On 4 October 2019, the Securities and Futures Commission (SFC) published the pro forma terms and conditions (the Terms and Conditions) applicable to licensed corporations managing a fund (or portion of a fund) that invests in virtual assets and meet the de minimis threshold [1] (Virtual Assets Fund Manager) .

This follows the SFC’s earlier statement on the regulatory framework for virtual asset portfolio managers and fund distributors (amongst others). In that statement, the SFC sets out overarching principles and standards aimed at closing the regulatory gap on virtual asset management portfolio activities. Under the new framework, certain activities involving virtual assets falling outside the definition [2] of “securities” or “futures contracts” would now be brought within the SFC’s oversight through the imposition of Terms and Conditions (with minor variations to fit the individual business model) as licensing conditions on Virtual Asset Fund Managers. The intention is to ensure that Virtual Assets Fund Managers would be subject to the same regulatory requirements, irrespective of whether the virtual assets under their management constitute “securities” or “futures contracts”. Accordingly, the Terms and Conditions are based on the principles contained in the existing requirements (e.g. the Code of Conduct for Persons Licensed by or Registered with the SFC and the Fund Manager Code of Conduct), adapted to address the particular risks associated with virtual assets. Appendix 1 to that statement already provided some of the key terms and conditions which are now reflected in the pro forma version. The Terms and Conditions cover matters such as restrictions on distribution of any virtual asset fund (i.e. to professional investors only), custody of assets and disclosure requirements.

We note that breach of the licensing conditions is likely to be considered as misconduct under the Securities and Futures Ordinance which will may adversely affect the fitness and properness of a Virtual Asset Fund Manager to remain licensed and may result in the SFC taking regulatory action. The explanatory notes to the Terms and Conditions however indicate that a pragmatic approach will be taken by the SFC and all relevant circumstances, including size of the Virtual Asset Fund Manager and compensatory measures implemented by its senior management, will be taken into account before any action is taken.

A copy of the Terms and Conditions is available here.

[1] The de minimis threshold refers to a situation where either: (a) the stated investment objective of a fund is to invest in virtual assets; or (b) the intention of a fund is to invest 10% or more of the gross asset value in virtual assets. Please note that there are certain situations where a fund will not be regarded as having met the de minimis threshold – for further details, please refer to the Terms and Conditions.
[2] As defined under the Securities and Futures Ordinance (Cap. 571).