Much like the recent investigative report from the SEC in the USA in relation to the DAO token issuance, in which it was determined that a token sale amounted to the issuance of securities, this statement from the SFC serves to explain that, depending on the facts and circumstances of an ICO, digital tokens that are offered or sold may be “securities” as defined in the Securities and Futures Ordinance, and subject to the securities laws of Hong Kong.
Where the digital tokens involved in an ICO fall under the definition of “securities”, dealing in or advising on the digital tokens, or managing or marketing a fund investing in such digital tokens, may constitute a “regulated activity”. Parties engaging in a “regulated activity” are required to be licensed by or registered with the SFC irrespective of whether the parties involved are located in Hong Kong, so long as such business activities target the Hong Kong public.
The SFC discusses how ICOs typically involve the issuance of digital tokens, created and disseminated using distributed ledger or blockchain technology.
ICO scheme operators may promise buyers of digital tokens that the proceeds of an ICO will be used to fund development of a digital platform or related software which the token holders can subsequently access. Some token holders expect to make a return on their investment by reselling their tokens on the cryptocurrency exchanges. Whilst digital tokens offered in typical ICOs are usually characterised as a “virtual commodity”, the SFC has observed more recently that certain ICOs have terms and features that may mean that they are “securities”.
The SFC goes on to explain that:
Where digital tokens offered in an ICO represent equity or ownership interests in a corporation, these tokens may be regarded as “shares”. For example, token holders may be given shareholders’ rights, such as the right to receive dividends and the right to participate in the distribution of the corporation’s surplus assets upon winding up.
Where digital tokens are used to create or to acknowledge a debt or liability owed by the issuer, they may be considered as a “debenture”. For example, an issuer may repay token holders the principal of their investment on a fixed date or upon redemption, with interest paid to token holders.
If token proceeds are managed collectively by the ICO scheme operator to invest in projects with an aim to enable token holders to participate in a share of the returns provided by the project, the digital tokens may be regarded as an interest in a “collective investment scheme” (CIS).
Shares, debentures and interests in a CIS are all regarded as “securities”.