Distributing NFTs – Hong Kong regulatory issues

View PDF

Authored by: Su Cheen Chuah and Mary Nieto

Hong Kong’s Securities and Futures Commission (SFC) recently issued a warning to investors about the risks associated with non-fungible tokens (NFTs).

In addition to reminding investors about the various risks involved in investing in NFTs and other virtual assets, the SFC also reminded market participants that NFTs may, depending on their structure, constitute “securities” or interests in a “collective investment scheme” (CIS), both as defined in the Securities and Futures Ordinance (SFO).

When marketing or distributing an NFT in Hong Kong, the two main issues that need to be considered from a securities regulatory perspective are:

1. Licensing: Marketing or distributing an NFT that constitutes “securities” in Hong Kong may be considered a “regulated activity” under the SFO. It is a criminal offence under the SFO to carry on a business in any regulated activity in Hong Kong without the proper SFC licence unless an exemption is available.
   
2. Offering rules: Subject to the exemptions set out in the SFO and other legislation, it is an offence to offer to the Hong Kong public an interest in a CIS which is not authorised by the SFC. The SFC says “where an arrangement in relation to an NFT involves any offer to the Hong Kong public to participate in a CIS, authorisation requirements under the SFO may be triggered”.

Further information

The SFC has established a dedicated area of its website to provide information for businesses which intend to conduct regulated activities involving virtual assets: SFC Fintech Contact Point

For a summary of the joint circular issued by the SFC and the Hong Kong Monetary Authority on 28 January 2022 on the distribution of virtual asset-related products, the provision of virtual asset dealing services and the provision of virtual asset advisory services, please see: Changes to the requirements for virtual asset-related activities

For a brief overview of other legal issues, such as intellectual property rights, in relation to NFTs, please see: Trading NFTs? A few legal reminders