Security Token Offerings (STOs) in Hong Kong: Legal Framework

What Is a Security Token Offering?

A security token offering (STO) is a method of issuing securities in a digital, tokenised form on a distributed ledger or blockchain. Unlike utility tokens, which confer access to a product or service, security tokens represent ownership interests, debt instruments, or investment contracts, and are therefore classified as securities under Hong Kong law.

STOs offer potential advantages over traditional capital-raising methods, including programmable compliance, automated dividend or interest payments, fractional ownership, and enhanced liquidity through secondary market trading. However, these advantages must be weighed against the regulatory complexity associated with issuing regulated securities in digital form.

Regulatory Classification: Are Security Tokens Securities?

In Hong Kong, the Securities and Futures Commission (SFC) takes the position that most security tokens constitute securities within the meaning of the Securities and Futures Ordinance (SFO). The SFO defines securities broadly to include shares, debentures, interests in collective investment schemes, and other investment instruments.

The SFC's position is articulated in its 2019 Statement on Security Tokens Offerings and subsequent circulars. Where a token represents a share in a company, a debt obligation, or a fractional interest in an underlying asset (such as real estate, art, or infrastructure), it is likely to be treated as a security and subject to the full range of securities regulation.

By contrast, tokens that confer utility (access to a platform or service) and do not involve investment expectations may fall outside the securities regime, though this characterisation is fact-specific and the SFC will assess each token on its individual characteristics.

Licensing Requirements for STO Issuances

Conducting an STO that involves the offering of securities to the public in Hong Kong engages the prospectus requirements under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO). A prospectus must be registered with the Registrar of Companies unless an exemption applies.

The key exemptions from prospectus requirements include offerings to professional investors only, offerings to fewer than 50 persons, and minimum consideration exemptions (where each investor pays at least HKD 500,000). Most STOs in Hong Kong rely on the professional investor exemption, restricting participation to institutional and high-net-worth investors as defined under the SFO.

Dealing in or advising on security tokens requires SFC licensing. Platforms facilitating secondary trading of security tokens are required to be licensed as virtual asset trading platforms (VATPs) under the VASP licensing regime effective June 2023, and must apply for the additional permissions required to handle security token trading.

Anti-Money Laundering and KYC Requirements

STOs in Hong Kong are subject to robust anti-money laundering (AML) and know-your-customer (KYC) requirements. Issuers must conduct customer due diligence on investors, verify their professional investor status, and screen for sanctions and politically exposed persons (PEPs). Ongoing transaction monitoring is required for secondary market trading platforms.

The AML requirements are set out in the Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) and the SFC's Anti-Money Laundering Guidelines, which apply to all licensed corporations including those involved in STO distribution and trading.

Structuring Considerations for STOs

Successful STOs require careful structural planning. Key considerations include the legal characterisation of the token (equity, debt, or hybrid), the jurisdiction of issuance and applicable prospectus regime, the choice of blockchain and technical standards, smart contract functionality for automated compliance (transfer restrictions, investor eligibility checks), custody arrangements for the digital assets, and the secondary market trading mechanism.

Where the STO involves a collective investment scheme structure — for example, a tokenised fund that pools investor capital for investment in a portfolio — the fund manager must be SFC-licensed and the fund may need to be authorised or fall within an applicable exemption.

Secondary Market Trading of Security Tokens

Secondary liquidity is a key attraction of STOs. Under the VASP licensing regime, trading platforms wishing to facilitate secondary market trading of security tokens must hold both a VATP licence and the relevant SFC licences. The SFC has published specific guidance on the conduct requirements for security token trading, including pre-trade and post-trade transparency, best execution obligations, and investor protection measures.

How Alan Wong LLP Can Help

Alan Wong LLP advises on the legal structuring of security token offerings in Hong Kong, including regulatory analysis, investor documentation, prospectus exemption strategies, and ongoing compliance. We work with issuers, platforms, and investors on both primary issuance and secondary trading of digital securities. Our team combines expertise in securities law, corporate finance, and virtual asset regulation to deliver comprehensive STO legal support.