Security Token Offerings in Hong Kong: A Legal and Regulatory Guide

Security token offerings (STOs) represent one of the most significant intersections of traditional securities law and blockchain technology. By representing ownership interests in real-world assets — equity, debt, real estate, funds — as digital tokens on a blockchain, STOs promise to democratise access to traditionally illiquid asset classes and streamline issuance and secondary market trading. Hong Kong, as a leading international financial centre, has engaged seriously with STOs and established a regulatory framework that applies existing securities law rigorously to token-based securities. This guide explains the legal and regulatory requirements for conducting an STO in Hong Kong.

What is a Security Token?

A security token is a digital token that represents a security within the meaning of the Securities and Futures Ordinance (SFO) (Cap. 571). The SFO defines "securities" broadly to include:

• Shares, stocks, and debentures of a company
• Interests in a collective investment scheme (CIS)
• Structured products
• Options and futures contracts

Tokens that carry rights analogous to any of these — e.g., profit participation rights, ownership rights in an asset pool, or debt repayment obligations — are likely to constitute securities under the SFO regardless of the technology used to represent them. The SFC's position, stated in multiple circulars, is that it applies a substance-over-form test: a token that functions as a security is a security.

By contrast, tokens that are merely used as a means of accessing a platform or service (utility tokens) and that do not confer rights analogous to securities are generally not securities under the SFO. However, many tokens in practice have mixed utility and security features, requiring careful legal analysis.

The SFC's Regulatory Framework for Security Tokens

SFC Circular on Security Token Offerings (2019)

In March 2019, the SFC issued a circular on Security Token Offerings setting out its regulatory position. Key points:

• Security tokens are "securities" under the SFO and are subject to the full range of securities regulatory requirements
• Persons who market or distribute security tokens must be licensed by the SFC to carry out regulated activities (primarily Type 1: dealing in securities)
• Offerors of security tokens (i.e., issuers conducting an STO) must comply with the prospectus regime or applicable exemptions under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO)
• At that time (2019), the SFC's position was that security tokens could only be offered to professional investors (as defined in the SFO — broadly, individuals with HK$8 million+ portfolio or institutional investors)

Updated Guidance (2023 and Beyond)

Following the development of the VASP regime and the broader virtual asset regulatory framework, the SFC has updated its guidance on security tokens and tokenised securities. Key developments include:

• Licensed VASP platforms may offer security tokens to retail investors subject to meeting the same investor protection conditions as for other listed securities (token eligibility criteria, risk disclosures, etc.)
• The SFC has issued guidance on tokenised securities (including tokenised funds and tokenised bonds), clarifying that tokenised versions of existing securities are subject to the same regulatory framework as non-tokenised equivalents
• Project Evergreen (2023) and the Government's tokenised green bond issuances (2023, 2024) have demonstrated Hong Kong's readiness to use blockchain for government securities

Issuing a Security Token: The Regulatory Requirements

Prospectus Requirements

If a security token constitutes a "share" or "debenture" as defined in the CWUMPO, offering it to the public in Hong Kong requires either:

• A prospectus registered with the Companies Registry, complying with the detailed disclosure requirements of the CWUMPO and the Third Schedule thereto; or
• An applicable exemption from the prospectus requirement, including:
  • Professional investor exemption: The offer is made only to professional investors
  • Small offer exemption: The aggregate consideration for the offer does not exceed HK$5 million
  • Private placement exemption: The offer is made to not more than 50 persons

In practice, the vast majority of STOs in Hong Kong are conducted as private placements to professional investors, avoiding the prospectus requirement and the associated cost and disclosure obligations.

SFC Authorisation for Collective Investment Schemes

If the security token represents interests in a collective investment scheme (e.g., a tokenised fund), offering it to the public in Hong Kong requires SFC authorisation of the scheme under Section 104 of the SFO, or an applicable exemption (e.g., professional investor or private placement exemption). The SFC's Code on Unit Trusts and Mutual Funds (and related codes) applies to publicly offered collective investment schemes.

Licensing Requirements for Intermediaries

Persons involved in the marketing, distribution, and secondary market trading of security tokens must hold the appropriate SFC licences:

• Type 1 (Dealing in Securities): Required for any person who buys or sells security tokens as principal or agent, or who markets security tokens to investors
• Type 4 (Advising on Securities): Required for persons who advise clients on investments in security tokens
• Type 6 (Advising on Corporate Finance): Required for persons advising on the structuring of the STO (e.g., financial advisers to the issuer)
• Type 9 (Asset Management): Required for persons managing a discretionary portfolio that includes security tokens

Anti-Money Laundering

Licensed intermediaries dealing in security tokens must comply with AML/CFT requirements under the AMLO. Issuers should also conduct KYC on investors (particularly in private placements) to ensure compliance with applicable AML laws in Hong Kong and relevant investor jurisdictions.

Secondary Market Trading of Security Tokens

One of the key promises of STOs is liquidity through secondary market trading on blockchain-based platforms. In Hong Kong, secondary market trading of security tokens is subject to:

• VASP licensing: A platform that provides a marketplace for secondary trading of security tokens (matching buy and sell orders) must be licensed as a VASP under AMLO and hold the appropriate SFC licence (Type 1 for dealing in securities)
• Listing requirements: Where security tokens are to be listed on a recognised exchange (including a licensed VASP platform), the platform's listing rules and eligibility criteria apply
• Market manipulation: The SFO's market manipulation and insider dealing prohibitions apply to security tokens traded in Hong Kong, just as they apply to conventional securities

Tokenised Bonds and Tokenised Funds

Two categories of tokenised securities have attracted particular attention in Hong Kong:

Tokenised Bonds

The Hong Kong government issued tokenised green bonds in 2023 and 2024, demonstrating the feasibility of blockchain-based bond issuance. The legal framework for tokenised bonds uses the existing bond issuance framework (prospectus or private placement) with the blockchain layer added for record-keeping and transfer. The SFC and HKMA have both issued guidance on tokenised bonds, clarifying that the same regulatory requirements apply as for conventional bonds.

Tokenised Funds

In 2023, the SFC issued guidance on tokenised funds (including tokenised SFC-authorised funds), confirming that tokenised versions of SFC-authorised funds are permissible subject to meeting specific conditions (including enhanced disclosure on tokenisation arrangements, custody requirements, and investor eligibility). This opens the door for asset managers to issue tokenised fund units on blockchain platforms while maintaining SFC authorisation.

Practical Checklist for an STO in Hong Kong

1. Token classification: Conduct a legal analysis to determine whether the token is a security under the SFO and, if so, what type of security (share, debenture, CIS interest)
2. Issuer and structure: Choose an appropriate issuer entity and legal structure for the STO (e.g., Hong Kong company, BVI/Cayman SPV, trust)
3. Regulatory exemptions: Confirm which offer exemptions are available (professional investor, private placement, small offer) and structure the offering accordingly
4. Offering document: Prepare a compliant offering memorandum (for private placements) or prospectus (for public offers), including required disclosures and risk factors
5. Licensed intermediaries: Appoint SFC-licensed dealers and advisers to market and distribute the tokens
6. Smart contract audit: Commission an independent technical audit of the smart contract governing the token issuance, transfer, and rights
7. Custody arrangements: Establish compliant custody arrangements for both the digital tokens and any underlying assets
8. Secondary market: If secondary trading is intended, engage a licensed VASP platform and address listing requirements
9. Ongoing compliance: Implement ongoing reporting, KYC/AML, and corporate governance obligations for the issuer

Jurisdiction Comparison: Why Hong Kong for an STO?

Hong Kong offers several advantages as a jurisdiction for STOs:

• Clear regulatory framework: Unlike many jurisdictions that have left STO regulation ambiguous, Hong Kong has clearly applied its existing securities law to security tokens, providing legal certainty for issuers and investors
• Deep investor base: Hong Kong's status as a financial hub provides access to institutional and high-net-worth investors across Asia
• HKEX connectivity: For tokenised securities seeking to connect to traditional capital markets, Hong Kong's proximity to the Hong Kong Stock Exchange (HKEX) and its listing infrastructure is a significant advantage
• Regulatory engagement: The SFC and HKMA have demonstrated proactive engagement with the tokenisation agenda (e.g., Project Evergreen, Project Genesis for green bonds), providing a supportive environment for innovation

Conclusion

Security token offerings in Hong Kong are fully regulated under the existing securities law framework, with the SFC applying a substance-over-form approach that treats security tokens identically to conventional securities. While this creates compliance obligations for issuers and intermediaries, it also provides legal certainty and investor protection that enhance the credibility of the STO market. With clear regulatory guidance, a sophisticated investor base, and growing infrastructure for tokenised securities trading, Hong Kong is well-positioned as a leading venue for STOs in Asia.

Alan Wong LLP advises on the legal structuring of STOs, token classification analysis, offering document preparation, and SFC regulatory compliance. Contact us to discuss your security token project.