On 19 March 2018, the Securities and Futures Commission (SFC) issued a press release stating that Black Cell Technology Limited (Black Cell) halted its initial coin offering (ICO) to the Hong Kong public as a result of regulatory action by the SFC.

The SFC considered Black Cell’s offering of its digital coins, KROPS, to constitute a Collective Investment Scheme (CIS), since the proceeds of the coin sale would fund the development of a mobile application, and the coins would allow holders to redeem Black Cell’s equity shares. Black Cell’s ICO was promoted through its website, where the digital tokens were sold, and this was accessible by the Hong Kong public.

The essential features of a CIS under the statutory definition in Schedule 1 of the Securities and Futures Ordinance (SFO) are:

  1. it must involve an arrangement in respect of property;
  2. participants do not have day-to-day control over the management of the property;
  3. the property is managed as a whole by or on behalf of the person operating the arrangements, and/or the participants’ contributions and the profits or income are pooled; and
  4. the purpose of the arrangement is to provide participants with profits, income or other returns from the acquisition or management of the property.

A Hong Kong ICO which constitutes a CIS will constitute an offer of “securities” which is subject to Hong Kong securities laws and regulations. An ICO which involves an offer to the Hong Kong public to acquire an interest in, or to participate in, a CIS requires the SFC’s prior authorisation of both the CIS itself under section 104 SFO and of any offering or marketing document under section 105 SFO, unless an exemption applies (e.g. for an offer only to professional investors as defined in the SFO). The SFO’s licensing requirements also apply so that an ICO can only be marketed, offered, traded, or managed in Hong Kong by entities which are licensed or registered with the SFC for relevant SFC-regulated activity/ies. An interest in a CIS is a “security” under the SFO. Thus promoting or offering an ICO in Hong Kong without a licence for regulated activity Type 1 (“dealing in securities” which includes, among others, seeking to induce Hong Kong persons to acquire interests in a CIS), is an offence under section 114 SFO.  Further, offering an interest in a CIS to members of the Hong Kong public without having obtained SFC authorisation for the CIS itself and for any invitation to acquire an interest in a CIS which is publicly offered in Hong Kong, is an offence under section 103 SFO.

The SFC’s regulatory action resulted from concerns that Black Cell had engaged in potential unauthorized advertising activities and unlicensed regulated activities, potentially in breach of sections 103 and 114 of the SFO, respectively.

To address the SFC’s concerns, Black Cell will unwind ICO transactions with Hong Kong investors and has undertaken not to devise, establish or market any CIS except in compliance with the SFO’s requirements.

This action follows the SFC’s warning on cryptocurrency risks issued on 9 February 2018, which informed investors that the SFC had written to seven ICO issuers and seven cryptocurrency exchanges to establish whether ICOs being offered and traded in Hong Kong are securities. Most of the Hong Kong ICO issuers and crypto exchanges contacted however confirmed that their activities comply with the requirements of the SFO, or ceased to offer non-compliant ICOs in Hong Kong, in the case of ICO issuers, or ceased to deal in tokens that are securities, in the case of crypto trading exchanges. For further information relating to the SFC’s February warning, please refer to Charltons Quantum’s February newsletter.

The SFC’s statement ends with a reminder that ICO issuers considering offering coins or tokens in Hong Kong should seek legal or professional advice regarding the applicable regulatory requirements.  Potential investors are also warned again of the need to exercise caution when considering investing in ICOs.


Black Cell halts ICO

SFC halted a Hong Kong ICO

Collective Investment Scheme ICO

interest in a CIS

Black Cell will unwind ICO transaction

KROPS coins

SFC’s regulatory action on cryptocurrencies

licensing requirements under the SFO

hong kong cryptocurrency regulation

ethereum hong kong

digital tokens KROPS

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Charltons Quantum – 2018