Hong Kong Securities Commission Issues STO Warning

The SFC has released a statement which lays out detailed guidelines for all legal and regulatory requirements for security token offerings.

Hong Kong’s Securities and Futures Commission (SFC) has released a detailed official statement outlining the laws and regulations which are applicable to security token offerings (STOs) and warning investors to be wary of the risks associated with digital assets.

Published on March 28, the statement sets out the parameters for STOs, which it defines as:

“… specific offerings which are structured to have features 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.”

In accordance with this definition, the statement notes that security tokens are “likely to be "securities" under the Securities and Futures Ordinance (SFO) and so subject to the securities laws of Hong Kong”.

In light of this, any party that is conducting a STO that is either based in Hong Kong or targeting investors in the country, will be required to acquire a license or get registered for dealing in securities (known as Type 1 regulated activity). Failure to do so before engaging in regulated activities is a criminal offence under the SFO.

The SFC also stresses that all intermediaries dealing with STOs must ensure compliance with all existing rules and regulations; security tokens classify as “complex products” and require additional investor protection measures.

Furthermore, all intermediaries who market and distribute STOs need to be mindful of three requirements (which apply, on a wider level, to intermediaries dealing with all types of virtual asset funds):

  1. Ensure appropriate licensing and registration (Type 1) for dealing in securities. In addition, the security tokens must only be offered to professional investors.
  2. Conduct due diligence, which means doing thorough research and developing a deep understanding of the STO, in order to ensure that all information provided to potential investors is accurate and not misleading.
  3. Provide customers all information about the STO in a clear, transparent manner, including all warnings and possible risks.

The SFC concludes the statement with a warning, urging investors to be wary of the risks associated with digital tokens and emphasizing the need for thorough research and understanding before making an investment.

Owing to the notoriety and controversy garnered by initial coin offerings (ICOs), many of which were revealed to be scams, both regulators and investors have become wary, with the latter seeking secure investment opportunities, preferably involving equity ownership. While STOs aim to fill this gap, they may find regulators on high alert after the frauds and hacks that plagued ICOs.

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