Hong Kong’s Securities Regulator Unveils Elaborate Rules for Security Token Offerings

Official rules for security token offering (STOs) were published by the Securities and Futures Commission (SFC), which is the market watchdog of Hong Kong. The rules intends to provide a clear picture of the statutory and regulatory compliances expected from entities involved in STO related activities.

To begin with, the document describes a security token and its sale, before elaborating on the salient features of STOs:

“STOs typically refer to specific offerings which are structured to have features of traditional securities offerings, and involve Security Tokens which are digital representations of ownership of assets (e.g., gold or real estate) or economic rights (eg, a share of profits or revenue) utilizing blockchain technology.”

SFC has opined that securities tokens will probably considered as securities under Hong Kong’s Securities and Futures Ordinance, thereby falling under existing securities laws. This implies that any entity targeting Hong Kong based investors for its STO must receive a license and enroll for dealing in securities under the existing ordinance.

SFC has warned that dealing in securities, which is a “Type 1 regulated activity,” without a proper license is considered to be a criminal offense. Third-party entities who intend to operate or promote an STO are required to confirm to the prevailing Code of Conduct for firms that are licensed or enrolled with the securities regulator. The statement also points out that security tokens are considered to be complicated offerings for which extra investor protection steps apply.

Finally, the SFC asserts that potential STO operators are obliged to follow the guidelines originally described in a November 2018 notice for cryptourrency exchanges and third-party involved in the dispersion of digital asset funds. Three points were set out in these guidelines.

First, compliance with the above-mentioned criteria for licensing and registration, and also clear and specific limitation of STO sales to accredited investors only. Second, to cultivate a comprehensive awareness of the STO in question, middlemen are expected to complete background research.

It is also the task of intermediaries to ensure that any details shared with investors is clear and not deceptive. Finally, they must provide clear and straightforward details to investors and send out wake-up calls outlining the issues linked with digital asset holdings.

In case of the US, numerous dignitaries and legislators from the crypto sector have demanded that the securities watchdog of the nation to provide higher legislative clarification for tokens deployed on blockchain.