Much as with regulators in other jurisdictions, the recent influx of ICOs in Hong Kong has prompted the Hong Kong Securities and Futures Commission (SFC) to provide guidance on the regulatory status of such issuances. On 5 September 2017, the SFC issued a statement on ICOs, which discusses the applicability of the securities laws of Hong Kong to the new token issuances (Statement).1
The SFC, continuing the pattern established by other regulators, did not take a bright-line position on whether digital tokens are “securities” as defined in the Securities and Futures Ordinance (SFO), instead noting that the determination depends on the “facts and circumstances” of an ICO. In Hong Kong, unless authorised by the SFC, it is an offence under the SFO for a person to distribute to the public in Hong Kong advertisements, invitations or documents for securities or regulated investment agreements, subject to certain exemptions. In the event that an ICO is determined to be an offer of securities, the marketing of such digital tokens to the public in Hong Kong would be subject to the securities laws of Hong Kong; further, the advertisements, invitations or documents relating to the ICO must either be authorised by the SFC or fall within one of the relevant exemptions. In the Statement, the SFC differentiates between the characterisation of such digital tokens as a “virtual commodity,” which itself is not a security, and those “terms and features” that may render the tokens to be a security (e.g., shares, debentures, and collective investment schemes).
In addition, the SFC notes that activities conducted by service providers related to the ICO may constitute “regulated activities” under the SFO with respect to “dealing in or advising on the digital tokens, or managing or marketing a fund investing in” such digital tokens. An SFC licence or registration is needed if (1) a business in a “regulated activity” is actually being carried on in Hong Kong (or a person holding himself out to carry on such business) or (2) a business in a regulated activity is being carried on outside Hong Kong but such business has been actively marketed to the Hong Kong public. It is an offence under the SFO to carry on business in any regulated activity without being licensed by or registered with the SFC. For the purpose of regulation in Hong Kong, regulated activities include (among other activities): Type 1 (dealing in securities); Type 4 (advising on securities); Type 7 (providing automated trading services); and Type 9 (asset management).
Similar to the other regulators evaluating the implications of ICOs, the SFC has expressed significant concerns, particularly given the anonymity often associated with such issuances and trading, as well as issues relating to money laundering, terrorist financing, and investor protection. According to the SFC, the nature of the primary and secondary markets for ICOs creates heightened risks of investor fraud and misrepresentation. While the Statement provides some guidance as to the Hong Kong regulator’s view of ICOs, such regulatory determinations cannot be completely divorced from the PRC’s recent prohibition of ICOs, and may lead to an informal prohibition on such issuances in Hong Kong.