Black Day for ICOs in Hong Kong?

The Hong Kong Securities and Futures Commission (‘SFC’) has blocked ICO issuer Black Cell Technology Limited (‘Black Cell’) from continuing its initial coin offering (‘ICO’) to the Hong Kong public earlier this week. Black Cell has agreed to unwind ICO transactions for Hong Kong investors and has undertaken not to devise, set up or market any scheme that constitutes a Collective Investment Scheme (‘CIS’) unless in compliance with the relevant requirements under the Securities and Futures Ordinance (‘SFO’). This follows the SFC's concerns that Black Cell may have been engaged in unlicensed activities and unauthorised promotional activities.

That firm regulatory action against ICOs would occur sooner or later is not unexpected, as the SFC signalled its reservations regarding cryptocurrencies and ICOs in circulars in September 2017 and again in February 2018. The SFC also revealed that it had questioned several cryptocurrency exchanges and ICO issuers about their activities.

The SFC found that Black Cell had promoted an ICO to sell digital tokens to investors through its website accessible by the Hong Kong public, with the pitch that the ICO proceeds would be used to fund the development of a mobile application and holders of the tokens would be eligible to redeem equity shares of Black Cell.

The SFC has stated that it considers such arrangement may constitute a CIS under the circumstances. An interest in a CIS is regarded as a form of "securities" as defined in the SFO, so where an ICO involves an offer to the Hong Kong public to acquire an interest or participate in a CIS, prior authorisation and licensing requirements under the SFO are triggered unless an exemption applies.

Although the SFC's announcement focused on CIS, we believe there was another feature that arguably makes the tokens "securities" (that is, falling into the wider meaning of "securities" in the SFO and not just the narrower category of CIS): the promise that token holders would get equity shares.

This is not the first time that the SFC has taken action to shut down arrangements which they think constitute a CIS. In 2013, the SFC formed the view that an offer to sell 360 hotel room units at a development called The Apex Horizon appeared to be an invitation to participate in a CIS. Following this, essentially, the transactions were unwound; purchasers of the units were reimbursed their deposits, any part payments made together with interest and offered an amount of $10,000 as reimbursement of any reasonable legal and other expenses.

Just as in The Apex Horizon case, the SFC's announcement with regard to Black Cell Technology illustrates that the SFC does not hesitate to step in early and take robust positions regarding arrangements with which they are not comfortable, and in both cases these companies were forced to back down (even though they may have disagreed with the SFC's views). This reinforces our advice to clients who are keen to enter into activities involving cryptocurrencies and ICOs in Hong Kong: obtain legal advice on what you can and cannot do, be realistic about what you can achieve with an ICO or your fintech business, understand the risks associated with operating in an environment where the laws are complex and occasionally unclear and be prepared to engage with the Hong Kong regulators.

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Partner, Howse Williams Bowers