How SAFEs and convertible notes work in a Hong Kong company

SAFEs and Convertible Notes in a Hong Kong Company Explained

SAFEs (Simple Agreements for Future Equity) and convertible notes are not standard instruments under the Companies Ordinance (Cap. 622). Hong Kong startups use them routinely to raise early-stage funding. These instruments give investors the right to receive shares upon a future triggering event, typically at a discount to the next round's price. Hong Kong law does not recognise a distinct "convertible instrument" category for share issuance. The conversion mechanics rely on standard company law procedures: share allotment, stamp duty on the instrument of transfer, and filing with the Companies Registry.

How SAFEs and Convertible Notes Work in a Hong Kong Company

A SAFE agreement gives the investor the right to receive shares when a specified future event occurs, a priced equity round, a liquidity event. A convertible note is a loan that converts into equity at maturity or upon a qualifying round. Both instruments set a conversion price or a discount rate that determines how many shares the investor receives.

Hong Kong operates a no-par-value regime. There is no authorised share capital. That simplifies conversion math: the company can allot shares at any price without needing to adjust a nominal value. The conversion is treated as a new share allotment, not a transfer of existing shares. Stamp duty implications arise from the instrument that documents the conversion.

Convertible Note Hong Kong Stamp Duty

Stamp duty under the Inland Revenue Ordinance (Cap. 117) applies to instruments that transfer shares. When a convertible note converts, the investor receives newly allotted shares. The conversion itself is not a transfer of existing shares. The note or SAFE agreement may be treated as an instrument of transfer if it effectively conveys a right to shares.

The Inland Revenue Department (IRD) assesses stamp duty at 0.1% from the buyer and 0.1% from the seller, plus a fixed HK$5 on the instrument. Duty is charged on the higher of the consideration and the value of the shares. For a conversion, the consideration is the principal amount of the note or the SAFE investment amount. If the shares are worth more than that amount at the time of conversion, duty is charged on the higher value. The fixed HK$5 duty applies per instrument. If multiple investors convert under separate agreements, each instrument attracts its own HK$5.

Safe Agreement Hong Kong Company

A SAFE agreement is not a debt instrument. It is a contractual right to future equity. When the triggering event occurs, the company allots shares to the SAFE holder. The SAFE agreement itself is not stamped at issuance. Upon conversion, the company must prepare an instrument of transfer or a written confirmation of allotment. The IRD may require the SAFE agreement to be presented for stamping if it is treated as a transfer instrument.

Execute a separate instrument of transfer at conversion to satisfy stamp duty requirements. The bought and sold notes that accompany a standard share transfer are not required for an allotment. The instrument of transfer must be stamped before the company updates its register of members.

Convertible Instrument Hong Kong Share Allotment

When a convertible instrument converts, the company must allot shares to the investor. Report the allotment to the Companies Registry using Form NSC1 (return of allotment). File Form NSC1 within one month of the allotment date. The form requires details of the number of shares allotted, the class of shares, and the consideration received. It also needs the names of the allottees.

Hong Kong shares have no par value. The consideration can be any amount agreed between the company and the investor. The conversion price or discount rate from the SAFE or convertible note determines the consideration per share. If the company allots shares at a discount to the market value, the IRD may still assess stamp duty on the higher of the consideration and the value of the shares.

Hong Kong Convertible Note Form NSC1

Form NSC1 is the standard return of allotment form for all share issuances, including those arising from convertible note conversions. A director or the company secretary must sign the form. File it with the Companies Registry. Alongside Form NSC1, the company must also file Form NSC11 if the allotment results in a change to the company's share capital structure, such as creating a new class of shares.

Update the register of members to reflect the new shareholders. Issue share certificates within two months of the allotment. The Companies Registry does not require a copy of the convertible note or SAFE agreement to be filed. Retain these documents for the company's records.

Instrument of Transfer and Stamp Duty Mechanics

Although a conversion involves new shares, the instrument that documents the transfer of rights from the investor to the company (or the allotment to the investor) may be treated as an instrument of transfer for stamp duty purposes. Present the instrument to the IRD for stamping within 30 days of execution.

The duty payable is 0.1% from the buyer (the investor) and 0.1% from the seller (the company), plus a fixed HK$5 on the instrument. The buyer and seller each pay their share. In practice the company often pays the entire duty and recovers the investor's portion. Calculate the duty on the higher of the consideration (the investment amount) and the value of the shares at the time of conversion. If the shares are unlisted, the value is determined by the company's net asset value or a valuation method acceptable to the IRD.

Bought and Sold Notes and the Fixed HK$5 Duty

For a standard share transfer, bought and sold notes are required to document the transaction. For a conversion of a SAFE or convertible note, bought and sold notes are not typically used because the transaction is an allotment, not a transfer. If the company and investor execute a separate instrument of transfer to facilitate stamping, that instrument must be stamped with the fixed HK$5 duty. The HK$5 duty is a flat fee per instrument, regardless of the transaction value. If multiple investors convert under separate instruments, each instrument attracts its own HK$5. The IRD does not waive this fee for conversions.

Register of Members and Share Certificates

After the allotment is completed and the instrument of transfer is stamped, update the company's register of members to record the new shareholders. The register must include the names, addresses, and number of shares held by each investor. Issue share certificates within two months of the allotment. The register of members is a public document that can be inspected at the Companies Registry. Failure to update the register or issue certificates within the statutory period may attract penalties under the Companies Ordinance.

Special Resolution and Share Capital Considerations

If the conversion requires an amendment to the company's articles of association or a change to the share capital structure, a special resolution of the members is needed. For example, if the company creates a new class of shares for the investors, it must pass a special resolution and file Form NSC11 with the Companies Registry. The no-par-value regime means there is no need to adjust authorised share capital. The company must ensure that the allotment does not exceed the number of shares authorised by the articles. The conversion price and discount rate are contractual terms that do not require statutory approval. Document them in the SAFE or convertible note agreement.

Practical Steps for Conversion

When a SAFE or convertible note converts, the company should follow these steps:

1. Determine the conversion price or discount rate from the agreement.
2. Calculate the number of shares to be allotted.
3. Execute an instrument of transfer or a written confirmation of allotment.
4. Present the instrument to the IRD for stamping within 30 days.
5. Pay stamp duty at 0.1% each side plus HK$5 fixed duty.
6. File Form NSC1 with the Companies Registry within one month.
7. Update the register of members.
8. Issue share certificates within two months.

Consider whether the conversion triggers any pre-emption rights under the articles of association or any shareholders' agreement. If pre-emption rights apply, the company must offer the shares to existing shareholders before allotting them to the investors. Waiving pre-emption rights typically requires a special resolution.

Stamp Duty on Consideration vs Value of Shares

The IRD charges stamp duty on the higher of the consideration and the value of the shares. For a convertible note conversion, the consideration is the principal amount of the note. For a SAFE, the consideration is the investment amount. If the shares are worth more than the consideration at the time of conversion, duty is charged on the higher value.

Obtain a valuation of the shares if the value is not readily determinable. The IRD may accept a valuation based on the company's net asset value or a discounted cash flow analysis. If the company undervalues the shares, the IRD may reassess the duty and impose penalties.

No-Par-Value Shares and Conversion Math

Hong Kong's no-par-value regime simplifies conversion calculations. Shares have no nominal value. The company can allot shares at any price without creating a share premium account. The conversion price is simply the investment amount divided by the number of shares. If an investor contributes HK$100,000 under a SAFE with a 20% discount rate, the conversion price is 80% of the next round's price. If the next round price is HK$10 per share, the conversion price is HK$8, and the investor receives 12,500 shares. The company records the consideration as HK$100,000 and allots 12,500 shares. No share premium or par value adjustments are needed.