Released on 5th September, the statement is not as harsh as the PBOC’s ruling — but does remind businesses and organizations planning on launching their ICOs that some of these offerings may be categorized as “securities,” and would thus be subject to the Securities and Futures Ordinance (SFO) of Hong Kong.
Three Definitions of a Regulated ICO
The statement outlines three situations where an ICO could be characterized thus, namely when they are offered as “shares,” as “debenture,” or as a “collective investment scheme.”
- Where digital tokens offered in an ICO represent equity or ownership interests in a corporation, these tokens may be regarded as “shares”.
- 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”.
- 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.”
While few ICOs offer their tokens in exchange for equity, debenture and collective investment schemes (CIS) are becoming a common strategy. The Philippines-based PawnHero is currently offering a debenture-like ICO, which would potentially need to comply with the securities ordinance.
The US-based SuperBloom Capital is an example of a CIS-like operator, using an ICO to build a Crypto Asset Hedge Fund modeled after the popular startup accelerator program YCombinator.
The Hong Kong SFC states that parties engaging in ICOs that fall under any of those three definitions would be required to be licensed by the SFC.
Applies to Hong Kong Incorporated Companies and Others
Importantly, the requirements would apply regardless of whether the company in question is incorporated in Hong Kong or not. As long as the Hong Kong public has access to the ICO, registration is considered mandatory.
Additionally, parties engaging in the secondary trading of such tokens “may also be subject to the SFC’s licensing and conduct requirements.”
The statement did not describe any penalties or fines in the case of non-compliance, but did remind investors that they were exposing themselves to “heightened risks of fraud”. They should “carefully weigh the risks against the return before making an investment.”
Do you think Hong Kong’s plan is more, or less, appropriate? Let’s hear your thoughts.
Images via Pixabay