On 28 March 2019, the Securities and Futures Commission (SFC) published a statement reminding parties who engage in security token offerings (STOs) to be aware of the applicable legal and regulatory requirements. This statement is helpful given that STOs are a relatively new form of token issuance.
STOs are specific offerings which are structured to have features of traditional security offerings, and involve security tokens which are digital representations of ownership of assets (e.g. gold or real estate) or economic rights (e.g. share of profits or revenue) utilising blockchain technology (Security Tokens).
Security Tokens are likely to be considered “securities” for the purposes of the Securities and Futures Ordinance (SFO) and therefore fall within the scope of Hong Kong’s securities laws. The statement reminds parties engaging in STOs to be aware of the following:
- any person (including an intermediary) who markets and distributes Security Tokens falling within the meaning of “securities” under the SFO (whether in Hong Kong or targeting Hong Kong investors) is required to be licensed or registered for Type 1 regulated activity (dealing in securities) under the SFO, unless an applicable exemption applies;
- intermediaries who market and distribute Security Tokens must also ensure compliance with all existing legal and regulatory requirements, including paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the SFC as supplemented by the Suitability FAQs.[1] Further, such intermediaries should be mindful of other requirements such as selling restrictions (for example, that Security Tokens be offered to professional investors only), performing proper and adequate due diligence and ensuring that any information provided to clients are clear and comprehensible (with prominent warning statements on risks associated with investing in virtual assets) to enable them to make informed investment decisions;
- intermediaries should also ensure that adequate systems and controls are in place before they engage in the distribution of STOs. Failure to do so may affect their fitness and properness to remain licensed or registered and may result in disciplinary action by the SFC; and
- investors should be wary of the potential risks involved in virtual assets, including insufficient liquidity or volatility, opaque pricing, hacking and fraud. Caution should therefore be exercised and investors should ensure that they understand the full extent of the potential risks before making an investment.
For the full SFC statement, please click here.
[1] Note that under the Guidelines on Online Distribution and Advisory Platforms and paragraph 5.5 of the Code of Conduct, Security Tokens would be regarded as “complex products” and therefore additional investor protection measures also apply.
