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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.
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