The SFC looks to ensure regulatory due diligence from those offering STOs, as well as intermediaries and investors.

Hong Kong’s securities regulator, the Securities and Futures Commission (SFC), has released a statement outlining and clarifying the regulatory requirements for those looking to hold or invest in a security token offering (STO). The SFC provides a walkthrough of the necessary steps to be taken before holding an STO and also reminds investors “to be wary of the risks associated with virtual assets.”

According to the SFC, security tokens are “likely” to be considered securities under Hong Kong’s securities and futures ordinance (SFO), which makes them subject to securities laws. Under the SFO, any person who markets or distributes security tokens is required to be licensed for “Type 1 regulated activity,” which allows for legal dealings in securities. The license is required for any STO taking place in Hong Kong or targeting Hong Kong investors.

As for intermediaries working between STOs and their investors, the SFC states that, because security tokens are regarded as “complex products,” intermediaries licensed with the SFC are required to provide information that complies with Hong Kong’s code of conduct. Specifically, intermediaries are expected to comply with paragraph 5.2 and paragraph 5.5 (which won’t come into effect until July) of the code of conduct, which stipulate that the intermediary must ensure the STO is a reasonable investment given the investor’s circumstances, as well as inform the investor of the risks associated with a complex product.

The SFC’s statement also asks that intermediaries and STO operators familiarize themselves with a set of guidelines previously published by the regulator in November 2018. The SFC’s November circular states that investment firms that invest 10 percent or more of their gross asset value in virtual assets, either directly or through an intermediary, will need a license from the SFC.

Additionally, the circular highlights three main points aimed at intermediary compliance. It details the aforementioned licensing requirements, goes over what information about the STO has to be communicated to the investor before an investment is made, and notes that intermediaries should only be targeting clients who are “professional investors.”

Lastly, the SFC ends its statement with a warning, saying that, because STOs are a nascent form of fundraising with a market that is still evolving, investors should avoid security tokens if they “cannot fully understand the risks and bear the potential losses.”