Hong Kong’s Securities Regulator Issues Detailed Guidance for Security Token Offerings

Hong Kong's securities regulator, the Securities and Futures Commission (SFC) has issued official guidance on security token offerings (STOs), in a statement published on March 28.

The guidance aims to clarify the legal and regulatory requirements for parties engaging in STO-related activities. The document opens with a proposed working definition of a security token and sale, noting that:

“STOs typically refer to 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.”

According to the SFC, security tokens are “likely to be ‘securities’” under Hong Kong’s Securities and Futures Ordinance, and thus fall under existing securities laws.

Unless an exemption applies, this therefore means that any Hong Kong-based STO — or STO targeting Hong Kong investors — must acquire a license and register for dealing in securities under the provisions of the ordinance.

Engaging in securities dealing (defined as a “Type 1 regulated activity”) without a due license is a criminal offense, the SFC notes.

Intermediaries that intend to market or operate an STO are also required to comply with the existing Code of Conduct for entities that are licensed or registered with the securities regulator. The statement also notes that security tokens are deemed to be "complex products," for which additional investor protection measures further apply.

Lastly, the SFC states that prospective STO operators are required to observe the guidance it has previously outlined in a November 2018 circular for crypto exchanges and intermediaries engaged in the distribution of virtual asset funds.

This guidance stipulated three points. First, observing the aforementioned license and registration requirements, as well as an explicit restriction of STO sales to professional investors only.

Second, intermediaries are required to conduct due diligence in order to develop a thorough understanding of the STO in question. Intermediaries are also tasked with ensuring that any information provided to investors is sound and not misleading.

Lastly, they are required to provide investors with transparent information, as well as to issue warnings that outline the risks associated with virtual asset investments.

In the United States context, multiple crypto industry figures and lawmakers have called on the country’s securities regulator to provide greater regulatory clarity for blockchain-based tokens.