The Circular takes note of SFC-authorised funds’ investment into VA both directly and indirectly and illustrates the requirements that the funds must comply with as part of SFC’s goal for appropriate investor protection. Alongside the requirements stated in the Overarching Principles Section and the Code on Unit Trusts and Mutual Funds (“UT Code”) in the SFC Handbook for Unit Trusts and Mutual Funds, Investment-Linked Assurance Schemes and Unlisted Structured Investment Products, the Circular also sets out other additional requirements to be read alongside the joint circular on intermediaries’ VA-related activities (see our news update of this joint circular here).

Management, personnel and service providers

Management companies of SFC-authorised VA Funds must have a good track record of regulatory compliance and at least one experienced and competent staff member in managing VA products specifically. To regulate such, management companies must abide by a set of additional terms and conditions by the Licensing Department (the “LD”).

Alongside ensuring their own, and the service providers’ competence in supporting the SFC-authorised VA funds, management companies are also responsible for carrying out investor education before launch in compliance with the existing requirements under the UT Code. This is adjacent to the product key facts statements with a disclosure of the funds’ investment limits and key risks that should be offered to investors on the offering documents.

Investment restrictions and strategies

SFC-authorised VA funds are free to invest directly or indirectly in VA tokens as long as they are accessible to the Hong Kong public for trading on SFC-licensed virtual asset trading platforms (“VATPs”). However, investment in VA futures is limited only to those that are traded on conventional regulated futures exchanges subject to the management company showing that (i) the relevant futures have adequate liquidity and (ii) the roll costs are manageable and how such roll costs will be managed. If the SFC-authorised VA fund primarily adopts an investment strategy that is futures-based, the SFC also expects much flexibility in the portfolio composition.

Moreover, funds receiving indirect exposure to VA are subject to requirements in the UT Code and other requirements which may be imposed by the SFC. At the base line, there should not be any leveraged exposure to VA at the fund level.

Transactions and direct acquisitions of spot VA

SFC-authorised VA Funds should only conduct transactions and acquisitions of spot VA through SFC-licensed VATPs or authorised financial institutions (“AI”) in compliance with the requirements of the Hong Kong Monetary Authority (the “HKMA”). Both in-kind and in-cash subscription and redemption are allowed for SFC-authorised spot VA ETFs. Further, for ETFs that invest in spot VA, their participating dealers should be SFC-licensed corporations or registered institutions, and are subject to additional terms and conditions imposed by the LD.

Custody

The trustee/custodian of an SFC-authorised VA Fund can delegate its VA custody function to an SFC-licensed VATP or an AI that meets the expected standards of VA custody imposed by the MA. The trustee/ custodian and any delegate should ensure that (i) the VA holdings are segregated from their own assets and those of other clients, (ii) most of the VA holdings are stored in a cold wallet, and duration of VA holdings stored in the hot wallet should be minimised, and (iii) the seeds and private keys are securely stored, restricted to authorised personnel, resistant to speculation or collusion, and properly backed up to avoid any single point of failure.

Analysis and takeaway

The Circular sets out the expectations and requirements under which the SFC would consider when approving investment funds with more than 10% of their NAV exposed to VA. The SFC’s evaluation and approval of VA-exposed SFC-authorised funds indicate the recognition of market potential in Hong Kong.

The SFC emphasises a balance between evolving the market to incorporate VA elements and protecting the interests of the investors. It is important that continued supervision and scrutiny is made towards this developing market to mitigate further risks in the future.

“Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.”

On 22 December 2023, the Securities and Futures Commission of Hong Kong (the “SFC”) and the Hong Kong Monetary Authority (the “HKMA”) issued a joint circular (the “Circular”) regarding the requirements applicable to intermediaries when distributing virtual asset-related products and standards of conduct expected of intermediaries when distributing virtual asset funds authorised by the SFC, respectively. This Circular supersedes the joint circulars on intermediaries’ virtual asset-related activities (“VA-related activities”) issued on 20 October 2023 and 28 January 2022.

Background

The Circular provides a policy update on the restrictions imposed on VA-related activities by the SFC back in 2018. Noting the latest market developments and expansion of the virtual asset (“VA”) landscape into mainstream finance, the SFC has since offered a broader space for VA-related activities to exist within Hong Kong. This includes allowing SFC-licensed VA trading platforms to serve retail investors and authorising VA futures exchange-traded funds for public offerings in Hong Kong.

After a three-month transition period for intermediaries serving the existing clients of their VA dealing services, such policies have been officially implemented on 20 January 2024. All intermediaries are now expected to comply with the following requirements before introducing or extending their services.

Part 1: Distribution of investment products with exposure to VA

The SFC and HKMA note that the current VA industry still contains the risks as identified in 2018. Regulation is limited to AML/CFT purposes, if any, and is not subject to the same robust regulation as that in traditional financial markets. Due to the lack of a unified approach to regulation, investor protection issues ranging from a lack of pricing transparency to potential market manipulation may arise. Thus, it is first and foremost that Part IV of the SFO prohibits the offering to the Hong Kong public of investments which have not been authorised by the SFC.

Subsequently, owing to retail investors’ general lack of awareness to such risks, VA-related products are most likely considered to be “complex products” (with a few exceptions as elaborated below). Intermediaries with the intention of participating in the distribution of VA-related products are thus subject to, on top of SFC’s requirements on the sale of complex products, other additional investor protection measures specifically tailored towards the distribution of VA-related products:

Additional investor protection measures

Selling restrictions – VA-related products which are considered complex products should only be offered to professional investors with a few exceptions.

Such exceptions include VA-related products traded on regulated exchanges or approved for offering to retail investors and VA funds authorised by the SFC for public offering. Certain VA-related derivative products traded on regulated exchanged as specified by the SFC and other exchange-traded VA derivative funds authorised for offering to retail investors by the respective regulator in the designated jurisdiction are also not restricted by the “professional investors only” rule.

When it comes to these complex-traded derivatives, fewer restrictions are put into place due to the trading’s governance by conventional rules. Such allow for exemptions from complying with the suitability requirements and the minimum information and warning statements requirements. However, it should be noted that this only applies to products of the same type as a complex exchange-traded derivative on the non-exhaustive list of examples of non-complex and complex products published on the SFC’s website. Other derivative products would be deemed as complex products and subject to the complex product requirements and additional investor protection measures as mentioned above.

VA-knowledge test – Intermediaries owe a duty to assess whether their clients have sufficient knowledge or network to assume the risks and potential losses in investing in VAs or VA-related products before effecting such transaction on their behalf. Otherwise, adequate training must first be provided to the clients in advance.

For further details relating to the assessment of clients on their VA-knowledge, please also refer to paragraphs 13 and 14 of the Circular.

The VA-knowledge test must be applied to all clients except for institutional professional investors and qualified corporate professional investors.

Suitability requirements

Intermediaries should act in the best interests of their clients and ensure that any recommendations made regarding VA-related products are suitable for these clients. If the VA-related product is a derivative product, compliance must be made in accordance with paragraphs 5.1A and 5.3 of the Code of Conduct.

Information and warning statements requirements

Intermediaries should provide to their clients clear and easily comprehensible information and warning statements in relation to VA-related products and risk disclosure statements specific to VAs.

Part 2: Provision of VA dealing services

As many overseas VA trading platforms are not subject to the regulatory standards comparable to the SFC’s regulatory framework for VA trading platforms, the SFC and HKMA consider it necessary to require intermediaries to partner only with SFC-licensed VA trading platforms when providing VA dealing services. This is necessary to provide adequate investor protection during trading activities.

According to the SFC, provision of VA dealing services may have an impact on an intermediary’s fitness and properness to conduct regulated activities. Trading activities involving virtual assets also form part of the dealing services provided by intermediaries and intermediaries are expected to comply with all the regulatory requirements imposed by the SFC and the HKMA when providing VA dealing services. In particular, the SFC and HKMA heavily emphasise on the compliance of the licensing or registration conditions and terms and conditions for licensed corporations or registered institutions providing virtual asset dealing services and virtual asset advisory services. One licensing or registration condition will require intermediaries to comply with the prescribed terms and conditions (“Terms and Conditions”)

For further details relating to the highlighted Terms and Conditions by the SFC and HKMA, please also refer to paragraph 20 of the Circular.

The SFC and HKMA also note the requirements under Chapter 12 of the Guideline on Anti-Money Laundering and Counter-Financing of Terrorism (For Licensed Corporations and SFC-licensed Virtual Asset Service Providers) when handling these virtual asset deposits and withdrawals.

Part 3: Provision of asset management services in respect of virtual assets

Intermediaries who provide services with a stated investment objective of a portfolio to invest in virtual assets or an intention to invest 10% or more of the gross asset value of a portfolio in virtual assets are considered to have met the de minimis threshold. They are then subject to additional requirements set out in the Terms and Conditions for licensed corporations or registered institutions which manage portfolios that invest in virtual assets as imposed by the SFC.

The SFC and HKMA also further clarify that Type 1 intermediaries authorised by its clients to provide VA dealing services on a discretionary basis as an ancillary service should only invest less than 10% of the gross asset value of the client’s portfolio in virtual assets.

In addition, intermediaries should also comply with existing requirements governing asset management and the expected standards of conduct and guidance on tokenised securities issued by the SFC from time to time.

Part 4: Provision of virtual asset advisory services

Intermediaries providing advisory services in virtual assets are expected to comply with all regulatory requirements imposed by the SFC and HKMA in relation to the intermediary’s advisory business. Subsequently, the intermediaries should only provide these services to their Type 1 or Type 4 regulated activity clients.

Moreover, intermediaries are expected to comply with the conduct requirements for VA advisory services as prescribed in the Terms and Conditions, including observation of suitability obligations.

In addition, intermediaries should also comply with existing requirements governing advising on securities and the expected standards of conduct and guidance on tokenised securities issued by the SFC from time to time.

Analysis and takeaway

As reflected in the Circular, the SFC is eager to adapt their policies to the developing market of VA-related activities. With a need to loosen restrictions on such activities, further safeguards and guidelines are put in place to mitigate risks and protect the best interests of investors. By imposing policies and rules on intermediaries to address new risks and ensuring investor protection, the SFC aims to foster a healthy virtual asset trading platform.

“Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.

This news update is for information purposes only. Its content does not constitute legal advice and should not be treated as such. Stevenson, Wong & Co. will not be liable to you in respect of any special, indirect or consequential loss or damage arising from or in connection with any decision made, action or inaction taken in reliance on the information set out herein.”

Junee, through the subsidiaries, OPS Interior Design Consultant Ltd. (“OPS HK”) provides quality interior design, fit-out and maintenance services to both residential and commercial clients in the Hong Kong interior design market. OPS HK also provides a broad range of repair and maintenance services, including routine home condition upkeep services. OPS HK won the Muse Design Award in 2020, and was the given Most Valuable Companies in Hong Kong Award 2020 by Mediazone.

Our Partners, Mr. Hank Lo and Mr. Gordon Tsang, and Associate Mr. Gary Kwok, acted as the Hong Kong legal counsel for Spartan Capital Securities in the Nasdaq Listing and provided comprehensive Hong Kong legal services.

Please contact Mr. Hank Lo or Mr. Gordon Tsang for any enquiries or further information about this transaction.

The Issuer is a state-owned enterprise 90% owned by the State-owned Assets Supervision and Administration Commission of Weifang City and 10% owned by Shandong Caixin Asset Operation Co., Ltd.  The Issuer is a major water supply, investment and construction entity in Weifang City. The main businesses of the Issuer and its subsidiaries include engineering construction and housing sales, water sales, financing and factoring, trade and others.

Wanhai Securities (HK) Limited, Haitong International Securities Company Limited, Dongxing Securities (Hong Kong) Limited, Tung Yat Securities Limited, Interarch Asset Management Limited and Raising International Securities Limited acted as the placing agents in this issuance.

Our placing agent’s counsel team was led by Partner Mr. Rodney Teoh, supported by team members including Associates Ms. Angela Lau and Ms. Audrey Ng, Trainee Solicitor Mr. Austin Kot, and Paralegal Mr. Jay Lee.

The Issuer is a state-owned enterprise 90% owned by the State-owned Assets Supervision and Administration Commission of Weifang City and 10% owned by Shandong Caixin Asset Operation Co., Ltd.  The Issuer is a major water supply, investment and construction entity in Weifang City. The main businesses of the Issuer and its subsidiaries include engineering construction and housing sales, water sales, financing and factoring, trade and others.

Interarch Asset Management Limited and Haitong International Securities Company Limited acted as the joint global coordinators, joint bookrunners and joint lead managers. Shanghai Pudong Development Bank Co., Ltd., Hong Kong Branch, Shanggu Asset Management (Asia) Limited, Integrity Construction & Development Securities Group Limited, Zhongtai International Securities Limited and Orient Securities Limited acted as the joint bookrunners and joint lead managers.

Our manager’s counsel team was led by Partner Mr. Rodney Teoh, supported by team members including Associates Ms. Angela Lau and Ms. Audrey Ng, Trainee Solicitor Mr. Austin Kot, and Paralegal Mr. Jay Lee.

Please contact our Partner Mr. Rodney Teoh for any enquiries or further information.