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What should asset managers do if they want to manage portfolios holding virtual assets?

Increasingly, asset managers are looking to manage portfolios that invest in virtual assets.  Under the regulatory framework of the Securities and Futures Commission (“SFC”), asset management is a regulated activity and requires a Type 9 licence from the SFC.  Specifically, asset management is defined to encompass real estate scheme management, and securities and futures contracts management under the Securities and Futures Ordinance (“SFO”).

Cryptocurrencies such as Bitcoin (“BTC”) or Ethereum (“ETH”) are generally considered to be non-security tokens and fall outside of the definition of “securities”.  In order to address the risks associated with virtual assets, the SFC has started to regulate virtual asset portfolio managers.  This article provides guidance on what an asset manager should do if they want to manage portfolios that invest in virtual assets.

Type 9 licence uplift

If you are an asset manager in Hong Kong and you already hold a SFC Type 9 licence for your securities and/or futures portfolio, you should consider whether a licence uplift is required before you start managing virtual assets.  A licence uplift would be required if you manage or plan to manage portfolios with (i) a stated investment objective of investing in virtual assets; or (ii) an intention to invest 10% or more of the gross asset value (“GAV”) of the portfolio in virtual assets.

Terms and conditions for a Type 9 uplift

An application for a Type 9 uplift is not always straightforward.  The SFC will seek to understand the asset manager’s business activities and apply additional terms and conditions regarding the management of virtual assets.  There will be discussions as to whether any of the terms and conditions proposed by the SFC should be varied based on your business model to the extent reasonable and appropriate.  Your lawyer should be able to guide you through the application process.

Notification requirement

Even if you do not cross the 10% GAV de minimis threshold, you are still required to inform the SFC if you plan to manage one or more portfolios that invest in virtual assets.  This notification requirement applies whether or not the virtual assets you manage amount to securities or futures contracts.  This would capture cryptocurrencies such as BTC and ETH.  Failure to inform the SFC could result in a breach of your regulatory obligations.

Please contact us if you wish to find out more about cryptocurrency regulation.

WRITTEN BY

For further information, please contact:

Andy Lau – Partner,
andylau@hauzen.hk

Mr. Andy Lau is a partner in the Hong Kong office of Hauzen LLP.  He has over a decade of experience as a legal advisor in the securities and financial sector, focusing on corporate finance transactions, securities regulations, virtual assets and cryptocurrencies.

Andy focuses his legal practice on corporate finance, equity and debt capital markets, IPOs, mergers and acquisitions, pre-IPO investments, cornerstone investments, venture capital financing and private equity.  He also advises on virtual assets and cryptocurrency transactions, regulations and licensing issues.  He acts for Hong Kong listed companies, private companies, private equity firms, investors, shareholders, directors, issuers, sponsors, underwriters, licensed securities firms, crypto firms and startups.

Andy previously practiced law at Magic Circle and international law firms.  He also served as senior legal counsel at a global investment bank focusing on corporate finance and investment banking business in Hong Kong, China and Southeast Asia, and as senior legal counsel in a major cryptocurrency exchange listed on the Mainboard of the Hong Kong Stock Exchange.  He advises on the Listing Rules, Takeovers Code, corporate, commercial, SFC licensing, due diligence, asset management, cryptocurrencies, Web3.0, decentralized finance (DeFi), fintech and blockchain.

Andy is admitted as an attorney and counselor-at-law in New York, USA and as a solicitor in Hong Kong.  He is fluent in English, Mandarin and Cantonese.

Education

  • University of Hong Kong, Postgraduate Certificate in Laws (P.C.LL.)
  • University of Kent, U.K., Bachelor of Laws (LL.B.)

Qualifications

  • Attorney and Counselor-at-Law of the Supreme Court, New York, USA
  • Solicitor of the High Court, Hong Kong

Experience

  • Advising issuers, sponsors and underwriters on capital markets transactions including IPO, rights issue, general offer, block trade, top-up placing, convertible bonds and other equity and debt financing activities
  • Advising investors, target companies, shareholders, founders and directors on cross border M&A, private equity, pre-IPO investments and cornerstone investments
  • Advising crypto firms and exchanges on licensing applications, crypto trading, market making, security token offering, margin trading, crypto lending and borrowing, internal controls and regulatory issues in Hong Kong, Singapore and overseas
  • Advising private equity firms and investors on crypto transactions, asset management and crypto investments
  • Advising listed companies on compliance with the Listing Rules and Takeovers Code, and application for waivers from the HKEx and SFC
  • Advising listed companies on acquisitions and disposal of assets such as connected transactions, major transactions and very substantial acquisitions (VSA)
  • Advising startups, growth companies, founders and investors on venture capital and Series A/B/C fundraising

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