Lock-Up Agreement. The Class B Sellers are also permitted to pledge their shares during the Lock-Up period so long as the pledgee agrees not to exercise its remedies with respect to the Exchange Shares during the Lock-Up Period.
Transaction with Minority Shareholder
In October 2021, Lion Wealth Management Limited (“LWML”), one of our subsidiaries and Dawa Future Graphic Technology Co., Ltd (“DAWA”) formed Lion Metaverse Limited (“LML”), to develop the Group’s new Metaverse project “Lion World”. LWML and DAWA each hold 50% of equity interest in LML. As of December 31, 2021, LML recorded payable to DAWA for research and development expenses in the amount of approximately $119,000.
Employment Agreements and Indemnification Agreements
See “Management — Employment Agreements and Indemnification Agreements.”
Other Related Party Transactions
See “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Related Party Transactions”.
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DESCRIPTION OF SHARE CAPITAL
General
We are a Cayman Islands exempted company incorporated with limited liability and our affairs are governed by our currently effective memorandum and articles of association, the Companies Act of the Cayman Islands, as amended from time to time.
As of the date of this prospectus, our Amended and Restated Memorandum and Articles of Association authorizes the issuance of 500,000,000 authorized shares with a par value of US$0.0001 each, comprising (a) 300,000,000 Class A Ordinary Shares; (b) 150,000,000 Class B Ordinary Shares; and (c) 50,000,000 preferred shares.
Class A Ordinary Shares
The holders of Class A Ordinary Shares are entitled to one vote for each share held of record on all matters to be voted on by shareholders.
There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the votes, including votes from holders of Class B Ordinary Shares, for the election of directors can elect all of the directors.
Class B Ordinary Shares
The holders of Class B Ordinary Shares are entitled to twenty five votes for each share held of record on all matters to be voted on by shareholders.
Each Class B Ordinary Share is convertible into one Class A Ordinary Share at any time by the holder thereof, subject to adjustments for any subdivision or combination, while Class A Ordinary Shares are not convertible into Class B Ordinary Shares under any circumstances. Upon any sale of Class B Ordinary Shares by a holder thereof to any person other than an affiliate of such holder, such Class B Ordinary Shares shall be automatically and immediately converted into the same number of Class A Ordinary Shares.
Other than as describe above, holders of Class B Ordinary Shares have all of the same rights as holders of Class A Ordinary Shares.
Warrants
Business Combination Warrants (2019 Warrants)
Each warrant represents the right to purchase one Class A Ordinary Share in the form of ADSs at a price of $11.50 per share or $11.50 per ADS, subject to adjustment as discussed below. However, no warrants will be exercisable for cash unless we have an effective and current registration statement covering the Class A Ordinary Shares issuable upon exercise of the warrants and a current prospectus relating to such Class A Ordinary Shares. Notwithstanding the foregoing, if a registration statement covering the shares issuable upon exercise of such warrants is not effective within a specified period following the Closing, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis in the same manner as if we called the warrants for redemption and required all holders to exercise their warrants on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the warrants for that number of Class A Ordinary Shares equal to the quotient obtained by dividing (x) the product of the number of shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. The “fair market value” for this purpose will mean the average reported last sale price of the Class A Ordinary Shares traded in the form of ADSs for the ten (10) trading days ending on the trading day prior to the date of exercise. Our warrants will become exercisable thirty (30) days after the Closing and will expire on the fifth anniversary of the Closing.
Our warrants issued in exchange for private warrants are identical to warrants issued in exchange for the Public Warrants, except that such private warrants will be exercisable for cash (even if a registration statement covering the Class A Ordinary Shares issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by us, in each case so long as they are still held by the initial purchasers or their affiliates.
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We may call the warrants for redemption (excluding the private warrants), in whole and not in part, at a price of $0.01 per warrant,
• at any time while the warrants are exercisable;
• upon not less than 30 days’ prior written notice of redemption to each warrant holder;
• if, and only if, the reported last sale price of our ADSs equals or exceeds $18.00 per ADS, for any 20 trading days within a 30-day trading period ending on the third business day prior to the notice of redemption to warrant holders; and
• if, and only if, there is a current registration statement in effect with respect to the Class A Ordinary Shares underlying such warrants commencing five business days prior to the 30-day trading period and continuing each day thereafter until the date of redemption.
The right to exercise will be forfeited unless the warrants are exercised prior to the date specified in the notice of redemption. On and after the redemption date, a record holder of a warrant will have no further rights except to receive the redemption price for such holder’s warrant upon surrender of such warrant.
The redemption criteria for our warrants have been established at a price which is intended to provide warrant holders a reasonable premium to the initial exercise price and provide a sufficient differential between the then-prevailing share price and the warrant exercise price so that if the share price declines as a result of our redemption call, the redemption will not cause the share price to drop below the exercise price of the warrants.
If we call the warrants for redemption as described above, our management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering the warrants for that number of Class A Ordinary Shares equal to the quotient obtained by dividing (x) the product of the number of Class A Ordinary Shares underlying the warrants, multiplied by the difference between the exercise price of the warrants and the “fair market value” (defined below) by (y) the fair market value. In this case, the “fair market value” shall mean the average reported last sale price of the Class A Ordinary Shares traded in the form of ADSs for the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of warrants. Whether we will exercise our option to require all holders to exercise their warrants on a “cashless basis” will depend on a variety of factors including the price of our Class A Ordinary Shares at the time the warrants are called for redemption, our cash needs at such time and concerns regarding dilutive stock issuances.
The exercise price and number of Class A Ordinary Shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. However, the warrants will not be adjusted for issuances of Class A Ordinary Shares at a price below their respective exercise prices.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of Class A Ordinary Shares and any voting rights until they exercise their warrants and receive Class A Ordinary Shares. After the issuance of Class A Ordinary Shares upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.
Warrant holders may elect to be subject to a restriction on the exercise of their warrants such that an electing warrant holder would not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially own in excess of 4.9% or 9.8% (or such other amount specified by the holder) of the Class A Ordinary Shares outstanding.
No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we will, upon exercise, round up or down to the nearest whole number the number of Class A Ordinary Shares to be issued to the warrant holder.
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PIPE Warrants
Each warrant represents the right to purchase one Class A Ordinary Share in the form of ADSs at a price of $3.00 per share or $3.00 per ADS, subject to adjustment as discussed below. The warrants will be exercisable for cash only if a registration statement registering the Warrant ADSs is not effective at the time of exercise.
The exercise price and number of Class A Ordinary Shares issuable on exercise of the warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or our recapitalization, reorganization, merger or consolidation. Further, the exercise price of the warrants will be adjusted if we issue Class A Ordinary Shares at a price below the exercise price of the warrants to be the same as such issuance price.
The warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price, by certified or official bank check payable to us, for the number of warrants being exercised. The warrant holders do not have the rights or privileges of holders of Class A Ordinary Shares and any voting rights until they exercise their warrants and receive Class A Ordinary Shares. After the issuance of Class A Ordinary Shares upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.
Warrant holders are not be able to exercise their warrants to the extent that, after giving effect to such exercise, such holder would beneficially own in excess of 9.9% of the our total issued and outstanding common stock or voting shares.
No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we may, at our option(i) pay an amount in cash equal to the exercise price multiplied by such fraction or (ii) round the number of ADSs issuable, up to the next whole number.
2020 Warrants
Three series of the 2020 Warrants are exercisable for, in the aggregate, up to 13,700,000 ADSs. The Series B Warrant has a two-year term and is immediately exercisable at an exercise price of $2.00 per ADS. The Series A Warrant is exercisable until on or prior to 5:00 p.m. (New York City time) on December 14, 2027 at an exercise price of $2.45 per ADS. The Series C Warrant has a seven-year term and is immediately exercisable at an exercise price of $2.45 per ADS, but the exercisability of which shall be in proportion to the exercise of the Series B Warrant by the holder of the Series C Warrant. The 2020 Warrants include an adjustment provision in the event of a December 2020 Share Combination Event (as defined below) that reduces to exercise price of such warrants to the Market Price on the sixteenth (16th) trading day following the December 2020 Share Combination Event. Additionally, if we issue ordinary shares or ordinary share equivalents for an effective price less than $2.20, subject to adjustment, then the exercise price shall be adjusted to such lower price and the number of ADSs issuable upon exercise of the 2020 Warrants shall be adjusted proportionally to maintain the aggregate exercise price of the 2020 Warrants. Further, for each $1 million of subscription amount under the 2020 Debenture and the Series B Warrant, the purchaser shall receive a certificate representing 50,000 ADSs (or such lesser number on a ratable basis if the Subscription Amount is less than $1 million). As a result, there are an additional 80,000 ADSs to be issued in relation to the full subscription of the 2020 Debentures and an additional 500,000 ADSs issuable (50,000 ADSs for every $1 million in aggregate paid for the 2020 Warrants) upon the full exercise of the Series B Warrant.
The 2020 Warrants are subject to a “conversion blocker” such that the each of the holders of our 2020 Warrants cannot convert the 2020 Warrants to the extent that the conversion would result in the holder and its affiliates holding more than 4.99% of the outstanding common stock (which the holder can increase to 9.99% upon at least 61 days prior written notice to us).
The warrant holders do not have the rights or privileges of holders of Class A Ordinary Shares and any voting rights until they exercise their warrants and receive Class A Ordinary Shares. After the issuance of Class A Ordinary Shares upon exercise of the warrants, each holder will be entitled to one vote for each share held of record on all matters to be voted on by shareholders.
No fractional shares will be issued upon exercise of the warrants. If, upon exercise of the warrants, a holder would be entitled to receive a fractional interest in a share, we may, at our option (i) pay an amount in cash equal to the exercise price multiplied by such fraction or (ii) round the number of ADSs issuable, up to the next whole number.
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Notwithstanding the foregoing, if a registration statement covering the ADSs issuable upon exercise of such warrants is not effective 120 days following December 14, 2020, and prior to the respective expiration date of the 2020 Warrants, warrant holders may, until such time as there is an effective registration statement and during any period when we shall have failed to maintain an effective registration statement, exercise warrants on a cashless basis in the same manner as if we called the warrants for redemption and required all holders to exercise their warrants on a “cashless basis.”
Debentures
2020 Debentures
The 2020 Debentures mature 30 months from the dates of issuance and may be redeemed by us prior to maturity as described below. The 2020 Debentures accrue interest at 9% per annum payable quarterly in cash or, in lieu of cash payment, in our ADSs, subject to adjustment and certain customary equity conditions. If interest is paid in our ADSs, the interest conversion rate will be 60% of the lesser of the then conversion price and the average of the five daily volume weighted average prices (“2020 Debentures VWAP”) of our ordinary shares immediately prior to the applicable interest payment date. As a result, an additional 300,000 ADSs are issuable and will be paid in kind pursuant to the 2020 Debentures if the Company elects not to pay interest quarterly in cash. The 2020 Debentures are senior secured obligations of ours secured by substantially all of our assets pursuant to the terms of a security agreement dated as of December 14, 2020. The 2020 Debentures are convertible at $2.00 per ADS at any time.
The 2020 Debentures are subject to a “conversion blocker” such that the each of the holders of our 2020 Debentures cannot convert the 2020 Debentures to the extent that the conversion would result in the holder and its affiliates holding more than 4.99% of the outstanding common stock (which the holder can increase to 9.99% upon at least 61 days prior written notice to us).
Commencing on the one year anniversary date of the effective date of this registration statement, so long as at such time the company meets customary equity conditions including the effectiveness of a registration statement registering all of the ADSs issuable upon conversion of the 2020 Debenture (“December 2020 Conversion Shares”), there is no existing event of default and the ADSs continue to trade on the primary trading market, we may at our option call for redemption all or part of the 2020 Debentures, upon not more than 20 trading days written notice, for an amount equal to 115% of the sum of the principal amount plus accrued but unpaid interest. Additionally, in connection with any such redemption, we will issue to the holder thereof an ADS purchase warrant, in the form of the Series A Warrant, to purchase up to 50% of the number of ADSs underlying the 2020 Debenture subject to such redemption at an exercise price of $2.45, subject to adjustment thereunder.
Any stock splits, reverse splits, recapitalizations, mergers, combinations and asset sales, stock dividends, and similar events (“December 2020 Share Combination Event”) will result in a customary adjustment of the conversion price of the 2020 Debentures. Additionally, the 2020 Debentures include an adjustment provision that, subject to certain exceptions, on the sixteenth (16th) trading day, following the December 2020 Share Combination Event, if the 5 lowest 2020 Debentures VWAPs during the 20 trading days immediately prior to the December 2020 Share Combination Event (“December 2020 Market Price”) is less than the then conversion price, then the conversion price of the 2020 Debentures will be reduced to equal to the December 2020 Market Price. In addition to the foregoing, the conversion price of the 2020 Debenture also includes full ratchet anti-dilution in the event that the Company issues any ADSs or ordinary shares for a per share purchase price less than the then conversion price of the 2020 Debentures. In addition the consent of a majority of the then outstanding 2020 Debenture holders will be required before we can (i) other than permitted indebtedness, enter into, create, incur, assume, guarantee or suffer to exist any indebtedness for borrowed money of any kind, including, but not limited to, a guarantee, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom; (ii) other than permitted liens, enter into, create, incur, assume or suffer to exist any Liens of any kind, on or with respect to any of its property or assets now owned or hereafter acquired or any interest therein or any income or profits therefrom; (iii) amend, alter, or repeal any provision of our charter documents, including, without limitation, certificate of incorporation or bylaws, in a manner adverse to the 2020 Debentures; (iv) repay, repurchase or offer to repay, repurchase or otherwise acquire more than a de minimis number of ADSs, ordinary shares or ordinary shares equivalents other than as to (a) the December 2020 Conversion Shares or the shares issuable upon exercise of the Series B Warrant as permitted or required under the related documents pursuant to the Securities Purchase Agreement and (b) repurchases of ADSs, ordinary shares or ordinary shares equivalents of departing officers and directors of the Company, provided that such repurchases shall not exceed an aggregate of $100,000 for all officers and directors during the term of the 2020 Debenture; (v) repay,
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repurchase or offer to repay, repurchase or otherwise acquire any indebtedness, other than the 2020 Debentures if on a pro-rata basis, other than regularly scheduled principal and interest payments as such terms are in effect as of the original issue date of the 2020 Debentures, provided that such payments shall not be permitted if, at such time, or after giving effect to such payment, any event of default exist or occur; (vi) pay cash dividends or distributions on any equity securities of the Company; (vii) enter into any transaction with any affiliate of the Company which would be required to be disclosed in any public filing with the SEC, unless such transaction is made on an arm’s-length basis and expressly approved by a majority of the disinterested directors of the Company (even if less than a quorum otherwise required for board approval); (viii) as to our subsidiaries other than Lion Wealth Limited, Lion Foreign Exchange Limited, and Lion Wealth Management Limited, grant any party other than the selling stockholder a security interest in the assets of such subsidiaries; or (ix) enter into any agreement with respect to any of the above foregoing.
Series A Convertible Preferred Shares
The following summary of the terms and provisions of the Series A Convertible Preferred Shares does not purport to be complete and is qualified in its entirety by reference to our Articles of Incorporation, the form of Certificate of Designation establishing the Series A Convertible Preferred Shares is filed as an exhibit to the registration statement of which this prospectus is a part, and incorporated by reference herein.
Authorization.
The Series A Convertible Preferred Shares are a new series of preferred shares. As of the date of this prospectus and prior to the issuance of any shares in this offering, there were no Series A Convertible Preferred Shares issued. Upon conversion of the Series A Convertible Preferred Shares at the initial conversion price of $3.00 per share, there will be 2,333,333 ADSs outstanding. The Series A Convertible Preferred Stock contained a “full ratchet” anti-dilution provision which would reduce the respective conversion price or exercise prices to the effective price at which any future securities are sold (the “Provision”). As part consideration of entering into the Securities Purchase Agreement dated December 13, 2021, the selling shareholder agreed to waive such the Provision and the Company and the selling shareholder agreed to set the conversion price of the Series A Preferred Stock will be adjusted to the lower of $1.75 or 90% of the lowest daily volume-weighted average price in the last 10 trading days prior to conversion.
Dividends.
Dividends on the Series A Convertible Preferred Shares offered hereby are cumulative and will be payable on quarterly on January 1, April 1, July 1 and October 1, beginning on the first such date after the six month anniversary of the closing date of the February Private Placement, when, as and if declared by our Board of Directors. Dividends will be payable out of amounts legally available therefor at a rate equal to 8.00% per annum. No dividend shall accrue hereunder within six (6) months of the closing date of the February Private Placement, regardless of whether the Registration Statement is effective or not. The Series A Convertible Preferred Shares will be credited as having accrued daily dividends since the date after the six month anniversary of the closing date of the February Private Placement. Any dividend payable on the Series A Convertible Preferred Shares will be computed on-the-basis-of a 360-day year consisting of twelve 30-day months.
Voting Rights.
The Series A Convertible Preferred Shares will not vote with the ordinary shares.
Optional Redemption.
The Series A Convertible Preferred Shares shall redeemable by us by an optional redemption notice to the selling shareholder at any time after (a) this Registration Statement has been declared effective by the SEC, (b) all of the underlying shares pursuant to the December Private Placement have been sold pursuant to Rule 144 or may be sold pursuant to Rule 144 without the requirement for the Company to be in compliance with the current public information required under Rule 144 and without volume or manner-of-sale restrictions, (c) following the one year anniversary of the closing date of the February Private Placement (being February 18, 2021), provided that a holder of the underlying shares pursuant to the February Private Placement is not an Affiliate of the Company, or (d) all of the underlying shares pursuant to the February Private Placement may be sold pursuant to an exemption from registration under Section 4(a)(1) of the Securities Act without volume or manner-of-sale restrictions and Company Counsel has
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delivered to such holders a standing written unqualified opinion that resales may then be made by such holders of the Underlying Shares pursuant to such exemption which opinion shall be in form and substance reasonably acceptable to such holders (the “Optional Redemption Date”) except as described below. On and after such date, we may redeem the Series A Convertible Preferred Shares, in whole or in part, at any time or from time to time, for cash at a redemption price equal to $1,000.00 per share for a maximum of 7,000 shares, plus any accumulated and unpaid dividends, on the 90th trading day following the optional redemption notice. There is currently no established trading market for the Series A Convertible Preferred Shares.
Liquidation Preference of Series A Convertible Preferred Shares.
If we liquidate, dissolve or wind up, holders of the Series A Convertible Preferred Shares will have the right to receive $1,000.00 per share for a maximum of 7,000 shares, plus all accrued and unpaid dividends (whether or not earned or declared) to and including the date of payment, before any payments are made to the holders of our ADSs and all other ADSs equivalents.
Ranking.
The Series A Preferred Shares, with respect to dividend rights and rights upon our voluntary or involuntary liquidation, dissolution or winding up, will rank:
• senior to our ADSs and all other securities of our Group which would entitle the holder thereof to acquire at any time ADSs, including, without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exercisable or exchangeable for, or otherwise entitles the holder thereof to receive, ADSs, the terms of which provide that such equity securities will rank junior to the Series A Convertible Preferred Shares;
• on junior or parity (pari passu) with any equity securities the terms of which provide that such equity securities will rank to the Preferred Stock in dividend rights or liquidation preference; and
We will be restricted in our ability to issue or create any class or series of capital stock ranking senior to the Series A Convertible Preferred Shares with respect to dividends or distributions.
Registrar, Transfer Agent and Dividend Paying Agent
The registrar, transfer agent and dividend payment agent for our ADSs is American Stock Transfer & Trust Company, LLC.
Listing
Our ADSs and 2019 Warrants are listed on the NASDAQ under the symbols “LGHL” and “LGHLW”, respectively. We do not plan on applying to list the 2021 Registrable Warrants on the Nasdaq, or any other national securities exchange.
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DESCRIPTION OF AMERICAN DEPOSITARY SHARES
Deutsche Bank Trust Company Americas, as depositary, will register and deliver the ADSs, subject to the terms of a deposit agreement among us, the depositary and you, as an ADS holder, and the beneficial owners of ADSs. Each ADS represents one Class A Ordinary Share, deposited with Deutsche Bank AG, Hong Kong Branch, as custodian for the depositary. Each ADS will also represent ownership of any other securities, cash or other property which may be held by the depositary. The depositary’s corporate trust office at which the ADSs will be administered is located at 60 Wall Street, New York, NY 10005, USA. The principal executive office of the depositary is located at 60 Wall Street, New York, NY 10005, USA.
The Direct Registration System, or DRS, is a system administered by The Depository Trust Company, or DTC, pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto.
We will not treat ADS holders as our shareholders and accordingly, you, as an ADS holder, will not have shareholder rights. Cayman Islands law governs shareholder rights. The depositary will be the holder of the Class A Ordinary Shares underlying your ADSs. As a holder of ADSs, you will have ADS holder rights. A deposit agreement among us, the depositary and you, as an ADS holder, and the beneficial owners of ADSs sets out ADS holder rights as well as the rights and obligations of the depositary. The laws of the State of New York govern the deposit agreement and the ADSs. See “- Jurisdiction and Arbitration.”
The following is a summary of the material provisions of the deposit agreement. For more complete information, you should read the entire deposit agreement and the form of American Depositary Receipt. Class A Ordinary Shares deposited with the depositary that are restricted securities as defined under the deposit agreement (which includes shares held by our affiliates) are not eligible for deposit under the terms of the deposit agreement, but rather under the terms of a separate restricted deposit agreement, pursuant to which you would receive restricted ADSs and should also review the form of Restricted American Depositary Receipt.
Holding the ADSs
How will you hold your ADSs?
You may hold ADSs either (1) directly (a) by having an American Depositary Receipt, or ADR, which is a certificate evidencing a specific number of ADSs, registered in your name, or (b) by holding ADSs in DRS, or (2) indirectly through your broker or other financial institution. If you hold ADSs directly, you are an ADS holder. This description assumes you hold your ADSs directly. ADSs will be issued through DRS, unless you specifically request certificated ADRs. If you hold the ADSs indirectly, you must rely on the procedures of your broker or other financial institution to assert the rights of ADS holders described in this section. You should consult with your broker or financial institution to find out what those procedures are.
Dividends and Other Distributions
How will you receive dividends and other distributions on the shares?
The depositary has agreed to pay to you the cash dividends or other distributions it or the custodian receives on Class A Ordinary Shares or other deposited securities, after deducting its fees and expenses. You will receive these distributions in proportion to the number of Class A Ordinary Shares your ADSs represent as of the record date (which will be as close as practicable to the record date for our Class A Ordinary Shares) set by the depositary with respect to the ADSs.
Cash. The depositary will convert or cause to be converted any cash dividend or other cash distribution we pay on the Class A Ordinary Shares or any net proceeds from the sale of any Class A Ordinary Shares, rights, securities or other entitlements under the terms of the deposit agreement into U.S. dollars if it can do so on a practicable basis, and can transfer the U.S. dollars to the United States and will distribute promptly the amount thus received. If the depositary shall determine in its judgment that such conversions or transfers are not practical or lawful or if any government approval or license is needed and cannot be obtained at a reasonable cost within a reasonable period or otherwise sought, the deposit agreement allows the depositary to distribute the foreign currency only to those ADS holders to whom it is possible to do so. It will hold or cause the custodian to hold the foreign currency it cannot convert for the account of the ADS holders who have not been paid and such funds will be held for the respective accounts of the ADS holders. It will not invest the foreign currency and it will not be liable for any interest for the respective accounts of the ADS holders.
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Before making a distribution, any taxes or other governmental charges, together with fees and expenses of the depositary, that must be paid, will be deducted. See “Taxation.” It will distribute only whole U.S. dollars and cents and will round down fractional cents to the nearest whole cent. If the exchange rates fluctuate during a time when the depositary cannot convert the foreign currency, you may lose some or all of the value of the distribution.
Shares. For any Class A Ordinary Shares we distribute as a dividend or free distribution, either (1) the depositary will distribute additional ADSs representing such Class A Ordinary Shares or (2) existing ADSs as of the applicable record date will represent rights and interests in the additional Class A Ordinary Shares distributed, to the extent reasonably practicable and permissible under law, in either case, net of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. The depositary will only distribute whole ADSs. It will try to sell Class A Ordinary Shares which would require it to deliver a fractional ADS and distribute the net proceeds in the same way as it does with cash. The depositary may sell a portion of the distributed Class A Ordinary Shares sufficient to pay its fees and expenses, and any taxes and governmental charges, in connection with that distribution.
Elective Distributions in Cash or Shares. If we offer holders of our Class A Ordinary Shares the option to receive dividends in either cash or shares, the depositary, after consultation with us and having received timely notice as described in the deposit agreement of such elective distribution by us, has discretion to determine to what extent such elective distribution will be made available to you as a holder of the ADSs. We must timely first instruct the depositary to make such elective distribution available to you and furnish it with satisfactory evidence that it is legal to do so. The depositary could decide it is not legal or reasonably practicable to make such elective distribution available to you. In such case, the depositary shall, on the basis of the same determination as is made in respect of the Class A Ordinary Shares for which no election is made, distribute either cash in the same way as it does in a cash distribution, or additional ADSs representing Class A Ordinary Shares in the same way as it does in a share distribution. The depositary is not obligated to make available to you a method to receive the elective dividend in shares rather than in ADSs. There can be no assurance that you will be given the opportunity to receive elective distributions on the same terms and conditions as the holders of Class A Ordinary Shares.
Rights to Purchase Additional Shares. If we offer holders of our Class A Ordinary Shares any rights to subscribe for additional shares, the depositary shall having received timely notice as described in the deposit agreement of such distribution by us, consult with us, and we must determine whether it is lawful and reasonably practicable to make these rights available to you. We must first instruct the depositary to make such rights available to you and furnish the depositary with satisfactory evidence that it is legal to do so. If the depositary decides it is not legal or reasonably practicable to make the rights available but that it is lawful and reasonably practicable to sell the rights, the depositary will endeavor to sell the rights and in a riskless principal capacity or otherwise, at such place and upon such terms (including public or private sale) as it may deem proper distribute the net proceeds in the same way as it does with cash. The depositary will allow rights that are not distributed or sold to lapse. In that case, you will receive no value for them.
If the depositary makes rights available to you, it will establish procedures to distribute such rights and enable you to exercise the rights upon your payment of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. The Depositary shall not be obliged to make available to you a method to exercise such rights to subscribe for Class A Ordinary Shares (rather than ADSs).
U.S. securities laws may restrict transfers and cancellation of the ADSs represented by shares purchased upon exercise of rights. For example, you may not be able to trade these ADSs freely in the United States. In this case, the depositary may deliver restricted depositary shares that have the same terms as the ADSs described in this section except for changes needed to put the necessary restrictions in place.
There can be no assurance that you will be given the opportunity to exercise rights on the same terms and conditions as the holders of Class A Ordinary Shares or be able to exercise such rights.
Other Distributions. Subject to receipt of timely notice, as described in the deposit agreement, from us with the request to make any such distribution available to you, and provided the depositary has determined such distribution is lawful and reasonably practicable and feasible and in accordance with the terms of the deposit agreement, the depositary will distribute to you anything else we distribute on deposited securities by any means it may deem practicable, upon your payment of applicable fees, charges and expenses incurred by the depositary and taxes and/or other governmental charges. If any of the conditions above are not met, the depositary will endeavor to sell, or cause to be sold, what we
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distributed and distribute the net proceeds in the same way as it does with cash; or, if it is unable to sell such property, the depositary may dispose of such property in any way it deems reasonably practicable under the circumstances for nominal or no consideration, such that you may have no rights to or arising from such property.
The depositary is not responsible if it decides that it is unlawful or impractical to make a distribution available to any ADS holders. We have no obligation to register ADSs, shares, rights or other securities under the Securities Act. We also have no obligation to take any other action to permit the distribution of ADSs, shares, rights or anything else to ADS holders. This means that you may not receive the distributions we make on our shares or any value for them if we and/or the depositary determines that it is illegal or not practicable for us or the depositary to make them available to you.
Deposit, Withdrawal and Cancellation
How are ADSs issued?
The depositary will deliver ADSs if you or your broker deposit Class A Ordinary Shares or evidence of rights to receive Class A Ordinary Shares with the custodian. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will register the appropriate number of ADSs in the names you request and will deliver the ADSs to or upon the order of the person or persons entitled thereto.
When you make a deposit of Class A Ordinary Shares, you will be responsible for transferring good and valid title to the depositary. As such, you will be deemed to represent and warrant that:
• the Class A Ordinary Shares are duly authorized, validly issued, fully paid, non-assessable, and legally obtained;
• all preemptive (and similar) rights, if any, with respect to such Class A Ordinary Shares have been validly waived or exercised;
• you are duly authorized to deposit the Class A Ordinary Shares;
• the Class A Ordinary Shares presented for deposit are free and clear of any lien, encumbrance, security interest, charge, mortgage, or adverse claim, and are not, and the ADSs Issuable upon such deposit will not be, “restricted securities” (as defined in the deposit agreement);
• the Class A Ordinary Shares presented for deposit have not been stripped of any rights or entitlements; and
• the Class A Ordinary Shares are not subject to any lock-up agreement, or the lock-up restrictions imposed have expired or been validly waived.
If any of the representations or warranties is incorrect in any way, we and the depositary may, at your cost and expense, take any and all actions necessary to correct the consequences of the misrepresentation.
How do ADS holders cancel an American Depositary Share?
You may turn in your ADSs at the depositary’s corporate trust office or by providing appropriate instructions to your broker. Upon payment of its fees and expenses and of any taxes or charges, such as stamp taxes or stock transfer taxes or fees, the depositary will deliver the Class A Ordinary Shares and any other deposited securities underlying the ADSs to you or a person you designate at the office of the custodian. Or, at your request, risk and expense, the depositary will deliver the deposited securities at its corporate trust office, to the extent permitted by law.
How do ADS holders interchange between Certificated ADSs and Uncertificated ADSs?
You may surrender your ADR to the depositary for the purpose of exchanging your ADR for uncertificated ADSs. The depositary will cancel that ADR and will send you a statement confirming that you are the owner of uncertificated ADSs. Alternatively, upon receipt by the depositary of a proper instruction from a holder of uncertificated ADSs requesting the exchange of uncertificated ADSs for certificated ADSs, the depositary will execute and deliver to you an ADR evidencing those ADSs.
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Voting Rights
How do you vote?
You may instruct the depositary to vote the Class A Ordinary Shares or other deposited securities underlying your ADSs at any meeting at which you are entitled to vote pursuant to any applicable law, the provisions of our memorandum and articles of association, and the provisions of or governing the deposited securities. Otherwise, you could exercise your right to vote directly if you withdraw the Class A Ordinary Shares. However, you may not know about the meeting sufficiently enough in advance to withdraw the Class A Ordinary Shares.
If we ask for your instructions and upon timely notice from us by regular, ordinary mail delivery, or by electronic transmission, as described in the deposit agreement, the depositary will notify you of the upcoming meeting at which you are entitled to vote pursuant to any applicable law, the provisions of our memorandum and articles of association, and the provisions of or governing the deposited securities, and arrange to deliver our voting materials to you. The materials will include or reproduce (a) such notice of meeting or solicitation of consents or proxies; (b) a statement that the ADS holders at the close of business on the ADS record date will be entitled, subject to any applicable law, the provisions of our memorandum and articles of association, and the provisions of or governing the deposited securities, to instruct the depositary as to the exercise of the voting rights, if any, pertaining to the Class A Ordinary Shares or other deposited securities represented by such holder’s ADSs; and (c) a brief statement as to the manner in which such instructions may be given to the depositary or deemed given in accordance with the second to last sentence of this paragraph if no instruction is received to the depositary to give a discretionary proxy to a person designated by us. Voting instructions may be given only in respect of a number of ADSs representing an integral number of Class A Ordinary Shares or other deposited securities. For instructions to be valid, the depositary must receive them in writing on or before the date specified. The depositary will try, as far as practical, subject to applicable law and the provisions of our memorandum and articles of association, to vote or to have its agents vote the Class A Ordinary Shares or other deposited securities (in person or by proxy) as you instruct. The depositary will only vote or attempt to vote as you instruct. If we timely requested the depositary to solicit your instructions but no instructions are received by the depositary from an owner with respect to any of the deposited securities represented by the ADSs of that owner on or before the date established by the depositary for such purpose, the depositary shall deem that owner to have instructed the depositary to give a discretionary proxy to a person designated by us with respect to such deposited securities, and the depositary shall give a discretionary proxy to a person designated by us to vote such deposited securities. However, no such instruction shall be deemed given and no such discretionary proxy shall be given with respect to any matter if we inform the depositary we do not wish such proxy given, substantial opposition exists or the matter materially and adversely affects the rights of holders of the ordinary shares.
We cannot assure you that you will receive the voting materials in time to ensure that you can instruct the depositary to vote the Class A Ordinary Shares underlying your ADSs. In addition, there can be no assurance that ADS holders and beneficial owners generally, or any holder or beneficial owner in particular, will be given the opportunity to vote or cause the custodian to vote on the same terms and conditions as the holders of our Class A Ordinary Shares.
The depositary and its agents are not responsible for failing to carry out voting instructions or for the manner of carrying out voting instructions. This means that you may not be able to exercise your right to vote and you may have no recourse if the Class A Ordinary Shares underlying your ADSs are not voted as you requested.
In order to give you a reasonable opportunity to instruct the depositary as to the exercise of voting rights relating to deposited securities, if we request the depositary to act, we will give the depositary notice of any such meeting and details concerning the matters to be voted at least 30 business days in advance of the meeting date.
Compliance with Regulations
Information Requests
Each ADS holder and beneficial owner shall (a) provide such information as we or the depositary may request pursuant to law, including, without limitation, relevant Cayman Islands law, any applicable law of the United States of America, our memorandum and articles of association, any resolutions of our Board of Directors adopted pursuant to such memorandum and articles of association, the requirements of any markets or exchanges upon which the Class A Ordinary Shares, ADSs or ADRs are listed or traded, or to any requirements of any electronic book-entry system by which the ADSs or ADRs may be transferred, regarding the capacity in which they own or owned ADRs, the identity of
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any other persons then or previously interested in such ADRs and the nature of such interest, and any other applicable matters, and (b) be bound by and subject to applicable provisions of the laws of the Cayman Islands, our memorandum and articles of association, and the requirements of any markets or exchanges upon which the ADSs, ADRs or Class A Ordinary Shares are listed or traded, or pursuant to any requirements of any electronic book-entry system by which the ADSs, ADRs or Class A Ordinary Shares may be transferred, to the same extent as if such ADS holder or beneficial owner held Class A Ordinary Shares directly, in each case irrespective of whether or not they are ADS holders or beneficial owners at the time such request is made.
Disclosure of Interests
Each ADS holder and beneficial owner shall comply with our requests pursuant to Cayman Islands law, the rules and requirements of the Nasdaq Stock Market and any other stock exchange on which the Class A Ordinary Shares are, or will be, registered, traded or listed or our memorandum and articles of association, which requests are made to provide information, inter alia, as to the capacity in which such ADS holder or beneficial owner owns ADS and regarding the identity of any other person interested in such ADS and the nature of such interest and various other matters, whether or not they are ADS holders or beneficial owners at the time of such requests.
Fees and Expenses
As an ADS holder, you will be required to pay the following service fees to the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs):
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Service |
Fees |
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To any person to which ADSs are issued or to any person to which a distribution is made in respect of ADS distributions pursuant to stock dividends or other free distributions of stock, bonus distributions, stock splits or other distributions (except where converted to cash) |
Up to US$0.05 per ADS issued |
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Cancellation of ADSs, including the case of termination of the deposit agreement |
Up to US$0.05 per ADS cancelled |
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Distribution of cash dividends |
Up to US$0.05 per ADS held |
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Distribution of cash entitlements (other than cash dividends) and/or cash proceeds from the sale of rights, securities and other entitlements |
Up to US$0.05 per ADS held |
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Distribution of ADSs pursuant to exercise of rights. |
Up to US$0.05 per ADS held |
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Distribution of securities other than ADSs or rights to purchase additional ADSs |
Up to US$0.05 per ADS held |
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Depositary services |
Up to US$0.05 per ADS held on the applicable record date(s) established by the depositary bank |
As an ADS holder, you will also be responsible to pay certain fees and expenses incurred by the depositary bank and certain taxes and governmental charges (in addition to any applicable fees, expenses, taxes and other governmental charges payable on the deposited securities represented by any of your ADSs) such as:
• Fees for the transfer and registration of Class A Ordinary Shares charged by the registrar and transfer agent for the Class A Ordinary Shares in the Cayman Islands (i.e., upon deposit and withdrawal of Class A Ordinary Shares).
• Expenses incurred for converting foreign currency into U.S. dollars.
• Expenses for cable, telex and fax transmissions and for delivery of securities.
• Taxes and duties upon the transfer of securities, including any applicable stamp duties, any stock transfer charges or withholding taxes (i.e., when Class A Ordinary Shares are deposited or withdrawn from deposit).
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• Fees and expenses incurred in connection with the delivery or servicing of Class A Ordinary Shares on deposit.
• Fees and expenses incurred in connection with complying with exchange control regulations and other regulatory requirements applicable to Class A Ordinary Shares, deposited securities, ADSs and ADRs.
• Any applicable fees and penalties thereon.
The depositary fees payable upon the issuance and cancellation of ADSs are typically paid to the depositary bank by the brokers (on behalf of their clients) receiving the newly issued ADSs from the depositary bank and by the brokers (on behalf of their clients) delivering the ADSs to the depositary bank for cancellation. The brokers in turn charge these fees to their clients. Depositary fees payable in connection with distributions of cash or securities to ADS holders and the depositary services fee are charged by the depositary bank to the holders of record of ADSs as of the applicable ADS record date.
The depositary fees payable for cash distributions are generally deducted from the cash being distributed or by selling a portion of distributable property to pay the fees. In the case of distributions other than cash (i.e., share dividends, rights), the depositary bank charges the applicable fee to the ADS record date holders concurrent with the distribution. In the case of ADSs registered in the name of the investor (whether certificated or uncertificated in direct registration), the depositary bank sends invoices to the applicable record date ADS holders. In the case of ADSs held in brokerage and custodian accounts (via DTC), the depositary bank generally collects its fees through the systems provided by DTC (whose nominee is the registered holder of the ADSs held in DTC) from the brokers and custodians holding ADSs in their DTC accounts. The brokers and custodians who hold their clients’ ADSs in DTC accounts in turn charge their clients’ accounts the amount of the fees paid to the depositary banks.
In the event of refusal to pay the depositary fees, the depositary bank may, under the terms of the deposit agreement, refuse the requested service until payment is received or may set off the amount of the depositary fees from any distribution to be made to the ADS holder.
The depositary may make payments to us or reimburse us for certain costs and expenses, by making available a portion of the ADS fees collected in respect of the ADR program or otherwise, upon such terms and conditions as we and the depositary bank agree from time to time.
Payment of Taxes
You will be responsible for any taxes or other governmental charges payable, or which become payable, on your ADSs or on the deposited securities represented by any of your ADSs. The depositary may refuse to register or transfer your ADSs or allow you to withdraw the deposited securities represented by your ADSs until such taxes or other charges are paid. It may apply payments owed to you or sell deposited securities represented by your ADSs to pay any taxes owed and you will remain liable for any deficiency. If the depositary sells deposited securities, it will, if appropriate, reduce the number of ADSs to reflect the sale and pay to you any net proceeds, or send to you any property, remaining after it has paid the taxes. You agree to indemnify us, the depositary, the custodian and each of our and their respective agents, directors, employees and affiliates for, and hold each of them harmless from, any claims with respect to taxes (including applicable interest and penalties thereon) arising from any refund of taxes, reduced rate of withholding at source or other tax benefit obtained for you. Your obligations under this paragraph shall survive any transfer of ADRs, any surrender of ADRs and withdrawal of deposited securities or the termination of the deposit agreement.
Reclassifications, Recapitalizations and Mergers
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If we: |
Then: |
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Change the nominal or par value of our Class A Ordinary Shares |
The cash, shares or other securities received by the depositary will become deposited securities. |
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Reclassify, split up or consolidate any of the deposited securities |
Each ADS will automatically represent its equal share of the new deposited securities. |
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Distribute securities on the Class A Ordinary Shares that are not distributed to you, or Recapitalize, reorganize, merge, liquidate, sell all or substantially all of our assets, or take any similar action |
The depositary may distribute some or all of the cash, shares or other securities it received. It may also deliver new ADSs or ask you to surrender your outstanding ADRs in exchange for new ADRs identifying the new deposited securities. |
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Amendment and Termination
How may the deposit agreement be amended?
We may agree with the depositary to amend the deposit agreement and the form of ADR without your consent for any reason. If an amendment adds or increases fees or charges, except for taxes and other governmental charges or expenses of the depositary for registration fees, facsimile costs, delivery charges or similar items, including expenses incurred in connection with foreign exchange control regulations and other charges specifically payable by ADS holders under the deposit agreement, or materially prejudices a substantial existing right of ADS holders, it will not become effective for outstanding ADSs until 30 days after the depositary notifies ADS holders of the amendment. At the time an amendment becomes effective, you are considered, by continuing to hold your ADSs, to agree to the amendment and to be bound by the ADRs and the deposit agreement as amended. If any new laws are adopted which would require the deposit agreement to be amended in order to comply therewith, we and the depositary may amend the deposit agreement in accordance with such laws and such amendment may become effective before notice thereof is given to ADS holders.
How may the deposit agreement be terminated?
The depositary will terminate the deposit agreement if we ask it to do so, in which case the depositary will give notice to you at least 90 days prior to termination. The depositary may also terminate the deposit agreement if the depositary has told us that it would like to resign, or if we have removed the depositary, and in either case we have not appointed a new depositary within 90 days. In either such case, the depositary must notify you at least 30 days before termination.
After termination, the depositary and its agents will do the following under the deposit agreement but nothing else: collect distributions on the deposited securities, sell rights and other property and deliver Class A Ordinary Shares and other deposited securities upon cancellation of ADSs after payment of any fees, charges, taxes or other governmental charges. Six months or more after the date of termination, the depositary may sell any remaining deposited securities by public or private sale. After that, the depositary will hold the money it received on the sale, as well as any other cash it is holding under the deposit agreement, for the pro rata benefit of the ADS holders that have not surrendered their ADSs. It will not invest the money and has no liability for interest. After such sale, the depositary’s only obligations will be to account for the money and other cash. After termination, we shall be discharged from all obligations under the deposit agreement except for our obligations to the depositary thereunder.
Books of Depositary
The depositary will maintain ADS holder records at its depositary office. You may inspect such records at such office during regular business hours but solely for the purpose of communicating with other holders in the interest of business matters relating to the Company, the ADRs and the deposit agreement.
The depositary will maintain facilities in the Borough of Manhattan, The City of New York to record and process the issuance, cancellation, combination, split-up and transfer of ADRs.
These facilities may be closed at any time or from time to time when such action is deemed necessary or advisable by the depositary in connection with the performance of its duties under the deposit agreement or at our reasonable written request.
Limitations on Obligations and Liability
Limits on our Obligations and the Obligations of the Depositary and the Custodian; Limits on Liability to Holders of ADSs
The deposit agreement expressly limits our obligations and the obligations of the depositary and the custodian. It also limits our liability and the liability of the depositary. The depositary and the custodian:
• are only obligated to take the actions specifically set forth in the deposit agreement without gross negligence or willful misconduct;
• are not liable if any of us or our respective controlling persons or agents are prevented or forbidden from, or subjected to any civil or criminal penalty or restraint on account of, or delayed in, doing or performing any act or thing required by the terms of the deposit agreement and any ADR, by reason of any provision
155
of any present or future law or regulation of the United States or any state thereof, the Cayman Islands or any other country, or of any other governmental authority or regulatory authority or stock exchange, or on account of the possible criminal or civil penalties or restraint, or by reason of any provision, present or future, of our memorandum and articles of association or any provision of or governing any deposited securities, or by reason of any act of God or war or other circumstances beyond its control (including, without limitation, nationalization, expropriation, currency restrictions, work stoppage, strikes, civil unrest, revolutions, rebellions, explosions and computer failure);
• are not liable by reason of any exercise of, or failure to exercise, any discretion provided for in the deposit agreement or in our memorandum and articles of association or provisions of or governing deposited securities;
• are not liable for any action or inaction of the depositary, the custodian or us or their or our respective controlling persons or agents in reliance upon the advice of or information from legal counsel, any person presenting Class A Ordinary Shares for deposit or any other person believed by it in good faith to be competent to give such advice or information;
• are not liable for the inability of any holder of ADSs to benefit from any distribution on deposited securities that is not made available to holders of ADSs under the terms of the deposit agreement;
• are not liable for any special, consequential, indirect or punitive damages for any breach of the terms of the deposit agreement, or otherwise;
• may rely upon any documents we believe in good faith to be genuine and to have been signed or presented by the proper party;
• disclaim any liability for any action or inaction or inaction of any of us or our respective controlling persons or agents in reliance upon the advice of or information from legal counsel, accountants, any person presenting Class A Ordinary Shares for deposit, holders and beneficial owners (or authorized representatives) of ADSs, or any person believed in good faith to be competent to give such advice or information; and
• disclaim any liability for inability of any holder to benefit from any distribution, offering, right or other benefit made available to holders of deposited securities but not made available to holders of ADS.
The depositary and any of its agents also disclaim any liability (i) for any failure to carry out any instructions to vote, the manner in which any vote is cast or the effect of any vote or failure to determine that any distribution or action may be lawful or reasonably practicable or for allowing any rights to lapse in accordance with the provisions of the deposit agreement, (ii) the failure or timeliness of any notice from us, the content of any information submitted to it by us for distribution to you or for any inaccuracy of any translation thereof, (iii) any investment risk associated with the acquisition of an interest in the deposited securities, the validity or worth of the deposited securities, the credit-worthiness of any third party, (iv) for any tax consequences that may result from ownership of ADSs, Class A Ordinary Shares or deposited securities, or (v) for any acts or omissions made by a successor depositary whether in connection with a previous act or omission of the depositary or in connection with any matter arising wholly after the removal or resignation of the depositary, provided that in connection with the issue out of which such potential liability arises the depositary performed its obligations without gross negligence or willful misconduct while it acted as depositary.
In the deposit agreement, we agree to indemnify the depositary under certain circumstances.
Jurisdiction and Arbitration
The laws of the State of New York govern the deposit agreement and the ADSs and we have agreed with the depositary that the federal or state courts in the City of New York shall have exclusive jurisdiction to hear and determine any dispute arising from or in connection with the deposit agreement and that the depositary will have
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the right to refer any claim or dispute arising from the relationship created by the deposit agreement to arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The arbitration provisions of the deposit agreement do not preclude you from pursuing claims under the Securities Act or the Exchange Act in federal or state courts.
Jury Trial Waiver
The deposit agreement provides that each party to the deposit agreement (including each holder, beneficial owner and holder of interests in the ADRs) irrevocably waives, to the fullest extent permitted by applicable law, any right it may have to a trial by jury in any lawsuit or proceeding against us or the depositary arising out of or relating to our shares, the ADSs or the deposit agreement, including any claim under the U.S. federal securities laws. If we or the depositary opposed a jury trial demand based on the waiver, the court would determine whether the waiver was enforceable based on the facts and circumstances of that case in accordance with the applicable law.
Requirements for Depositary Actions
Before the depositary will issue, deliver or register a transfer of an ADS, split-up, subdivide or combine ADSs, make a distribution on an ADS, or permit withdrawal of Class A Ordinary Shares, the depositary may require:
• payment of stock transfer or other taxes or other governmental charges and transfer or registration fees charged by third parties for the transfer of any Class A Ordinary Shares or other deposited securities and payment of the applicable fees, expenses and charges of the depositary;
• satisfactory proof of the identity and genuineness of any signature or any other matters contemplated in the deposit agreement; and
• compliance with (A) any laws or governmental regulations relating to the execution and delivery of ADRs or ADSs or to the withdrawal or delivery of deposited securities and (B) such reasonable regulations and procedures as the depositary may establish, from time to time, consistent with the deposit agreement and applicable laws, including presentation of transfer documents.
The depositary may refuse to issue and deliver ADSs or register transfers of ADSs generally when the register of the depositary or our transfer books are closed or at any time if the depositary or we determine that it is necessary or advisable to do so.
Your Right to Receive the Shares Underlying Your ADSs
You have the right to cancel your ADSs and withdraw the underlying Class A Ordinary Shares at any time except:
• when temporary delays arise because: (1) the depositary has closed its transfer books or we have closed our transfer books; (2) the transfer of Class A Ordinary Shares is blocked to permit voting at a shareholders’ meeting; or (3) we are paying a dividend on our Class A Ordinary Shares;
• when you owe money to pay fees, taxes and similar charges;
• when it is necessary to prohibit withdrawals in order to comply with any laws or governmental regulations that apply to ADSs or to the withdrawal of Class A Ordinary Shares or other deposited securities, or other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time); or
• other circumstances specifically contemplated by Section I.A.(l) of the General Instructions to Form F-6 (as such General Instructions may be amended from time to time); or
• for any other reason if the depositary or we determine, in good faith, that it is necessary or advisable to prohibit withdrawals.
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The depositary shall not knowingly accept for deposit under the deposit agreement any Class A Ordinary Shares or other deposited securities required to be registered under the provisions of the Securities Act, unless a registration statement is in effect as to such Class A Ordinary Shares.
This right of withdrawal may not be limited by any other provision of the deposit agreement.
Direct Registration System
In the deposit agreement, all parties to the deposit agreement acknowledge that the DRS and Profile Modification System, or Profile, will apply to uncertificated ADSs upon acceptance thereof to DRS by DTC. DRS is the system administered by DTC pursuant to which the depositary may register the ownership of uncertificated ADSs, which ownership shall be evidenced by periodic statements issued by the depositary to the ADS holders entitled thereto. Profile is a required feature of DRS which allows a DTC participant, claiming to act on behalf of an ADS holder, to direct the depositary to register a transfer of those ADSs to DTC or its nominee and to deliver those ADSs to the DTC account of that DTC participant without receipt by the depositary of prior authorization from the ADS holder to register such transfer.
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SELLING SHAREHOLDER
This prospectus covers the partial resale from time to time by the selling shareholder identified in the table below of up to an aggregate of 12,288,980 ADSs including (i) 4,744,490 ADSs issuable upon exercise of the Series E Warrant to purchase ADSs, (ii) 2,800,000 ADSs issuable upon exercise of the Series D Warrant to purchase ADSs, and (iii) 4,744,490 ADSs issuable upon exercise of the Series F Warrant to purchase ADSs. The 2021 February Warrants are subject to a “conversion blocker” such that each of the selling shareholder cannot exercise the 2021 February Warrants to the extent that the conversion or exercise would result in the selling shareholder and its affiliates holding more than 4.99% of the outstanding ordinary shares (which the selling shareholder can increase to 9.99% upon at least 61 days prior written notice to us).
We are registering the partial resale of ADSs issuable upon exercise of the 2021 February Warrant pursuant to the Securities Purchase Agreement we entered into with the selling shareholder on February 15, 2021.
Unless otherwise indicated in the footnotes below, no selling shareholder has any material relationship with us or any of our affiliates within the past three years other than as a security holder.
The table below (i) lists the selling shareholder and other information regarding the beneficial ownership (as determined in accordance with Rule 13d-3(d) promulgated by the SEC under the Exchange Act) of our ADSs and Series A Convertible Preferred Shares by the selling shareholder (including securities issued in transactions unrelated to the February Private Placement, if any); (ii) has been prepared based upon information furnished to us by the selling shareholder; and (iii) to our knowledge, is accurate as of the date of this prospectus. The selling shareholder may sell all, some or none of its securities in this offering. The selling shareholder identified in the table below may have sold, transferred or otherwise disposed of some or all of its securities since the date of this prospectus in transactions exempt from or not subject to the registration requirements of the Securities Act. Information concerning the selling shareholder may change from time to time and, if necessary, we will amend or supplement this prospectus accordingly as required.
|
Name of Selling Shareholder |
Number of |
Maximum |
Number of |
Percentage |
||||
|
ATW Opportunities Master Fund, L.P.(3)† |
12,288,980 |
12,288,980 |
0 |
0 |
____________
† The selling shareholder is a broker-dealer registered under Section 15 of the Exchange Act or an affiliate of a broker-dealer registered under Section 15 of the Exchange Act.
(1) The amounts reported by such selling shareholder are as of date of this prospectus, with percentages based on 47,120,039 ordinary shares outstanding (excluding 7,000 preferred shares issued and held by our selling shareholder pursuant to the February Private Placement.), including 37,276,943 Class A Ordinary Shares and 9,843,096 Class B Ordinary Shares, except where the selling shareholder has the right to receive shares within the next 60 days (as indicated in the other footnotes to this table), which would increase the number of shares owned by such selling shareholder and the number of shares outstanding. Under the rules of the SEC, “beneficial ownership” is deemed to include shares for which an individual, directly or indirectly, has or shares voting or dispositive power, whether or not they are held for the individual’s benefit, and includes shares that may be acquired within 60 days, including, but not limited to, the right to acquire.
(2) Assumes that (i) all of the securities registered by the registration statement of which this prospectus is a part, including the ADSs issuable upon the exercise of the 2021 Registrable Warrants held by such selling shareholder, are sold in this offering; (ii) the selling shareholder does not (a) sell any of the ordinary shares or ADSs, if any, that have been issued to them other than those covered by this prospectus, and (b) acquire additional ADSs after the date of this prospectus and prior to the completion of this offering.
(3) Includes up to an aggregate of 12,288,980 ADSs pursuant to the partial resale of (i) 4,744,490 ADSs issuable upon exercise of the Series E Warrant to purchase ADSs, (ii) 2,800,000 ADSs issuable upon exercise of the Series D Warrant to purchase ADSs, and (iii) 4,744,490 ADSs issuable upon exercise of the Series F Warrant to purchase ADSs.
159
PLAN OF DISTRIBUTION
Each selling shareholder of the securities and any of their pledgees, assignees and successors-in-interest may, from time to time, sell any or all of their securities covered hereby on the principal Trading Market or any other stock exchange, market or trading facility on which the securities are traded or in private transactions. These sales may be at fixed or negotiated prices. A selling shareholder may use any one or more of the following methods when selling securities:
• ordinary brokerage transactions and transactions in which the broker-dealer solicits purchasers;
• block trades in which the broker-dealer will attempt to sell the securities as agent but may position and resell a portion of the block as principal to facilitate the transaction;
• purchase by a broker-dealer as principal and resale by the broker-dealer for its account;
• an exchange distribution in accordance with the rules of the applicable exchange;
• privately negotiated transactions;
• settlement of short sales;
• in transactions through broker-dealers that agree with the selling shareholder to sell a specified number of such securities at a stipulated price per security;
• through the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
• a combination of any such methods of sale; or
• any other method permitted pursuant to applicable law.
The selling shareholder may also sell securities under Rule 144 or any other exemption from registration under the Securities Act of 1933, as amended, if available, rather than under this prospectus.
Broker-dealers engaged by the selling shareholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions or discounts from the selling shareholder (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser) in amounts to be negotiated, but, except as set forth in a supplement to this Prospectus, in the case of an agency transaction not in excess of a customary brokerage commission in compliance with FINRA Rule 2121; and in the case of a principal transaction a markup or markdown in compliance with FINRA Rule 2121.
In connection with the sale of the securities or interests therein, the selling shareholder may enter into hedging transactions with broker-dealers or other financial institutions, which may in turn engage in short sales of the securities in the course of hedging the positions they assume. The selling shareholder may also sell securities short and deliver these securities to close out its short positions, or loan or pledge the securities to broker-dealers that in turn may sell these securities. The selling stockholder may also enter into option or other transactions with broker-dealers or other financial institutions or create one or more derivative securities which require the delivery to such broker-dealer or other financial institution of securities offered by this prospectus, which securities such broker-dealer or other financial institution may resell pursuant to this prospectus (as supplemented or amended to reflect such transaction).
The selling shareholder and any broker-dealers or agents that are involved in selling the securities may be deemed to be “underwriters” within the meaning of the Securities Act in connection with such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the securities purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Each selling shareholder has informed the Company that it does not have any written or oral agreement or understanding, directly or indirectly, with any person to distribute the securities.
The Company is required to pay certain fees and expenses incurred by the Company incident to the registration of the securities. The Company has agreed to indemnify the selling shareholder against certain losses, claims, damages and liabilities, including liabilities under the Securities Act.
160
This registration statement is effective until the earlier of (i) the date on which the securities may be resold by the selling shareholder without registration and without regard to any volume or manner-of-sale limitations by reason of Rule 144 under the Securities Act, without the requirement for the Company to be in compliance with the current public information under Rule 144 under the Securities Act or any other rule of similar effect or (ii) all of the securities have been sold pursuant to this prospectus or Rule 144 or any other rule of similar effect. The resale securities will be sold only through registered or licensed brokers or dealers if required under applicable state securities laws. In addition, in certain states, the resale securities covered hereby may not be sold unless they have been registered or qualified for sale in the applicable state or an exemption from the registration or qualification requirement is available and is complied with.
Under applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not simultaneously engage in market making activities with respect to the ADSs for the applicable restricted period, as defined in Regulation M, prior to the commencement of the distribution. In addition, the selling shareholder will be subject to applicable provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of purchases and sales of the ADSs by the selling shareholder or any other person. Copies of this registration statement will be available to the selling shareholder and have informed them of the need to deliver a copy of this prospectus to each purchaser at or prior to the time of the sale (including by compliance with Rule 172 under the Securities Act).
161
EXPERTS
The consolidated financial statements of Lion Group Holding Ltd. as of and for the years ended December 31, 2019, 2020, and 2021 appearing in this prospectus and registration statement have been audited by UHY LLP, independent registered public accounting firm, as set forth in their reports appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as an expert in accounting and auditing.
LEGAL MATTERS
The legality under Cayman law of the securities offered by this prospectus will be passed upon by Ogier. Certain federal securities law matters will be passed upon for us by Loeb & Loeb LLP, New York.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement, including relevant exhibits, with the SEC on Form F-1 under the Securities Act with respect to the underlying Class A ordinary shares represented by the ADSs to be sold by this prospectus. We have also filed a related registration statement on Form F-6 with the SEC to register the ADSs, which was declared effective by SEC on May 20, 2020. The term registration statement on Form F-1 means the original registration statement on Form F-1 and any and all amendments including the schedules and exhibits to the original registration statement or any amendment. This prospectus does not contain all of the information set forth in the registration statement on Form F-1 we filed. Each statement made in this prospectus concerning a document filed as an exhibit to the registration statement on Form F-1 is qualified by reference to that exhibit for a complete statement of its provisions. The registration statement on Form F-1, including its exhibits and schedules, may be inspected and copied at the public reference facilities maintained by the Commission.
Government Filings
We file reports, proxy statements and other information with the SEC as required by the Exchange Act. You may access information on Proficient at the SEC web site containing reports, proxy statements and other information at: http://www.sec.gov.
162
INDEX TO FINANCIAL STATEMENTS
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Director and
Shareholders of Lion Group Holding Ltd.
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Lion Group Holding Ltd. and its subsidiaries (the “Group”) as of December 31, 2021 and 2020, and the related consolidated statements of operations and comprehensive income (loss), changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Group as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Group’s management. Our responsibility is to express an opinion on the Group’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Group in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Group is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Group’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ UHY LLP
We have served as the Group’s auditor since 2019.
New York, New York
April 22, 2022
PCAOB ID # 1195
F-2
LION GROUP HOLDING LTD.
CONSOLIDATED BALANCE SHEETS
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December 31, |
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2021 |
2020 |
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(as restated) |
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Assets |
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Current Assets |
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Cash and cash equivalents |
$ |
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$ |
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Restricted cash-bank balances held on behalf of customers |
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Securities owned, at fair value |
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Receivables from broker-dealers and clearing organizations |
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Short-term loans receivable |
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Other receivables |
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Prepaids,deposits and other |
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Total current assets |
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Long term investment |
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Fixed assets, net |
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Other assets |
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Deferred taxes |
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Total Assets |
$ |
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$ |
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Liabilities, Mezzanine Equity and Stockholders’ Equity |
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Liabilities |
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Current Liabilities |
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Payables to customers |
$ |
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$ |
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Payables to broker-dealers and clearing organizations |
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Accrued expenses and other payables |
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Derivative liabilities, at fair value |
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Short-term borrowings |
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Due to director |
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Total current liabilities |
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Convertible debenture |
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Warrant liabilities |
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Total Liabilities |
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Commitments and Contingencies |
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Mezzanine Equity |
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Stockholders’ Equity |
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Preferred shares, $0.0001 par value, 50,000,000 shares authorized |
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| Class A ordinary shares, $ |
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| Class B ordinary shares, $ |
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Additional paid in capital(i) |
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Accumulated deficit |
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( |
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( |
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Accumulated other comprehensive losses |
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( |
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( |
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Total LGHL shareholders’ equity |
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Non–controlling interest |
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( |
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Total shareholders’ equity |
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Total Liabilities, Mezzanine Equity and Shareholders’ Equity |
$ |
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$ |
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____________
(i)
The accompanying notes are an integral part of the consolidated financial statements.
F-3
LION GROUP HOLDING LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
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Years Ended December 31, |
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2021 |
2020 |
2019 |
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(as restated) |
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Revenues |
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Insurance brokerage commissions |
$ |
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$ |
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$ |
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Securities brokerage commissions and fees |
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Market making commissions and fees |
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Interest income |
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Trading gains |
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Cryptocurrency mining revenue |
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Other income |
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Expenses |
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Commissions and fees |
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Compensation and benefits |
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Occupancy |
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Communication and technology |
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Cost of crypto mining |
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General and administrative |
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Professional fees |
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Research and development |
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Services fees |
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Interest |
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Depreciation |
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Marketing |
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Payment service charge |
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( |
) |
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Unrealized loss on equity securities |
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Change in fair value of option liabilities |
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Change in fair value of warrant liabilities |
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( |
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Other operating |
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(Loss) income before income taxes |
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( |
) |
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( |
) |
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|
|
|||||||
|
Income tax expense |
|
( |
) |
|
( |
) |
|
( |
) |
|||
|
|
|
|
|
|
|
|||||||
|
Net (loss) income |
$ |
( |
) |
$ |
( |
) |
$ |
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Net loss attributable to non-controlling interests |
|
|
|
|
|
|
|
|||||
|
|
|
|
|
|
|
|||||||
|
Net income (loss) attributable to LGHL |
$ |
|
|
$ |
( |
) |
$ |
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Deemed dividend on the effect of the down round features |
|
( |
) |
|
|
|
|
|||||
|
Dividends and deemed dividends on preferred shares |
|
( |
) |
|
|
|
|
|||||
|
|
|
|
|
|
|
|||||||
|
Net (loss) income attributable to LGHL ordinary shareholders |
$ |
( |
) |
$ |
( |
) |
$ |
|
|
|||
|
|
|
|
|
|
|
|||||||
|
(Loss) earnings per share for both Class A and Class B – basic and diluted(i) |
$ |
( |
) |
$ |
( |
) |
$ |
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Weighted average Class A ordinary shares outstanding – basic and diluted(i) |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Weighted average Class B ordinary shares outstanding – basic and diluted(i) |
|
|
|
|
|
|
|
|
|
|||
____________
(i)
The accompanying notes are an integral part of the consolidated financial statements.
F-4
LION GROUP HOLDING LTD.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
|
Years Ended December 31, |
|||||||||||
|
2021 |
2020 |
2019 |
|||||||||
|
(as restated) |
|||||||||||
|
Net (loss) income |
$ |
( |
) |
$ |
( |
) |
$ |
|
|||
|
|
|
|
|
|
|||||||
|
Other comprehensive (loss) income |
|
|
|
|
|
||||||
|
Foreign currency translation adjustment |
|
( |
) |
|
|
|
|
|
|||
|
Comprehensive (loss) income |
$ |
( |
) |
$ |
( |
) |
$ |
|
|||
The accompanying notes are an integral part of the consolidated financial statements.
F-5
LION GROUP HOLDING LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
|
|
Class A |
Class B |
Additional |
Accumulated |
Accumulated |
Non- |
Total |
||||||||||||||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
||||||||||||||||||||||||||||||
|
Balance at January 1, 2019 |
$ |
|
|
$ |
|
|
$ |
|
$ |
|
|
|
( |
) |
$ |
( |
) |
$ |
$ |
|
|
||||||||||||||
|
Return of capital |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
( |
) |
||||||||||||||||||||
|
Dividends declared |
|
|
— |
|
— |
|
|
|
|
( |
) |
|
|
|
|
( |
) |
||||||||||||||||||
|
Net income |
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Other comprehensive income (loss) |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||
|
Balance at December 31, 2019 |
$ |
|
|
$ |
|
|
$ |
|
$ |
|
|
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|
|
||||||||||||||
|
Effect of reverse recapitalization, net of costs(ii) |
|
|
|
$ |
|
|
$ |
|
$ |
( |
) |
$ |
|
$ |
|
$ |
$ |
( |
) |
||||||||||||||||
|
Conversion of rights to ordinary shares upon the reverse recapitalization |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|||||||||||||||||||
|
Shares issued to prior D&O |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Shares issued in connection with August 2020 PIPE, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Shares issued as a result of post-merger consideration adjustment |
|
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|||||||||||||||||
|
2020 incentive shares granted and unissued |
— |
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Detachable warrants issued in connection with December 2020 Convertible Debenture, net of costs |
— |
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Beneficial conversion feature in connection with December 2020 Convertible Debenture |
— |
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Net loss |
— |
|
|
— |
|
— |
|
|
|
|
( |
) |
|
|
|
|
( |
) |
|||||||||||||||||
|
Other comprehensive |
— |
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Balance at December 31, 2020 (as restated) |
$ |
|
|
$ |
|
|
$ |
|
$ |
|
|
$ |
( |
) |
$ |
( |
) |
$ |
$ |
|
|
||||||||||||||
|
Issuance of January 2021 Call Options for service |
— |
|
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
|
Conversion of Debenture into ordinary shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Exercise of December 2020 Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Exercise of August 2020 PIPE Warrants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Issuance of ordinary shares in connection with 2020 Share Incentive Plan |
|
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|||||||||||||||||||
|
Issuance of ordinary shares to Yun Tian |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Exercise of January 2021 Call Options |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Issuance of Series A Convertible Preferred Shares and detachable February 2021 Warrants, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||
|
Beneficial conversion feature (“BCF”) of Series A Convertible Preferred Shares |
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
Deemed dividend on Series A Convertible Preferred Shares in connection with BCF |
|
|
|
— |
|
— |
— |
|
— |
|
( |
) |
|
|
|
|
|
|
|
||||||||||||||||
F-6
LION GROUP HOLDING LTD.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY — (Continued)
|
|
Class A |
Class B |
Additional |
Accumulated |
Accumulated |
Non- |
Total |
|||||||||||||||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
|||||||||||||||||||||||||||||||
|
Accrued dividends on Series A Convertible Preferred Shares |
|
|
|
|
|
|
( |
) |
|
— |
|
|
|
|
|
( |
) |
|||||||||||||||||||
|
Conversion of Series A Convertible Preferred Shares and accrued dividends |
( |
) |
|
( |
) |
|
|
|
|
|
|
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|||||||||||||
|
Issuance of Series B Convertible Preferred Shares and detachable December 2021 Warrants, net of costs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||||||||||||||||
|
BCF of Series B Convertible Preferred Shares |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
|
Deemed dividend on Series B Convertible Preferred Shares in connection with BCF and accretion of discounts |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
|
|
||||||||||||||||||||
|
Accrued dividends on Series B Convertible Preferred Shares |
|
|
|
|
|
|
( |
) |
|
— |
|
— |
|
|
— |
|
|
( |
) |
|||||||||||||||||
|
Acquisition of noncontrolling interest |
|
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
( |
) |
|||||||||||||||||||
|
Net Income (loss) |
— |
|
|
|
— |
|
— |
|
|
|
|
|
|
|
|
( |
) |
|
( |
) |
||||||||||||||||
|
Other comprehensive loss |
— |
|
|
— |
|
— |
|
— |
|
|
|
|
|
( |
) |
|
|
|
( |
) |
||||||||||||||||
|
Balance at December 31, 2021 |
|
|
$ |
|
|
|
$ |
|
|
$ |
|
$ |
|
|
$ |
( |
$ |
( |
) |
$ |
( |
) |
$ |
|
|
|||||||||||
____________
(i)
(ii)
The accompanying noted are an integral part of the consolidated financial statements.
F-7
LION GROUP HOLDING LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
For the Years Ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
(as restated) |
||||||||||||
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
||||||
|
Net (loss) income |
$ |
( |
) |
$ |
( |
) |
$ |
|
|
|||
|
Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
|
|
|
|
|
|
||||||
|
Stock based compensation expense |
|
|
|
|
|
|
|
|
||||
|
Change in fair value of warrant liabilities |
|
|
|
|
( |
) |
|
|
||||
|
Change in fair value of option liability |
|
|
|
|
|
|
|
|||||
|
Gain on sale of crypto currencies |
|
( |
) |
|
|
|
|
|||||
|
Amortization of debt discounts |
|
|
|
|
|
|
|
|
||||
|
Depreciation |
|
|
|
|
|
|
|
|
|
|||
|
Deferred taxes |
|
|
|
|
( |
) |
|
( |
) |
|||
|
Gain on forgiveness of debt |
|
( |
) |
|
|
|
( |
) |
||||
|
(Increase) decrease in operating assets |
|
|
|
|
|
|
||||||
|
Securities owned |
|
( |
) |
|
|
|
|
|
|
|||
|
Receivables from broker-dealers and clearing |
|
( |
) |
|
( |
) |
|
|
|
|||
|
Prepaids, deposits and other assets |
|
( |
) |
|
( |
) |
|
( |
) |
|||
|
|
|
|
|
|
|
|||||||
|
Increase (decrease) in operating liabilities |
|
|
|
|
|
|
||||||
|
Payables to customers |
|
|
|
|
|
|
|
( |
) |
|||
|
Payables to broker-dealers and clearing organizations |
|
|
|
|
|
|
|
|
||||
|
Accrued expenses and other payables |
|
|
|
|
|
|
|
( |
) |
|||
|
Net cash (used in) provided by operating activities |
|
( |
) |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
||||||
|
Purchases of fixed assets |
|
( |
) |
|
|
|
( |
) |
||||
|
Acquisition of Trademarks |
|
|
|
( |
) |
|
( |
) |
||||
|
Advance payments for assets acquisition |
|
|
|
( |
) |
|
|
|||||
|
Advances to shareholder |
|
|
|
|
|
( |
) |
|||||
|
Advances to unrelated parties |
|
|
|
|
|
( |
) |
|||||
|
Investment in investment funds |
|
( |
) |
|
|
|
|
|||||
|
Acquisition of noncontrolling interest |
|
( |
) |
|
|
|
|
|||||
|
Short term loans receivable |
|
( |
) |
|
( |
) |
|
( |
) |
|||
|
Collection of short term loan |
|
|
|
|
|
|
|
|
||||
|
Net cash used in investing activities |
|
( |
) |
|
( |
) |
|
( |
) |
|||
|
|
|
|
|
|
|
|||||||
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
||||||
|
Dividends paid |
|
|
|
( |
) |
|
|
|||||
|
Cash acquired in the reverse recapitalization |
|
|
|
|
|
|
|
|||||
|
Payments for reverse recapitalization and ordinary shares issuance costs |
|
|
|
( |
) |
|
|
|||||
|
Proceeds from August 2020 PIPE, net of costs |
|
— |
|
|
|
|
|
— |
|
|||
|
Proceeds from the exercise of December 2020 warrants |
|
|
|
|
|
|
|
|||||
|
Proceeds from the exercise of August 2020 PIPE Warrants |
|
|
|
|
|
|
|
|||||
|
Proceeds from the exercise of January 2021 Call Options |
|
|
|
|
|
|
|
|||||
|
Proceeds from issuance Series A Convertible Preferred Shares and detachable warrants, net of issuance costs |
|
|
|
|
|
|
|
|||||
|
Proceeds from issuance of Series B Convertible Preferred Shares and detachable December 2021 Warrants, |
|
|
|
|
— |
|
|
|
||||
|
Proceeds from issuance of ordinary shares to Yuntian |
|
|
|
|
|
|
|
|||||
F-8
LION GROUP HOLDING LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS — (Continued)
|
For the Years Ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
(as restated) |
||||||||||||
|
Proceeds from issuance of convertible debenture |
|
|
|
|
|
|
— |
|
||||
|
Proceeds from Short-term borrowings |
|
|
|
|
|
|
|
|
||||
|
Repayment of Short-term borrowings |
|
( |
) |
|
( |
) |
|
( |
) |
|||
|
Repayment of Short-term borrowings from related party |
|
|
|
( |
) |
|
|
|||||
|
Advances from director |
|
|
|
|
|
|
|
|
||||
|
Repayments to director |
|
|
|
( |
) |
|
( |
) |
||||
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Effect of Exchange Rate Changes on Cash, Cash Equivalents, and Restricted Cash |
|
( |
) |
|
|
|
|
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Net Change in Cash, Cash Equivalents, and Restricted Cash |
|
|
|
|
( |
) |
|
|
|
|||
|
Cash, Cash Equivalents, and Restricted Cash – Beginning of Year |
|
|
|
|
|
|
|
|
|
|||
|
Cash, Cash Equivalents, and Restricted Cash – End of Year |
$ |
|
|
$ |
|
|
$ |
|
|
|||
|
|
|
|
|
|
|
|||||||
|
Noncash Investing and Financing Activities |
|
|
|
|
|
|
||||||
|
Settlement of short-term loans receivable and borrowings |
$ |
|
$ |
|
$ |
|
|
|||||
|
Return of capital through reduction in subscription receivable |
$ |
|
$ |
|
$ |
|
|
|||||
|
Return of capital through reduction in due from shareholder |
$ |
|
$ |
|
$ |
|
|
|||||
|
Dividends made through reduction in due from shareholder |
$ |
|
$ |
|
$ |
|
|
|||||
|
Dividends declared and payable at year-end |
$ |
|
$ |
|
$ |
|
|
|||||
|
Net liabilities acquired in the reverse recapitalization |
$ |
|
$ |
|
|
$ |
|
|||||
|
Increase in payables for ordinary shares isssuance costs |
$ |
|
$ |
|
|
$ |
|
|||||
|
Transfer from other assets to intangible assets |
$ |
|
$ |
|
|
$ |
|
|||||
|
Decrease in accrued expenses for shares issued to prior D&O |
$ |
|
$ |
|
|
$ |
|
|||||
|
Convertible debenture debt discounts and issuance costs charged to equity |
$ |
|
$ |
|
|
$ |
|
|||||
|
Subscription receivable for the shares issued in August 2020 PIPE |
$ |
|
$ |
|
|
$ |
|
|||||
|
Decrease in notes receivable and other assets in exchange for fixed assets (Note 8) |
$ |
|
|
$ |
|
$ |
|
|||||
|
Decrease in receivable in exchange for fixed assets |
$ |
|
|
$ |
|
$ |
|
|||||
|
Value of January 2021 Call Options issued for service |
$ |
|
|
$ |
|
$ |
|
|||||
|
Issuance of ordinary shares in connection with 2020 Share Incentive Plan |
$ |
|
|
$ |
|
$ |
|
|||||
|
Conversion of crypto currencies to USDT |
$ |
|
|
$ |
|
$ |
|
|||||
|
Conversion of Debenture into ordinary shares |
$ |
|
|
$ |
|
$ |
|
|||||
|
Conversion of Series A Convertible Preferred Shares and accrued dividends |
$ |
|
|
$ |
|
$ |
|
|||||
|
Accrued dividends on Series A and Series B Convertible Preferred Shares |
$ |
|
|
$ |
|
$ |
|
|||||
|
Deemed dividend on Series A and Series B Convertible Preferred Shares |
$ |
|
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The accompanying noted are an integral part of the consolidated financial statements.
F-9
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Principal Activities
Lion Group Holding Ltd. (the “Company”, “Lion” or “LGHL”) is a company with limited liability registered as an exempted company in the Cayman Islands.
The Company and its subsidiaries (collectively referred to as the “Group”) provide securities, futures and derivatives brokerage services, insurance brokerage services and market maker trading services. As a result of the transaction described below, the Company’s ordinary shares and warrants started to be traded on the NASDAQ Capital Market under the ticker symbols LGHL and LGHLW, respectively on June 17, 2020. Each American Depositary Shares (“ADSs”) of the Company represents one Class A ordinary share.
Reverse Recapitalization
The Company was incorporated on February 11, 2020 for the sole purpose of consummating the business combination described further below. A business combination agreement dated March 10, 2020, as amended and restated on May 12, 2020 (the “Business Combination Agreement”), was entered into by and among the Company, Proficient Alpha Acquisition Corp., a Nevada corporation (“PAAC”), Lion MergerCo I, Inc., a Delaware corporation and a wholly-owned subsidiary of the Company (the “Merger Sub”), Lion Financial Group Limited, a corporation organized under the laws of the British Virgin Islands (“LFGL”), each of the holders of LFGL’s outstanding capital shares (collectively, the “Sellers”) and the other parties thereto (collectively, the “Business Combination”). The exchange consideration was approximately $
On June 16, 2020, the Company consummated the Business Combination (the “Closing”) and each of PAAC and LFGL became a wholly-owned subsidiary of the Company and the Company became a new public company owned by the prior stockholders of PAAC and the prior shareholders of LFGL, where each outstanding share of PAAC common stock has been exchanged for one Class A ordinary share of the Company, each outstanding warrant of PAAC has been exchanged for one warrant of the Company and each outstanding right of PAAC has been exchanged for one-tenth of one Class A ordinary share of the Company, resulting in
The Business Combination was accounted for as a reverse recapitalization in accordance with U.S. generally accepted accounting principles. Under this method of accounting, LGHL and PAAC are treated as the “acquired” company for financial reporting purpose. This determination was primarily based on LFGL comprising the ongoing operations of the combined company, LFGL’s senior management comprising the senior management of the combined company, and LFGL’s stockholders having a majority of the voting power of the combined company. Accordingly, for accounting purposes, LFGL is deemed the accounting acquirer in the transaction. The transaction is not a business combination because neither PAAC nor LGHL was a business under ASC 805. Consequently, the transaction is treated as the equivalent of LFGL issuing stock for the net monetary assets of PAAC, accompanied by a recapitalization of LFGL. Accordingly, the consolidated assets, liabilities and results of operations of LFGL are the historical financial statements of the combined company, and LGHL and PAAC’s assets, liabilities and results of operations are consolidated with LFGL beginning on June 16, 2020.
The consolidated financial statements are prepared as a continuation of the financial statements of LFGL, the acquirer and predecessor, with retrospective adjustments to give effect of the reverse recapitalization. The equity is restated using the exchange ratio of
F-10
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Principal Activities (cont.)
reflect this change. Upon the consummation of the reverse recapitalization, the assets and liabilities of PAAC were recognized at fair value. The fair value of cash and short-term liabilities acquired approximates their historical costs due to their short maturity. After the redemption of ordinary shares of PAAC before the closing of the Business Combination, the net assets acquired by the Company were in the amount of $
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$ |
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Prepaid expenses and other current assets |
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Accrued expenses |
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Net assets acquired by LGHL as of June 16, 2020 |
$ |
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During the year ended December 31, 2020, the Group incurred approximately $
• In the event that the net income for the calendar year ended December 31, 2021 (the “2021 Net Income”), as set forth in LGHL’s audited financial statements, is equal to or greater than $19,000,000 (the “First Net Income Target”), then, the Class B Sellers’ rights to 50% of the Earnout Escrow Property (the “First Half Earnout Property”) shall vest and shall no longer be subject to forfeiture. If the 2021 Net Income is less than the First Net Income Target, but is equal to or greater than $9,500,000, then the Sellers’ rights to 50% of the First Half Earnout Property shall vest and shall no longer be subject to forfeiture. In all other cases, the First Half Earnout Property will be forfeited.
• In the event that the net income for the calendar year ended December 31, 2022 (the “2022 Net Income”), as set forth in LGHL’s audited financial statements, is equal to or greater than $21,850,000 (the “Second Net Income Target”), then the Class B Sellers’ rights to the remaining Earnout Escrow Property (after giving effect to any forfeitures for the 2021 calendar year, the “Second Half Earnout Property”) shall vest and shall no longer be subject to forfeiture. If the 2022 Net Income is less than the Second Net Income Target, but is equal to or greater than $10,925,000, then the Class B Sellers’ rights to 50% of the Second Half Earnout Property shall vest and shall no longer be subject to forfeiture. In all other cases, the Second Half Earnout Property will be forfeited.
Principal Activities
The Group generates commission revenues by enabling its customers to trade in securities, futures and derivative markets throughout the world. The Group’s trading customers consist of corporate clients, individual traders and retail investors primarily located in People’s Republic of China (“PRC”) and Southeast Asia, although its trading platform allows it to serve customers worldwide.
F-11
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Principal Activities (cont.)
The Group also generates commission revenues by providing insurance brokerage services to high-net-worth individuals primarily located in the PRC.
In May 2019, the Group began to serve as the counterparty to its customers in derivative transactions. This predominantly occurs when a customer utilizes a contract for difference (CFD). CFDs allow for the exchange of the difference in value of a particular asset such as a currency pair between the time at which a contract is opened and the time at which it is closed. If the trades of one customer can be used to naturally offset the trades of another customer, the Group will act as the market maker to offer liquidity and pricing to both customers. When such an offsetting is not available, the Group may choose to use its own trades to offset the trades of its customer, and the Group may also act as a broker in arranging trades between the customer and third-party market makers.
The Group officially began offering total return swap (TRS) trading services to customers in July 2020. The Group has entered into International Swaps and Derivatives Association (ISDA) master agreements and related supplementary agreements with two of the top five swap traders in China. The Group is currently offering A-shares (shares that are denominated in Renminbi and traded in the Shanghai Stock Exchange and Shenzhen Stock Exchange) and Hong Kong stock basket linked TRS, which provides international investors seeking to invest in the China stock market with higher leverage compared with buying A-share stocks directly. The Group earns income from the spread on interest rate loans provided to TRS trading customers and loans borrowed from its business partners. In addition, the Group also receives commissions and fees from customers for trades made through the TRS trading service.
For the years ended December 31, 2021 and 2020, no trading customers accounted for more than
The Group commenced bitcoin mining operations in late May 2021 and voluntarily ceased the operation in October 2021 as the electricity cost increased significantly.
The subsidiaries of the Company include a participant of the Stock Exchange of Hong Kong Limited (“SEHK”) and Hong Kong Securities Clearing Company Limited (“HKSCC”), remote trading member of Singapore Exchange Limited (“SGX”), and member of the Professional Insurance Brokers Association Limited (“PIBA”); possess the licenses issued by Hong Kong Securities and Futures Commission (“HKSFC”) to carry out regulated activities including Type 1 Dealing in Securities, Type 2 Dealing in Futures Contracts, Type 4 Advising on Securities, Type 5 Advising on Futures Contracts, and Type 9 Asset Management, the full license issued by Cayman Islands Monetary Authority (“CIMA”) to carry out securities investment business including Broker Dealer and Market Maker, and the Capital Markets Service License (“CMS License”) issued by the Monetary Authority of Singapore.
COVID-19
In December 2019, COVID-19 emerged and has subsequently spread worldwide. In March 2020, the World Health Organization declared COVID-19 as a pandemic. In the fiscal year of 2021, some instances of COVID-19 infections emerged in various regions worldwide. Governments around the globe have taken measures to contain the spread of the COVID-19 virus, including quarantining individuals infected with or suspected of having COVID-19, prohibiting residents from free travel, encouraging employees of enterprises to work remotely from home and cancelling public activities, among others. COVID-19 has also resulted in temporary closure of many corporate offices and factories around the world. In addition, as the outbreak continues to threaten global economies, it may continue to cause significant market volatility and declines in general economic activities. Since December 2021, there has been a recurrence of COVID-19 outbreaks in China and Hong Kong due to the Delta and Omicron variants. Like most companies, the Group’s various business lines have been adversely impacted by COVID-19. CFD trading volume and
F-12
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Principal Activities (cont.)
futures contract volumes decreased significantly compared to prior year, which was mainly attributable to economic and financial impact brought about by COVID-19 on the Group’s customers, causing a decrease in both their willingness to trade and make investments as well as their disposable income allocated making such transactions. Furthermore, customers’ concerns about future unpredictability also caused their trading activity to decline, impacting the Group’s CFD trading business in particular. In addition, travel restrictions in Hong Kong caused cancellations and prevented management from attending branding, business promotion, and exhibition activities, which limited the opportunities to acquire new customers. Meanwhile, the Group’s futures and insurance brokerage businesses were negatively affected as new or existing customers may not be able to travel to Hong Kong to open new futures trading accounts or purchase insurance products. No impairments were recorded as of the consolidated balance sheet date, as the carrying amounts of the Group’s assets are expected to be recoverable; however, due to significant uncertainty surrounding the situation, management’s judgment regarding this could change in the future. In addition, the Group cannot reasonably estimate the related financial impact to the Group’s future financial results given the uncertainties surrounding the duration of the outbreak. The Group continues to monitor the impact of the COVID-19 outbreak closely.
Details of the Company’s subsidiaries as of December 31, 2021 are as follows:
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F-13
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 — Organization and Principal Activities (cont.)
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Note 2 — Significant Accounting Policies
Basis of Presentation
These consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) and have been prepared in accordance with the regulations of the Securities and Exchange Commission (“SEC”).
Restatement of Previously Issued Financial Statements
The Company has restated its consolidated financial statements as of and for the year ended December 31, 2020, as well as the unaudited condensed consolidated financial statements for the six month-period ended June 30, 2020 to correct the misapplication of the accounting guidance for its Public Warrants (as defined in Note 21) and Private Warrants (as defined in Note 21).
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act of 1933, as amended, (the “Securities Act”), as modified by the Jumpstart our Business Startups Act of 2012, (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the
F-14
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Significant Accounting Policies (cont.)
auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, and its subsidiaries in which it has a controlling financial interest. A subsidiary is an entity (including a structured entity), directly or indirectly, controlled by the Company. The financial statements of the subsidiaries are prepared for the same reporting period as the Company, using consistent accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions between members of the Group are eliminated in consolidation. The Group consolidates the loss of the subsidiaries and subtracts the net loss that is attributable to the non-controlling interest holders in calculating the net income (loss) that is attributable to the Group.
Translation of Foreign Currencies
The functional currency is the U.S. dollar for the Group’s Cayman Island operations and the Hong Kong dollar for all other Group operations. The Group’s reporting currency is the U.S. dollar. 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the financial statements as well as the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits with banks and all highly liquid investments, with maturities of three months or less, that are not segregated and deposited for regulatory purposes. The Group does not have any cash equivalents as of December 31, 2021 and 2020.
F-15
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Significant Accounting Policies (cont.)
The Group maintains its cash in bank deposit accounts which at times may exceed insured limits. The Group has not experienced any losses in such accounts. Management believes that the Group is not exposed to any significant credit risk on cash and cash equivalents.
Restricted Cash — Bank Balances Held on Behalf of Customers
The Group maintains segregated trust accounts with licensed banks or payment platform to hold customer funds in accordance with the relevant legislation. The Group has classified customer funds as bank balances held on behalf of customers with a corresponding payable to customers in the liabilities section of the consolidated balance sheets.
Securities Owned and Derivatives
The Group’s proprietary trading securities transactions are recorded on the trade date, as if they had settled.
Securities, futures and derivative positions are recorded at fair value in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 “Fair Value Measurements and Disclosures” (“ASC 820”).
Receivables
Receivables arise from the business of dealing in investment securities, futures and derivatives and include the amounts due on brokerage transactions on a trade-date basis. Broker-dealers will require balances to be placed with them in order to cover the positions taken by its customers. Clearing house receivables typically represent proceeds receivable on trades that have yet to settle and are usually collected within two days.
Receivables from broker-dealers and clearing organizations as presented in the consolidated balance sheets represent such receivables related to the Group’s customer trading activities, including customers’ cash deposits, receivables arising from unsettled trades in securities, futures and CFD trading service, and receivables arising from the Group’s TRS trading service in an amount generally equal to the market value of A-shares. Receivables from broker-dealers and clearing organizations include such receivables arising from the Group’s proprietary trading activities as well.
Commissions receivable represent commissions due from trading activities and from insurance providers once referrals have been made and the transactions have been executed under the terms of the relevant insurance policy or subscription agreement. As of December 31, 2021, and 2020, commissions receivable amounted to $
Crypto Currencies
The following table presents the activities of the crypto currencies for the year ended December 31, 2021:
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Crypto currencies at December 31, 2021 |
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(1) The Group did not recognize impairment loss on crypto currencies during the year ended December 31, 2021 as the crypto currencies were converted to stable coins shortly after the consideration was received and all stable coins were liquidated before the year end.
F-16
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Significant Accounting Policies (cont.)
Crypto-currency Machines
Management has assessed the basis of depreciation of the Group’s crypto-currency machines used to verify crypto currency transactions and generate crypto currencies and believes they should be depreciated over a 3-year period. The rate at which the Group generates digital assets and, therefore, consumes the economic benefits of its transaction verification servers are influenced by a number of factors including the following:
• the complexity of the transaction verification process which is driven by the algorithms contained within the bitcoin open source software;
• the general availability of appropriate computer processing capacity on a global basis (commonly referred to in the industry as hashing capacity which is measured in Petahash units); and
• technological obsolescence reflecting rapid development in the transaction verification server industry such that more recently developed hardware is more economically efficient to run in terms of digital assets generated as a function of operating costs, primarily power costs i.e. the speed of hardware evolution in the industry is such that later hardware models generally have faster processing capacity combined with lower operating costs and a lower cost of purchase.
The Group operates in an emerging industry for which limited data is available to make estimates of the useful economic lives of specialized equipment. Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. This assessment takes into consideration the management’s expectations regarding the direction of the industry including potential changes in technology. Management will review this estimate annually and will revise such estimates as and when data comes available.
To the extent that any of the assumptions underlying management’s estimate of useful life of its transaction verification servers are subject to revision in a future reporting period either as a result of changes in circumstances or through the availability of greater quantities of data then the estimated useful life could change and have a prospective impact on depreciation expense and the carrying amounts of these assets.
Fixed Assets, Net
Furniture, equipment and leasehold improvements are stated at cost less accumulated depreciation. Depreciation is provided on a straight-line basis using estimated useful lives of to years. Leasehold improvements are amortized over the lesser of the economic useful life of the improvement or the term of the lease.
Payables
Payables arise from the business of dealing in investment securities, futures and derivatives. Payables to customers as presented in the consolidated balance sheets represent such payables related to the Group’s customer trading activities as well as the cash balances held on behalf of customers.
The Group borrows loans from business partners at benchmark interest rate plus a fixed spread, and immediately lent to TRS trading service customers. Net loans borrowed from TRS business partners are included in the line item “payables to broker-dealers and clearing organizations”. As of December 31, 2021 and 2020, the balance of payables to broker-dealers and clearing organizations was primarily comprised of such net loans.
Commissions payable mainly represent amounts owed to referral sources of insurance brokerage business outside of the Group for transactions referred based on the terms of the underlying agreements. As of December 31, 2021, and 2020, commissions payable amounted to $
F-17
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Significant Accounting Policies (cont.)
Revenue Recognition
See Note 3 for details.
Commissions and Fees
Commissions and fees related to securities, derivative and TRS trading transactions are recorded on a trade date basis. Commissions expense on insurance products are recognized on the closing date of a transaction as determined by the terms of the relevant contract and insurance policy.
Cost of Crypto Mining
Cost of crypto mining consists primarily of direct costs of earning bitcoins related to mining operations, including electric power costs and other service charges, also including depreciation of mining equipment.
Convertible Securities, Warrants and Derivative Instruments
The accounting treatment of warrants and convertible securities issued is determined pursuant to the guidance provided by ASC 470, Debt, ASC 480, Distinguishing Liabilities from Equity, and ASC 815, Derivatives and Hedging (“ASC 815”), as applicable. Each feature of freestanding financial instruments including, without limitation, any rights relating to subsequent dilutive issuances, equity sales, rights offerings, conversions, optional redemptions and dividends are assessed with determinations made regarding the proper classification in the Company’s consolidated financial statements.
The Company evaluates all of its equity-linked financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives, pursuant to ASC 480 and ASC 815. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity and whether embedded derivative shall be bifurcated from the host instrument and separately accounted for as a derivative, is reassessed at the end of each reporting period. Derivative assets and liabilities are recorded at fair value at inception and re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations.
If the conversion feature does not require recognition of a bifurcated derivative, the convertible instrument is evaluated for consideration of any beneficial conversion feature (“BCF”) requiring separate recognition pursuant to ASC 470. When we record a BCF, the intrinsic value of the BCF is recorded as a discount against the respective convertible security (offset to additional paid-in capital) and amortized to interest expense over the life of the debt. For convertible preferred stock, the amortization of BCF should be accounted for as a deemed dividend over the applicable period if accretion is required.
Earnings (Loss) per Ordinary Share
The Company complies with accounting and disclosure requirements ASC Topic 260, “Earnings Per Share”, which requires earnings per share for each class of stock (ordinary shares and participating securities) to be calculated using the two-class method. The two-class method is an allocation of earnings between the holders of ordinary shares and a company’s participating security holders. Under the two-class method, earnings for the reporting period are allocated between ordinary shareholders and other security holders based on their respective participation rights in undistributed earnings. As the Company’s two classes of ordinary shares have the same dividend rights, earnings (loss) per share for each class of ordinary shares have the same results.
Basic earnings (loss) per ordinary share is computed by dividing net income or loss available to ordinary shareholders by the weighted average number of ordinary shares issued and outstanding for the periods. For the years ended December 31, 2021 and 2020, the December 2020 Convertible Debenture (as discussed in Note 14) which is convertible into the Company’s Class A ordinary shares, as represented by ADSs and December 2020 Series A Warrant
F-18
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Significant Accounting Policies (cont.)
(as discussed in Note 14) which is exercisable into the Company’s Class A ordinary shares, as represented by ADSs, have the same dividend rights as the ordinary shares on an as-converted and as-exercised basis, and therefore qualify as participating securities for the period they were outstanding in accordance with ASC 260. The holders of Convertible Debenture and Series A Warrant do not have a contractual obligation to share in the Company’s losses, therefore participating securities are excluded from the calculation of earnings (loss) per share for the years ended December 31, 2021 and 2020 in which there are losses available to ordinary shareholders.
In accordance with ASC 260-10-45, the
For purposes of determining diluted earnings (loss) per ordinary share, basic earnings (loss) per ordinary share is further adjusted to include the effect of potential dilutive ordinary shares outstanding during the period. Potential ordinary shares consist of the incremental ordinary shares upon exercise of warrants using the treasury stock method and upon conversion of convertible debt using the if-converted method.
For the years ended December 31, 2021, 2020 and 2019 (on a retroactively adjusted basis), the following potential dilutive securities denominated in ordinary shares equivalents were excluded for the period they were outstanding from the computation of diluted earnings (loss) per share because to do so would have been antidilutive. As a result, diluted earnings (loss) per ordinary share is the same as basic earnings (loss) per ordinary share for all periods presented.
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See Note 15 |
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See Note 14 |
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See Note 14 |
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See Note 14 |
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Subsequently, an aggregate of approximately
Non-controlling Interest
F-19
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Significant Accounting Policies (cont.)
On May 7, 2021, Lion NFT Limited (“LNFT”) was formed by Lion Financial Group Limited (“LFGL”) and three other shareholders in British Virgin Islands. LFGL owned
Reclassification
Certain prior periods amounts have been reclassified to be comparable to the current period presentation. The reclassification has no effect on previously reported net assets or net income (loss).
Stock-based Compensation
The Company applies ASC No. 718, “Compensation-Stock Compensation”, which requires that share-based payment transactions with employees and nonemployees upon adoption of ASU 2018-07, be measured based on the grant date fair value of the equity instrument and recognized as compensation expense over the requisite service period, with a corresponding addition to equity. Under this method, compensation cost related to employee share options or similar equity instruments is measured at the grant date based on the fair value of the award and is recognized over the period during which an employee is required to provide service in exchange for the award, which generally is the vesting period.
The fair value of the Company’s ordinary shares underlying stock-based awards is determined to be based on the closing price of the Company’s shares as reported by Nasdaq on the date of grant. The Company values its stock options or warrants that have service vesting requirements or performance-based awards with or without market conditions using the Binomial Option Pricing Model.
Research and Development Expenses
Research and development expenses are expensed in the period when incurred. These costs primarily consist of designing, coding, project management, and other IT services related to developing and enhancing the project.
Income Taxes
The amount of current taxes payable or refundable is recognized as of the date of the consolidated financial statements, utilizing currently enacted tax laws and rates of the relevant authorities. Deferred income taxes are recognized for temporary differences between the tax basis of assets and liabilities and their reported amounts in the consolidated financial statements, net operating loss carry forwards and tax credits based on applicable tax rates. Deferred tax assets are reduced by a valuation allowance when management determines that it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax expenses or benefits are recognized in the consolidated financial statements for the changes in deferred tax liabilities or assets between years.
The Group recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Group presents any interest or penalties related to an underpayment of income taxes as part of its income tax expense in the consolidated statements of operations.
F-20
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2 — Significant Accounting Policies (cont.)
Recent Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, “Leases (Subtopic 842).” The new guidance requires lessees to recognize assets and liabilities arising from leases as well as extensive quantitative and qualitative disclosures. A lessee will need to recognize on its balance sheets a right-of-use asset and a lease liability for the majority of its leases (other than leases that meet the definition of a short-term lease). The lease liabilities will be equal to the present value of lease payments. The right-of-use asset will be measured at the lease liability amount, adjusted for lease prepayment, lease incentives received and the lessee’s initial direct costs. For public business entities, the standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. In June 2020, the FASB issued ASU 2020-05, “Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities”. Under the ASU, private companies may apply the new leases standard for fiscal years beginning after December 15, 2021, and to interim periods within fiscal years beginning after December 15, 2022. ASU 2016-02 is required to be applied using the modified retrospective approach for all leases existing as of the effective date and provides for certain practical expedients. Upon adoption on January 1, 2022, the Group recognized a lease liability and corresponding right-of-use asset based on the present value of minimum lease payments in an amount of approximately $
In June 2016, FASB amended guidance related to impairment of financial instruments as part of ASU 2016-13 Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU requires a financial asset (or group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. The amendments affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual rights to receive cash. For public business entities, the amendments in this ASU are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. For private companies, the ASU on credit losses will take effect for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years. All entities may adopt the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). In May 2019, FASB issued ASU 2019-05, Financial instrument — Credit Losses (Topic 326), Targeted Transition Relief, which provides an irrevocably fair value option to elect for eligible instruments. In November 2019, FASB issued ASU 2019-11 Codification Improvements to Topic 326, Financial Instruments — Credit Losses, which clarified and improved various aspects of ASU 2016-13. In November 2019, FASB issued ASU 2019-10 to amend private companies, not-for-profit organizations, and certain small public companies effective date on its credit losses (CECL) standards to fiscal years beginning after December 15, 2022 and interim periods therein. The Group has evaluated the effect of the adoption of this ASU and does not expect there will be significant impact on its consolidated financial statements from the adoption of the new guidance.
In August 2020, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40). This new ASU eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. In addition, the new guidance modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impacting the diluted EPS computation. The amendments in this ASU are effective for the Group for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. This ASU requires adoption using either modified retrospective basis or retrospective basis. The Group is currently assessing the impact that the new guidance will have on its our consolidated financial statements.
F-21
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Revenue Recognition
Under ASC Topic 606 Revenue from Contracts with Customers, revenues are recognized when control of the promised goods or services is transferred to customers in exchange for an amount that reflects the consideration the Group expects to be entitled to and in return for transferring those goods or services.
Significant Judgments
Revenue from contracts with customers include commission income from securities, futures and derivative brokerage, market making trading and insurance brokerage. The recognition and measurement of revenue is based on the assessment of individual contract terms. Significant judgment is required to determine whether performance obligations are satisfied at a point in time or over time; how to allocate transaction prices where multiple performance obligations are identified; when to recognize revenue based on the appropriate measure of progress under the contract; whether revenue should be presented gross or net of certain costs; and whether constraints on variable consideration should be applied due to uncertain future events.
Commissions and Fees
The Group earns fees and commissions from securities, futures and derivatives brokerage services (including commissions and fees related to TRS trading business) and CFD trading services when the Group acts as a market maker. Each time a customer executes a securities, futures, derivative or CFD transaction, commissions and fees are earned. Commissions and related clearing fees and expenses are recorded on the trade date. The performance obligation is satisfied on the trade date because that is when the underlying financial instrument or purchaser is identified, the pricing is agreed upon and the risks and rewards of ownership have been transferred to/from the customer. The Group charges securities brokerage commissions and market making commissions based on amount of transaction volume, or the number of shares, lots of contracts executed in each order, which generally vary in accordance with the type of products or services the Group offers.
The Group also earns commission income arising from insurance brokerage services which are recognized at a point in time when the performance obligation has been satisfied by successfully referring an insurance client to an insurer in accordance with the relevant broker contract. The commission earned is equal to a percentage of the premium paid to the insurance provider.
The following table presents revenue from contracts with customers, in accordance with ASC Topic 606, by major source and geographic region:
|
For the Years Ended December 31, |
|||||||||
|
2021 |
2020 |
2019 |
|||||||
|
Insurance brokerage commissions |
$ |
|
$ |
|
$ |
|
|||
|
Securities brokerage commissions |
|
|
|
|
|
|
|||
|
Market making commissions and fees |
|
|
|
|
|
|
|||
|
Total revenue from contracts with customers |
$ |
|
$ |
|
$ |
|
|||
|
|
|
|
|||||||
|
Hong Kong |
$ |
|
$ |
|
$ |
|
|||
|
Cayman Islands |
|
|
|
|
|
|
|||
|
$ |
|
$ |
|
$ |
|
||||
All of the Group’s revenues from contracts with customers are recognized at a point in time.
F-22
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Revenue Recognition (cont.)
Trading Gains (Losses), Interest Income and Other
Trading gains and losses along with interest revenue fall within the scope of ASC Topic 825, Financial Instruments.
Trading gains (losses) consist of realized and unrealized gains (losses) derived from (i) managed portfolio trading positions where the Group acts as counterparty to customers’ trades, and (ii) marking up the bid/offer spreads on customers’ CFD transactions, and (iii) trading gains/(losses) from proprietary TRS trading activities. Trading gains/(losses) is recorded on a trade date basis. The following table represents trading gain (loss) breakdown. For the year ended December 31, 2021, realized loss in option trading in the amount of $
|
For the Years Ended December 31, |
|||||||||||
|
2021 |
2020 |
2019 |
|||||||||
|
CFD trading gain (loss) |
$ |
|
$ |
|
|
$ |
|
|
|||
|
TRS trading gain (loss) |
|
|
|
|
|
|
|
||||
|
Other |
|
|
|
( |
) |
|
( |
) |
|||
|
$ |
|
$ |
|
|
$ |
|
|
||||
Interest income primarily consist of interests earned on bank deposits and short-term loans the Group extends to unrelated third parties, interest rate difference between currency pairs the Group hold resulting from rolling over currency positions and interest earned from loans provided to TRS trading customers, which are recorded on an accrual basis. Interest income is recognized as it accrues using the effective interest method.
Other income primarily consists of the dividends income, transaction fee, advisory service fee, government subsidy and other miscellaneous charges from customers etc.
Crypto Currencies Mining
The Group recognizes revenue under ASC 606, Revenue from Contracts with Customers. The core principle of the revenue standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The following five steps are applied to achieve that core principle:
• Step 1: Identify the contract with the customer
• Step 2: Identify the performance obligations in the contract
• Step 3: Determine the transaction price
• Step 4: Allocate the transaction price to the performance obligations in the contract
• Step 5: Recognize revenue when the Company satisfies a performance obligation
In order to identify the performance obligations in a contract with a customer, a company must assess the promised goods or services in the contract and identify each promised good or service that is distinct. A performance obligation meets ASC 606’s definition of a “distinct” good or service (or bundle of goods or services) if both of the following criteria are met: The customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer (i.e., the good or service is capable of being distinct), and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract (i.e., the promise to transfer the good or service is distinct within the context of the contract).
If a good or service is not distinct, the good or service is combined with other promised goods or services until a bundle of goods or services is identified that is distinct.
F-23
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 3 — Revenue Recognition (cont.)
The transaction price is the amount of consideration to which an entity expects to be entitled in exchange for transferring promised goods or services to a customer. The consideration promised in a contract with a customer may include fixed amounts, variable amounts, or both. When determining the transaction price, an entity must consider the effects of all of the following:
• Variable consideration
• Constraining estimates of variable consideration
• The existence of a significant financing component in the contract
• Noncash consideration
• Consideration payable to a customer
Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. The transaction price is allocated to each performance obligation on a relative standalone selling price basis. The transaction price allocated to each performance obligation is recognized when that performance obligation is satisfied, at a point in time or over time as appropriate.
Providing computing power in digital asset transaction verification services is an output of the Group’s ordinary activities. The provision of providing such computing power is the only performance obligation in the Group’s contracts with mining pool operators. The transaction consideration the Group receives, if any, is noncash consideration, which the Group measures at fair value on the date received, which is not materially different than the fair value at contract inception or the time the Group has earned the award from the pools. The consideration is all variable. Because it is not probable that a significant reversal of cumulative revenue will not occur, the consideration is constrained until the mining pool operator successfully places a block (by being the first to solve an algorithm) and the Group receives confirmation of the consideration it will receive, at which time revenue is recognized. There is no significant financing component in these transactions.
Fair value of the cryptocurrency award received is determined using the quoted closing price of the related cryptocurrency at the date of receipt. There is currently no specific definitive guidance under GAAP or alternative accounting framework for the accounting for cryptocurrencies recognized as revenue or held, and management has exercised significant judgment in determining the appropriate accounting treatment. In the event authoritative guidance is enacted by the FASB, the Group may be required to change its policies, which could have an effect on the Group’s consolidated financial position and results from operations.
Note 4 — Cash and Restricted Cash
The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets and statements of cash flows.
|
December 31, |
|||||||||
|
2021 |
2020 |
2019 |
|||||||
|
Cash |
$ |
|
$ |
|
$ |
|
|||
|
Restricted cash |
|
|
|
|
|
|
|||
|
Total cash and restricted cash presented in the consolidated statements of cash flows |
$ |
|
$ |
|
$ |
|
|||
Restricted cash includes cash balances held on behalf of customers (see Note 2 for further information).
F-24
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Fair Value
Fair Value Hierarchy
FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and establishes a hierarchy of fair value inputs. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market. Valuation techniques that are consistent with the market, income or cost approach, as specified by FASB ASC 820, are used to measure fair value.
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels:
• Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company can access at the measurement date.
• Level 2 are inputs other than quoted prices included within level 1 that are observable for the assets or liabilities either directly or indirectly.
• Level 3 inputs are unobservable inputs for the assets or liabilities.
The availability of observable inputs can vary from security to security and is affected by a wide variety of factors, including, for example, the type of security, the liquidity of markets, and other characteristics particular to the security. To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised in determining fair value is greatest for instruments categorized in level 3.
The inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement falls in its entirety is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
A description of the valuation techniques applied to the Group’s major categories of assets and liabilities measured at fair value on a recurring basis follows.
Exchange-traded equity securities and futures are generally valued based on quoted prices at the close of trading on the period end date. To the extent these securities and futures are actively traded, valuation adjustments are not applied, and they are categorized in level 1 of the fair value hierarchy; otherwise, they are categorized in level 2 or level 3 of the fair value hierarchy.
Listed derivatives that are actively traded are valued based on quoted prices at the close of trading on the period end date and are categorized in level 1 of the fair value hierarchy. Listed derivatives that are not actively traded are valued using the same approaches as those applied to over-the-counter (“OTC”) derivatives; they are generally categorized in level 2 of the fair value hierarchy.
Depending on the product and the terms of the transaction, the fair value of OTC derivative products can be either observed or modeled using a series of techniques and model inputs from comparable benchmarks. Substantially all of the Group’s OTC derivatives were carried at fair value based on spot exchange rates broadly distributed in active markets, or amounts approximating fair value. Such values are categorized as level 2 of the fair value hierarchy.
F-25
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Fair Value (cont.)
The significant assumptions which the Company used to value the options in the Monte-Carlo Simulation model are:
|
December 31, |
|||
|
Stock price |
$ |
|
|
|
Exercise price |
$ |
|
|
|
Expected term in years |
|
|
|
|
Expected dividend yield |
|
|
|
|
Volatility |
|
|
|
|
Risk-free interest Rate |
|
|
|
Public Warrants are classified as level 1 financial instruments, as their value is derived using quoted market prices as of the measurement date. Private Warrants are classified as level 2, which are valued using a Black-Sholes-Merton pricing model at of the measurement date.
The significant assumptions which the Company used in the model are:
|
December 31, |
For the |
||||||
|
Stock price |
$ |
|
|
$ |
|
||
|
Exercise price |
$ |
|
|
$ |
|
||
|
Expected term in years |
|
|
|
|
|
||
|
Expected dividend yield |
|
|
% |
|
|
||
|
Volatility |
|
|
% |
|
|
||
|
Risk-free interest Rate |
|
|
% |
|
|
||
The following table presents the Group’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis at December 31, 2021 and 2020:
At December 31, 2021
|
Quoted Prices |
Significant |
Significant |
Total |
||||||||||||
|
Assets |
|
|
|
|
|
|
|
||||||||
|
Fair value measurement: |
|
|
|
|
|
|
|
||||||||
|
Listed equity securities |
$ |
|
|
$ |
|
|
$ |
|
|
||||||
|
NAV practical expedient: |
|
|
|
|
|
|
|
||||||||
|
Long term investment |
|
|
|
|
|
|
|
|
|
|
|
||||
|
$ |
|
|
$ |
|
$ |
$ |
|
|
|||||||
|
Liabilities |
|
|
|
|
|
|
|
||||||||
|
Option liabilities(1) |
$ |
|
$ |
( |
) |
$ |
$ |
( |
) |
||||||
|
Warrant liabilities |
|
( |
) |
|
( |
) |
|
|
( |
) |
|||||
|
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
||||||
____________
(1) No collateral received or pledged for derivative contracts.
F-26
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Fair Value (cont.)
At December 31, 2020
|
Quoted Prices |
Significant |
Significant |
Total |
||||||||||||
|
Assets |
|
|
|
|
|
|
|
||||||||
|
Listed equity securities |
$ |
|
|
$ |
|
$ |
$ |
|
|
||||||
|
|
|
|
|
|
|
|
|||||||||
|
Liabilities |
|
|
|
|
|
|
|
||||||||
|
CFD derivatives(1) |
$ |
|
$ |
( |
) |
$ |
$ |
( |
) |
||||||
|
Warrant liabilities |
|
( |
) |
|
( |
) |
|
— |
|
( |
) |
||||
|
$ |
( |
) |
$ |
( |
) |
$ |
$ |
( |
) |
||||||
____________
(1) No collateral received or pledged for derivative contracts.
There were no transfers between level 1, level 2, and level 3 during either year.
The following table presents the carrying values and estimated fair values of financial assets and liabilities, excluding financial instruments that are carried at fair value on a recurring basis, and information is provided on their classification within the fair value hierarchy.
At December 31, 2021
|
Total |
Quoted Prices |
Significant |
Significant |
Estimated |
|||||||||||
|
Assets |
|
|
|
|
|
||||||||||
|
Cash and cash equivalents |
$ |
|
$ |
|
$ |
$ |
$ |
|
|||||||
|
Bank balances held on behalf of customers |
|
|
|
|
|
|
|
|
|||||||
|
Receivables from broker-dealers and clearing organizations |
|
|
|
|
|
|
|
|
|||||||
|
Other receivables |
|
|
|
|
|
|
|
|
|||||||
|
$ |
|
$ |
|
$ |
|
$ |
$ |
|
|||||||
|
|
|
|
|
|
|||||||||||
|
Liabilities |
|
|
|
|
|
||||||||||
|
Payables to customers |
$ |
|
$ |
$ |
|
$ |
$ |
|
|||||||
|
Payables to broker-dealers and clearing organizations |
|
|
|
|
|
|
|
|
|||||||
|
Accrued expenses and other payables |
|
|
|
|
|
|
|
|
|||||||
|
Short-term borrowings |
|
|
|
|
|
|
|
|
|||||||
|
Due to director |
|
|
|
|
|
|
|
|
|||||||
|
$ |
|
$ |
$ |
|
$ |
$ |
|
||||||||
F-27
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Fair Value (cont.)
At December 31, 2020
|
Total |
Quoted Prices |
Significant |
Significant |
Estimated |
|||||||||||
|
Assets |
|
|
|
|
|
||||||||||
|
Cash and cash equivalents |
$ |
|
$ |
|
$ |
$ |
$ |
|
|||||||
|
Bank balances held on behalf of customers |
|
|
|
|
|
|
|
|
|||||||
|
Receivables from broker-dealers and clearing organizations |
|
|
|
|
|
|
|
|
|||||||
|
Short-term loans receivable |
|
|
|
|
|
|
|
|
|||||||
|
Commissions receivable |
|
|
|
|
|
|
|
|
|||||||
|
Other receivables |
|
|
|
|
|
|
|
|
|||||||
|
$ |
|
$ |
|
$ |
|
$ |
$ |
|
|||||||
|
|
|
|
|
|
|||||||||||
|
Liabilities |
|
|
|
|
|
||||||||||
|
Payables to customers |
$ |
|
$ |
$ |
|
$ |
$ |
|
|||||||
|
Payables to broker-dealers and clearing organizations |
|
|
|
|
|
|
|
|
|||||||
|
Commissions payable |
|
|
|
|
|
|
|
|
|||||||
|
Accrued expenses and other payables |
|
|
|
|
|
|
|
|
|||||||
|
Short-term borrowings |
|
|
|
|
|
|
|
|
|||||||
|
Due to director |
|
|
|
|
|
|
|
|
|||||||
|
$ |
|
$ |
$ |
|
$ |
$ |
|
||||||||
Note 6 — Prepaids, Deposits, and Other
Prepaids, deposits, and other consisted of the following as of December, 2021 and 2020:
|
December 31, |
||||||
|
2021 |
2020 |
|||||
|
Prepaid software and IT related services |
$ |
|
$ |
|
||
|
Prepaid insurance |
|
|
|
|
||
|
Prepaid stock-based compensation expense |
|
|
|
|||
|
Prepaid rent and utility |
|
|
|
|
||
|
Prepaid offering expenses |
|
|
|
|||
|
Prepaid consulting |
|
|
|
|
||
|
Deposit for miners(1) |
|
|
|
|||
|
Prepaid research and development expenses(2) |
|
|
|
|||
|
Commissions receivable |
|
|
|
|
||
|
Other |
|
|
|
|
||
|
$ |
|
$ |
|
|||
____________
(1) The Group paid an aggregate of $
(2) Prepaid research and development expenses mainly comprised of costs related to developing the Group’s newly launched Metaverse project “Lion World”.
F-28
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 7 — Short-term Loans Receivable
(a) On December 20, 2019, the Group issued notes receivable in an aggregate of approximately $
(b) In June and December 2020, the Group entered into loan agreements in the aggregate principal amount of $
(c) In June 2020, the Group entered into a loan agreement in the principal amount of $
On March 1, 2021, the Group entered into Deeds of Assignment (“Assignment No. 1”) with the two unrelated borrowers discussed in (a) and (b) above and Lanlian (as discussed in Note 8). As a result, the Group assigned the outstanding loans receivable and accrued interest in (a) in an aggregate of approximate $
(d) On April 28, 2021, the Group entered into loan agreement in the principal amount of $
On September 7, 2021, the Group entered into an asset acquisition agreement with Lanlian, to acquire various software systems for TRS trading service. The acquisition was closed on September 27, 2021 upon which Lanlian conveyed and delivered to the Group the software systems. The aggregate purchase price for the software systems was $
As of December 31, 2021 and 2020, the aggregate outstanding balance of loan receivables above was $-
Note 8 — Other Assets
As of December 31, 2021, the balance of other assets was primarily comprised of long-term portion of the value of January 2021 Call Options issued for service (see Note 15 for detail), amounted to $
As of December 31, 2020, the balance of other assets was primarily comprised of advance payment for purchasing eight copyrighted trading software in the amount of $
F-29
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 9 — Long-term Investment
In May 2021, the Group formed Lion Group (Hangzhou) Investment Limited and invested RMB
FASB ASC 820-10-35-59, Fair Value Measurements and Disclosures, indicates that investments in certain funds that do not have a readily determinable fair value qualify for the use of the net asset value (NAV) practical expedient. The Group classified the investment to long term investment and elects to use the NAV practical expedient. As of December 31, 2021, no unrealized gain or loss is recognized.
Note 10 — Fixed Assets, Net
Fixed assets consisted of the following as of December, 2021 and 2020:
|
December 31, |
||||||||
|
2021 |
2020 |
|||||||
|
Cryptocurrency mining Machines |
$ |
|
|
$ |
|
|||
|
Software (Note 7 & 8) |
|
|
|
|
|
|||
|
Leasehold improvement |
|
|
|
|
|
|
||
|
Office and equipment |
|
|
|
|
|
|
||
|
Total cost of fixed assets |
|
|
|
|
|
|
||
|
Less: accumulated depreciation |
|
( |
) |
|
( |
) |
||
|
Fixed assets, net |
$ |
|
|
$ |
|
|
||
On April 19, 2021, Lion Wealth Limited (the “Transferee”), a wholly-owned subsidiary of the Group, entered into an antminer transfer and maintenance agreement (the “Antminer Transfer and Maintenance Agreement”) with Shanghai ITHELP Network Technology Co., Ltd, (the “Transferor”), in a single transaction, to acquire the Bitmain Antminers S9 Hydro computer model equipment from the Transferor and the maintenance of the mining machines by Shanghai Minebaba Network Technology Co., Ltd (“Minebaba”). The acquisition was closed in May 2021, upon onsite inspection and acceptance and payment, with the Transferee acquiring five thousand brand new units of mining machines. The aggregate purchase price for the mining machines was approximately RMB
Depreciation expense, not including depreciation expense for the mining machines during the operation, for the years ended December 31, 2021 and 2020 was $
There were no impairment charges related to fixed assets for the period ended December 31, 2021 and 2020.
F-30
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 11 — Short-term Borrowings
As of December 31, 2021, total short-term borrowings outstanding was $
In October 2021, Lion Wealth Management Limited (“LWML”) and Dawa Future Graphic Technology Co., Ltd (“DAWA”) formed Lion Metaverse Limited to develop the Group’s newly launched Metaverse project “Lion World”. LWML and DAWA each hold
In August and September 2019,
During 2020, LWL entered into a supplemental loan agreement with Tonghai and the loan was changed to due on demand afterwards. During the year ended December 31, 2020, the repayments made were approximately $
In September 2019, LFGL obtained short-term borrowings with an unrelated third-party lender at an interest rate of
In November 2019,
Note 12 — Derivatives
Derivative financial instruments used for trading purposes are carried at fair value. Fair values for exchange-traded derivatives, principally futures and certain options, are based on quoted market prices. Fair values for OTC derivative financial instruments, principally CFDs are based on spot exchange rates broadly distributed in active markets, OTC option contracts are based on stock price and stock volatility. Factors taken into consideration in estimating the fair value of OTC derivatives include market liquidity, concentrations, and funding and administrative costs incurred.
F-31
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 12 — Derivatives (cont.)
The Group does not apply hedge accounting as defined in ASC 815, because all financial instruments are recorded at fair value with changes in fair values reflected in earnings. Therefore, certain of the disclosures required under ASC 815 are generally not applicable with respect to these financial instruments.
As discussed in Note 1, the Group’s derivative trading activity primarily relates to situations where it assumes the role of a market maker or a counter party in its customers’ CFD and options transactions. If the trades of one customer can be used to naturally hedge and offset the trades of another customer, the Group will act as the market maker to offer liquidity and pricing to both customers. When such an offsetting is not available, the Group may choose to use its own trades to hedge and offset the trades of its customer.
The contractual amounts related to CFDs reflect the volume and activity and generally do not reflect the amounts at risk. The fair value of the asset or liability is the best indicator of the Group’s risk. The credit risk for the CFDs and option contracts is limited to the unrealized fair value gains (losses) recorded in the balance sheets. Market risk is substantially dependent upon the value of the underlying assets and is affected by market forces such as volatility and changes in interest and foreign exchange rates. The Group’s open derivative positions at December 31, 2021 and 2020 were net derivative liabilities of approximately $
Offsetting Arrangements
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated balance sheets if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, or to realize the assets and settle the liabilities simultaneously.
Concentrations of Credit Risk
The Group is engaged in various trading and brokerage activities in which counterparties primarily include broker-dealers, individuals, and other financial institutions. In the event counterparties do not fulfil their obligations, the Group may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is the Group’s policy to review, as necessary, the credit standing of each counterparty.
Note 13 — Related Parties
During the year ended December 31, 2021, no advances were received or repaid from/to the individual shareholder. During the year ended December 31, 2020, dividends paid to the individual shareholder were $
As of December 31, 2021, LML recorded payable to DAWA for research and development expenses in the amount of approximately $
Note 14 — Convertible Securities and Attached Warrants
December 2020 Convertible Debenture and Warrants
On December 14, 2020, the Company completed a private placement with net proceeds of $
F-32
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Convertible Securities and Attached Warrants (cont.)
The Company follows Accounting for Certain Financial Instruments with Down Round Features. The detachable December 2020 Warrants issued to the holder are considered to be indexed to the Company’s own stock and classified in stockholders’ equity and therefore they meet the scope exception prescribed in ASC 815-10-15. The fair value of December 2020 Warrants is measured by using Binomial Option Pricing Model and Black-Scholes Merton Valuation Model with the assumptions below on the date of issuance, with no subsequent adjustment of fair value in accordance with ASC 815.
|
Series A |
Series B |
Series C |
||||||||||
|
Expected term in years |
|
|
|
|
|
|
|
|
|
|||
|
Stock price |
$ |
|
|
$ |
|
|
$ |
|
|
|||
|
Expected dividend yield |
|
|
% |
|
|
% |
|
|
% |
|||
|
Volatility |
|
|
% |
|
|
% |
|
|
% |
|||
|
Risk-free interest Rate |
|
|
% |
|
|
% |
|
|
% |
|||
|
Initial fair value per share |
$ |
|
|
$ |
|
|
$ |
|
|
|||
In accordance with ASC 470-20, Debt with Conversion and Other Options, the net proceeds of $
For the holder of the Debenture, conversion price results in BCF that is separated as an equity component and assigned a value of approximately $
The issuance costs are allocated in the same proportion as the proceeds are allocated to the debt and warrants. Issuance costs allocated to the equity-classified warrants in an aggregate of $
The Debenture is recognized initially at fair value, net of debt discounts including original issue discount of $
On January 29, 2021, the Debenture along with accrued interest of $
F-33
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Convertible Securities and Attached Warrants (cont.)
As a result of January 2021 Call Options as discussed in Note 15, exercise price of Series A and Series C Warrants was adjusted from $
During the year ended December 31, 2021, as a result of full exercise of December 2020 Warrants, the Company received the proceeds of $
February 2021 Series A Convertible Preferred Shares and Warrants
The number of Series A Convertible Preferred Shares is
Series A Convertible Preferred Shares are classified as equity and carried at the amount recorded at inception, without amortization. The discount to the redemption amount shall be recognized as a dividend upon redemption.
The detachable February 2021 Warrants issued to the holder are considered to be indexed to the Company’s own stock and classified in stockholders’ equity and therefore they meet the scope exception prescribed in ASC 815-10-15. The fair value of February 2021 Warrants is measured by using Binomial Option Pricing Model and Black-Scholes Merton Valuation Model with the assumptions below on the date of issuance, with no subsequent adjustment of fair value in accordance with ASC 815.
|
Series D |
Series E |
Series F |
||||||||||
|
Expected term in years |
|
|
|
|
|
|
|
|
|
|||
|
Stock price |
$ |
|
|
$ |
|
|
$ |
|
|
|||
|
Expected dividend yield |
|
|
% |
|
|
% |
|
|
% |
|||
|
Volatility |
|
|
% |
|
|
% |
|
|
% |
|||
|
Risk-free interest Rate |
|
|
% |
|
|
% |
|
|
% |
|||
|
Initial fair value per share |
$ |
|
|
$ |
|
|
$ |
|
|
|||
In accordance with ASC 470-20, Debt with Conversion and Other Options, the Company allocated the net proceeds to Series A Convertible Preferred Shares, the detachable Series D, E and F February 2021 Warrants on their relative fair value basis, in the amount of approximately $
F-34
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Convertible Securities and Attached Warrants (cont.)
the holder of the Series A Convertible Preferred Shares, conversion price results in BCF that is separated as an equity component and assigned a value of approximately $
The issuance costs are allocated in the same proportion as the proceeds are allocated to the preferred stock and warrants. Issuance costs allocated to the equity-classified warrants in an aggregate of $
The Series A Convertible Preferred Shares are recognized initially at fair value, net of discounts including original issue discount of $
During the year ended December 31, 2021,
December 2021 Series B Convertible Preferred Shares and Warrants
The number of Series B Convertible Preferred Shares is
The detachable December 2021 Warrants issued to the holder are considered to be indexed to the Company’s own stock and classified in stockholders’ equity and therefore they meet the scope exception prescribed in ASC 815-10-15.
F-35
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 14 — Convertible Securities and Attached Warrants (cont.)
In accordance with applicable accounting standards, Series B Convertible Preferred Shares qualified as redeemable securities and are classified as mezzanine equity; the net proceeds were allocated to the Series B Convertible Preferred Shares and the detachable Series G Warrant on their relative basis, in the amount of approximately $
The issuance costs are allocated in the same proportion as the proceeds are allocated to the preferred stock and warrants. Issuance costs allocated to the equity-classified warrants in an aggregate of $
The Series B Convertible Preferred Shares are recognized initially at fair value, net of debt discounts including original issue discount of $
Note 15 — Stockholders’ Equity
Ordinary Shares and Preferred Shares
The shareholders of Class A and Class B ordinary shares have the same rights except for the voting and conversion rights. Each Class A ordinary share is entitled to one vote, and is not convertible into Class B ordinary share under any circumstance; and each Class B ordinary share is entitled to ten votes, and is convertible into one Class A ordinary share at any time by the holder thereof, subject to adjustments for any subdivision or combination.
A total of
As of December 31, 2021 and 2020, there was an aggregate of
On February 16, 2022, the Company held a General Meeting of Shareholders that approved the increase by the number of votes attached to Class B Ordinary Shares from ten (10) votes per Class B Ordinary Share to twenty five (25) votes per Class B Ordinary Share.
August 2020 Private Placement
F-36
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Stockholders’ Equity (cont.)
fees. In accordance with ASC 815-40, Derivatives and Hedging — Contracts in Entity’s Own Equity, warrants are classified within stockholders’ equity as “additional paid in capital” upon their issuance. The proceeds were allocated to ordinary shares and private investment in public equity warrants (“PIPE Warrants”) on the relative fair value of the securities in accordance with ASC 470-20-30. In aggregate, the net proceeds to the Company were approximately $
Such warrants shall be exercisable for a period of three years from the issuance date. Exercise price is subject to adjustments in case of reorganization, consolidation, merger etc. and in case of stock purchase rights in the subsequent two-year period at a price per share less than the exercise price as stated in the securities purchase agreement.
The exercise price of PIPE Warrants was adjusted to $
For the year ended December 31, 2021,
Share Subscription Agreement with Yun Tian
On December 19, 2020, the Company entered into a private placement share subscription agreement (the “Share Subscription Agreement”) with Yun Tian Investment Limited (“Yun Tian”). Yun Tian subscribes for an aggregate of not more than
For the six months ended June 30, 2021, the Company received subscription price in an aggregate of $
January 2021 Call Options
On January 6, 2021, the Company entered into a binding strategic cooperation framework agreement (the “Strategic Cooperation Agreement”) with Mr. Yao Yongjie (“Mr. Yao”) and engaged Mr. Yao as the chief technical adviser to provide technical advice and consultancy service in blockchain industry. The Company grants to Mr. Yao options (the “Call Options”) to subscribe for
(i) if the closing price of the shares in the Company exceeds US$3 per share for 3 consecutive trading days, Mr. Yao may exercise 2 million call options;
(ii) if the closing price of the shares in the Company exceeds US$5 per share for 3 consecutive trading days, Mr. Yao may exercise 2 million call options;
(iii) if the closing price of the shares in the Company exceeds US$7.50 per share for 3 consecutive trading days, Mr. Yao may exercise 2 million call options.
The Company estimated the fair value of the call options at $
F-37
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 15 — Stockholders’ Equity (cont.)
For the year ended December 31, 2021, an aggregate of $
Note 16 — Stock-Based Compensation
2020 Share Incentive Plan
In June 2020, in connection with the Business Combination, the Company’s board approved the 2020 Share Incentive Plan (the “2020 Plan”) and reserved
Note 17 — Income Taxes
The current and deferred portions of the income tax expense included in the consolidated statements of operations and comprehensive income (loss) as determined in accordance with ASC 740, Income Taxes, are as follows:
|
Years Ended December 31, |
|||||||||||
|
2021 |
2020 |
2019 |
|||||||||
|
Current |
$ |
|
$ |
|
|
$ |
|
|
|||
|
Deferred |
|
|
|
( |
) |
|
( |
) |
|||
|
$ |
|
$ |
|
|
$ |
|
|
||||
A reconciliation of the difference between the expected income tax expense or benefit computed at applicable statutory income tax rates and the Group’s income tax expense is shown in the following table:
|
Years Ended December 31, |
||||||||||||
|
2021 |
2020 |
2019 |
||||||||||
|
Income tax expense (benefit) at applicable statutory rate(1) |
$ |
|
|
$ |
( |
) |
$ |
|
|
|||
|
Nondeductible expenses |
|
( |
) |
|
|
|
|
|||||
|
(Income) loss not subject to tax(2) |
|
( |
) |
|
( |
) |
|
( |
) |
|||
|
Current year change in valuation allowance |
|
|
|
|
|
|
|
|
|
|||
|
Other |
|
( |
) |
|
|
|
|
|
|
|||
|
Prior year examination adjustment |
|
|
|
|
|
|
|
|||||
|
Reported income taxes |
$ |
|
|
$ |
|
|
$ |
|
|
|||
____________
(1) The applicable statutory rate applied is based on the profits tax rates in Hong Kong.
(2) The Group also has entities domiciled in the British Virgin Islands and the Cayman Islands, but such entities are not subject to income or capital gains taxes.
F-38
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 17 — Income Taxes (cont.)
Significant components of the Group’s deferred tax assets (liabilities) are presented below:
|
December 31, |
||||||||
|
2021 |
2020 |
|||||||
|
Deferred tax asset |
|
|
|
|
||||
|
Others |
$ |
|
$ |
|
|
|||
|
Net operating loss carryforwards |
|
|
|
|
|
|
||
|
Less: valuation allowance |
|
( |
) |
|
( |
) |
||
|
Net deferred tax asset |
$ |
|
$ |
|
|
|||
Management has applied a valuation allowance to the total amount of deferred tax assets based on the determination that it is more likely than not that some portion of the deferred tax asset will not be realized. This determination was based on the historic and estimated future profitability of the entities to which the deferred tax assets relate. The tax rules in Hong Kong do not allow the Group to file on a consolidated basis.
Note 18 — Commitments
The Group leases certain office premises under non-cancelable leases. Rent expenses under operating leases for the year ended December 31, 2021, 2020 and 2019 were approximately $
Future minimum payments under non-cancelable operating leases were as follows at December 31, 2021:
|
Year Ended |
|||
|
2022 |
$ |
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
||
|
2026 |
|
||
|
$ |
|
||
Note 19 — Regulatory Requirements
The following table illustrates the minimum regulatory capital as established by the Hong Kong Securities and Futures Commission, the Insurance Authority (Hong Kong) and the Cayman Islands Monetary Authority (CIMA) that the Company’s subsidiaries were required to maintain as of December 31, 2021 and the actual amounts of capital that were maintained.
|
Entity Name |
Minimum |
Capital |
Excess Net |
Percent of |
||||||||
|
Lion International Securities Group Limited |
$ |
|
$ |
|
$ |
|
|
% |
||||
|
Lion Futures Limited |
|
|
|
|
|
|
|
% |
||||
|
Lion Asset Management Limited |
|
|
|
|
|
|
|
% |
||||
|
BC Wealth Management Limited |
|
|
|
|
|
|
|
% |
||||
|
Lion International Financial (Singapore) Pte. Ltd. |
|
|
|
|
|
|
|
% |
||||
|
Lion Broker Limited (Cayman)(1) |
|
|
|
|
|
|
|
% |
||||
|
Total |
$ |
|
$ |
|
$ |
|
|
|
||||
____________
(1) On February 18, 2022, Lion Broker Limited (“LBL”) received an administrative fine notice in the amount of CI $
F-39
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 — Segment Reporting
ASC 280, Disclosures about Segments of an Enterprise and Related Information, establishes standards for reporting information about operating segments. Operating segments are defined as components of an enterprise which engage in business activities from which they may earn revenues and incur expenses, and about which separate financial information is available that is evaluated regularly by the chief operating decision-maker, or decision-making group, in deciding how to allocate resources and in assessing performance.
The Group has
|
Futures |
CFD |
TRS |
Other |
Total |
|||||||||||||||
|
Year ended December 31, 2021 |
|
|
|
|
|
|
|
|
|
||||||||||
|
Revenue |
$ |
|
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Commissions and fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Compensation and benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Communication and technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Crypto currencies |
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Professional fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Depreciation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Payment service charge |
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|||||||
|
Unrealized loss on equity securities |
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Change in fair value of warrant liabilities |
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Change in fair value of option liabilities |
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Income (loss) from operations |
$ |
( |
) |
$ |
|
|
$ |
|
$ |
( |
) |
$ |
( |
) |
|||||
|
Total segment assets |
$ |
|
|
$ |
|
|
$ |
|
$ |
|
|
$ |
|
|
|||||
F-40
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 20 — Segment Reporting (cont.)
|
Futures and |
CFD |
TRS |
Other |
Total |
||||||||||||||||
|
Year ended December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
||||||||||
|
Revenue |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
|
Commissions and fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Compensation and benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
|
Occupancy |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Communication and technology |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Professional fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Service fees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Depreciation |
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|||||
|
Marketing |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Payment service charge |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
Change in fair value of warrant liabilities |
|
|
|
|
|
|
|
( |
) |
|
( |
) |
||||||||
|
Other operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
|
Income (loss) from operations |
$ |
( |
) |
$ |
|
|
$ |
( |
) |
$ |
( |
) |
$ |
( |
) |
|||||
|
Total segment assets |
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|||||
|
Futures and |
CFD |
Other |
Total |
|||||||||||
|
Year ended December 31, 2019 |
|
|
|
|
|
|
||||||||
|
Revenue |
$ |
|
|
$ |
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|||||||||
|
Commissions and fees |
|
|
|
|
|
|
|
|
|
|
||||
|
Compensation and benefits |
|
|
|
|
|
|
|
|
|
|||||
|
Occupancy |
|
|
|
|
|
|
|
|
|
|
||||
|
Communication and technology |
|
|
|
|
|
|
|
|
|
|
||||
|
General and administrative |
|
|
|
|
|
|
|
|
|
|
||||
|
Professional fees |
|
|
|
|
|
|
|
|
|
|
||||
|
Service fees |
|
|
|
|
|
|
|
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Interest |
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||||||
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Depreciation |
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Marketing |
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Payment service charge |
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Other operating expenses |
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|||||
|
Income (loss) from operations |
$ |
( |
) |
$ |
|
$ |
( |
) |
$ |
|
||||
|
Total segment assets |
$ |
|
|
$ |
|
$ |
|
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$ |
|
||||
F-41
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 — SPAC Warrants
PAAC’s warrants (collectively, the “SPAC Warrants”), which include (i) 11,500,000 warrants, those warrants included in the units as part of initial public offering (the “IPO”) on June 3, 2019 (the “Public Warrants”), (ii) 5,375,000 warrants purchased by the founders of PAAC in a private placement simultaneously closed with PAAC’s IPO (the “Private Warrants”) and (iii) 920,000 warrants issued to the underwriters of PAAC’s IPO (the “Underwriters’ Warrants”).
Public Warrants and Private Warrants
The Company’s warrants issued in exchange for PAAC’s private warrants are identical to warrants issued in exchange for the PAAC’s public warrants, except that such private warrants will be exercisable for cash (even if a registration statement covering the Class A ordinary shares issuable upon exercise of such warrants is not effective) or on a cashless basis, at the holder’s option, and will not be redeemable by the Company, in each case so long as they are still held by PAAC’s initial purchasers or their affiliates.
The Company may call the warrants for redemption (excluding the private warrants), in whole and not in part, at a price of $0.01 per warrant,
• at any time while the warrants are exercisable;
• upon not less than 30 days’ prior written notice of redemption to each warrant holder;
• if, and only if, the reported last sale price of the Company’s ADSs equals or exceeds $18.00 per ADS, for any 20 trading days within a 30-day trading period ending on the third business day prior to the notice of Redemption to warrant holders; and
• if, and only if, there is a current registration statement in effect with respect to the Class A ordinary shares underlying such warrants commencing five business days prior to the 30-day trading period and continuing each day thereafter until the date of redemption.
If the Company calls the warrants for redemption as described above, management will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.”
Subsequent to the closing,
F-42
LION GROUP HOLDING LTD.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 21 — SPAC Warrants (cont.)
Accordingly, due to the restatement, the Public and Private Warrants are now classified as a liability at fair value on the Company’s consolidated balance sheets at December 31, 2020, and the change in the fair value of such liability in each period is recognized as a gain or loss in the Company’s consolidated statements of operations and comprehensive income (loss). Because the Public Warrants were publicly traded and thus had an observable market price, fair value adjustments were determined by utilizing the market prices whereas the Private Warrants were valued using a Black-Sholes-Merton pricing model as described in Note 5 to the consolidated financial statements. The changes in the fair value of the warrants may be material to our future operating results.
Underwriters’ Warrants
The Underwriters’ Warrants may be exercised for cash or on a cashless basis at $
Subsequent to the Closing,
Note 22 — Subsequent Events
In January 2022, the Group launched the NFT business through Flying Lion Limited, including (i) issuance of MetaWords character NFTs and MetaWords work NFTs (collectively, the “MetaWords NFTs”), and (ii) the establishment of the NFT trading platform, namely the Lion NFT platform (f/k/a/ Meta World). The sales were conducted through an online auction or blind boxes direct sell on the Lion NFT platform in January 2022.
In March 2022, the Group issued an aggregate of 2,450,000 deferred shares to third-party consultants in exchange for their services over the next two years.
F-43
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 6. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Cayman Islands law does not limit the extent to which a company’s articles of association may provide for indemnification of officers and directors, except to the extent any such provision may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences of committing a crime.
Our Amended and Restated Memorandum and Articles of Association provides that we shall indemnify our officers and directors against all actions, proceedings, costs, charges, expenses, losses, damages or liabilities incurred or sustained by such directors or officer, other than by reason of such person’s dishonesty, willful default or fraud as determined by a court of competent jurisdiction, in or about the conduct of our company’s business or affairs (including as a result of any mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil proceedings concerning our company or its affairs in any court whether in the Cayman Islands or elsewhere.
Pursuant to the form of indemnification agreements filed as Exhibit 10.12 to this registration statement, we agreed to indemnify our directors and executive officers against certain liabilities and expenses that they incur in connection with claims made by reason of their being a director or officer of our company.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”) may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
ITEM 7. SALES OF UNREGISTERED SECURITIES.
Upon our incorporation in February 2020, we issued one ordinary share to our then sole shareholder, Lion Financial Group Limited. Following that we have issued the following securities. We believe that each of the following issuances was exempt from registration pursuant to Section 4(2) of the Securities Act regarding transactions not involving a public offering or in reliance on Regulation S under the Securities Act regarding sales by an issuer in offshore transactions. No underwriters were involved in these issuances of securities.
|
Securities/Purchaser |
Date of Issuance |
Number of Securities |
Consideration |
|||
|
Class A Ordinary Shares |
||||||
|
Class A Sellers (as defined in the Business Combination Agreement) |
June 16, 2020 |
3,140,388 |
In exchange for shares of Lion Financial Group Limited |
|||
|
Founder of Proficient Alpha Acquisition Corp. (“PAAC”) (as defined in the Business Combination Agreement) |
June 16, 2020 |
2,875,000 |
In exchange for shares of PAAC |
|||
|
Greentree Financial Group, Inc. |
August 3, 2020 |
239,584 |
US$625,000 |
|||
|
R-Opus Management Inc. |
August 3, 2020 |
47,917 |
US$125,000 |
|||
|
Capital Markets Solutions, LLC |
August 3, 2020 |
95,833 |
US$250,000 |
|||
|
Class A Sellers (as defined in the Business Combination Agreement) |
November 12, 2020 |
29,591 |
In exchange for shares of Lion Financial Group Limited |
|||
|
Greentree Financial Group, Inc. |
November 12, 2020 |
791,666 |
US$1,250,000 |
|||
|
R-Opus Management Inc. |
November 12, 2020 |
158,333 |
US$250,000 |
|||
|
Capital Markets Solutions, LLC |
November 12, 2020 |
316,667 |
US$500,000 |
II-1
|
Securities/Purchaser |
Date of Issuance |
Number of Securities |
Consideration |
|||
|
Warrants |
||||||
|
Greentree Financial Group, Inc. |
August 3, 2020 |
208,334 |
— |
|||
|
R-Opus Management Inc. |
August 3, 2020 |
41,667 |
— |
|||
|
Capital Markets Solutions, LLC |
August 3, 2020 |
83,333 |
— |
|||
|
Greentree Financial Group, Inc. |
November 12, 2020 |
729,166 |
— |
|||
|
R-Opus Management Inc. |
November 12, 2020 |
145,833 |
— |
|||
|
Capital Markets Solutions, LLC |
November 12, 2020 |
291,667 |
— |
On December 11, 2020, Lion Group Holding Ltd. entered into a Securities Purchase Agreement with ATW Opportunities Master Fund, L.P. (the “Purchaser”), pursuant to which the Company received $1,540,000 in exchange for the issuance of:
• 9% Senior Secured Convertible Debenture (the “Debenture”) in the principal amount of $1,600,000; and
• a 2-year warrant (the “Warrant”) to purchase 5,000,000 American Depositary Shares (“ADS”) of the Company at an exercise price of $2.00 per ADS.
• a warrant to purchase 1,200,000 ADS (“Series A Warrant”) until on or prior to 5:00 p.m. (New York City time) on December 14, 2027 at an exercise price of $2.45 per ADS.
• a 7-year warrant to purchase 7,500,000 ADS (“Series C Warrant”, together with Series A Warrant and the Warrant, the “2020 Warrants”) at an exercise price of $2.45 per ADS, the exercisability of which shall vest ratably from time to time in proportion to the exercise of the Warrant by the holder of the Series C Warrant.
The transactions contemplated under the Securities Purchase Agreement closed on December 14, 2020. The Company used the proceeds from the issuance of the Debenture and the 2020 Warrant for working capital purposes.
The Debenture matures on June 14, 2023, bears interest at a rate of 9% per annum, and is convertible into the ADSs, beginning after its original date of issuance at an initial conversion price of $2.00 per share. Interest is payable quarterly in cash, or the Company may pay accrued interest in its ADSs.
The 2020 Warrants contain provisions permitting cashless exercise subject to certain conditions.
The Debenture may be prepaid at any time in an amount equal to 115% of the principal amount plus accrued interest.
The Debenture and the 2020 Warrants contain conversion limitations providing that a holder thereof may not convert the Debenture or exercise the 2020 Warrants to the extent (but only to the extent) that, if after giving effect to such conversion, the holder or any of its affiliates would beneficially own in excess of 4.99% the ordinary shares immediately after giving effect to such conversion or exercise. The Company has also entered into a Registration Rights Agreement to file with the Securities and Exchange Commission a Registration Statement covering the resale of all of the registrable securities under the Registration Rights Agreement.
The Company’s obligations under the Securities Purchase Agreement are jointly and severally, unconditionally and irrevocably, guaranteed by its subsidiaries: Lion Wealth Limited, Lion Foreign Exchange Limited and Lion Wealth Management Limited (the “Subsidiary Guarantors”), upon the terms and subject to the conditions set forth in a Subsidiary Guarantee made by each of the Subsidiary Guarantors (the “Subsidiary Guarantee”).
On February 15, 2021, Lion Group Holding Ltd. entered into a Securities Purchase Agreement the Purchaser, pursuant to which the Company received $6,440,000 in consideration of the issuance of:
• Series A Convertible Preferred Shares (the “Series A Convertible Preferred Shares”) with a stated value of $7,000,000; and
• a warrant (the “Series D Warrant”) to purchase 2,333,333 American Depositary Shares (“ADS”) of the Company until on or prior to 5:00 p.m. (New York City time) on the five year anniversary of the closing date at an exercise price of $3.00 per ADS.
II-2
• a one-year warrant to purchase 13,333,333 ADS (the “Series E Warrant”) at an exercise price of $3.00 per ADS, each exercise of which entitles the Warrant holder to receive one ADS and a 8% cash discount.
• a 5-year warrant to purchase 13,333,333 ADS (the “Series F Warrant”, together with the Series D Warrant and the Series E Warrant, the “February Warrants”) at an exercise price of $3.00 per ADS, the exercisability of which shall vest ratably from time to time in proportion to the exercise of the Series E Warrants by the holder of the Series E Warrant.
The transactions contemplated under the Securities Purchase Agreement closed on or about February 16, 2021. The Company used the proceeds from the issuance of the Series A Convertible Preferred Shares and the Series E Warrant for working capital purposes.
The Series A Convertible Preferred Shares bears dividend right at a rate of 8% per annum commencing on the 6 month anniversary of the closing date, and is convertible into the ADSs, beginning after its original date of issuance at an initial conversion price of $3.00 per share. Dividend is payable quarterly in cash, or the Company may pay accrued interest in its ADSs.
The Series A Convertible Preferred Shares may be prepaid at any time following the effective date of a resale registration statement registering the underlying shares in an amount equal to 100% of the principal amount plus accrued dividend.
The Series A Convertible Preferred Shares and the February Warrants contain conversion limitations providing that a holder thereof may not convert the Series A Convertible Preferred Shares or exercise the February Warrants to the extent (but only to the extent) that, if after giving effect to such conversion or exercise, the holder or any of its affiliates would beneficially own in excess of 4.99% the ordinary shares immediately after giving effect to such conversion or exercise. A holder may increase or decrease its beneficial ownership limitation upon notice to the Company provided that in no event such limitation exceeds 9.99%, and that any increase shall not be effective until the 61st day after such notice.
The Company has also entered into a Registration Rights Agreement to file with the Securities and Exchange Commission a Registration Statement covering the resale of all of the registrable securities under the Registration Rights Agreement.
On December 13, 2021, we entered into a Securities Purchase Agreement with the Purchaser, pursuant to which the we received net proceeds of $3,800,000 in consideration of the issuance of:
• Series B Convertible Preferred Shares (the “Series B Convertible Preferred Shares”) with a stated value of $4,000,000; and
• a 5-year warrant to purchase 2,285,715 ADSs (the “Series G Warrant”) of the Company until on or prior to 5:00 p.m. (New York City time) on December 13, 2026, at an exercise price of $2.50 per ADS.
The transactions contemplated under the Securities Purchase Agreement closed on December 13, 2021. No underwriters were involved in these issuances of securities.
The Series B Convertible Preferred Shares bears dividends at a rate of 8% per annum if paid in cash or 12% per annum if paid in ADSs, payable quarterly beginning on the first such date after the closing date, and is convertible into the ADSs, beginning after its original date of issuance at an initial conversion price of $1.75 per share or 90% of the lowest daily volume-weighted average price during the 10 consecutive trading days prior to the conversion date. Dividends are payable quarterly in cash, or the Company may pay accrued interest in its ADSs.
On the third anniversary of the original issue date, the Company shall redeem, at the option of the holder, all of the then outstanding Series B Convertible Preferred Shares, for an amount in cash equal to the sum of (a) 100% of the aggregate cash investment and (b) accrued but unpaid dividends due in respect of the Series B Convertible Preferred Shares.
The Series B Convertible Preferred Shares and the Warrants contain conversion limitations providing that a holder thereof may not convert the Series B Convertible Preferred Shares or exercise the Warrants to the extent (but only to the extent) that, if after giving effect to such conversion or exercise, the holder or any of its affiliates would beneficially
II-3
own in excess of 4.99% the ordinary shares immediately after giving effect to such conversion or exercise. A holder may increase or decrease its beneficial ownership limitation upon notice to the Company provided that in no event such limitation exceeds 9.99%, and that any increase shall not be effective until the 61st day after such notice. The Series B Convertible Preferred Shares and Series G Warrants contain a “full ratchet” anti-dilution provision which would reduce the respective conversion price or exercise price to the effective price at which any future securities are sold.
The Company has also entered into a Registration Rights Agreement to file with the Securities and Exchange Commission a Registration Statement covering the resale of all of the registrable securities under the Registration Rights Agreement. The Company has also granted the Purchaser a 24-month right to participate in specified future financings, up to a level of 30%.
According to the Securities Purchase Agreement dated December 13, 2021, the Series A Convertible Preferred Stock and the Series D, Series E, and Series F American Depositary Shares Purchase Warrants issued on February 18, 2021 (collectively, the “February 2021 Securities”) contained a “full ratchet” anti-dilution provision which would reduce the respective conversion price or exercise prices to the effective price at which any future securities are sold (the “Provision”). As part consideration of entering into the Securities Purchase Agreement, the Purchaser agreed to waive such the Provision and set the conversion price and exercise prices as follows: (i) the conversion price of the Series A Preferred Stock will be adjusted to the lower of $1.75 or 90% of the lowest daily volume-weighted average price in the last 10 trading days prior to conversion; (ii) the exercise price of the Series D Warrants will be adjusted to $2.50; (iii) the exercise price of the Series E Warrants will be adjusted to $2.00; and (iv) the exercise price of the Series F Warrants will be adjusted to $2.50.
ITEM 8. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
See Exhibit Index beginning on page II-6 of this registration statement.
(b) Financial Statement Schedules
Schedules have been omitted because the information required to be set forth therein is not applicable or is shown in the Consolidated Financial Statements or the Notes thereto.
ITEM 9. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 6, or otherwise, the registrant has been advised that in the opinion of the SEC such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1. To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation
II-4
from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement;
(iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
2. That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.
4. To file a post-effective amendment to the registration statement to include any financial statements required by Item 8.A of Form 20-F at the start of any delayed offering or throughout a continuous offering. Financial statements and information otherwise required by Section 10(a)(3) of the Act need not be furnished, provided that the registrant includes in the prospectus, by means of a post-effective amendment, financial statements required pursuant to this paragraph (a)(4) and other information necessary to ensure that all other information in the prospectus is at least as current as the date of those financial statements. Notwithstanding the foregoing, with respect to registration statements on Form F-3, a post-effective amendment need not be filed to include financial statements and information required by Section 10(a)(3) of the Act or Item 8.A of Form 20-F if such financial statements and information are contained in periodic reports filed with or furnished to the Commission by the registrant pursuant to section 13 or section 15(d) of the Securities Exchange Act of 1934 that are incorporated by reference in the Form F-3.
5. That, for the purpose of determining liability under the Securities Act of 1933 to any purchaser, each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating to an offering, other than registration statements relying on Rule 430B or other than prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included in the registration statement as of the date it is first used after effectiveness. Provided, however, that no statement made in a registration statement or prospectus that is part of the registration statement or made in a document incorporated or deemed incorporated by reference into the registration statement or prospectus that is part of the registration statement will, as to a purchaser with a time of contract of sale prior to such first use, supersede or modify any statement that was made in the registration statement or prospectus that was part of the registration statement or made in any such document immediately prior to such date of first use.
6. For the purpose of determining any liability of the registrant under the Securities Act to any purchaser in the initial distribution of the securities, the undersigned registrant undertakes that in an offering of securities of the undersigned registrant pursuant to this registration statement, regardless of the underwriting method used to sell the securities to the purchaser, if the securities are offered or sold to such purchaser by means of any of the following communications, the undersigned registrant will be a seller to the purchaser and will be considered to offer or sell such securities to such purchaser:
(i) Any preliminary prospectus or prospectus of the undersigned registrant relating to the offering required to be filed pursuant to Rule 424;
(ii) Any free writing prospectus relating to the offering prepared by or on behalf of the undersigned registrant or used or referred to by the undersigned registrant;
(iii) The portion of any other free writing prospectus relating to the offering containing material information about the undersigned registrant or its securities provided by or on behalf of the undersigned registrant; and
(iv) Any other communication that is an offer in the offering made by the undersigned registrant to the purchaser.
II-5
LION GROUP HOLDING LTD.
EXHIBIT INDEX
|
Exhibit No. |
Description |
|
|
2.1 |
||
|
3.1 |
||
|
3.2 |
||
|
4.1 |
||
|
4.2 |
||
|
4.3 |
||
|
4.4 |
||
|
4.5 |
||
|
5.1* |
||
|
10.1 |
||
|
10.2 |
||
|
10.3 |
||
|
10.4 |
||
|
10.5 |
||
|
10.6 |
||
|
10.7 |
||
|
10.8 |
II-6
|
Exhibit No. |
Description |
|
|
10.9 |
||
|
10.10 |
||
|
10.11 |
||
|
10.12 |
||
|
10.13 |
||
|
10.14 |
||
|
10.15 |
||
|
10.16 |
||
|
10.17 |
||
|
10.18 |
||
|
10.19 |
||
|
10.20 |
||
|
10.21 |
||
|
10.22 |
||
|
10.23 |
||
|
10.24 |
||
|
10.25 |
||
|
10.26 |
||
|
10.27 |
||
|
10.28 |
||
|
10.29 |
||
|
10.30 |
||
|
10.31 |
||
|
21.1 |
II-7
|
Exhibit No. |
Description |
|
|
99.1 |
||
|
99.2* |
||
|
99.3* |
||
|
99.4 |
||
|
99.5* |
||
|
99.6 |
||
|
101.INS |
Inline XBRL Instance Document. |
|
|
101.SCH |
Inline XBRL Taxonomy Extension Schema Document. |
|
|
101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
|
|
101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document. |
|
|
101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
|
|
104 |
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
|
|
107* |
____________
* Previously filed
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the registrant certifies that it has reasonable grounds to believe that it meets all of the requirements for filing on Form F-1 and has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Hong Kong, on September 28, 2022.
|
Lion Group Holding Ltd. |
||||||
|
By: |
/s/ Chunning Wang |
|||||
|
Name: |
Chunning Wang |
|||||
|
Title: |
Chief Executive Officer |
|||||
Pursuant to the requirements of the Securities Act, this Registration Statement has been signed by the following persons in the capacities and on September 28, 2022.
|
Signature |
Title |
|
|
/s/ Jian Wang |
Chairman of the Board |
|
|
Name: Jian Wang |
||
|
/s/ Chunning Wang |
Director and Chief Executive Officer |
|
|
Name: Chunning Wang |
(principal executive officer) |
|
|
/s/ Sze Hau Lee |
Chief Financial Officer |
|
|
Name: Sze Hau Lee |
(principal financial and accounting officer) |
|
|
/s/ Yan Zhang |
Director and President |
|
|
Name: Yan Zhang |
||
|
/s/ Hua Luo |
Director and Chief Operating Officer |
|
|
Name: Hua Luo |
||
|
/s/ Zhixiang Zhang |
Director |
|
|
Name: Zhixiang Zhang |
||
|
/s/ Chi Fai Choi |
Director |
|
|
Name: Chi Fai Choi |
||
|
/s/ Walter Cook |
Director |
|
|
Name: Walter Cook |
||
|
/s/ Chi-yang Cheng |
Director |
|
|
Name: Chi-yang Chen |
II-9
SIGNATURE OF AUTHORIZED REPRESENTATIVE IN THE UNITED STATES
Pursuant to the Securities Act of 1933, the undersigned, the duly authorized representative in the United States of Lion Group Holding Ltd., has signed this registration statement or amendment thereto in New York on September 28, 2022.
|
Cogency Global Inc. |
||||||
|
By: |
/s/ Colleen A. De Vries |
|||||
|
Name: |
Colleen A. De Vries |
|||||
|
Title: |
Senior Vice-President on behalf of |
|||||
II-10
