securities - Pwim.Net

First Ever Blockchain-Based IPO Launches on National Stock Exchange

MERJ Exchange, the national stock exchange of Seychelles had previously announced a partnership with a UK-based fintech firm, Globacap to issue tokenized securities available on the MERJ exchange platform. MERJ Exchange became the first national stock exchange to list tokenized securities. The exchange is now launching an IPO of the tokens.

Globacap, founded in 2017 and based in the UK, is a blockchain fundraising firm that will also be supporting the launch. The fundraising firm was accepted into the Financial Conduct Authority’s (FCA) regulatory Sandbox Cohort 4 in 2018 and became the first company to issue a security token backed by equity under the FCA’s surveillance. Having exited the sandbox in June 2019, Globacap became the UK’s first fully regulated digital security offering platform.

The shares are available on the MERJ exchange platform as well as through broker-dealer Jumpstart and crypto custodian Prime Trust, which are both based in the US and via Globacap.

Edmond Tuohy, CEO of MERJ Exchange mentioned:

“These novel financial instruments are here to reshape the financial industry for years to come. MERJ provides the regulatory framework necessary for investors globally to access these markets in a safe and compliant manner. Whether they’re issuing tokenized or traditional shares, companies are not going to want to go to a jurisdiction that doesn’t meet high international standards because it will attract greater scrutiny from global regulators.”

Reported by CoinDesk, MERJ mentioned that it is using the Ethereum blockchain to record share register ownership as “it is the best supported protocol for these purposes.”

MERJ’s listings page shows that the tokenized security is currently trading at $2.42, with a market capitalization of $21,015,781.

Licensed by the Indian Ocean nation’s Financial Services Authority as a securities exchange, clearing agency, and securities depository (CSD), MERJ is able to host issuers from North America, Europe, Asia, Australia, and Africa.

Tuohy further mentioned that MERJ being licensed as an exchange, and CSD will help deliver on the benefits of tokenization:

“We’ve spent three years working with our regulators to build a robust and compliant framework for issuers wanting to leverage the benefits of distributed ledger technology within a publicly listed environment.”

Telegram May Push TON Launch Date Before Facing SEC

After coming under fire from the United States Securities Commission (SEC), Telegram has allegedly informed its investors that it will postpone launching its Telegram Open Network (TON).

According to Cointelegraph, on Oct. 16th Telegram sent a message to its investors saying it wants to push the launch from the previously set late October 2019 to April 30, 2020.

The change in plan comes following the SEC’s recent press release that declared that Telegram’s $1.7 billion dollar token offering was illegal and that emergency action and a restraining order had been filed against Telegram. The complaint further stated that the SEC considers tokens to be securities and the Securities Act of 1933 requires all securities to be registered with the SEC, which Telegram had failed to do. Telegram Violated Exemption

In February 2018, Telegram submitted a ‘Form D’ filing, which leverages the exemption 506(c) that allows securities to be sold with registration with the SEC as long as it is exclusively sold to accredited investors.

As the GRM Token assets could be resold by the accredited investors, the SEC interprets Telegram’s actions as a violation of the exemption. The SEC made their issue known in a public complaint which put forward the allegations of Telegram’s and Ton’s failure to register the GRM tokens as a security.

Telegram will respond to the SEC’s allegations in a hearing scheduled for Oct. 24. in New York.

Image via Shutterstock

Enigma Settles With US SEC Over Unregistered 2017 ICO

The US Securities and Exchange Commission (SEC) recently announced it has settled charges against blockchain startup Enigma MPC.

According to a statement by the SEC on Feb 19, Enigma had been charged by the regulatory body for conducting an unregistered offering of securities in the form of an initial coin offering (ICO).

The SEC’s order found that Enigma had raised nearly $45 million in sakes if its token ENG in 2017. The SEC identified the tokens as securities and therefore fell under the federal securities law, meaning that Enigma had failed to register them as such and did not qualify for an exemption.

Enigma reached a settlement with the SEC and “has agreed to return funds to harmed investors via a claims process, register its tokens as securities, file periodic reports with the SEC, and pay a $500,000 penalty.”

While Enigma did not admit or deny the findings of the order, they agreed on the terms of the claims process and consented to register the ENG Tokens as securities and file periodic reports. John T. Dugan, Associate Director for Enforcement in the SEC’s Boston Regional Office. “The remedies in today’s order provide ICO investors with an opportunity to obtain compensation and provide investors with the information to which they are entitled as they make investment decisions.”

Regulatory Clarity

Despite the outcries of regulatory uncertainty within the US blockchain and crypto space, the SEC has maintained throughout that digital tokens likely fall under US securities laws. The SEC has punctuated this stance through enforcement against high profile projects like Telegram and EOS provider, Block.One who was fined 24 million dollars for its ICO offering.

Prior to his withdrawal from the race, presidential candidate, Andrew Yang recently discussed how the mess of regulations in the US is stifling innovation. He said, “Right now we’re stuck with this hodgepodge of state-by-state treatments and it’s bad for everybody: it’s bad for innovators who want to invest in this space. So that would be my priority is clear and transparent rules so that everyone knows where they can head in the future and that we can maintain competitiveness.”

To make matters worse, some regulators currently seem unwilling to offer guidance.

As reported by Blockchain.News, the IRS recently refused the recommendations of the Government Accountability Office (GAO) to clarify and disclaim sections of their 2019 Crypto Tax guidance. GAO had conducted the report evaluating the IRS’ current approach and public guidelines on cryptocurrency following Rep. Ken Brady’s (R-TX) request for clarity on how taxes are levied against cryptocurrency.

The IRS refused the recommendation although the justification was dissatisfying.

Relief May Be Coming

What may bring relief to others innovating in the space is that the SEC’s Commissioner Hester Peirce has doubled down on her recent suggestion to provide decentralized network developers a safe harbor and has even submitted a formal draft proposal.

On Feb. 7, Peirce spoke at the International Blockchain Congress in Chicago and outlined her token safe harbor proposal which would grant blockchain projects a three-year exemption for US securities laws.

Image via Shutterstock

Telegram Prohibited from Issuing Gram Tokens as US Court Grants SEC's Injunction

A United States District Court has sided with the US Securities and Exchange Commission (SEC) granting an injunction against Telegram to to temporarily prevent the company from issuing its Gram tokens.

Gram is a security according to Howey Test

The cryptocurrency and blockchain community have been closely watching the court case between the SEC and Telegram over the legal status of the latter’s $1.7 billion token offerings. The SEC has maintained throughout that the tokens sold were unregistered securities and today a US district court has sided with the regulator.

In a March 24 filing, the Court granted the SEC’s motion for a preliminary injunction to halt the sale of Gram tokens.

As per the Court’s filing, “The Court finds that the SEC has shown a substantial likelihood of success in proving that the contracts and understandings at issue, including the sale of 2.9 billion Grams to 175 purchasers in exchange for $1.7 billion, are part of a larger scheme to distribute those Grams into a secondary public market, which would be supported by Telegram’s ongoing efforts. Considering the economic realities under the Howey test, the Court finds that, in the context of that scheme, the resale of Grams into the secondary public market would be an integral part of the sale of securities without a required registration statement.”

The story continues

The saga began when a suit was brought against Telegram last October from the SEC, as the regulator believes that Telegram violated the Securities Act with its 2018 token offering by not adhering to the registration requirements.

According to the SEC, citing the Securities Act of 1933, Telegram and TON failed to register their sale of Gram tokens, and the SEC considers the sale to be “unlawful.” The SEC’s complaint reads, “Telegram committed to delivering Grams to the Initial Purchasers in conjunction with the launch of the TON Blockchain by no later than Oct. 31, 2019, and it plans to sell millions of additional Grams at the same time.”

Telegram has maintained its stance that the ICO was authorized to sell to accredited investors since the company had filed a Form D 506(c) Notice of Exempt Offering of Securities prior to the first round of its offering. The court has disqualified this argument in the recent injunction filing, which read, “Telegram’s sale of Grams to the Initial purchasers, who will, function as statutory underwriters, is the first step in an ongoing public distribution of securities and, as such, Telegram cannot receive the benefit of an exemption from the registration requirement under either section 4(a) of Rule 506 (c).”

The SEC’s Howey Test

As investment continues to increase in the cryptocurrency space has grown, the SEC has become increasingly interested in defining cryptocurrencies.

If the SEC is able to determine that a particular cryptocurrency token is classified as a security, that brings about a host of implications for that cryptocurrency. Effectively, it means the SEC can determine whether or not the token can be sold to US investors legally or not; it also compels US investors to register their token holdings with the SEC.

When applying the Howey Test, the question to ask, in this case, is whether or not Gram’s investors were participating in a speculative enterprise, and if so, if the profits those investors believe they will receive are entirely dependent upon the work of Telegram.

On Feb. 18, Telegram’s lawyer, Alexander Drylewski had criticized the application of the SEC’s Howey Test, citing that a test designed to categorize securities does not apply to digital assets that are offered with a promise of managerial oversight, that will increase their value over time. The lawyer argued that when TON blockchain launches, Grams will not be securities but commodities.

The injunction filing also indirectly countered Drylewski’s stance—rejecting Telegram’s argument that Gram should not fall under the SEC’s jurisdiction as it would soon become a commodity, the Court stated, “The Court rejects Telegram’s characterization of the purported security, in this case. While helpful as a shorthand reference, the security, in this case, is not simply the Gram, which is little more than alphanumeric cryptographic sequence. Howey refers to an investment contract…that consists of the full sets of contracts, expectations, and understandings centered on the sales and distribution of the Gram. Howey requires and examination of the entirety of the parties’ understanding and expectations.”

Judge Denies Telegram's Appeal to Issue Grams to Non-US Entities, Says it's Too Late to Question SEC Jurisdiction

US Federal Judge P. Kevin Castel has denied Telegram’s request to issue its Gram tokens to overseas investors.

Telegram had filed an appeal to last week’s ruling by a United Stated federal court in favour of the US Securities and Exchange Commission (SEC) which is prohibiting the issuance of Gram tokens for the time being.

In the most recent turn in Telegram’s six-month court battle with the U.S. Securities and Exchange Commission (SEC) over the legal status of the former’s $1.7 billion Gram token offering in 2018, the US courts have ruled that the injunction barring Telegram from issuing its Gram tokens is applicable to all potential investors both in the United State and overseas.

Courts Continue to Side with SEC

In Telegram’s notice of appeal with the Court of Appeals for the Second Circuit, the company cited the SEC’s lack of jurisdiction with overseas investors and even made the suggestion that it would implement safe-guards to protect against “non-US Private Placement purchasers reselling Grams to US purchasers in the future.”

Judge Castel argued that Telegram had not provided enough evidence that it could implement these types of safeguards and cited that, “the TON Blockchain was designed and is intended to grant anonymity to those who purchase or sell Grams,” meaning that the proposed safeguard would be unenforceable in the real-world.

The order also points out that the question of the SEC’s jurisdiction has not been previously raised by Telegram, and said at this point it is too late to consider it.

Will TCF Launch TON without Telegram?

As the picture is starting to look very grim for the launch of the Telegram Open Network (TON), some in the TON Community Foundation came forward with contingency alternatives on March 26: notably their ability to launch with or without the messaging platform’s further participation and without regulator approval.

As the US Courts appear to be siding with regulators, granting a temporary halt on Gram distribution; the TON Community Foundation’s founder, Fedor Skuratov said that the community is seriously considering options like launching the network without Telegram.

Skuratov said “Strictly speaking, no additional measures are required to launch TON by the community, except for a consensus within the community. But in order to get recognized, we will need to come to an agreement with investors (at least, with a majority of them).”

Skuratov highlighted that all the code necessary to launch TON is available online as it was published as open-source by Telegram. He explained that they would merely need to create the genesis block and could run the network on a minimum of 13 validators.

While the US Securities and Exchange Commission may have temporarily succeeded in stopping the launch of Telegram’s TON network, can they really stop open-source technology?

Images via Shutterstock

Has Judgement Finally Come for 2017 ICOs? Class Action Lawsuits Name Binance, BitMEX and Block.One Among Host of Crypto Defendants

11 class action lawsuits have been filed against 42 defendants for violating securities law by Roche Freedman LLP. Among the companies named were some of the crypto industry’s most prominent players including Binance, Block.One and Bitmex.

According to OffShoreAlert, the class action law suits were filed in the Southern District of New York Court on April 3 for the sale of unregistered securities.

The lawsuits have also included crypto firms HDR Global Trading; Tron; Civic; Kyber Network; Status; Bibox; KuCoin, and Quantstamp.

Several executives have also been specifically named including Changpeng Zhao (CZ) of Binance, Brendan Blumer and Dan Larimer of Block.one (EOS), Vinny Lingham of Civic, as well as Arthur Hayes of BitMEX.

Roche Freedman LLP is known in the crypto industry for having represented the estate of the late Dave Kleiman in its lawsuit against the self-proclaimed “Satoshi Nakomoto” and instigator of the BSV fork, Craig Wright.

2017 ICO Reckoning?

The crypto world suffered an onslaught of initial coin offerings (ICO) in 2017 as bitcoin surged bringing with it a manic public interest and incredible inflows of investment to the nascent digital space. As outlined by Offshore alert, the ICO investors who collectively lost 80% of their investments during this period were entitled to certain financial disclosures as mandated by the United States Securities and Exchange Commission (SEC).

At the time, many of these project sought to take advantage of the loose categorization of digital assets and many were successful in separating investors from their money with little recourse brought against them. It appears that these new law suits are targeting the ultra successful companies that executed ICOs such as Binance, which has grown into a colossus and was even able to recently acquire CoinMarketCap for $400 million.

The class action has been made on behalf of several individuals who invested in these 2017 projects including Chase Williams, Alexander Clifford, Eric Lee, and William Zhang, but also include “all others similarly situated.”

The lawsuit covers 42 defendants across 16 different countries, some with very little enforceable regulation. Decentralized projects means that there are rarely any central figures to hold accountable and bringing many of these projects to justice will prove near impossible for the Courts.

Has Telegram Ruling Opened Floodgate?

Many believe a precedent may have been set when the SEC won an important decision in their court case against Telegram over the legal status of the latter’s $1.7 billion Gram token offering.The US federal court granted the regulator an injuction to halt the distribution of Grams at the outset of the legal battle as the evidence presented to the court through the SEC’s Howey Test appears to have compelled them to act in favour of the regulator veryearly in the legal proceedings.

Philip Moustakis, attorney at Seward & Kissel LLP and former SEC counsel told Blockchain.News that the SEC application of the Howey test was done correctly stating “An issuer cannot avoid application of the federal securities laws by separating in time the capital raise and the delivery of the digital representation of the investor’s interest in that capital raise. And, at delivery, in my view, the Grams would still represent the series of promises and understandings that led up to their distribution.”

It appears the success of the Howey Test in determining Telegram’s 2018 ICO as the sale of unregistered securities may have opened the floodgates for the crypto industry with the class action lawsuit being mounted by Roche Freedman LLP very shortly after the US Courts sided with the SEC.

Floyd Mayweather Promoted 2017 ICO Was a Fraud, Co-Founder Pleads Guilty

The $25 million 2017 Centra Tech ICO court case has finally resulted in a verdict against one of the co-founders who pleaded guilty to fraud yesterday. The other founders are still awaiting trial.

Robert Joseph Farkas is one of the co-founders of Miami-based crypto startup Centra Tech, which managed to raise more than $25 million in an initial coin offering (ICO) in 2017 thanks to some high-profile celebrity shilling. Yesterday, Farkas pled guilty for his role in securities fraud.

One of the key’s to Centra Tech’s ability to raise the astonishing $25 million was its use of high-profile celebrity endorsement. The Miami-based crypto start-up cut deals with the undefeated boxer Floyd “Money” Mayweather and music icon DJ Khaled to promote its Initial Coin Offering (ICO). The purported aim of the ICO was to develop a product called a Centra Card which was supposedly able to use VISA and Mastercard terminals to make payments with cryptocurrency.

According to the US Federal Bureau of Investigation (FBI) the entire operation was a massive fraud complete with Centra Tech creating non-existent individuals for its executive team. It was also very quickly determined that the company never had relationships with either VISA or Mastercard and did not hold any valid licenses in most US states.

Floyd Mayweather Defeated, DJ Khaled Doesn’t Win

In April 2018, the Securities and Exchange Commission (SEC) filed a civil action against Centra Tech’s founders, alleging that the ICO was fraudulent. The U.S. Attorney’s Office for the Southern District of New York filed parallel criminal charges.

In November 2018, the SEC announced that it had settled charges against professional boxer Floyd Mayweather Jr. and music producer Khaled Khaled, known as DJ Khaled, for failing to disclose payments they had received for promoting investments in Centra Tech’s ICO. These are the SEC’s first cases to charge touting violations involving ICOs.

The SEC’s orders found that Mayweather failed to disclose promotional payments from three ICO issuers, including $100,000 from Centra Tech Inc., and that Khaled failed to disclose a $50,000 payment from Centra Tech, which he touted on his social media accounts as a “Game changer.” Mayweather’s promotions included a message to his Twitter followers that Centra’s ICO “starts in a few hours. Get yours before they sell out, I got mine…”

Without admitting or denying the findings, Mayweather and Khaled agreed to pay disgorgement, penalties and interest. Mayweather agreed to pay $300,000 in disgorgement, a $300,000 penalty, and $14,775 in prejudgment interest. Khaled agreed to pay $50,000 in disgorgement, a $100,000 penalty, and $2,725 in prejudgment interest. This concluded their involvement with Centra Tech.

One Co-Founder Pleads Guilty

On June 17 2020, Robert Farkas, one of the co-founders of Centra Tech plead guilty for the 2017 ICO which raised $25 million and was determined as the unauthorized sale of unregistered securities.

Farkas, 33, pled guilty to two charges, each of which carries a maximum sentence of five years in prison. His sentencing date has not been set but it has been reported that Farkas has agreed to a plea agreement that calls for a sentence between 70 and 87 months and a fine of up to $250,000.

In the official statement, United States attorney Craig Stewart said, “Farkas and his co-conspirators duped ICO investors into investing digital currency worth millions of dollars based on fictitious claims about their company, including misrepresentations relating to its purported digital technologies and its relationships with legitimate businesses in the financial services sector,” He continued, “Whether in the context of traditional equity IPOs or newer cryptocurrency-related ICOs, raising capital through lies and deceit is a crime.”

With Farkas now ruled upon for his involvement – his co-defendants, Sohrab Sharma and Raymond Trapani, are due to appear in court later this year, in November.

SEC Finalizes Lawsuit Against the Founder and CEO of Fraudulent ICO

The US Securities and Exchange Commission (SEC) has revealed that it has received a final judgment in a US district court action against Eran Eyal, the CEO and Founder of Shopin, for carrying out an allegedly fraudulent ICO. The US District Court for the Southern District Of New York handed a final judgment against Eyal on June 23, 2020.

Verdict and Sentencing

In December 2019, the SEC brought the lawsuit against the founder of the firm that launched an allegedly fraudulently initial coin offering (ICO). The lawsuit filed by the SEC showed that Eyal and Shopin fraudulently raised $42.5 million worth of cryptocurrency from the unregistered sales of securities called Shopin tokens from August 2017 to April 2018 based on a series of misleading and false statements to actual and potential investors. Eyal was accused of misappropriating funds obtained from the $42 million ICO.

Eyal, 45, has joint Israel-South Africa citizenship. On May 18, 2020, Eyal was deported from the United States to Israel, after being held in a New Jersey prison facility by the ICE (US’s Immigration and Customs Enforcement) since February.

According to the SEC’s final judgment, Eyal was found guilty and therefore ordered to repay investors a total of $422,100 that represented the profits gained as a consequence of the fraudulent activity alleged in the SEC’s complaint. The addition of interest levied of the amount of $34,940 consequently made the total to become $457,040.

But Eyal was considered to have satisfied the payment. It is reported that he gave up a total of 3105.78 Ethereum tokens to pursue his plea agreement, which guaranteed protection of his rights as the accused party.

As part of the court’s final judgment, Eyal and also former Shopin agents and employees are prohibited from acting as a director or officer of any issuer, which has digital asset securities registered under Section 12 of the US’s Exchange Act. Furthermore, Eyal is prohibited from engaging in any offering of digital asset securities.

However, Shopin investors are shocked as they termed the court’s final judgment as a joke and ridiculous. They say that with the final judgment, Eyal can use investors’ money to settle his own personal liabilities as the SEC appears to agree with that.

Will Cryptocurrency Scam Ever Subside?

The anonymous nature of crypto assets has indirectly assisted in proliferating crypto-related scams. The latest scenario handled in the court is just one out of many crypto-related scams that have been reported across the globe this year. Crypto and blockchain users may wonder if a lasting solution could ever come to stop the rising cases of cryptocurrency scams.

With the evolving nature of new cryptocurrencies and their related services such as ICOs (Initial Coin Offerings), transfer, exchanges, and trading services, the crypto world is becoming more complicated. Although it is difficult to stop the scams, a balanced approach involving a proper security framework and regulation could assist in containing the epidemic.

Malaysia’s Securities Commission Legalizes Digital Asset and Crypto Trading

Malaysia’s Securities Commission (Shariah Advisory Council) has announced that the trading of digital assets is now legal in the country. The Securities Commission is the regulatory authority that oversees the implementation of Islamic laws in the operations of Islamic financial institutions.

Datuk Syed Zaid, the Chairman of the Securities Commission, said that the regulator has resolved key issues facing regulations of digital currencies in a principled manner.

Big Crypto Gains

Malaysia has experienced exponential growth of interests in the crypto market but there have also been inside trading abuses, market manipulation, and some exchanges were even involved in predatory and deceptive practices. All these have led to the need to reposition the existing financial regulatory framework to incorporate the supervision of the crypto market in the country.

Datuk stated that the regulator has resolved that trading and investment of digital currencies and tokens are permissible in registered digital asset exchanges. He said that in a teleconference panel session at Invest Malaysia 2020 here today. He said: “This is a really ground-breaking resolution by SAC (Shariah Advisory Council) that could spur greater development and investment in digital assets.”

Datuk stated that the commission’s resolution has been finalized, and the agency would issue further details later.

The commission has currently allowed three digital asset exchanges (including Tokenize, SINEGY, and Luno) to operate in the country.

As per the report, the agency has approved at least four digital assets in the nation up until this month.

SINEGY is the first crypto exchange approved by Malaysia’s securities regulator. The founder of SINEGY, Kelvyn Chuah, termed the announcement as having extreme significance as more than 60% of Malaysians are Muslims. He said that the announcement has cleared several ambiguities associated with digital assets. Chuah is delighted by the announcement that the country has made. He revealed that Malaysia aims to become the hub of Islamic fintech and finance.

Chuah said that currently, all regulated trading activities of digital assets are allowed, but many non-compliant activities are not permitted. He said that the crypto industry in the country is closely waiting for the commission’s full guidelines on trading and issuance of digital assets. Chuah mentioned that crypto operators think that the regulatory authorities may consider creating a regulated digital asset derivatives market in the future.

As the Malaysian Muslim community is still awaiting a Shariah-compliant resolution for the trading of digital assets, crypto firms such as SINEGY now can explore potential services, which may welcome more Muslims into the digital asset space.

Malaysia Leading the Way in Crypto Regulation

The status of the cryptocurrency industry in the country had been unclear until the recent announcement by the Securities Commission. Crypto trading was not termed illegal but remained unregulated.

In February 2019, Securities Commission Malaysia (SC) announced that the nation would be implementing new regulations on the trading of digital assets and ICOs (initial coin offerings). Malaysia’s finance minister, Lim Guna, said that new regulations guiding cryptocurrency trading would assist in serving as criteria for exchange operators and coin issuers. That would also assist in ensuring standard practice in terms of trading, pricing, and asset protection.

The new regulations require any digital asset offering to get approval from the Securities Commission. Such offerings are also required to meet counter-terrorism financing and anti-money laundering rules. Any trader identified trying to bypass the law would be subjected to a fine up to US$2.4 million (RM10 million) or a prison sentence of up to 10 years. The country’s central bank and the Securities Commission said that new rules aim to help protect investors’ assets and create fair trading.

DLA Piper: Security Tokenization in Hong Kong

Security tokenization is the representation of fractional interests in an asset using blockchain. A security token derives its value from an underlying asset, such as a work of art. This differs from a utility token, which gives a holder the right to use a particular product or service, or a cryptocurrency such as Bitcoin, which has its own value as a currency.

This article will outline advantages for asset owners and investors, key aspects of the publicly-stated approach of the Securities and Futures Commission of Hong Kong (“SFC”) to security tokens, and our observations regarding security tokenization in Hong Kong.

Advantages for asset owners

Security tokenization could represent a new way to raise capital efficiently. It could unlock liquidity for asset owners by giving them access to a larger potential pool of investors. This is particularly valuable for high-value illiquid assets such as real estate or fine art because security tokenization broadens the class of potential purchasers to include small investors that are only seeking a fractional interest in an asset. This, in turn, allows for the spreading of risk and adds a liquidity premium to the value of the asset.

An important feature of security tokenization is the flexibility of tokenomics. The self-executing smart contract embedded in a token can be drafted so the token represents anything from the equity in a legal structure owning an asset, to an interest in debt secured by an asset, to an interest in an income stream based on cash flows from an asset. This gives owners optionality to suit their needs and the ability to devise investment propositions to attract potential investors.

Advantages for investors

Investors can gain exposure to an asset with security tokenization that they might not ordinarily be able to acquire outright. Although they could acquire a unit in a vehicle such as a real estate investment trust, this would usually involve exposure to more than one asset, and the investment holdings of such a trust are restricted in various ways. In contrast, security tokenization facilitates single-asset exposure, giving investors much greater direct control over their investment portfolio allocations.

The fast digital nature of security tokenization is another key advantage. Due to information disclosures facilitated by smart contracts, investors can be provided with information 24 hours a day. They can then trade tokens based on that information at any time because a token exchange is not tied to the trading hours of a traditional securities exchange. This is especially attractive in a volatile market.

The SFC’s approach

In many instances, the SFC regulates security token offerings. In addition, certain security token-related activities will require an SFC license, including the marketing and distribution of security tokens (whether in Hong Kong or targeting Hong Kong investors) and the operation of an electronic trading platform for matching client orders in Hong Kong.

Furthermore, the SFC’s current position is that security tokens should only be offered to Hong Kong “professional investors” as defined in the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong).

Our observations regarding security tokenization in Hong Kong

Our Hong Kong asset owner clients are showing interest in increasingly sophisticated tokenomics specifications, including how to disclose, or equally limit the disclosure, of information to investors.

From a technology perspective, security tokenization would enable investors to trade tokens on digital assets exchanges as these come online. At the moment potential token issuers currently seem more focused on using tokenization to raise funds in the first instance. This might be a reflection of current market dynamics and we predict that there will be an increased focus on secondary market liquidity as the sector develops.

In a post-COVID-19 world, one of the few certainties is that the market will need to do more with less.  With its speed, efficiency and reliability, security tokenization could be the catalyst for the transformation of asset ownership and investment.

This article was written by: Scott Thiel and Jonathan Gill, DLA Piper