Hong Kong’s Securities and Futures Commission (SFC) issued an official statement on Thursday regarding the regulation of security token offerings (STOs).
The statement issued by the SFC mostly stands as a reminder of the legal and regulatory requirements that apply to parties who wish to engage in STOs, while also reminding investors of the associated risks.
The SFC defines an STO as the following:
“…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. Security Tokens are normally offered to professional investors only.”
Continuing, the document clarifies that STOs are “likely to be ‘securities'” subject to Hong Kong’s existing securities laws. This means that any party offering STOs, whether Hong Kong-based or targeting investors in Hong Kong, must be licensed or registered for “Type 1 regulated activity” — or activity dealing with securities — under Hong Kong’s Securities and Futures Ordinance, or be punishable by law.
Exchanges wishing to list security tokens for trading are also required to comply with legal and regulatory requirements, the SFC notes, citing the Code of Conduct, in addition to implementing proper investor protection measures.
The statement concludes with three requirements that intermediaries such as exchanges must observe. Firstly, it must be licensed to deal in securities as mentioned above, and restrictions must be placed to allow only professional investors access to security tokens.
Next, the SFC requires such intermediaries to conduct proper due diligence of the STOs, ensuring that all information they present to investors is not misleading in any way.
Finally, they are required to warn investors of the risks associated with digital assets, as well as providing investors with easily understandable information about STOs.
While US regulators continue fence-sitting on legal clarification of blockchain-based tokens — possibly due to a lack of understanding — the rest of the world does not; allowing businesses, particularly in Asia, to race ahead in terms of blockchain innovation without fear of future legal ramifications.