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26 March, 2018
A financial services regulator in Hong Kong has stepped in to stop a business offering digital tokens to prospective investors.
The Securities and Futures Commission (SFC) said it had concerns that Black Cell Technology's 'initial coin offering' (ICO) to the public in Hong Kong was promoted in breach of regulatory requirements.
According to the SFC, Black Cell Technology had offered the public the chance to obtain digital tokens called 'krops', which could be redeemed as equity shares in the company, in return for their investment. The company had said the proceeds it raised from the sale of the tokens would be used to fund the development of a mobile app, the regulator said.
However, the SFC said the arrangement "may constitute" a collective investment scheme, the provision of which is generally subject to regulation under securities laws in Hong Kong.
Businesses that wish to issue and promote participation in a collective investment scheme are generally required have authorisation to do so from the SFC, unless an exemption applies. It is an offence, under Hong Kong's Securities and Futures Ordinance, to carry on a business in a regulated activity without a licence or authorisation from the SFC.
The SFC said Black Cell Technology had "agreed to unwind ICO transactions for Hong Kong investors by returning them the relevant tokens" and "also undertaken not to devise, set up or market any scheme that constitutes a collective investment scheme (CIS) unless in compliance with the relevant requirements".
ICOs are an increasingly popular way for businesses to raise money. Typically, businesses will develop a digital token, such as their own proprietary virtual currency, and look to sell those tokens to investors in a bid to raise capital in return for existing cryptocurrency, such as Bitcoin, Ether or Ripple rather than fiat currency such as dollars, euros or pounds. The trade of these tokens is recorded using blockchain.
Investors can in most cases sell on those tokens for profit on certain peer-to-peer exchange platforms should the value of the tokens increase. They are sometimes further incentivised into buying the tokens by being given the opportunity to share in profits generated from the business ventures that benefit from their investment.
A number of regulators around the world have set out their view on the extent to which ICOs are subject to regulation.
This article was published in Out-law here.
For further information, please contact:
David Heffron, Partner, Pinsent Masons
david.heffron@pinsentmasons.com
