The Securities and Futures Commission (SFC) has taken its first public regulatory action against the issuer of an initial coin offering (ICO) over concerns it had engaged in potential unauthorised promotional activities and unlicensed regulated activities in breach of the Securities and Futures Ordinance (SFO). The issuer promoted an ICO to sell digital tokens to investors in Hong Kong through its website, with the pitch that the ICO proceeds would be used to fund the development of a mobile application and holders of the tokens would be eligible to redeem equity shares of the issuer. The SFC considers such arrangement may constitute a collective investment scheme (CIS) under the circumstances. Following the SFC’s regulatory action, the issuer has halted its ICO to the Hong Kong public and agreed to unwind ICO transactions for Hong Kong investors.
In a statement issued on 9 February 2018, the SFC advised it had sent letters to seven cryptocurrency exchanges in Hong Kong or with connections to Hong Kong warning them that they should not trade cryptocurrencies which are “securities” as defined in the SFO without a licence.
Interests in a CIS are "securities" under the SFO. ICO may be regarded as a CIS if the following elements are satisfied:
- an arrangement in respect of property;
- participants of the arrangement do not have day-to-day control over the management of the property even if they have the right to be consulted or to give directions about the management of the property;
- the property is managed as a whole by or on behalf of the person operating the arrangement, and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and
- the purpose of the arrangement is for participants to participate in or receive profits, income or other returns from the acquisition or management of the property.
Offering and promoting digital tokens which constitute interests in a CIS to the Hong Kong public will trigger SFC licensing and authorisation requirements, unless an exemption applies.
We anticipate that ICOs will continue to be on the SFC’s radar and the SFC will not hesitate to intervene in ICOs to the Hong Kong public and take regulatory action where it deems appropriate.
It would be prudent for ICO issuers who intend to raise funds in Hong Kong and promote or market their digital tokens to the Hong Kong public to seek legal advice in order to ensure compliance with securities laws and regulations in Hong Kong.