The list of regulators signaling that initial coin offerings, or "ICOs," may involve securities is growing on an international scale. As previously discussed here and here, regulators in the U.S. and Canada, respectively, have already announced that they may consider certain cryptocurrency tokens sold in ICOs to be "securities," subject to regulation under applicable securities laws. This week, in response to "an increase in the use of [ICOs] to raise funds in Hong Kong and elsewhere," regulators in Hong Kong have issued a similar warning.
In its "Statement on initial coin offerings," the Securities and Futures Commission ("SFC") stated that "digital tokens that are offered or sold [in ICOs] may be 'securities,'" and therefore subject to the securities laws of Hong Kong. The SFC called out three types of arrangements under which, in its view, the issuance of digital tokens could be considered a security. The first type is where tokens "represent equity or ownership interests in a corporation," and thus may be considered "shares." The second is where tokens "are used to create or to acknowledge a debt or liability owed by the issuer," which may be considered "debentures." The third—interests in "collective investment schemes"—involve "token proceeds . . . 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." Under Hong Kong law, the SFC explained, instruments that qualify as shares, debentures, and interests in collective investment schemes are all deemed "securities."
Like the statements issued by other regulators, the SFC's warning was not a blanket declaration that all ICOs are necessarily going to involve securities. To the contrary, the SFC expressly noted that whether digital tokens are securities will depend on "the facts and circumstances of an ICO." However, beyond its allusions to "shares," "debentures," and "collective investment schemes," it did not specify any characteristics likely to trigger a determination that a token is a security. Nor did it identify any examples of ICOs it deemed to involve an offering of securities. To further complicate the matter, the SFC cautioned that, if a token is a security, those engaged in secondary trading of such tokens, including on cryptocurrency exchanges, may also be subject to regulation under Hong Kong's securities laws. Thus, as regulatory watchdogs the world over turn their focus to ICOs, uncertainty mounts for token developers and potential purchasers alike.
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