Hong Kong’s financial watchdog clarified its attitude towards security token offerings(STOs) and warned investors again about the high risks associated with digital asset investments on Thursday, in a move to enhance investor protection.

STOs, unlike initial coin offerings (ICOs) with utility tokens, bear many similarities to an initial public offering (IPO) as blockchain-based security tokens represent the ownership of assets (digital or physical) and operate within legal boundaries. While ICO frenzy is cooling down due to the strict crackdown on the unregulated fundraising method across the world, STOs are well on their way to becoming a secure and regulated method of financing blockchain projects.

The Hong Kong Securities and Futures Commission (SFC) said in a statement that security tokens fall under the category of “securities” and thus they are subject to the securities laws of the region.

The financial market watchdog also noted that any person who markets and distributes such tokens whether in the region or targeting Hong Kong investors needs to obtain a license or register for Type 1 regulated activity under the SFC.

“It is a criminal offence for any person to engage in regulated activities without a licence unless an exemption applies,” the SFC states.

Intermediaries of virtual assets are advised to to meet three requirements: imposing selling restrictions which means security tokens should only be offered to professional investors, conducting proper due diligence and providing information to clients in a clear and comprehensible way.

In case if distributors fail to comply with the regulations set by the SFC will possibly lose the license or result in “disciplinary action by the SFC”.

The SFC also warned investors against the risks of STOs, saying as STOs are a nascent form of fundraising and the market is still evolving, investors should be cautious when deciding whether to invest.

This comes at a time when Hong Kong’s financial regulators is exploring a proper regulatory framework for parties engaging in cryptocurrency trading activities, such as crypto trading platforms and funds, in an effort to ultimately exclude retail traders.

In November 2018, the SFC announced plans to regulate cryptocurrency exchanges and funds and launched a regulatory “sandbox” for these entities. Under the proposed rules, only professional investors will be allowed to invest in virtual assets. As per Hong Kong regulations, a “professional investor” is someone who has a portfolio of at least HK $8 million (US$1 million) and two years of experience.

Unlike mainland China, Hong Kong is not leaning towards a total ban of digital assets and instead to create a crypto-friendly environment to lure projects and investors. The Asian financial center is well on its way to become a major crypto trading hub and is attracting an increasing number of big players with proper regulation.