Initial Coin Offerings (“ICOs”) have been attracting significant interest from both investors and regulators in recent times.  Earlier this month, a joint statement from a number of regulatory bodies in China sought to clamp down on ICOs on the Mainland.  On 5 September 2017, the Securities and Futures Commission (“SFC”) issued a statement on their position on ICOs here.¹

The SFC noted that ICOs are typically characterized as a virtual commodity and, if this was factually correct, then this would fall outside of their regulatory framework created under the Securities and Futures Ordinance (“SFO”)².

However, the SFC also notes that, in reality, the underlying features of many ICOs are akin to offers for “Securities”.  Examples given by the SFC in their statement include the following:

• Where ICOs give subscribers equity interests, or rights similar to those of a shareholder in a company. In such cases, these interests may be regarded by the SFC as Shares;
• If the ICOs provide for repayment and interest terms for holders, then these may be seen as debentures;
• If the issuer manages the proceeds of the offering and allows subscribers to participate in the returns, then this is likely to be collective investment scheme.

All of the above are examples of “Securities” as defined under the SFO and, in such cases, would come within the SFC's ambit.

If the ICO is, in reality, an offering of securities then this would have a number of legal implications to participants. In respect of the offering, unless one of the limited safe harbours apply, the marketing of the product would require authorisation under the SFO or else be subject to the prospectus regime for public offerings³.

The SFC also notes that, where ICO is deemed to be a security, then parties dealing in or advising on these products are likely to require an intermediary’s licence⁴.

Whilst the SFC's statement does not amount to a ban of ICOs in Hong Kong, it is clear that regulators here will now be scrutinising these offerings – and the associated trading activities – to see if they come within the ambit of the local regulatory framework and may take enforcement action accordingly.

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1. http://www.sfc.hk/edistributionWeb/gateway/EN/news-and-announcements/news/doc?refNo=17PR117
2. Cap 571 of the laws of Hong Kong.
3. See Parts II and XII of the Companies (Winding Up and Miscellaneous Provisions) Ordinance Cap 32.
4. See the definitions of regulated activities set out at Schedule 5 Part 1 of the SFO.

 

Publication date: 8 September 2017

For more information on Initial Coin Offerings related matters in Hong Kong, please contact:-

Chris Lambert                       | clambert@robertsonshk.com       |  +852 2861 8417

Avinash Hotchandani          | avinash@robertsonshk.com         |  +852 2861 8458