Hong Kong’s securities regulator, the Securities and Futures Commission (SFC) has recently issued official guidelines regarding security token offerings (STOs). As per the announcement, in Hong Kong, Security Tokens are likely to be “securities under the Securities and Futures Ordinance (SFO) and so subject to the securities laws of Hong Kong.
Warning to Investors
The statement from SFC urges investors to be wary of the potential risks involved in virtual assets. The SFC will again remind investors that virtual assets are exposed to heightened risks of insufficient liquidity or volatility, opaque pricing, hacking and fraud. These risks are also applicable to Security Tokens. As 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.
Regulations for Security Tokens
The published statement from the SFC clearly states”
“STOs typically refer to specific offerings which are structured to have feature of traditional securities offerings, and involve Security Tokens which are digital representations of ownership of assets (eg, gold or real estate) or economic rights (eg, a share of profits or revenue) utilising blockchain technology.”
Intermediaries which market and distribute Security Tokens are required to ensure compliance with all existing legal and regulatory requirements. Failure to do so may affect their fitness and properness to remain licensed or registered and may result in disciplinary action by the SFC. 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 (dealing in securities) regulated activity.
To help clients make informed investment decisions, intermediaries should provide the information in relation to STOs in a clear and easily comprehensible manner. Intermediaries should also provide prominent warning statements covering risks associated with virtual assets.