The SFC’s guidance provides helpful clarity amidst growing interest in security token offerings.
On 28 March 2019, the Hong Kong Securities and Futures Commission (SFC) issued a policy statement on security token offerings (STOs) summarizing the legal and regulatory requirements applicable to parties engaging in STOs. This guidance follows the SFC’s 5 September 2017 policy statement on initial coin offerings (ICOs).
STOs typically refer to specific offerings which are structured to have features of traditional securities offerings, and involving security tokens that are digital representations of ownership of assets (e.g., gold or real estate) or economic rights (e.g., a share of profits or revenue) using blockchain technology.
Security tokens that have the characteristics of “securities” under the Securities and Futures Ordinance (SFO) will be subject to existing applicable securities laws and regulations, including the following provisions:
- Unless an applicable exemption applies under the SFO, any person who markets and distributes security tokens (whether in Hong Kong or targeting Hong Kong investors) must be licensed or registered for Type 1 regulated activity (dealing in securities).
- SFC-licensed intermediaries that market and distribute security tokens in Hong Kong are required to ensure compliance with all existing legal and regulatory requirements. In particular, they should comply with paragraph 5.2 of the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (Code of Conduct) as supplemented by the Suitability FAQs. Additionally, 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.
Further, SFC-licensed intermediaries are expected to observe requirements that are similar to those set out in the SFC’s 1 November 2018 circular to intermediaries on the distribution of virtual asset funds. Namely, the requirements involve:
- Selling restrictions (security tokens should only be marketed/sold to professional investors)
- Due diligence
- Information for clients
Additional details are available in this Latham & Watkins Client Alert.
SFC-licensed intermediaries should consult with the SFC before engaging in any activities relating to STOs.
In light of the SFC’s policy statement, persons marketing or selling STOs into Hong Kong should assess how the particular STO will be characterized under the Hong Kong regulatory framework and, in particular, whether the security tokens offered have the characteristics of “securities” under the SFO. If the STO falls within the Hong Kong regulatory framework, the offering will need to be structured in a way that is compliant with Hong Kong local laws and regulations.