HK SFC Issues Tokenized Securities Guidelines, Potentially Allows Retail Participation

The Hong Kong Securities and Futures Commission (SFC) has released two sets of circulars regarding "tokenized securities." One set clarifies specific requirements for product suppliers and intermediaries related to these products, while the other outlines investor protection requirements for public sales of tokenized securities. These guidelines update the 2019 regulations concerning Security Token Offerings (STOs) and conditionally open up participation to retail investors.

The SFC states that the nature of "tokenized securities" is essentially traditional securities packaged as tokens. Therefore, the existing legal and regulatory provisions governing traditional securities markets continue to apply, and there is no need to impose mandatory "professional investors only" restrictions. (This means that the SFC's 2019 restrictions on "professional investors only" for security token offerings no longer apply.) However, if the sale of tokenized securities is not recognized under the Securities and Futures Ordinance or does not comply with prospectus requirements, the SFC stipulates that such products can only be sold to professional investors or in accordance with relevant exemption provisions.

Regarding whether security token offerings were previously categorized as "complex products," the SFC no longer imposes this strict requirement. As for whether a specific tokenized security is considered a complex product, the SFC states that this depends on its complexity assessment in relation to the relevant traditional securities.

The circular points out that intermediaries distributing tokenized securities or providing advice on them, or engaging in secondary market trading on virtual asset trading platforms, are subject to current conduct requirements governing securities activities. In addition, intermediaries must manage new risks unrelated to traditional securities, including blockchain network interruptions and network security risks.

When assessing applications, the SFC will consider whether the insurance or compensation arrangements of virtual asset trading platforms are acceptable. For example, the platform must demonstrate that the issuer has implemented management and monitoring measures to guard against theft and hacking risks, thus protecting tokenized security holders using public non-permissioned networks.