Hong Kong’s Securities and Futures Commission (SFC) has stopped an initial coin offering (ICO) and ordered the issuer to refund investors, the first time the city’s regulator blocked this new way of fundraising.
The offering was launched by Hong Kong-based Black Cell Technology Limited, which intended to use the proceeds from the sale of KropCoins to support a mobile app called Krops, a marketplace that connects buyers to crop and livestock producers.
Since 2017, startups from various parts of the world have raised billions of dollars through ICO, a mechanism that is seen as an easier way to raise funds than the more regulated, traditional venture capital route.
Instead of selling shares in the traditional fundraising fashion, ICO issuers offer cryptocurrency-based tokens to investors, normally in exchange for another cryptocurrency, such as Bitcoin or Ethereum.
In a bulletin published on its website on Monday, the SFC said Black Cell agreed to unwind its ICO transactions for Hong Kong investors by returning them the relevant tokens, after the SFC raised concerns over Black Cell’s “potential unauthorized promotional activities and unlicensed regulated activities”.
The securities watchdog said Black Cell had promoted an ICO to sell digital tokens to investors through its website, which was accessible to the Hong Kong public, with the pitch that the ICO proceeds would be used to fund the development of a mobile application and holders of the tokens would be eligible to redeem equity shares of the company.
The SFC said such an arrangement may constitute a Collective Investment Scheme (CIS), and as such, “prior authorization or licensing requirements may be triggered”.
“Investors are again reminded to exercise caution before participating in an ICO,” the regulator said.
After the SFC order, Black Cell posted an update on its ICO website to clarify that the token sale “is not open to American citizens, Hong Kong citizens and any citizen of a country that does not allow participation”.
It urged Hong Kong investors to contact the company for refunds, which will be available until the end of this month.
In a white paper available online, Black Cell said it offers “tokenized shares of the company through an offering of 16,000,000 KropCoins”, adding that the authorized tokens “can redeem shares of Black Cell Technology Limited”.
The new token issuance represents “20 percent of the company equity”, and an investor holding a minimum amount of 500,000 KropCoin tokens would be “eligible to redeem share certificates proportional to a ratio of 8 tokens to 1 share”.
The company planned to raise more than US$16 million through the ICO, which would boost its valuation to US$100 million. It has the potential to become “the largest food marketplace in the world without even owning a single farm”, the company said in its white paper.
While regulators worldwide have been raising concerns about ICOs, this is the first time that a Hong Kong-based ICO was shot down by the SFC. Prior to the action, the watchdog had been merely reminding investors that ICO tokens are securities that legally fall under its jurisdiction.
Since the People’s Bank of China banned ICOs in the mainland last September, ICO projects and issuers have been migrating offshore, with Hong Kong and Singapore being their favorite destinations in Asia.
In the United States, the Securities and Exchange Commission (SEC) also intends to tighten restrictions on ICOs. SEC Chairman Jay Clayton emphasized last month that every ICO should be considered a security and needed to be registered with SEC before being sold to US investors.
But despite all the warnings and restrictions from regulators, ICOs continued to boom, raising about US$1.66 billion in the first two months of this year alone and on track to surpass last year’s US$6.5 billion tally, according to research and data firm Token Report.
The full article appeared in the Hong Kong Economic Journal on March 20
Translation by Ben Ng with additional reporting
[Chinese version 中文版]
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