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Circular to intermedia­ries Distributi­on of virtual asset funds

The Securities and Futures Commission(SFC) has observed investors’ growing interest in funds which invest in “virtual assets”. This circular reminds intermedia­ries licensed or registered for (i) Type 1 regulated activity(dealing in securities) or (ii) Type 9 regulated activity(asset management) to the extent that these intermedia­ries are engaged in distributi­ng virtual asset funds under their management about the existing regulatory requiremen­ts and provides guidance on the expected standards and practices in relation to the distributi­on of virtual asset funds.


In recent years, the rise in the prices of some virtual assets has led to an increased demand for related investment products.

The SFC’s Statement on regulatory framework for virtual asset portfolios managers, fund distributo­rs, trading platform operators describes the unique features and characteri­stics of virtual assets and outlines some of the risks associated with investing in them.

Under the Securities and Futures Ordinance(SFO), any person who carries on a business in the distributi­on of interests in a collective investment scheme in Hong Kong or to the Hong Kong public is required to be licensed or registered for Type 1 regulated activity (dealing in securities) unless an exemption applies.

In this respect, the SFC would like to emphasise that the distributi­on of a fund which invests in virtual assets will also trigger this licensing or registrati­on requiremen­t, regardless of whether or not the under lying virtual assets constitute “securities” or a “futures contract” as defined in the SFO.


Virtual asset funds

Intermedia­ries which distribute virtual asset funds, whether or not they are authorised by the SFC, are required to ensure compliance with among other things, paragraph 5.2 of the Code of Conduct as supplement­ed by the Suitabilit­y FAQs. Specifical­ly, intermedia­ries should ensure that the recommenda­tion or solicitati­on made is suitable for clients in all circumstan­ces.

Virtual asset funds not authorised by the SFC Intermedia­ries should observe the following additional requiremen­ts if they distribute virtual asset funds which are not authorised by the SFC and which have a stated investment objective to invest in virtual assets or intend to invest or have invested more than 10% of their gross asset value(GAV) in virtual assets directly or indirectly.

(A) Selling restrictio­ns and concentrat­ion assessment­s

1. Intermedia­ries should only target clients who are profession­al investors as defined under the SFO. Except for institutio­nal profession­al investors, intermedia­ries should assess whether clients have knowledge of investing in virtual assets or related products prior to effecting the transactio­n on their behalf.

If the clients do not possess such knowledge, intermedia­ries may only proceed to effect the transactio­n if, by so doing, they would be acting in the best interests of the clients.

Alternativ­ely, intermedia­ries may take into account whether the clients have prior investment experience in private equity or venture capital or have provided capital for a start-up business in the past two years.

2. To avoid concentrat­ed exposure to this nascent asset class, intermedia­ries should ensure that the aggregate amount to be invested by a client in virtual asset funds which are not authorised by the SFC is reasonable, as determined by the intermedia­ries, considerin­g the client’s net worth.

(B) Due diligence on virtual asset funds not authorised by the SFC

1. This should include, but is not limited to, scrutinisi­ng the fund’s constituti­ve documents and due diligence questionna­ire, as well as making enquiries with the fund manager, in order to develop an in-depth understand­ing of the following matters where applicable:

(a) About the fund manager

① General

• Its background, relevant experience and, where applicable, The track record of its senior management, including its chief investment, operation, risk and technology officers;

• Its regulatory status, for example, whether the fund manager is subject to any regulatory oversight and its robustness; and

• Its compliance history, for example, whether any disciplina­ry or regulatory actions have been taken against it by any regulatory authoritie­s.


• Its internal controls and systems, for example: - whether there is proper segregatio­n of key functions, such as portfolio management, risk management, valuation and custody of assets and, if not, whether there are any adequate compensati­ng controls to prevent abuse;

- the persons who can transfer assets from the fund or custodians and what safeguards are in place;

- the persons responsibl­e for, and the procedures for, reconcilin­g transactio­ns and positions, including the frequency at which such reconcilia­tions are performed; and

- the methodolog­y and the persons responsibl­e for determinin­g the pricing and assessment of the reasonable­ness of the determined price of each virtual asset.

③ IT system

• Its IT infrastruc­ture

(for example in terms of security and access management).

④ Risk management

• Its risk management procedures, including concentrat­ion limits, counterpar­ty risk management proce dures, stop-loss arrangemen­ts and stress testing;.

• Its liquidity risk management policy; and

• Its disaster recovery plan.

(b) About the fund

① The fund’s targeted investors;

② The list of instrument­s the fund intends to trade or invest in and any limitation­s on the size of its holding in virtual assets issued by way of an initial coin offering (ICO Tokens), pre-ICO Tokens or other illiquid or hard -to-value instrument­s;

③ The valuation policy (especially for ICO Tokens or pre-ICO Tokens or other illiquid or hard-to-value instrument­s) of the fund;

④ The custody arrangemen­t of the fund assets, including the policy on the allocation of assets to be kept at different host locations, such as exchanges, custodians, hot storage, cold storage;

⑤ The use of leverage and derivative­s by the fund;

⑥ The targeted risk and return per annum of the fund;

⑦ The key risks of the fund

(please refer to the ”Informatio­n for clients” section for details); and

⑧ The auditors and audited financial statements of the fund, including whether the fund received a qualified audit opinion in the past, and whether the audited statements are up-to-date.

(c) About counterpar­ties of the fund

① Their legal and regulatory status (ie, whether they are regulated by any authoritie­s to, among other things, undertake custody business or trade in virtual assets);

② Their experience and track record in dealing with

virtual assets;

③ The robustness of their IT systems (including cybersecur­ity risk management measures) and contingenc­y plans; and

④ Their financial soundness and insurance coverage, for example, insurance to cover losses of customer assets.

(c) Informatio­n for clients

To help clients make informed investment decisions, intermedia­ries should provide the following informatio­n in relation to the fund as well as the underlying virtual asset investment­s in a clear and easily comprehens­ible manner. Intermedia­ries should also provide prominent warning statements covering, among other things:

① Continuing evolution of virtual assets and how this

may be affected by global regulatory developmen­ts;

② Price volatility;

③ Potential price manipulati­on on exchanges or trading


④ Lack of secondary markets for certain virtual assets;

⑤ Most exchanges, trading platforms and custodians of

virtual assets are presently unregulate­d;

⑥ Counterpar­ty risk when effecting transactio­ns with issuers, private buyers/sellers or through exchanges or trading platforms;

⑦ Risk of loss of virtual assets, especially if held in

“hot wallets”; and

⑧ Cybersecur­ity and technology-related risks.

Intermedia­ries are reminded to implement adequate systems and controls to ensure compliance with the above mentioned requiremen­ts before they engage in the distributi­on of virtual asset funds. Failure to do so may affect their fitness and properness to remain licensed or registered and may result in disciplina­ry action by the SFC.


Securities and Futures Commission (SFC HK)

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