SFC statement on initial coin offerings (SFC ICO Hong Kong)

The SFC, also known as the Securities and Futures Commission has marked a rise in the use of ICOs, also called the initial coin offerings. ICOs are the issuing digital tokens or coins to raise capital for a company or a project, both in Hong Kong and other parts of the world. This new declaration from the SFC helps to demonstrate that, depending on the circumstances and facts of an initial coin offering, the digital tokens that are sold or given may be “securities” as specified in the SFO(Securities and Futures Ordinance). These would then be subjected to Hong Kong securities laws.

Offering of securities

ICOs usually comprise of the issuance of digital tokens that have been generated and spread utilizing blockchain technology or a distributed record. ICOs raise funds through distributing their digital tokens or coins to initial investors for funds, with the promise that the rewards of an ICO would be utilized to support the growth of a digital related software or digital platform that the holders of the token can eventually access or profit from.

Some of these token holders anticipate making a profit on their venture by reselling on the cryptocurrency transactions or coin appreciation. The digital tokens granted in standard ICOs are customarily characterized as a “virtual commodity,” where a virtual commodity itself is not a “security.” However, the SFC has witnessed lately that more particular ICOs have features and terms that might indicate that these ICOs are in fact “securities.”

Where the digital tokens that are given in the form of an initial coin offering signify ownership interests or equity in a business, these tokens might be taken as “shares.” Let us take for instance where the token holders might be given the rights as a shareholder in the business or project. This means they get the rights to take part in the distribution of the surplus assets of the company.

Furthermore, where these digital tokens are utilized to acknowledge a liability or debt owed by the person who issued it, they are then regarded as a debenture. Let us take for instance, a company who issued these digital tokens might refund the token holders the principal of the loan they made on a fixed date or against recovery, along with the interest paid to token holders.

The token proceeds may get managed through the operator of the ICO for investing in projects with an objective for the token holders to take part in a share of the revenues rendered by the scheme. If so, this is when the digital tokens might be considered as a CIS interest, which is “collective investment scheme.”

What is CIS about?

A CIS usually has 4 elements. The first is that it has to comprise of a settlement in regard to property. The second is that those who take part in it don’t have day-to-day control on the property management. The third is that the property is maintained as a whole by the person conducting the settlements, or on behalf of that person. The augmentations of those taking part and the gains or interest from which payments are given to them are combined.

The fourth is that the effect or purpose of the settlement is for people to take part in or receive income, profits or other returns from the management or procurement of the property. In short, the interests, debentures and shares in a CIS are all considered as securities.

Being involved in supervised activities

Wherever the digital tokens associated in an ICO come below the meaning of “securities,” marketing or managing a fund in such digital tokens, or advising on or dealing in the digital tokens, might form a “regulated activity.” Participants who are being a part of a “regulated activity” are expected to be enrolled with or authorized by the SFC. This is irrespective of whether the participants concerned are inhabited in Hong Kong, as long as before-mentioned company ventures target the public of Hong Kong.

Furthermore, wherever an ICO comprises a proposal to the public of Hong Kong for obtaining participates or “securities” in a CIS, authorization or registration obligations supporting the law might be activated unless an exclusion is involved. Participants involving in the subsequent dealing of such tokens, which may include the tokens like cryptocurrency exchanges, might also be subjected to the control obligations and licensing of the SFC.

Specific obligations associating to recognized exchange companies and automatic trading services might apply to the company exercises of cryptocurrency exchanges.

Cautionary statement

Since the features and the terms of the ICOs might be different in various cases, the participants involved in ICO ventures are suggested to seek professional or legal advice. This is in case they are unaware of the appropriate regulatory and legal conditions.

Since digital tokens associated in ICOs are held or bought and sold by an anonymous source, by their nature, they pose possible significant and inherent terrorist financing and money laundering risks. The SFC suggested associated entities and licensed businesses in the SFC 16 January 2014 announcement to adopt all prudent and reasonable steps to make sure that proper safeguards and protections exist to alleviate these risks.

The investors also need to be very careful regarding the possible risks associated with investment arrangements and ICOs concerning digital tokens. These individuals and settlements associated function online and might not be governed. And due to this, the investors might be endangered to intensified dangers of fraud.

Digital tokens exchanged in a subsequent market might raise the dangers of volatile pricing or inadequate liquidity. Investors need to fully comprehend the characteristics of any business projects or products they aim to invest in. And they also need to prudently counterbalance the dangers against the results before initiating an investment.

Disclaimer:If you would like to know more about this, it is better to seek professional advice regarding this. Note that this is not financial advice, and we do not offer financial services and any financial advice on this. However, we can guide you to professionals who can offer these to you. Connect with us to know the details and take a smart decision for your business in Hong Kong.