On March 28, 2019, the Hong Kong Securities and Futures Commission issued a statement on the issuance of securities-type tokens.
The following is the full text of the statement:
This statement is intended to remind companies or individuals involved in securities-based security token offering (STO) of applicable laws and regulations. The Securities and Futures Commission (SFC) also once again wishes to alert investors to the risks associated with virtual assets, including tokens related to STO, ie securities tokens.
- When the securities token tsunami strikes, who can seize the opportunity to become the ultimate winner?
Regulation of STO
STO generally refers to the issuance of specific tokens with the attributes of traditional securities offerings, which involve the use of blockchain technology to express asset ownership (such as gold or real estate) or economic rights (such as the share of profits or proceeds) in digital form. Type token. Securities tokens are generally only available for sale to professional investors.
In Hong Kong, securities tokens may be "securities" under the Securities and Futures Ordinance1 and are therefore regulated by Hong Kong securities laws.
In the case where the securities token is a "securities", any person who wants to promote and distribute securities tokens (whether in Hong Kong or in Hong Kong investors), unless they are exempted from the applicable The Futures Ordinance is licensed or registered for Type 1 regulated activities (dealing in securities). Anyone who engages in regulated activities without a licence is a criminal offence unless he is exempted.
Intermediaries promoting and distributing securities tokens must ensure compliance with all existing legislation and regulatory requirements, in particular paragraph 5.2 of the Code of Conduct 2 (as supplemented by the Frequently Asked Questions on Appropriation 3). According to the "Guidelines for the Online Distribution and Investment Advisory Platform" and the "Code of Conduct", paragraph 5.5, 4, securities-type tokens will be regarded as "complex products", so intermediaries are also required to take additional investor protection measures.
In addition, these intermediaries are also subject to the following provisions, similar to those set out in the Circular to the Intermediary, Distribution of Virtual Assets Fund, issued by the Association on November 1, 2018. The key points of the relevant regulations are summarized as follows:
(A) Sales restrictions
Intermediaries who are promoting or distributing securities tokens must be licensed or registered for Type 1 regulated activities (dealing in securities) and securities tokens should only be offered to professional investors.
(B) Due diligence
Intermediaries that distribute securities tokens should conduct proper due diligence to gain insight into STO, including (but not limited to) the background and financial soundness of management, R&D teams and issuers, and support for securities Whether the assets of the tokens exist and the rights attached to the assets. Intermediaries should also read all materials related to STO, including published information (such as white papers) and any related promotional materials, and ensure that all information provided to customers is accurate and not misleading.
(C) Information to be provided to the customer
To assist clients in making informed investment decisions, intermediaries should provide information about STO in a clear and understandable manner. Intermediaries should also provide a warning statement at the discretion of the risks associated with virtual assets.
Intermediaries are advised to implement adequate systems and monitoring measures to ensure compliance with the above requirements prior to engaging in the distribution of STO activities, otherwise they may affect their eligibility to continue to be licensed or registered, and may result in disciplinary action by the SFC.
Intermediaries should discuss their plans with the SFC before engaging in any activities related to STO.
Advice to investors
This Council urges investors to pay attention to the potential risks involved in virtual assets. The SFC has repeatedly reminded investors that virtual assets face higher risks of liquidity or price fluctuations, lack of transparency in pricing, hacking and fraud. These risks also apply to securities tokens. Since STO is a new way of fund raising and the market is still evolving, investors should be cautious when deciding whether to make an investment. Investors may suffer significant financial losses when trading securities-type tokens. Investors should not make an investment if they fail to fully understand the risks and bear potential losses.
If you have any questions about this statement, please contact the SFC Financial Technology Liaison Office (firstname.lastname@example.org).
Securities and Futures Commission Intermediary Department
The definition of 1 is set out in section 1 of Part 1 of Schedule 1 to the Securities and Futures Ordinance.
2 The Code of Conduct for Licensees or Registrants of the Securities and Futures Commission.
3 “Frequently Asked Questions about Licensee or Registrant's Compliance with Responsibility for Providing Reasonable and Proper Advice for Customers” and “Frequently Asked Questions about Triggering Responsibility for Providing Reasonable and Proper Advice for Customers”.
4 will take effect in July 2019.
5 For details, please refer to the “Circular to the Intermediary's Notice of Compliance Notice” dated June 1, 2018.