Set up in 1989, the Securities and Futures Commission (SFC) is an independent statutory body tasked with regulating Hong Kong’s securities and futures markets. The commission derives its investigative, remedial and disciplinary powers from the Securities and Futures Ordinance (SFO), which, according to its new Statement on Security Token Offerings, is also the foundation of its approach to STOs.
The statement opens with a reminder to investors about the risks posed by virtual assets, including security tokens, followed by an outline of regulatory requirements applicable to STOs, which can be summarized in five points:
1. Legal Status
Security tokens are likely to be considered “securities” as defined by the Securities and Futures Ordinance (SFO) and therefore subject to the securities laws of Hong Kong.
2. Licensing Requirement
Where security tokens are “securities”, unless an applicable exemption applies, any person who markets and distributes security tokens (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.
3. Marketing Restriction
Security tokens should only be offered to professional investors.
4. Due Diligence
Intermediaries distributing security tokens should conduct proper due diligence, in order to develop an in-depth understanding of STOs. This should include but is not limited to, the background and financial soundness of the management, development team, and issuer, as well as the existence of and rights attached to the assets which back the security tokens.
5. Discussing with Regulator
Intermediaries are reminded to discuss with the SFC before engaging in any activities relating to STOs.
In the document’s conclusion, the commission repeats its warning about the risks associated with virtual assets, including STOs, such as insufficient liquidity or volatility, opaque pricing, hacking and fraud.
“STOs are a nascent form of fundraising and the market is still evolving, investors should be cautious when deciding whether to invest. Investors may be exposed to significant financial losses in trading Security Tokens. If investors cannot fully understand the risks and bear the potential losses, they should not make an investment,” concludes the statement.