Name
Global FinTech Guide
Country _ Name
Hong Kong
SectionTitle
ICO/token sale
Body
Companies and projects have increasingly relied on the sale of digital assets, or tokens, as a means of fundraising. These tokens generally do not grant the holders an ownership interest in the issuing company or project, but may provide governance rights, access rights or other utility. This has been conducted through public sales known as initial coin offerings (ICOs), proliferation through token generation events (TGEs) or private sales, among other mechanisms.  While showing characteristics of traditional methods of fundraising, there are a range of unanswered questions related to the legal classifications of such products. As ICOs and TGEs will usually be distributed online and internationally, there is usually no single legal framework applying to such transaction, and the legal framework of each market in which the tokens may be offered or sold needs to be considered.

Introduction

Attitude of the country towards ICOs/token sales

In September 2017, the SFC issued a statement cautioning the public about the risks involved in ICOs. Hong Kong's financial services regulatory regime may apply to ICOs and token sales, depending on their nature and to whom they are offered. Attempts to structure coins and tokens as non-investment products, to bypass licensing and regulation in Hong Kong, are likely to be tested by the regulators.

SFC published a circular in November 2023 highlighting increasing industry interest in tokenization and providing useful references to intermediaries engaging in tokenized securities-related activities. SFC emphasizes the need for intermediaries to understand the risks, conduct thorough due diligence, and disclose material information to clients. The circular aims to clarify regulatory expectations, promote responsible innovation and ensure a flourishing tokenization marketplace in Hong Kong.

In the Policy 2.0, the FSTB emphasized its support for the development of tokenization projects, proposing that the HKMA and itself spearhead a legal and regulatory framework review, to promote further adoption of tokenization, with the intention to tokenize real world assets and financial instruments, beyond just the bond market. Under the HKMA's Project Ensemble, the Hong Kong government is encouraging innovative use cases, such as tokenization of electric vehicle charging stations, the commodity trading ecosystem, and renewable energy. In addition, they will issue waiver of stamp duty on the transfer of tokenized ETFs. The government also intends to submit legislative proposals to expand the types of qualifying transactions eligible for tax concessions for specified VAs. These are expected to take effect 2025/2026, subject to approval from the Legislative Council.

Further, the government emphasized its collaboration with Cyberport to provide an incubation ecosystem to accelerate VA development. Startups and enterprises working on tokenization solutions were promised tailored resources; and a funding scheme for Blockchain and VA offers funding to exemplary and high-impact applications.


Legal affairs

Presence of any explicit regulation on ICOs and the issuance of token/coins
There is no explicit laws applicable to ICOs; but Hong Kong's existing financial services regulatory regime will apply. Tokens/coins may be regarded as 'securities' or some other form of investment product and be subject to the requirements under the SFO.

Most usually, an ICO may be seen as a 'collective investment scheme' which will trigger regulatory requirements. Under the SFO, a 'collective investment scheme' has four elements: it involves an arrangement in respect of property; participants do not have day-to-day control over the management of the property; the property is managed as a whole by or on behalf of the person operating the arrangements, and/or the contributions of the participants and the profits or income from which payments are made to them are pooled; and the purpose or effect of the arrangement is for participants to participate in or receive profits, income or other returns from the acquisition or management of the property.

Presence of any explicit restrictions on ICOs or the issuance, distribution and/or transfer of token/coins

If the coins/tokens in question are deemed to be 'security' under the SFO, the requirements under the SFO on issuance, distribution and/or transfer of securities will apply. Please also see paragraph (ii) above.

Obligations and requirements to issue token/coins

Yes, if the tokens/coins are 'securities', in particular a 'collective investment scheme' or some other form of investment product governed by the SFO. Generally speaking, either a Type 1 (dealing in securities) or Type 9 (asset management) would be required.

Classification of token/coins in the jurisdiction

There is no specific statutory or regulatory definition of tokens/coins. While the SFC acknowledges that a virtual commodity is not a 'security', the SFC has observed certain ICOs have terms and features that may mean that they are 'securities', which has a wide definition under the SFO and includes investment products such as 'collective investment schemes'.

Presence of a duty to publish a prospectus bevor offering token/coins to investors

If the digital token offered under an ICO constitutes shares in or debentures of a corporation, an offer of the ICO to the general public in Hong Kong would need to comply with detailed prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance of Hong Kong. This is subject to certain exemptions, such as where the offer is in connection with an authorised collective investment scheme, or where an exemption is granted by the SFC.

Presence of AML/KYC requirements that are needed to be fulfilled regarding (i) the initial issuance of token/coins and (ii) any following transfer of token/coins to third parties

Hong Kong has a robust AML regime, which would apply to issuers and trading of tokens/coins if they are in Hong Kong. The Organised and Serious Crimes Ordinance ('OSCO') prohibits any one from dealing with monies which he knows or has reasonable grounds to believe that he is dealing with the proceeds of an indicatable offence. If the issue is a person covered by the Anti-money Laundering and Counter-Terrorist Financing Ordinance (such as financial institutions), further specific customer due diligence/KYC requirements will apply.

Additional comments regarding (i) the legal situation for ICOs/token/coins and (ii) any following transfer of token/coins to third parties

In 2018, Black Cell Technology Limited halted its initial coin offering and agreed to unwind transactions for Hong Kong investors following the SFC's concerns that the ICO may have constituted a collective investment scheme.

Further to this regulatory action, the SFC also published a statement on 9 February 2018 to (1) urge market professionals including lawyers, accountants and consultants to undertake a gatekeeping role to prevent fraud or dubious fundraising when assisting ICO issuers, particularly when providing advice to structure offerings as utility tokens to fall outside the purview of the SFO and that may accordingly circumvent the scrutiny of the SFC, (2) warn public investors of the risks of hacking and misappropriation of assets and difficulty in pursuing action against crypto currency exchanges or fraudsters to recover losses, and (3) remind market participants of the licensing requirements when the arrangement of an ICO or the underlying crypto currency amounts to 'securities' as defined under the SFO.
Please also see our comments on 'DLT and cryptocurrencies'.


Economic conditions

Market size for ICOs/token sales and existence of any previous regulated ICO/token sales in the jurisdiction

There is no publicly available information.

Additional comments regarding the economic situation for ICOs/token sales or what companies must be aware of in this business area

The demand or use of ICOs/issuance of token has fallen in recent times.




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