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Rough draft of ICO legal analysis

August 2, 2017

Here is an outline of some legal analysis with an ICO that I’m involved in.  You can think of this as an rough artists sketch, since I literally was typing this off the top of my head in ten minutes, but this gives an idea of the logic.


Is Platform A a collective investment scheme under SFO?

Platform A is a platform for exchanging real estate tokens. Platform
A issues Token A. When a seller uses platform A, then a fraction of
tokens they issue on Platform A are delivered to holders of Token A.

Note that there is a distinction between token A which is the token
issued by the platform A to backers, and the user tokens.


General interpretational principles:

Interpretations Ordinance:

Under the Interpretations Ordinance, ordinances in Hong Kong must be
interpreted in with respect to the goals of the Ordinance. (i.e. if
the goal of the SFO is to protect the HK investing public, then the
interpretation must be interpreted in ways that protect the HK
investing public.)

One country, two systems policy:

The HK government is a local government and cannot regulate in issues
that involve foreign policy or defense, and has no authority to
regulate on matters involving other areas of the People’s Republic of

Result is that all HK ordinances are strictly territorial, and the
HKSAR government has no authority to regulate transactions that occur
outside of Hong Kong.

Basic Law

Article 109
The Government of the Hong Kong Special Administrative Region shall
provide an appropriate economic and legal environment for the
maintenance of the status of Hong Kong as an international financial

Article 110

The monetary and financial systems of the Hong Kong Special
Administrative Region shall be prescribed by law.

The Government of the Hong Kong Special Administrative Region shall,
on its own, formulate monetary and financial policies, safeguard the
free operation of financial business and financial markets, and
regulate and supervise them in accordance with law.

Article 115
The Hong Kong Special Administrative Region shall pursue the policy of
free trade and safeguard the free movement of goods, intangible assets
and capital.

SFC ordinances must be interpreted in ways that promote HK as an
international financial centre and in ways that promote the free
movement of capital. In addition, Article 110 requires that any
regulations of the SFC and HKMA must be grounded in legislation that
has been passed by the Legislative Council.

Is token A a collective investment scheme….


Public interest argument:

The purpose of collective investment scheme investments is to insure
that tokens that are backed by property in which a manager manages
property are properly run and are not fraudulent. In situations where
the tokens are not backed by property, there is no public interest
reasons to use the consumer protection measures that are specifically
designed for CIS.

Legal argument:

Definition of collective scheme:

a) the scheme must involve an arrangement in respect of property*;

A holder of Token A has a reasonable expectation that they will
receive user Tokens if they hold Token A. However, this involved an
arrangement of a possible future interest in property, and not
interest in property itself. Thus Token A is not an arrangement with
respect to property.

b) participants do not have day-to-day control over the management of
the property even if they have the right to be consulted or to give
directions about the management of the property;

Once a holder of Token A receives User Tokens, they have direct
control of the management of User Tokens,

c) the property is managed as a whole by or on behalf of the person
operating the arrangements; and/or the contributions of the
participants and the profits or income from which payments are made to
them are pooled; and

The management of Platform A plays no role in the management of the
user tokens or any property generated by the user tokens. There is no
pooling of funds for Token A.

d) the purpose of the arrangement is for participants to participate
in or receive profits, income or other returns from the acquisition or
management of the property.

Since the tokens represent a claim on future property this does not

Conclusion: Token A is *NOT* a collective investment scheme and are
also not securities under HK law.


Are user tokens collective investment schemes?

This depends on a case by case analysis of the specific user token.

What are the consequences of user tokens being collective investment

Under HK law, there are two consequences of being a collective
investment scheme. Collective investment schemes require SFC
authorization for advertisement or offerings to the Hong Kong public.
Also without an exemption, dealing in securities requires to type 1

Neither situation applies to Platform A.

Platform A is not advertising or making offers to the Hong Kong

Platform A is located outside of Hong Kong, and is not undertaking any
marketing operations in Hong Kong. A member of the general public
cannot receive notices from Platform A, unless they specifically go to
the website of Platform A. As Platform A is located outside of Hong
Kong, any advertising or offers are outside the jurisdiction of the
HKSAR government.

Aside from territorial limitations, Platform A is not subject to type
1 security dealing licensing because it is a P2P platform and service
provider by which users may offer their own securities for sale or
trading. The securities themselves are controlled by the seller, and
the platform itself is not directly involved in the sales transaction.
The seller may be a principal or a holder of a Type 1 license in which
case the platform is not dealing in securities under exemptions (iv)
and (v)

Platform A also does not require a Type 7 license, as the trading
system are not those that involve “established methods, including any
method commonly used by a stock market or futures market” (note that
standard rules of legal interpretation mean that including is


Political arguments:

This is section wouldn’t be in any filing.  It’s stuff that anyone who lives in HK already knows, but I’m including this for the benefit of someone outside of HK.  A lot of the regulations in Hong Kong are designed to protect a monopoly or an oligopoly.  Big groups with a lot of power are 1) the stock exchange and 2) land developers.  Their interests are to make money and not to have their de-facto monopolies/oligopolies challenged.

You also have mid-level civil servants and their main goal is not to be the target of a demonstration.  So when they talk about consumer protection, their are thinking about massive demonstrations of angry people in Victoria Park (which happened after Lehman collapsed).  The senior officials are also concerned with that but they are also worried about jobs and keeping everyone happy.

So the political argument is.  Look, if you let us do what we want to do, everyone is going to make a ton of money.  Land developers are going to make a ton of money.  In the short term the stock exchange is not going to lose any money since anyone that is going to be using this platform isn’t going to be listing a REIT.  In the long term, this will make the stock exchange money, as people will use ICO’s to create new products that will get listed on HKEX.

For the civil servants, you point out that there aren’t any situations where you are going to have massive demonstrations of people screaming for your head, and by promoting blockchains and ICO’s, you generate jobs which will keep young people busy in some office somewhere making money, rather than on the streets asking for your head.


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