F-1 1 ea136067-f1_liongroup.htm REGISTRATION STATEMENT

As filed with the U.S. Securities and Exchange Commission on February 22, 2021.

Registration No. [*]

 

 

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 

 

  

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

 

 

 

Lion Group Holding Ltd.
(Exact Name of Registrant as Specified in Its Charter)

 

 

  

Not Applicable
(Translation of Registrant’s Name into English)

 

Cayman Islands   6211   Not Applicable
(State or Other Jurisdiction of Incorporation or Organization)   (Primary Standard Industrial Classification Code Number)  

(IRS Employer

Identification Number)

 

 

 

Unit A-C, 33/F
Tower A, Billion Center
1 Wang Kwong Road
Kowloon Bay
Hong Kong
+(852) 2820-9000
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)

 

c/o Cogency Global Inc.
122 East 42nd Street, 18th Floor
New York, NY 10168
(212) 947-7200
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)

 

 

  

Copies to:

 

Lawrence Venick, Esq.
Loeb & Loeb LLP
3 Connaught Road Central
Hong Kong SAR
Tel: +852.3923.1111
Fax: +852.3923.1100

 

 

 

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 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.

 

 

 

 

CALCULATION OF REGISTRATION FEE

 

Title of Each Class of Securities to Be Registered  Amount to be
Registered(1)
   Proposed
Maximum
Offering
Price
Per Share(3)
   Proposed
Maximum
Aggregate
Offering
Price
   Amount of
Registration
Fee(3)
 
Class A Ordinary Shares, par value $0.0001 per share, issuable upon conversion of the Series A Convertible Preferred Shares(2)   2,333,333   $      3.00    7,000,000   $763.70 
Class A Ordinary Shares, par value $0.0001 per share, issuable upon exercise of the Series D Warrant(2)   2,333,333    3.00    7,000,000    763.70 
Class A Ordinary Shares, par value $0.0001 per share, issuable upon exercise of the Series E Warrant(2)   13,333,333    3.00    40,000,000    4,364.00 
Class A Ordinary Shares, par value $0.0001 per share, issuable upon exercise of the Series F Warrant(2)   13,333,333    3.00    40,000,000    4,364.00 
Class A Ordinary Shares, par value $0.0001 per share(4)   311,111             
Total   31,644,443         94,000,000   $10,255.40 

 

 

(1)Represents the maximum number of Class A Ordinary Shares, represented by American Depositary Shares (“ADSs”), each representing one Class A Ordinary Share, offered by the selling shareholder named in this registration statement.
(2)Represents the registrant’s ADSs issuable upon conversion of the Series A Convertible Preferred Shares or upon exercise of the 2021 Warrants. The Series A Convertible Preferred Shares and the 2021 Warrants were previously issued to the selling shareholder named in this registration statement.
(3)Amount of registration fee is calculated based on proposed maximum aggregate offering price multiplied by 0.0001091 based on the filing fee rate issued by the Securities and Exchange Commission for the period between October 1, 2020 and September 30, 2021.
(4)Represents an additional 311,111 of the registrant’s ADSs issuable upon the dividends payment in kind under the Series A Convertible Preferred Shares if the Company elects not to pay dividends quarterly in cash.

 

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.

 

 

 

 

 

 

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 FEBRUARY 22, 2021

 

PROSPECTUS

 

LION GROUP HOLDING LTD.

 

29,311,110 AMERICAN DEPOSITARY SHARES REPRESENTING
CLASS A ORDINARY SHARES

2,333,333 AMERICAN DEPOSITARY SHARES REPRESENTING
CLASS A ORDINARY SHARES PURSUANT TO THE SERIES A CONVERTIBLE PREFERRED SHARES

 

This prospectus relates to the resale from time to time of 2,333,333 Class A Ordinary Shares, represented by American Depositary Shares (“ADS”) (which represents one Class A Ordinary Share) pursuant to the Series A Convertible Preferred Shares, which we refer to in this prospectus as the Series A Convertible Preferred Shares, and an aggregate of 29,311,110 ADSs (, par value $0.0001 per share, of Lion Group Holding Ltd. (“Lion,” the “Company,” “we,” “our,” or “us”), including (i) 13,333,333 ADSs issuable upon exercise of a one-year warrant (the “Series E Warrant”) to purchase ADSs, (ii) 2,333,333 ADSs issuable upon exercise of a five-year warrant (the “Series D Warrant”) to purchase ADSs, (iii) 13,333,333 ADSs issuable upon exercise of a five-year warrant (the “Series F Warrant”) to purchase ADSs (collectively, together with the Series D Warrant, the Series E Warrant and the Series F Warrant, referred to as the “2021 Warrants”), and (iv) an additional 311,111 ADSs are issuable and will be paid in kind pursuant to the Series A Convertible Preferred Shares if the Company elects not to pay dividends quarterly in cash. The 2021 Warrants and the Series A Convertible Preferred Shares 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 resale the ADSs issuable upon conversion of the Series A Convertible Preferred Shares and exercise of the 2021 Warrants pursuant to the securities purchase agreement (the “Securities Purchase Agreement”) that we entered into with the selling shareholder as of February 15, 2021.

 

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.

 

Holders of the Series A Convertible Preferred Shares generally will have no voting rights.

 

The Series A Convertible Preferred Shares shall be redeemable by us by an optional redemption notice to the selling shareholder at any time after 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 “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 accrued 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.

 

The Series A Convertible Preferred Shares and the 2021 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 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).

 

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 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 Warrants shall be adjusted proportionally to maintain the aggregate exercise price of the 2021 Warrants.

 

 

 

 

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 February 19, 2021, the closing trading prices of our ADSs and our 2019 Warrants were $5.40 and $0.77, respectively. There is currently no established trading market for the Series A Convertible Preferred Shares.

 

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 ten 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.”

 

Investing in our securities is highly speculative and involves a high degree of risk. See “Risk Factors” section beginning on page 9 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 [●], 2021.

 

 

 

  

TABLE OF CONTENTS

 

   Page
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS  ii
SUMMARY OF THE PROSPECTUS  1
THE OFFERING  4
SELECTED HISTORICAL FINANCIAL INFORMATION  7
RISK FACTORS  9
USE OF PROCEEDS  39
CORPORATE HISTORY AND STRUCTURE  40
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS  41
INDUSTRY  61
BUSINESS  67
MANAGEMENT  89
BENEFICIAL OWNERSHIP OF SECURITIES  95
RELATED PARTY TRANSACTIONS  96
DESCRIPTION OF SHARE CAPITAL  98
DESCRIPTION OF AMERICAN DEPOSITARY SHARES  104
SELLING SHAREHOLDER  113
PLAN OF DISTRIBUTION  114
EXPERTS  116
LEGAL MATTERS  116
WHERE YOU CAN FIND MORE INFORMATION  116
INDEX TO FINANCIAL STATEMENTS  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.

 

i

 

  

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;

 

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. Our business lines include our (i) CFD trading service, (ii) insurance brokerage service, (iii) futures brokerage service, (iv) securities brokerage service and (v) asset management service. We provide these services through our all-in-one Lion Brokers Pro app and a variety of 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, as well as institutional clients in Hong Kong that use our futures brokerage 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 also improved from a loss before income taxes of US$2.7 million in 2018, to income before income taxes of US$8.3 million in 2019. For the six months ended June 30, 2020, we generated income before income taxes of US$2.4 million.

 

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.

 

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.

1

 

The February Private Placement

 

On February 18, 2020, 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. As a result, an additional 311,111 ADSs are issuable and will be paid in kind for dividends pursuant to the Series A Convertible Preferred Shares if the Company elects not to pay dividends quarterly in cash. The Series A Preferred Shares are convertible at $3.00 per ADS at any time.

 

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.

2

 

We also issued three series of the 2021 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 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 Warrants shall be adjusted proportionally to maintain the aggregate exercise price of the 2021 Warrants.

 

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 Warrants, the 2021 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 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 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 Warrants. We will use our best efforts to have this registration statement declared effective by March 17, 2021.

 

Risk Factors

 

Our business is subject to numerous risks and uncertainties, including those highlighted in the section entitled “Risk Factors” immediately following this prospectus summary, that represent challenges that we face in connection with the successful implementation of our strategy and the growth of our business.

 

Corporate Information

 

Our principal executive office will be that of Lion, located at Unit A-C, 33/F, Tower A, Billion Center, 1 Wang Kwong Road, Kowloon Bay, Hong Kong, and its telephone number is +852 2796 2900.

 

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.

3

 

SUMMARY OF THE OFFERING

 

Issuer:   Lion Group Holding Ltd.
     
Securities offered by selling shareholder:   Up to 2,333,333 Class A Ordinary 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) 2,333,333 ADSs issuable upon exercise of the Series D Warrant to purchase ADSs, (iii) 13,333,333 ADSs issuable upon exercise of the Series F Warrant to purchase ADSs,  and (iv) an additional 311,111 ADSs are issuable and will be paid in kind for dividends pursuant to the Series A Convertible Preferred Shares if the Company elects not to pay dividends quarterly in cash
     
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:   25,201,983
     
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 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 39.

     
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.

 

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.

 

“ADSs” refers to our American depositary shares, each of which represents one Class A Ordinary Share.“ADRs” refers to the American depositary receipts that evidence our ADSs.

 

“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. which became effective upon the consummation of the Business Combination.

 

“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.

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“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 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.

 

“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 Placement Warrants” means the Warrants owned by the Sponsor and issued by Proficient simultaneously with the consummation of the Initial Public Offering.

 

“Proficient” or “Purchaser” means Proficient Alpha Acquisition Corp., a Nevada corporation.

 

“PRC” or “China” refers to the People’s Republic of China, excluding, for the purpose of this prospectus, Taiwan, Hong Kong and Macau.

 

“Public Stockholders” means the holders of Public Shares.

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“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 2,333,333 ADSs at an exercise price of $3.00 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 $3.00 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.

 

“Series F Warrant” means a five-year warrant exercisable into 13,333,333 ADSs at an exercise price of $3.00 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 Warrants 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$7.7501 to US$1.00, the noon buying rate in effect as of June 30, 2020.

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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, 2017, 2018 and 2019, 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 following selected consolidated financial data as of June 30, 2020 and for the six months ended June 30, 2019 and 2020 have been derived from our unaudited condensed consolidated financial statements included elsewhere in this prospectus and have been prepared on the same basis as our audited consolidated financial statements.

 

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.

 

Consolidated Statements of Operations and Comprehensive (Loss) Income

 

   Year ended December 31,   Six months ended June 30, 
   2017   2018   2019   2019   2020 
   US$   %   US$   %   US$   %   US$   %   US$   % 
                           (Unaudited)       (Unaudited)     
Revenues                                        
CFD trading services                   12,843,574    69.3    4,703,195    58.70    5,126,239    79.7 
Insurance brokerage services   9,623,359    97.3    5,378,679    81.8    2,648,141    14.3    1,820,214    22.7    638,574    9.9 
Futures brokerage and securities brokerage services   268,252    2.7    2,066,354    31.5    2,215,867    12.0    1,461,652    18.3    617,242    9.6 
Others           (876,770)   (13.3)   819,268    4.4    22,180    0.3    48,461    0.8 
Total revenues   9,891,611    100.0    6,568,263    100.0    18,526,850    100.0    8,007,241    100.0    6,430,516    100.0 
                                                   
Expenses                                                  
Commission expenses   (8,221,372)   (83.0)   (5,471,602)   (83.3)   (3,355,205)   (18.1)   (2,275,430)   (28.4)   (762,061)   (11.9)
Compensation expenses   (1,211,785)   (12.3)   (1,639,288)   (25.0)   (2,430,636)   (13.1)   (1,017,639)   (12.7)   (1,486,160)   (23.0)
Communication and technology expenses   (144,156)   (1.5)   (588,353)   (9.0)   (823,433)   (4.4)   (365,576)   (4.6)   (469,662)   (7.3)
Professional fees   (59,038)   (0.6)   (227,998)   (3.5)   (761,238)   (4.1)   (62,622)   (0.7)   (153,853)   (2.4)
Services fees                                 (164,414)   (2.1)   (231,785)   (3.6)
Interest expenses   (36,665)   (0.3)   (118)       (731,812)   (4.0)   (979)   (0.0)   (79,343)   (1.2)
General and administrative expenses   (272,682)   (2.8)   (539,773)   (8.2)   (692,648)   (3.7)   (320,507)   (4.0)   (292,788)   (4.6)
Occupancy expenses   (502,120)   (5.1)   (548,331)   (8.3)   (591,936)   (3.2)   (236,701)   (3.0)   (323,224)   (5.0)
Other expenses   (75,512)   (0.8)   (297,674)   (4.5)   (859,118)   (4.6)   (48,246)   (0.6)   (254,442)   (4.0)
Total expenses   (10,523,330)   (106.4)   (9,313,137)   (141.8)   (10,246,026)   (55.3)   (4,492,114)   (56.1)   (4,053,318)   (63.0)
(Loss)/income before income taxes   (631,719)   (6.4)   (2,744,874)   (41.8)   8,280,824    44.7    3,515,127    43.9    2,377,198    37.0 
Income tax expenses   (102,936)   (1.0)   (26,334)   (0.4)   (64,472)   (0.3)   (59,993)   (0.7)   (3,321)   (0.1)
Net (loss)/income   (734,655)   (7.4)   (2,771,208)   (42.2)   8,216,352    44.4    3,455,134    43.2    2,373,877    36.9 
Other comprehensive income (loss)                                                  
Foreign currency translation adjustment   (95,125)   (1.0)   (24,749)   (0.4)   75,637    0.4    (39,839)   (0.5)   20,560    0.3 
Comprehensive (loss)/income   (829,780)   (8.4)   (2,795,957)   (42.6)   8,291,989    44.8    3,415,295    42.7    2,394,437    37.2 

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Consolidated Statements of Financial Positions

 

   As of December 31,   June 30, 
   2017   2018   2019   2020 
               (Unaudited) 
Assets                
Cash and cash equivalents  $2,337,161   $3,116,209   $6,388,978   $8,111,409 
Restricted cash   619,970    3,991,949    2,192,201    1,470,486 
Securities owned, at fair value       1,107,233    180,201    9,424 
Derivative, at fair value           194,110    11,069 
Receivables from broker-dealers and clearing organizations   25,588    842,045    20,409    18,703 
Receivables from broker-dealers and clearing organizations – client accounts   907,568    5,566,745    1,664,552    2,182,623 
Commissions receivables   344,230    157,004    88,560    60,839 
Short-term loans receivable           1,637,310    2,087,593 
Other receivables   645,048            306,368 
Prepaids and deposits   268,987    470,707    676,355    452,385 
Fixed assets, net   76,121    105,964    73,688    53,186 
Intangible asset   63,980    63,847    67,964    86,762 
Other assets   131,122    251,058    233,343    219,558 
Deferred taxes           677    198 
Total assets  $5,419,775   $15,672,761   $13,418,348   $15,070,603 
                     
Liabilities                    
Payables to broker-dealer and clearing organizations  $8,625   $   $   $607,132 
Payables to clients   1,518,026    9,551,219    3,853,693    3,044,689 
Commissions payable   468,668    125,668    29,439    16,953 
Dividends payable           385,901     
Other payables   196,609    205,519    417,445    1,149,637 
Short-term borrowings           1,412,570    621,101 
Short-term borrowings from related party           128,415     
Derivative, at fair value       20,287         
Tax payable   76,276             
Deferred taxes   1,778    1,150         
Total liabilities  $2,269,982   $9,903,843   $6,227,463   $5,439,512 

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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 violates 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 are still in the process of implementing the improvements recommended by CIMA and expect that we will be able to adopt a 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 conditions and prospects.

 

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We had incurred net losses in the past, and we may incur losses again in the future.

 

We had net losses of US$0.7 million and US$2.8 million in 2017 and 2018, respectively. Although we had net income of US$8.2 million in 2019 and US$2.4 million for the six months ended June 30, 2020, we cannot assure you that we will be able to continue 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 99.7%, 112.6%, 85.9% and 61.0% of our total revenues from commissions charged to our clients who trade on our platform in 2017, 2018 and 2019 and for the six months ended June 30, 2020, 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 (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.

 

10

 

 

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 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.

 

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 134.7% from 1,722 as of December 31, 2017 to 4,047 as of December 31, 2019, but later slightly decreased by 1.7% to 3,980 due to decline in our insurance brokerage business. To further grow our business and expand our operation, we rely on continuous efforts in retaining existing clients and attracting new ones.

 

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.

 

11

 

 

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 trading services. Revenues generated from commission amounted to US$9.9 million, US$7.4 million and US$15.9 million in 2017, 2018 and 2019, respectively, and amounted to US$7.1 million and US$3.9 million for the six months ended June 30, 2019 and 2020, respectively. Especially starting from May 2019, we began our CFD trading services, commission of which became the largest contributor of our total revenues in 2019. 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 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 tests 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.

 

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.

 

12

 

 

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 exposer, 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. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Regulatory Capital Requirements.

 

As of June 30, 2020, all of our operating subsidiaries were in compliance with their respective regulatory capital requirements. 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, 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 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.

 

13

 

 

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$9.6 million, US$5.4 million and US$2.6 million in 2017, 2018 and 2019, respectively, representing 97.0%, 81.8% and 14.3% of our total revenues during the same periods. For the six months ended June 30, 2019 and 2020, insurance brokerage business generated US$1.8 million and US$0.6 million revenues, respectively, accounting for 22.7% and 9.9% of our total revenues during the same periods, respectively. 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 2019 compared to 2017 and 2018, primarily due to 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, during the six months ended June 30, 2020, 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.

 

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.

 

14

 

 

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.

 

15

 

 

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.

 

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.

 

16

 

 

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 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.

 

17

 

 

We derived a substantial portion of revenue from a small number of key clients.

 

In 2017, 2018 and 2019, 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.

 

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.

 

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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.

 

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.

 

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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.

 

We collect client information during the account opening and registration process and screens accounts against public databases or collaborates with external service providers for purpose of verifying client identity and detecting risks. Although we require our clients to submit documents for proof of their identity and address for completing the account registration and to update such information from time to time, we face risks as the information provided by our clients may be outdated, inaccurate, false or misleading. 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 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.

 

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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 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 us does 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.

 

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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 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.

 

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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 the course of auditing consolidated financial statements, 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.

 

The two material weaknesses that have been identified relate to (i) lack of sufficient internal capabilities and resources 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 to prepare financial statements and related footnote disclosures in accordance with U.S. GAAP, and (ii) lack of proper and adequate closing procedures to record all the transactions Lion entered into and ensure the proper cut-off at period end. For details, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Internal Control Over Financial Reporting.” Although we have already begun implementing remedial measures to address the material weaknesses, the implementation of these measures may not fully address the material weaknesses and 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 material weaknesses, 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 weaknesses or failure to discover and address any other material weaknesses or 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 and deficiencies. 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 ending December 31, 2020. 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.

 

During the course of documenting and testing our internal control procedures, in order to satisfy the requirements of Section 404, we may identify other weaknesses and deficiencies in our internal control over financial reporting. In addition, if we fail to maintain the adequacy of our internal control over financial reporting, as these standards are modified, supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404. If we fail to achieve and maintain an effective internal control environment, we could suffer material misstatements in our financial statements and fail to meet our reporting obligations, which would likely cause you to lose confidence in our reported financial information. This could in turn limit our access to capital markets and harm our results of operations. Additionally, ineffective internal control over financial reporting could expose us to increased risk of fraud or misuse of corporate assets and subject us to potential delisting from the stock exchange on which we list, regulatory investigations and civil or criminal sanctions. We may also be required to restate our financial statements from prior periods.

 

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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.

 

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 late 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.

 

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.

 

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Furthermore, our results of operations have been severely affected by the COVID-19 outbreak. Due to the instability of global financial markets and other economic and financial challenges brought about by COVID-19, as well as the relatively quiet period during the Chinese New Year holiday. Our futures brokerage and insurance brokerage businesses have been adversely affected by travel restrictions preventing PRC residents from travelling to Hong Kong. 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 may be 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.

 

Our headquarters are located in 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.

 

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.

 

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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, it remains to be unclear whether a “Phase 2” agreement can be reached 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.

 

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.

 

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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 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.

 

Risks Related to our ADSs, our Securities and this Offering

 

The price of our ADSs may be volatile.

 

The price of our ADSs may fluctuate 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.

 

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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;

 

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.

 

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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.

 

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.

 

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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.

 

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.

 

The Warrants are speculative in nature.

 

The 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.

 

Purchasers of our Warrants will not have any rights of common shareholders until such Warrants are exercised.

 

The 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.

 

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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.

 

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.

 

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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.”

 

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”

 

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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.

 

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.

 

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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 Series A Convertible Preferred Shares or our 2021 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 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 2020 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 Warrants, Series A Convertible Preferred Shares and our warrants.

 

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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.

 

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.

 

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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 consist of three directors, and Class II consist 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 ten 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 50.55% of our total issued and outstanding share capital, and 91.09% 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.

 

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.

 

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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, 2020. 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.

 

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.

 

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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 86.50% 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.

 

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, representing approximately more than 85% of our voting power total issued and outstanding share capital. Jian Wang and 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.

 

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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 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, BC Wealth Management Limited and Lion Foreign Exchange Limited in Hong Kong, were incorporated, to engage in securities and futures brokerage business, asset management 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 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.

 

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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, 2019, 2018 and 2017 are derived from Lion’s audited combined financial statements and the notes thereto included elsewhere in this prospectus. Information for the six months ended June 30, 2020 and 2019 are derived from our unaudited condensed consolidated financial statement 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) CFD trading services, (ii) insurance brokerage services, (iii) futures brokerage services, (iv) securities brokerage services 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, 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”). 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. Instead of a loss before income taxes of US$2.7 million in 2018, we generated income before income taxes of US$8.3 million in 2019. For the six months ended June 30, 2020, we generated income before income taxes of US$2.4 million.

 

Key Factors Affecting Our Results of Operations

 

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, insurance brokerage 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, 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.

 

Further, the outbreak of COVID-19 in the first half of 2020 may have an adverse impact on the macroeconomic condition all over the world, as well as on the amount of investable assets of a number of our clients and potential clients. Our financial performance is prone to changing global market conditions, especially the fluctuation and volatility of trading activities on major exchanges worldwide.

 

Number of users and transaction volumes

 

We 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. As of December 31, 2019, we had 1,843 CFD trading clients, most of which were retail investors. Further, the larger our number of active users, the greater will be our transaction 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 decreased to 3,980 as of June 30, 2020 due to the decline of our insurance brokerage business. Among our total 3,980 revenue-generating client accounts, 57.6% of accounts are CFD trading accounts which increased by approximately 25% to 2,295.

 

If we can effectively attract new users, retain existing 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.

 

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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. 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.

 

We also invest heavily in technology. Over the past few years, 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. We believe that the fast and reliable order execution and smooth user experience will enhance our clients’ stickiness and stimulate our revenue growth.

 

Effectiveness of cost control measures

 

Our profitability is affected not only by revenue growth, but also by our ability to effectively control costs. The commission expenses 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 continues to grow, that we will have greater leverage in dealing with our business partners, allowing us to negotiate improved commission rates. We have incurred substantial research and development expenses since we outsourced our related work to an information technology team, and expect to incur additional significant expenses relating to future development, maintenance and operation of our technology infrastructure.

 

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) and the Hong Kong Securities and Futures Commission (HKSFC), 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 in the future, our operations in those markets will be subject to local regulations which could also prove burdensome. On the other hand, if local regulators were to liberalize their regulatory policies, our business and results of operations could be greatly benefited.

 

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Key Components of Results of Operations

 

Revenue

 

Our revenues consist of commissions, trading gains (losses), interest 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,   Six months ended June 30, 
   2017   2018   2019   2019   2020 
   US$   %   US$   %   US$   %   US$   %   US$   % 
                           (Unaudited)       (Unaudited)     
Commissions                                        
Market making commissions and fees                   11,056,431    59.7    3,840,917    48.0    2,717,614    42.3 
Insurance brokerage commissions   9,591,989    97.0    5,375,531    81.8    2,648,119    14.3    1,820,214    22.7    638,574    9.9 
Securities brokerage commissions   267,902    2.7    2,025,650    30.8    2,210,915    11.9    1,457,232    18.2    565,517    8.8 
Trading gains/(losses)           (897,812)   (13.6)   1,782,750    9.6    739,060    9.2    2,337,607    36.4 
Interest and others   31,720    0.3    64,894    (1.0)   828,635    4.5    149,818    1.9    171,204    2.6 
Total   9,891,611    100.0    6,568,263    100.0    18,526,850    100.0    8,007,241    100.0    6,430,516    100.0 

 

Commissions

 

We earn commissions from our (i) insurance brokerage services, (ii) securities and futures brokerage 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 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 from (i) our managed flow portfolio trading positions where we act as counterparty to our clients’ trades, (ii) our dealing bid/offer spreads on our clients’ CFD transactions and (iii) interest rate difference between currency pairs we hold resulting from our rolling over forex positions, all of which are primarily from our CFD trading services. Trading gains/(losses) recorded in 2018 are primarily resulted from our proprietary trading activities on our own accounts. Trading gains/(losses) is recorded on a trade date basis. Changes in fair value in relation to the derivative contracts are recorded in trading gains/(losses), net on a daily basis.

 

Interest and others

 

Revenues generated from interest and other income primarily consist of 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, advisory service fee, gain from forgiveness of debts, and dividend income.

 

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Our revenues are generated from our main business lines, CFD trading services, insurance brokerage services, and futures and securities brokerage services. 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,   Six months ended June 30, 
   2017   2018   2019   2019   2020 
   US$   %   US$   %   US$   %   US$   %   US$   % 
                           (Unaudited)       (Unaudited)     
CFD trading services                   12,843,574    69.3    4,703,195    58.7    5,126,239    79.7 
Insurance brokerage services   9,623,359    97.3    5,378,679    81.8    2,648,141    14.3    1,820,214    22.7    638,574    9.9 
Futures and securities brokerage services   268,252    2.7    2,066,354    31.5    2,215,867    12.0    1,461,652    18.3    617,242    9.6 
Others           (876,770)   (13.3)   819,268    4.4    22,180    0.30    48,461    0.8 
Total   9,891,611    100.0    6,568,263    100.0    18,526,850    100.0    8,007,241    100.0    6,430,516    100.0 

 

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 profit 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.” We began offering CFD trading services in May 2019 and our income derived from CFD trading services has then become our largest revenue contributor, accounting for 79.7% of our total revenues for the six months ended June 30, 2020. Our CFD trading revenues consisting of (i) commissions, (ii) bid/offer spreads and trading profit, (iii) difference in interest rates and (iv) other income (resulting from write-off of account payables to customers), which were US$2.7 million, US$2.3 million, US$0.1 million and nil, respectively for the six months ended June 30, 2020. 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 six months ended June 30, 2020, approximately 73.5% related to stock indices and near 24.4% related to commodities, with a remaining insignificant proportion relating to other CFD products.

 

Insurance brokerage services income

 

Revenues generated from our insurance brokerage services primarily consist of commissions we received from the insurance companies based on a percentage of the premium paid by insurance purchasers. Insurance brokerage service was historically our largest revenue contributor, though it has decreased significantly in recent periods, primarily attributable to our strategic shift of business focus.

 

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.

 

Others

 

Our other income primarily consists of interest income earned on short-term loans extended to unrelated third parties and bank deposits, as well as advisory service fees received from our clients.

 

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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,   Six months ended June 30, 
   2017   2018   2019   2019   2020 
   US$   %   US$   %   US$   %   US$   %   US$   % 
                           (Unaudited)       (Unaudited)     
Commission expenses   8,221,372    83.0    5,471,602    83.3    3,355,205    18.1    2,275,430    28.4    762,061    11.9 
Compensation expenses   1,211,785    12.3    1,639,288    25.0    2,430,636    13.1    1,017,639    12.7    1,486,160    23.0 
Communication and technology expenses   144,156    1.5    588,353    9.0    823,433    4.4    365,576    4.6    469,662    7.3 
Professional fees   59,038    0.6    227,998    3.5    761,238    4.1    62,622    0.7    153,853    2.4 
Services fees                                 164,414    2.1    231,785    3.6 
Interest expense   36,665    0.3    118    0.0    731,812    4.0    979        79,343    1.2 
General and administrative expenses   272,682    2.8    539,773    8.2    692,648    3.7    320,507    4.0    292,788    4.6 
Occupancy expenses   502,120    5.1    548,331    8.3    591,936    3.2    236,701    3.0    323,224    5.0 
Other expenses   75,512    0.8    297,674    4.5    859,118    4.6    48,246    0.6    254,442    4.0 
Total   10,523,330    106.4    9,313,137    141.8    10,246,026    55.3    4,492,114    56.1    4,053,318    63.0 

 

Commission expenses

 

Our commission expenses consist of (i) the commissions and fees we paid to third-party market makers in certain CFD 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 83.0%, 83.3% and 18.1% of our revenues in 2017, 2018 and 2019, respectively, and accounted for 28.4% and 11.9% of our revenues in the six months ended June 30, 2019 and 2020, respectively.

 

Compensation expenses

 

Our compensation expenses include salaries, wages, bonuses, medical expenses, contribution to employee retirement plans and other benefits for our employees. Compensation expenses accounted for 12.3%, 25.0% and 13.1% of our revenues in 2017, 2018 and 2019, respectively, and accounted for 12.7% and 23.0% of our total revenues for the six months ended June 30, 2019 and 2020, respectively.

 

Communication and technology expenses

 

Our communication and technology expenses primarily consist of subscription fees and system fees we paid 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 1.5%, 9.0% and 4.4% of our revenues in 2017, 2018 and 2019, respectively, and accounted for 4.6% and 7.3% of our total revenues for the six months ended June 30, 2019 and 2020, respectively.

 

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Professional fees

 

Our professional fees primarily consist of service fees for auditing, consulting, legal, and other professional services which are needed during the ordinary course of our business operation, representing 0.6%, 3.5% and 4.1% of our revenues in 2017, 2018 and 2019, respectively, and accounted for 0.7% and 2.4% of our total revenues for the six months ended June 30, 2019 and 2020, respectively.

 

Interest expenses

 

Our interest expenses primarily consist of interest relating to our short-term borrowings and bridge loans facilitated by us to unrelated third parties.

 

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 2.8%, 8.2% and 3.7% of our revenues in 2017, 2018 and 2019, respectively, and accounted for 4.0% and 4.6% of our total revenues for the six months ended June 30, 2019 and 2020, respectively.

 

Occupancy expenses

 

Our occupancy expenses mainly consist of office rental expenses, which accounted for 5.1%, 8.3% and 3.2% of our revenues in 2017, 2018 and 2019, respectively, and accounted for 3.0% and 5.0% of our total revenues for the six months ended June 30, 2019 and 2020, respectively.

 

Other expenses

 

Our other expenses primarily consist of marketing expenses, independent contractor service fees, payment service charges, depreciation and other miscellaneous expenses. Our other expenses accounted for 0.8%, 4.5% and 4.6% of our revenues in 2017, 2018 and 2019, respectively, and accounted for 0.6% and 4.0% of our total revenues for the six months ended June 30, 2019 and 2020, 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.

 

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Results of Operations

 

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 comparison of operating results should not be relied upon as being indicative of our future performance.

 

   Year ended December 31,   Six months ended June 30, 
   2017   2018   2019   2019   2020 
   US$   %   US$   %   US$   %   US$   %   US$   % 
                           (Unaudited)       (Unaudited)     
Revenues                                        
CFD trading services                   12,843,574    69.3    4,703,195    58.70    5,126,239    79.7 
Insurance brokerage services   9,623,359    97.3    5,378,679    81.8    2,648,141    14.3    1,820,214    22.7    638,574    9.9 
Futures brokerage and securities brokerage services   268,252    2.7    2,066,354    31.5    2,215,867    12.0    1,461,652    18.3    617,242    9.6 
Others           (876,770)   (13.3)   819,268    4.4    22,180    0.3    48,461    0.8 
Total revenues   9,891,611    100.0    6,568,263    100.0    18,526,850    100.0    8,007,241    100.0    6,430,516    100.0 
                                                   
Expenses                                                  
Commission expenses   (8,221,372)   (83.0)   (5,471,602)   (83.3)   (3,355,205)   (18.1)   (2,275,430)   (28.4)   (762,061)   (11.9)
Compensation expenses   (1,211,785)   (12.3)   (1,639,288)   (25.0)   (2,430,636)   (13.1)   (1,017,639)   (12.7)   (1,486,160)   (23.0)
Communication and technology expenses   (144,156)   (1.5)   (588,353)   (9.0)   (823,433)   (4.4)   (365,576)   (4.6)   (469,662)   (7.3)
Professional fees   (59,038)   (0.6)   (227,998)   (3.5)   (761,238)   (4.1)   (62,622)   (0.7)   (153,853)   (2.4)
Service fees                                 (164,414)   (2.1)   (231,785)   (3.6)
Interest expenses   (36,665)   (0.3)   (118)       (731,812)   (4.0)   (979)   (0.0)   (79,343)   (1.2)
General and administrative expenses   (272,682)   (2.8)   (539,773)   (8.2)   (692,648)   (3.7)   (320,507)   (4.0)   (292,788)   (4.6)
Occupancy expenses   (502,120)   (5.1)   (548,331)   (8.3)   (591,936)   (3.2)   (236,701)   (3.0)   (323,224)   (5.0)
Other expenses   (75,512)   (0.8)   (297,674)   (4.5)   (859,118)   (4.6)   (48,246)   (0.6)   (254,442)   (4.0)
Total expenses   (10,523,330)   (106.4)   (9,313,137)   (141.8)   (10,246,026)   (55.3)   (4,492,114)   (56.1)   (4,053,318)   (63.0)
(Loss)/income before income taxes   (631,719)   (6.4)   (2,744,874)   (41.8)   8,280,824    44.7    3,515,127    43.9    2,377,198    37.0 
Income tax expenses   (102,936)   (1.0)   (26,334)   (0.4)   (64,472)   (0.3)   (59,993)   (0.7)   (3,321)   (0.1)
Net (loss)/income   (734,655)   (7.4)   (2,771,208)   (42.2)   8,216,352    44.4    3,455,134    43.2    2,373,877    36.9 
Other comprehensive income (loss)                                                  
Foreign currency translation adjustment   (95,125)   (1.0)   (24,749)   (0.4)   (75,637)   0.4    (39,839)   (0.5)   20,560    0.3 
Comprehensive (loss)/income   (829,780)   (8.4)   (2,795,957)   (42.6)   8,291,989    44.8    3,415,295    42.7    2,394,437    37.2 

 

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Six Months Ended June 30, 2020 Compared to Six Months Ended June 30, 2019

 

Revenues

 

Our total revenues decreased by 19.7% from US$8.0 million for the six months ended June 30, 2019 to US$6.4 million for the six months ended June 30, 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, partially offset by an increase in trading profits.

 

CFD Trading Services Income. Trading profit increased by US$1.6 million, mainly attributable to the fact that CFD trading services began in May 2019, partially offset by the decrease of US$1.1 million in market making commission income. Market making commission income decreased by 29.2% from US$3.8 million for the six months ended June 30, 2019 to US$2.7 million for the six months ended June 30, 2020, primarily due to the decrease in CFD trading volume from 338,873 lots to 111,418 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 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 promotion, and exhibition activities, which limited our opportunities to acquire new customers.

 

Insurance Brokerage Income. Revenues from insurance brokerage services decreased by 64.9% from US$1.8 million in for the six months ended June 30, 2019 to US$0.6 million for the six months ended June 30, 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 61.2% from US$1.5 million for the six months ended June 30, 2019 to US$0.6 million for the six months ended June 30, 2020, primarily due to a significant decrease in trading volume of futures products and securities, caused by the economic and financial challenges brought about by COVID-19. In addition, travel restrictions in Hong Kong caused cancellations and prevented management from attending branding, business promotion, and exhibition activities, which limited our opportunities to acquire new customers.

 

Others. We had US$48,000 revenues generated from others for the six months ended June 30, 2020, as compared to US$22,000 for the six months ended June 30, 2019. The increase in revenue was primarily attributed to the increase in interest income.

 

Expenses

 

Our total expenses decreased by 9.8% from US$4.5 million for the six months ended June 30, 2019 to US$4.1 million for the six months ended June 30, 2020, primarily due to increases in professional fees, compensation expenses, communication and technology and other expenses, partially offset by a decrease in commission expenses.

 

Commission Expenses. Our commission expenses decreased by 66.5% from US$2.3 million for the six months ended June 30, 2019 to US$0.8 million for the six months ended June 30, 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 by 46.0% from US$1.0 million for the six months ended June 30, 2019 to US$1.5 million for the six months ended June 30, 2020, primarily due to our growing number of employees in line with our business growth, as well as the increase in average compensation.

 

Occupancy Expenses. Our occupancy expenses increased by 36.6% from US$0.2 million for the six months ended June 30, 2019 to US$0.3 million for the six months ended June 30, 2020, primarily due to the new office spaces we rented for our subsidiary in Singapore.

 

Communication and Technology Expenses. Our communication and technology expenses slightly increased by 28.5% from US$0.4 million for the six months ended June 30, 2019 to US$0.5 million for the six months ended June 30, 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.

 

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General and Administrative Expenses. Our general and administrative expenses slightly decreased by 8.6% from US$320,000 for the six months ended June 30, 2019 to US$293,000 for the six months ended June 30, 2020, primarily as a result of our cost control measures.

 

Professional Fees. Our professional fees increased by 145.7% from US$63,000 for the six months ended June 30, 2019 to US$154,000 for the six months ended June 30, 2020, primarily due to the legal and consulting services fees in connection with our operations in Cayman Islands.

 

Services Fees. Our services fees for independent contractors and consultants increased by 41.0% from US$164,000 for the six months ended June 30, 2019 to US$232,000 for the six months ended June 30, 2020, as a result of greater outside service needed due to the growth of our business.

 

Interest Expenses. Our interest expenses increased significantly from US$979 for the six months ended June 30, 2019 to US$79,000 for the six months ended June 30, 2020, mainly attributable to interest made to the remaining balance from a one-off bridge loan, as well as interest we paid for loans borrowed from our TRS trading service business partners.

 

Other Expenses. Other expenses increased by 434.3% from US$48,000 for the six months ended June 30, 2019 to US$258,000 for the six months ended June 30, 2020, mainly due to an increase of US$200,000 in marketing expenses incurred for the promotion of our businesses.

 

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$60,000 for the six months ended June 30, 2019 to US$3,000 for the six months ended June 30, 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 Income

 

As a result of the foregoing, we had a net income of US$2.4 million for the six months ended June 30, 2020 compared to a net income of US$3.5 million for the six months ended June 30, 2019.

 

Year Ended December 31, 2019 Compared to Year Ended December 31, 2018

 

Revenues

 

Our total revenues increased by 182.1% from US$6.6 million in 2018 to US$18.5 million in 2019, primarily due to (i) the significant revenues contributed by our new business line, CFD trading services, (ii) an increase in futures and securities brokerage income and (iii) an increase in other revenue, partially offset by a decrease in insurance brokerage income.

 

CFD Trading Services Income. We began offering CFD trading services in May 2019 and generated US$12.8 million in revenues in 2019. Such revenues were derived from the commissions we charged our clients who trade on our platform, as well as bid/offer spreads, trading profit and difference in interest rates.

 

Insurance Brokerage Income. Revenues from insurance brokerage services decreased by 50.8% from US$5.4 million in 2018 to US$2.6 million in 2019, primarily due to more stringent foreign exchange controls in China and the unstable political environment in Hong Kong in 2019, 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 increased by 7.2% from US$2.1 million in 2018 to US$2.2 million in 2019, primarily due to an increase in trading volume of futures products and securities.

Others. We had US$0.8 million revenues generated from others in 2019, as compared to a loss of US$0.9 million in 2018, which is primarily due to the interest income earned on short-term loans we extended to unrelated parties in 2019, as compared to trading loss related to our proprietary trading activities in 2018.

 

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Expenses

 

Our total expenses increased by 10.0% from US$9.3 million in 2018 to US$10.2 million in 2019, primarily due to increases in compensation expenses, professional fees, communication and technology expenses, general and administrative expenses, and other expenses, partially offset by a decrease in commission expenses.

 

Commission Expenses. Our commission expenses decreased by 38.7% from US$5.5 million in 2018 to US$3.4 million in 2019, primarily due to a decrease in our insurance brokerage commission expenses, which is in line with the overall decrease of our insurance brokerage business. In addition, our CFD trading services which was the largest revenue contributor in 2019 did not incur significant commission expenses.

 

Compensation Expenses. Our compensation expenses increased by 48.3% from US$1.6 million in 2018 to US$2.4 million in 2019, primarily due to our growing number of employees in line with our business growth.

 

Communication and Technology Expenses. Our communication and technology expenses increased by 40.0% from US$0.6 million in 2018 to US$0.8 million in 2019, primarily due to an increase in trading systems subscription fees, server hosting fees, market data fees, data transfer and network expenses, which was in line with the launch and growth of our CFD trading services.

 

Professional Fees. Our professional fees increased by 233.9% from US$0.2 million in 2018 to US$0.8 million in 2019, primarily due to the launch of our CFD trading business, as well as our attempts for capital raising activities and the Business Combination.

 

Interest Expenses. Our interest expenses increased significantly from US$118 in 2018 to US$0.7 million in 2019, mainly attributable to our short-term borrowings and a bridge loan facilitated by us to unrelated third parties in 2019.

 

General and Administrative Expenses. Our general and administrative expenses increased by 28.3% from US$0.5 million in 2018 to US$0.7 million in 2019, primarily attributable to an increase in license and registration fees as well as travel expenses associated with establishment of our new subsidiary in Cayman Islands, Lion Brokers Limited, the launch of CFD trading business and the efforts for capital raising activities and the Business Combination.

 

Occupancy Expenses. Our occupancy expenses increased slightly by 8.0% from US$0.5 million in 2018 to US$0.6 million in 2019, primarily due to the new office spaces we rented.

 

Other Expenses. Other expenses increased by 188.6% from US$0.3 million in 2018 to US$0.9 million in 2019, mainly due to (i) an increase of US$0.4 million in payment service charge on our clients as a result of the new CFD trading services, and (ii) an increase of US$0.3 million in service fees we paid to our independent contractors and consultants.

 

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 tax liability. Our income tax expenses increased from US$26,300 in 2018 to US$64,500 in 2019, primarily due to an increase in income before income taxes, resulting from a decrease of commission expenses for insurance brokerage services.

 

Net (Loss)/Income

 

As a result of the foregoing, we had a net income of US$8.2 million in 2019 compared to a net loss of US$2.8 million in 2018.

 

Year Ended December 31, 2018 Compared to Year Ended December 31, 2017

 

Revenues

 

Our total revenues decreased by 33.6% from US$9.9 million in 2017 to US$6.6 million in 2018, primarily due to the significant decrease in revenues generated from our insurance brokerage business.

 

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Insurance Brokerage Income. Revenues generated from insurance brokerage services decreased by 44.1% from US$9.6 million in 2017 to US$5.4 million in 2018, primarily because we shifted our business growth focus from insurance brokerage business to futures and securities brokerage services in 2018.

 

Futures and Securities Brokerage Income. Revenues generated from futures and securities brokerage increased by 670.3% from US$0.3 in 2017 to US$2.1 million in 2018, primarily due to the increase in trading volume of futures products and securities on our platform. We began offering our futures brokerage services on our platform in May 2017 and the trading volume of which had steadily increased in 2018.

 

Others. We incurred a net loss of US$0.9 million in 2018, which is primarily attributable to the trading losses we incurred from our proprietary trading activities.

 

Expenses

 

Our total expenses decreased by 11.5% from US$10.5 million in 2017 to US$9.3 million in 2018, primarily due to a decrease in our commission expenses, partially offset by increases in compensation expenses, communication and technology expenses, general and administrative expenses, professional fees and other expenses.

 

Commission Expenses. Our commission expenses decreased by 33.4% from US$8.2 million in 2017 to US$5.5 million in 2018, primarily attributable to a decrease in commission expenses associated with insurance brokerage services, as we strategically shifted our business focus to futures and securities brokerage services.

 

Compensation Expenses. Our compensation expenses increased by 35.3% from US$1.2 million in 2017 to US$1.6 million in 2018, primarily due to a growing number of employees which is in line with our business expansion.

 

Communication and Technology Expenses. Our communication and technology expenses increased by 308.1% from US$0.1 million in 2017 to US$0.6 million in 2018, primarily due to an increase in trading systems subscription fees, server hosting fees, market data fees, and data transfer and network expenses since we began our futures brokerage services in April 2017.

 

Professional Fees. Our professional fees increased by 286.2% from US$59,000 in 2017 to US$0.2 million in 2018, primarily due to an increase in legal and regulatory compliance consulting fees for setting up our operating subsidiary and conducting new business in Cayman Islands.

 

Interest Expenses. Our interest expenses decreased from US$36,700 in 2017 to US$118 in 2018 mainly because we did not incur any substantial debt in 2018, while the interest expenses we incurred in 2017 were for short-term borrowings that were obtained in 2016 and fully repaid in 2017.

 

General and Administrative Expense. Our general and administrative expenses increased by 97.9% from US$0.3 million in 2017 to US$0.5 million in 2018, primarily due to US$0.3 million of software cost write-off, which was a trading system user end and interface application developed by a third party technology company, but was abandoned in 2018.

 

Occupancy Expenses. Our occupancy expenses remained relatively stable at US$0.5 million in 2017 and 2018, respectively.

 

Other Expenses. Other expenses increased by 294.2% from US$75,500 in 2017 to US$0.3 million in 2018, mainly due to an increase of US$0.2 million in marketing expenses as we increased our efforts in promoting our then existing services and preparing for the launch of new business line.

 

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 tax liability. Our income tax expenses decreased from US$0.1 million in 2017 to US$26,300 in 2018, primarily due to the decrease in our insurance brokerage income.

 

Net (Loss)

 

As a result of the foregoing, we had a net loss of US$2.8 million in 2018 compared to a net loss of US$0.7 million in 2017.

 

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Liquidity and Capital Resources

 

Our principal sources of liquidity have been cash generated from our operations and capital injections by our shareholder. As of December 31, 2017, 2018 and 2019, we had US$3.0 million, US$7.1 million and US$8.6 million of cash and cash equivalents, respectively. As of June 30, 2020, we had US$8.1 million of cash and cash equivalents (excluding cash held on behalf of clients), respectively. Our cash and cash equivalents primarily consist of cash on hand, cash deposited with banks and cash held on behalf of clients. We also held short-term investments that can be redeemed on demand of US$1.1 million and US$0.2 million as of December 31, 2018 and 2019, respectively. The short-term investments we held are mainly equity securities listed on Hong Kong Stock Exchange. We have been able to meet our working capital needs in the past, and we believe that we will be able to meet our working capital needs in the foreseeable future, with our internal financial resources and cash flows from our operations.

 

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 multiple jurisdictions our subsidiaries operate. The following table illustrates the minimum regulatory capital as established by the HKSFC, the Insurance Association (Hong Kong) and the CIMA that our subsidiaries were required to maintain as of December 31, 2018 and 2019 and as of June 30, 2020 and the actual amounts of capital that were maintained.

 

   As of December 31, 2018   As of December 31, 2019   As of June 30, 2020 
   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  $383,081   $1,192,039   $385,245   $1,107,110   $387,081   $1,077,577   $690,496    278.4%
Lion Futures Limited   383,081    984,387    385,245    895,077    387,081    830,743    443,662    214.6%
Lion Capital Management Limited   12,769    172,867    12,842    54,185    12,903    36,757    23,854    284.9%
BC Wealth Management Limited   12,769    628,693    12,842    206,430    12,903    253,570    240,667    1965.2%
Lion Brokers Limited   399,078    488,835    840,267    3,616,599    428,781    8,413,627    7,984,845    1962.2%
Total  $1,190,778   $3,466,821   $1,636,441   $5,879,401   $1,228,749   $10,612,274   $9,383,524    863.7%

 

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$387,081 (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$387,081 (HK$3 million).

 

Lion Capital Management Limited (“LCML”), 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, LCML is required to maintain a minimum liquid capital of approximately US$12,903 (HK$100,000).

 

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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$12,903 (HK$100,000).

 

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 SIBA. 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.

 

As of December 31, 2018 and 2019 and as of June 30, 2020, 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,   Six months ended June 30, 
   2017   2018   2019   2019   2020 
               (Unaudited)   (Unaudited) 
Net cash provided by (used in) operating activities  $448,961   $(1,176,853)  $7,976,995   $4,189,410   $2,061,335 
Net cash used in investing activities   (203,361)   (62,586)   (27,254,283)   (9,832)   (447,673)
Net cash provided by (used in) financing activities   839,843    5,415,082    20,664,343    (4,432,953)   (631,692)
Effect of exchange rate changes on cash   (95,125)   (24,616)   85,966    (39,997)   18,746 
Net increase (decrease) in cash and restricted cash   990,318    4,151,027    1,473,021    (293,372)   1,000,716 
Cash and restricted cash at beginning of year/period   1,966,813    2,957,131    7,108,158    7,108,158    8,581,179 
Cash and restricted cash at end of year/period  $2,957,131   $7,108,158   $8,581,179   $6,814,786   $9,581,895 

 

Operating Activities

 

Net cash provided by operating activities for the six months ended June 30, 2020 was US$2.1 million, primarily attributable to our net income of US$2.4 million.

 

Net cash provided by operating activities in 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$3.9 million in receivables from broker-dealers and clearing organizations — customer accounts.

 

Net cash used in operating activities in 2018 was US$1.2 million, primarily attributable to our net loss of US$2.8 million, as adjusted by (i) an increase of US$4.7 million in receivables from broker-dealers and clearing organizations — customer accounts and (ii) an increase of US$1.1 million in securities owned. These were partially offset by an increase of US$8.0 million in trade payables to customers.

 

Net cash provided by operating activities in 2017 was US$0.4 million, primarily attributable to our net loss of US$0.7 million, as adjusted by (i) an increase of US$1.5 million in payables to customer and (ii) an increase of US$1.3 million in commissions payable. These were partially offset by (i) an increase of US$0.9 million in receivables from broker-dealers and clearing organizations — customer accounts and (ii) an increase of US$0.3 million in prepaids, deposits and other assets.

 

Investing Activities

 

Net cash used in investing activities for the six months ended June 30, 2020 was US$448,000, primarily attributable to short-term loans receivable to unrelated parties in an aggregate of US$442,000, as well as US$5,000 payment for acquisition of trademarks.

 

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Net cash used in investing activities in 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).

 

Net cash used in investing activities in 2018 was US$62,600, primarily attributable to purchases of fixed assets.

 

Net cash used in investing activities in 2017 was US$0.2 million, primarily attributable to US$128,000 consideration we paid to acquire BC Wealth Management Limited under common control.

 

Financing Activities

 

Net cash used in financing activities for the six months ended June 30, 2020 was US$0.6 million, primarily attributable to, (i) payments for reverse recapitalization and ordinary shares issuance costs of US$1.8 million; (ii) repayment on short-term borrowings of US$0.9 million and (iii) dividends of US$0.4 million paid to Mr. Jian Wang, our then sole shareholder prior to Business Combination, partially offset by cash acquired of US$2.5 million in connection with our reverse recapitalization.

Net cash provided by financing activities in 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.

Net cash provided financing activities in 2018 was US$5.4 million, attributable to subscription payments from Mr. Jian Wang, our then sole shareholder. We also received US$0.5 million advances from Mr. Jian Wang, our then sole shareholder, for our working capital needs in 2018 and repaid it in full in 2018.

 

Net cash provided by financing activities in 2017 was US$0.8 million, primarily attributable to subscription payments of US$1.8 million from Mr. Jian Wang, our then sole shareholder, offset by repayments on our short-term borrowings of US$1.0 million.

 

Dividend

 

We did not pay any dividends to our shareholders in 2017 and 2018. 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. During six months ended June 30, 2020, dividends paid to the individual shareholder were US$385,901. We currently do not have any dividend policy.

 

Contractual Obligations and Commitments

 

Operating Lease Obligations

 

We lease certain office premises under non-cancelable leases. Our total rental expenses for all operating leases were US$0.5 million, US$0.5 million and US$0.6 million in 2017, 2018 and 2019, respectively and were US$0.2 million and US$0.3 million for the six months ended June 30, 2019 and 2020, respectively. We did not have any significant capital and other commitments, long-term obligations or guarantees as of June 30, 2020.

 

Commitments

 

The following table sets forth our non-cancelable operating lease obligations as of June 30, 2020:

 

       Payment Due by Period 
   Total   Less Than
1 Year
   1–3 
Years
   3–5 
Years
   More than
5 Years
 
Operating lease obligations  $656,653   $274,035   $378,884   $3,734   $ 

 

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Related Party Transactions

 

In November 2019, Lion Wealth Limited obtained a short-term borrowing from a related party in the amount of US$128,415 with an interest rate of 12% per annum and due on February 6, 2020. We incurred interest expense of approximately US$2,000 relating to this borrowing in 2019. This borrowing was fully repaid on January 3, 2020.

 

We received subscription payments from our then sole shareholder, Mr. Jian Wang, to meet the capital needs. In addition, Mr. Jian Wang funded our working capital needs and we repaid and provided advances to him from time to time and these advances received from and made to him are non-interest bearing and due on demand. See “— Liquidity and Capital Resources — Investing Activities” and “— Liquidity and Capital Resources — Financing Activities.”

 

Off-Balance Sheet Arrangements

 

We have not entered into any financial guarantees or other commitments to guarantee the payment obligations of any third parties. In addition, we have not entered into any derivative contracts that are indexed to our shares and classified as shareholder’s equity or that are not reflected in our consolidated financial statements. Furthermore, we do not have any retained or contingent interest in assets transferred to an unconsolidated entity that serves as credit, liquidity or market risk support to such entity. Moreover, we do not have any variable interest in any unconsolidated entity that provides financing, liquidity, market risk or credit support to us or engages in leasing, hedging or research and development services with us.

 

Capital Expenditures

 

Our capital expenditures consist primarily of expenditures for the purchase of fixed assets, such as electronic devices and office equipment, and acquisition of trademarks. Our capital expenditures amounted to US$75,400, US$62,600 and US$25,000 in 2017, 2018 and 2019, respectively, and US$10,000 and US$5,000 for the six months ended June 30, 2019 and 2020, respectively.

 

Borrowings

 

We may obtain short-term borrowings to fund our operations from time to time. Our subsidiary, Lion Wealth Limited, obtained US$20.4 million in short-term borrowings from China Tonghai Financial Limited, or China Tonghai, with an interest rate of 13% in August and September of 2019. Lion Wealth Limited then advanced US$19.1 million of the proceeds to four entities unrelated to us, collectively the Borrowers, under four separate loan agreements at an interest rate of 15%, which would allow us to earn the interest spread.

 

On December 5, 2019, Lion Wealth Limited entered into a deed of novation with China Tonghai and a new debtor, Xiao Bin Trading Company Limited, or Xiao Bin, whereby Lion Wealth Limited transferred all of its rights and obligations pertaining to US$19.1 million of the borrowings under its original borrowing agreement with China Tonghai to Xiao Bin. The remaining US$1.3 million under the original borrowing agreement that was not novated was included in the line “short-term borrowings” on our consolidated balance sheet as of December 31, 2019. Simultaneous with this novation agreement, Lion Wealth Limited entered into four separate deeds of novation with Xiao Bin, as the new creditor, and the four Borrowers to transfer all of Lion Wealth Limited’s rights and obligations under the four original loan agreements totaling US$19.1 million to Xiao Bin.

 

Our consolidated statements of cash flows present a noncash investing and financing activity in the amount of US$19.1 million and labeled “settlement of short-term loans receivables and borrowings” to reflect the offsetting of legal rights resulting from the deed of novation with China Tonghai and the four deeds of novation with the Borrowers. Since only the rights and obligations were transferred and no cash transactions were made, the settlement was presented as noncash in the noncash investing and financing section.

 

On March 5, 2020, Lion Wealth Limited entered into a supplemental loan agreement with China Tonghai Financial Limited to further extend the repayment of this remaining outstanding amount of US$1,284,155 from March 5, 2020 to April 6, 2020. On April 8 and June 23, 2020, Lion Wealth Limited made repayments in the aggregate of approximately US$663,000, and obtained grace periods to further extend the repayment of the remaining outstanding amount of US$621,000 to August 31, 2020. For the six months ended June 30, 2020, interest expense incurred on the remaining outstanding balance totaled approximately $71,000.

 

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In June 2020, we entered into loan agreements in the aggregate principal amount of US$442,000 to two unrelated parties. Both loans are due in six months accrue interest at a rate of 6% per annum. For six month ended June 30, 2020, interest income earned on these notes were approximately US$1,500.

 

Concentrations of Credit Risk

 

We are engaged in various trading and brokerage activities in which counterparties primarily include broker-dealers, and other financial institutions. In the event counterparties do not fulfill their obligations, we may be exposed to risk. The risk of default depends on the creditworthiness of the counterparty or issuer of the instrument. It is our policy to review, as necessary, the credit standing of each counterparty.

 

Critical Accounting Policies and Estimates

 

We prepare our consolidated financial statements in conformity with U.S. GAAP, which requires us to make judgments, estimates and assumptions. We continually evaluate these estimates and assumptions based on the most recently available information, our own historical experience and various other assumptions that we believe to be reasonable under the circumstances. Since the use of estimates is an integral component of the financial reporting process, actual results could differ from our expectations as a result of changes in our estimates.

 

An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur, could materially impact the consolidated financial statements. We believe that the following accounting policies involve a higher degree of judgment and complexity in their application and require us to make significant accounting estimates. The following description of critical accounting policies, judgments and estimates should be read in conjunction with our consolidated financial statements and other disclosures included in this prospectus.

 

Revenue Recognition

 

Revenue from contracts with customers include commission income from securities, futures and derivative brokerage services, CFD trading services as well as insurance brokerage services. 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

 

Each time a customer executes a securities, futures, derivative or CFD transaction, a commission is earned. Commissions and related clearing 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 agree upon and the risks and rewards of ownership have been transferred to/from the customer. We charge securities, futures and derivative brokerage commissions and market making commissions based on the 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.

 

Commission income arising from insurance brokerage services is 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 insurance provider. All of our revenue from contracts with customers is recognized at a point in time.

 

Trading Gains/Losses

 

Trading gains/(losses) consist of realized and unrealized gains and losses from various securities, futures and derivative transactions. Changes in fair value in relation to derivative contracts are recorded in trading gains (losses), net on a daily basis. Trading gains and losses along with interest revenue fall within the scope of ASC Topic 825, Financial Instruments, which is excluded from the scope of ASC Topic 606.

 

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Interest Income and Other

 

Interest income primarily consist of interests earned on bank deposit and short-term loans the Group extends to unrelated third parties, and interest earned from loans provided to TRS trading customers, which are recorded on an accrual basis. Interest income is recognized as it accrued using the effective interest method.

 

Other income primarily consists of advisory service fee, government subsidy and other miscellaneous charges from customers etc.

 

Receivables from and Payables to Clients, Broker-dealers and Clearing Organizations

 

Receivables arise from the business of dealing in investment securities, futures and derivatives. 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 arising from our proprietary trading activities. “Receivables from broker-dealers and clearing organization — customer” accounts as presented in the consolidated balance sheets represent such receivables related to our customer trading activities.

 

“Commissions receivable” as presented in the consolidated balance sheets represent trading commissions due and amounts due from insurance providers once referrals have been made and the transactions have been executed under the terms of the relative insurance policy or subscription agreement.

 

Payables arise from the business of dealing in investment securities, futures and derivatives. Broker-dealers will require balances to be placed with them in order to cover the positions taken by its customers. Clearing house payables typically represent amounts due on pending trades and are payable on demand. “Payables to broker-dealers and clearing organizations” as presented in the consolidated balance sheets represent such payables arising from our proprietary trading activities. “Payables to customers” as presented in the consolidated balance sheets represent such payables related to our customer trading activities as well as the bank balances held on behalf of customers.

 

Commissions payable mainly represent amounts owed to referral sources outside of us for transactions referred based on the terms of the underlying agreements.

 

Fair Value

 

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 we can access at the measurement date.

 

Level 2 are inputs other than quoted prices included within Level 1 that are observable for the asset or liability either directly or indirectly.

 

Level 3 inputs are unobservable inputs for the asset or liability.

 

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.

 

 

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A description of the valuation techniques applied to our 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 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 over-the-counter (OTC) derivative products can be either observed or modeled using a series of techniques and model inputs from comparable benchmarks. Substantially all of our 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.

 

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 CFD’s are based on spot exchange rates broadly distributed in active markets. Factors taken into consideration in estimating the fair value of OTC derivatives include market liquidity, concentrations, and funding and administrative costs incurred.

 

We do not apply hedge accounting as defined in FASB 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 FASB ASC 815 are generally not applicable with respect to the financial instruments.

 

The contractual amounts related to CFD’s 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 our risk. The credit risk for the CFD’s is limited to the unrealized fair value gains (losses) recorded in the consolidated 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.

 

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.

 

We recognize 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. We present any interest or penalties related to an underpayment of income taxes as part of its income tax expense.

 

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Recent Accounting Pronouncements

 

In February 2016, the FASB issued ASU No. 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. Since the Company is not a U.S. broker dealer, it does not qualify as a public business entity. In June 2020, the FASB issued ASU No. 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, the Group will recognize a lease liability and corresponding right-to-use asset based on the present value of minimum lease payments. The effects on the results of operations are not expected to be significant, as recognition and measurement of expenses and cash flows for leases will be substantially the same under the new standard.

 

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 Update 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 Update 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 No.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.

 

Internal Control Over Financial Reporting

 

Prior to the Business Combination, we were a private company with limited accounting personnel and other resources with which we address our internal control over financial reporting. In connection with the audits of our consolidated financial statements as of and for the years ended December 31, 2017, 2018 and 2019, we and our independent registered public accounting firm identified two material weaknesses in our internal control over financial reporting. As defined in the standards established by the U.S. Public Company Accounting Oversight Board, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weaknesses that have been identified relate to (i) lack of sufficient internal capabilities and resources 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 to prepare financial statements and related footnote disclosures in accordance with U.S. GAAP, and (ii) lack of proper and adequate closing procedures to record all the transactions Lion entered into and ensure the proper cut-off at period end. The material weaknesses, if not timely remedied, may lead to significant misstatements in our consolidated financial statements in the future.

 

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To remedy identified material weaknesses, we have implemented, and plan to continue to implement, several measures, including, among others:

 

hiring additional competent and qualified accounting and reporting personnel with appropriate knowledge and experience of U.S. GAAP and SEC financial reporting requirements;

 

establishing an ongoing program to provide sufficient and additional appropriate training to our accounting staff, especially trainings related to U.S. GAAP and SEC financial reporting requirements; and

 

formulating internal accounting and internal control guidance on U.S. GAAP and SEC financial reporting requirements.

 

However, we cannot assure you that all these measures will be sufficient to remediate our material weaknesses in a timely manner, or at all. See “Risk Factors — Risks Related to our Business and Industry — 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.”

 

As a company with less than US$1.07 billion in revenue for fiscal year of 2019, we qualify as an “emerging growth company” pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise applicable generally to public companies. These provisions include exemption from the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 in the assessment of the emerging growth company’s internal control over financial reporting.

 

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INDUSTRY

 

(iResearch please confirm whether there is any update. Company please coordinate with iResearch)

 

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$7.7 trillion in 2019, representing a compound annual growth rate (CAGR) of 13.1%, and is estimated to grow to between US$10.9 trillion and US$13.0 trillion by 2023, which would be a CAGR of between 9.1% and 14.0%, depending in part on enthusiasm in CFD trading and shifts in risk preferences.

 

Insurance Brokerage

 

Market size in new office premiums paid in Hong Kong by PRC residents increased from HK$24.4 billion in 2014 to HK$43.4 billion (US$5.6 billion) in 2018, representing a CAGR of 12.2%. Such premiums decreased from a high of HK$72.7 billion (US$9.4 billion) in 2016, mainly due to tightening foreign exchange control and RMB appreciation, which particularly affected the purchase of large universal life insurance policies.

 

Medical and protection insurance products purchased in Hong Kong by customers from Mainland China accounted for a large share of the new premiums. The share of medical and protection insurance products increased from 55% in 2016 to 74% in 2018 and 2019, which was mainly driven by price advantages in premium and wider coverage illness.

 

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Exchange-traded Futures and Derivatives Brokerage

 

The annual trading activity in the global exchange-traded derivatives markets reached a record high in 2019. The following diagrams illustrate the global contract volumes of exchange traded futures and options from 2009 to 2019, as well as their breakdowns by regions and categories in 2019.

 

 

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 2019. Exchanges in the Asia-Pacific and Latin American regions witnessed rapid growth of futures and options trading in 2019. The futures and options trading volumes on Asia-Pacific exchanges grew 29.1% to 14.5 billion contracts, while they grew 47.6% to 4.1 billion contracts on Latin American exchanges in 2019. Equity index futures and options trading were main drivers for the overall increase in trading in 2019. Global equity index volumes jumped 24.7% to 12.5 billion contracts in 2019, with exchanges in China, India, Latin America accounting for most of the increase.

 

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 2019, total trading volume of these four exchanges accounted for approximately 22% 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). 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 33.7% from 2015 to 2019, while Northbound Stock Connect (Hong Kong investing in the PRC) turnover has increased at a CAGR of 60.5% during the same period. With the expectation of China continuing the effort of opening-up, it is estimated that the trading turnover will reach RMB14–16 trillion (US$2-2.3 trillion) for Northbound Stock Connect, and HK$4–4.5 trillion (US$0.5-0.6 trillion) for Southbound Stock Connect by 2023.

 

 

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.

 

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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.

 

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$169 trillion in the first half of 2019.

 

 

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 a total net buy turnover of RMB351.7 billion (US$50.3 billion) in 2019. The increase of net buy turnover reflects rising confidence in a bullish China market for 2020. We expect that A-share and Hong Kong stock basket linked TRS trading will also be positively affected by following factors:

 

1.Global trade conflict stabilizes as first phase of trade deal signed by China and the U.S. in January 2020

 

2.Foreign banks and insurers are allowed broader access to China’s financial market in 2019

 

3.MSCI increased A-share weighting in indexes in 2019 to represent a more compelling opportunity set for global investors

 

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. Our business lines include our (i) CFD trading service, (ii) insurance brokerage service, (iii) futures brokerage service, (iv) securities brokerage service and (v) asset management service. We provide these services through our all-in-one Lion Brokers Pro app and a variety of 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, as well as institutional clients in Hong Kong that use our futures brokerage 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. Instead of a loss before income taxes of US$2.7 million in 2018, we generated income before income taxes of US$8.3 million in 2019. For the six months ended June 30, 2020, we generated income before income taxes of US$2.4 million.

 

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 estimated to be 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 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.

 

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We have an experienced management team supported by industry talents.

 

Our management team is led by our founder and CEO, 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.

 

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. See “— Our Business Lines — Securities Brokerage Services.” 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 service, (ii) insurance brokerage service, (iii) futures brokerage service and (iv) securities brokerage service and (v) asset management service. 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 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”.

 

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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 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:

 

 

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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 2019 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 2019 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 2019 were of this type.

 

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 for the six months ended June 30, 2020 was 111,418 lots, all of which were leveraged CFD products. As of June 30, 2020, we had 2,295 CFD trading clients, 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.

 

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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 1,379, 806, 269 and 6 in 2017, 2018, 2019 and for the six months ended June 30, 2020, and our total number of renewed policies was 815, 1,908, 2,607 and 1,490 respectively. We generated commission income of US$9.6 million, US$5.4 million, US$2.6 million and US$0.6 million 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, which discouraged PRC residents from purchasing insurance in Hong Kong. Commission income from our insurance brokerage business further decreased to US$0.6 million in the six months ended June 30, 2020, primarily due to decreasing number of PRC residents traveling to Hong Kong to purchase insurance policies due to travel bans caused by the outbreak of COVID-19.

 

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 92,230 lots, 777,303 lots, 911,693 lots and 223,656 lots in 2017, 2018 and 2019 and for the six months ended June 30, 2020, 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 June 30, 2020, we had 127 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.

 

The table below summarizes the current pricing of our securities brokerage services for securities traded on different stock exchanges.

 

Stock Exchanges on Which Securities are Traded   Our Pricing Terms   Other Fees and Expenses
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

 

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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 June 30, 2020, there were 95 securities trading accounts opened on our platform, most of which were retail investors.

 

We also began offering total return swap (TRS) trading services to clients in early 2020 and expect it to a main growth driver this year. Our total TRS trading volume reached US$9.1 million for the six months ended June 30, 2020. 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 2019, 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 borrow the funds that we lend to our TRS trading clients from our business partners and we earn the spread over the interest rate of our loans from such business partners. Our clients may obtain tailored cross-asset exposure and varied pay-off structure through TRS transactions. We are offering A-share (shares that denominated in Renminbi and traded in the SSE and SZSE) and Hong Kong stock basket linked TRS, which is the first step for us to explore the OTC structure trading business. We will develop more products including interest rate-related and FX rate-related products to satisfy our clients’ diversified trading and hedging needs.

 

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.

 

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

 

Until mid-April 2020, we had four 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.

 

Mobile App/Tool   Products/Services   Operating Entity
“Lion Brokers”   CFD (Futures and Derivatives) and Securities   Lion Brokers Limited
         
“MetaTrade”   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 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.