SFC Issues Reminder on Cryptocurrency-Related Products and Derivatives
On 11 December 2017, the Securities and Futures Commission of Hong Kong (SFC) issued a circular, which reminds financial service providers of the legal and regulatory requirements associated with Bitcoin futures contracts ("Bitcoin Futures") and other cryptocurrency-related investment products. Furthermore, it cautions investors of the underlying investment risks, and investors should carefully weigh them against their own risk appetite.
Licensing and other regulatory requirements in Hong Kong
The circular notes that futures and commodities exchanges in the United States have launched or will soon launch Bitcoin Futures where Hong Kong investors may be able to trade through an intermediary, a member of these exchanges. Bitcoin Futures have the conventional features of a "futures contract," which is defined in the Securities and Futures Ordinance (SFO) to include "a contract or an option on a contract made under the rules or conventions of a futures market." As such, Bitcoin Futures traded on overseas exchanges are subject to the rules of the respective exchanges and are regarded as "futures contracts" for the purposes of the SFO.
The circular sets out the following licensing requirements, which may apply to (i) any party who carries on a business in a "regulated activity" in Hong Kong; and (ii) any party who provides business services relating to Bitcoin Futures which constitute a "regulated activity," irrespective of whether the party is located in Hong Kong, as long as it targets the Hong Kong public:
- carrying on a business in dealing in Bitcoin Futures, including those who relay or route Bitcoin Futures orders (Type 2 regulated activity—dealing in futures contracts);
- marketing a fund investing in Bitcoin Futures (Type 1 regulated activity—dealing in securities);
- managing a fund investing in Bitcoin Futures (Type 9 regulated activity—asset management); and
- providing advisory services in relation to Bitcoin Futures (Type 5 regulated activity—advising on futures contracts).
Intermediaries are also expected to strictly comply with the suitability requirement and other conduct requirements under the Code of Conduct for Persons Licensed by or Registered with the SFC when providing the above services.
The SFC also reminds the industry that other forms of cryptocurrency-related investment products, including cryptocurrency options, swaps and contracts for differences may, depending on their terms and features, be regarded as "securities" as defined under the SFO. Therefore, parties dealing in, advising on or managing such products in Hong Kong, or targeting such services to investors in Hong Kong, may be subject to the licensing, conduct and authorization requirements under the SFO.
Warning to investors
The circular highlights risks which investors may be exposed to in trading Bitcoin Futures and cryptocurrencies, including insufficient liquidity, high price volatility and potential market manipulation. The SFC warns investors that such risks may be magnified in trading Bitcoin Futures due to the speculative nature of the underlying assets and the leverage embedded in the products. Investors should be aware that, in some cases, the overseas exchanges may operate entirely outside of the SFC's jurisdiction, and some cryptocurrency exchanges have collapsed or been hacked in the past.
The circular is available at:
SEC and NYSE/Nasdaq Developments
SEC Proposes Modernization and Simplification of Disclosure Rules
On 11 October 2017, the U.S. Securities and Exchange Commission (SEC) proposed certain amendments to Regulation S-K to simplify and streamline disclosures made by public companies and reduce compliance costs, while continuing to provide all material information to investors. The proposed amendments also seek to reduce duplicative and immaterial disclosure, leverage technology and improve the readability and navigability of disclosure documents. The amendments are part of the SEC's ongoing disclosure effectiveness review and implement a mandate under the Fixing America's Surface Transportation Act.
Highlighted below are some of the main proposed amendments:
- Management's Discussion and
Analysis (MD&A) requirements:
- Year-Over-Year Comparisons in the MD&A. Elimination of the Earliest of the Three Years Included in the Financial Statements. When financial statements included in a filing cover three years, a year-over-year discussion regarding the earliest year would not be required if (1) that discussion is not material to an understanding of the registrant's current financial condition, changes in financial condition and results of operations, and (2) the registrant has filed its prior year annual report on EDGAR containing MD&A of the earliest year.
- Elimination of the Reference to the Five-Year Selected Financial Data. The SEC is proposing to eliminate the instruction to include trend related disclosure, where relevant, with respect to the five-year selected financial data, given trend disclosure is already required for liquidity, capital resources and results of operations. This proposal is intended to eliminate duplication and not intended to discourage providing trend disclosure.
- Flexibility in the use of presentations. The proposed rules would allow companies to use any presentation that enhances a reader's understanding, thereby providing flexibility to choose the format deemed more appropriate to supplement or substitute the current year-over-year comparison that is ubiquitous in MD&A discussions.
Similar changes are also proposed for the "Operating and Financial Review and Prospects" section in Item 6 of Form 20-F, which would apply to annual reports filed by foreign private issuers.
Treatment Request: The proposed
amendment would permit the omission of confidential information
from material contracts without submitting a confidential treatment
request to the SEC staff. When redacting a material contract
exhibit, a company would still have to make a determination that
information redacted from a contract was not material to investors
and that its public disclosure would be competitively harmful to
the company. The company, however, would not have to present its
analysis to SEC staff when the redacted material contract is filed.
Companies would be required to indicate with brackets where
information has been omitted and include a prominent statement on
the first page of the material contract. Please note that the SEC
staff will, as part of its selective review of a company's
filings, assess whether redactions from material contracts are
limited to information that is not material and that would subject
the registrant to competitive harm if publicly disclosed.
The proposed amendment of this section would also apply to foreign private issuers who file on Form 20-F.
- Omitting Schedules and Exhibits from
Exhibit Filings: This proposal would permit companies to omit
entire schedules and similar attachments to filed exhibits unless
the schedules or attachments contain material information that is
not otherwise disclosed in the exhibit or the disclosure document.
This would be similar to the existing accommodation in Item
601(b)(2) for plans of acquisition, reorganization, arrangement,
liquidation or succession.
This proposed amendment would also apply to foreign private issuers who file on Form 20-F.
- Expanded hyperlinking (Item 10(d)):
While public companies are currently required to hyperlink to
exhibits that are incorporated by reference from other filings, the
proposed amendments include a proposal to expand hyperlinking by
also requiring hyperlinks to information that is incorporated by
reference in a periodic report or registration statement if that
information is available on EDGAR. The intent is to improve
readability and navigability of disclosure documents and discourage
As discussed in our Q3 2017 Memorandum, the SEC recently adopted rules requiring hyperlinks to most exhibits filed pursuant to Form 20-F.
- Tagging cover page data: Under the
proposed rules, all data points on the cover pages of Form 10-K,
Form 10-Q, Form 8-K, Form 20-F and Form 40-F would be required to
be provided in XBRL format (either inline or as an exhibit), and
the number of data points companies are required to tag would be
Comments on the proposed rule were due by 2 January 2018. The SEC's disclosure requirements will not change until the adoption of final rules by the SEC.
The SEC's proposed rule release is available at:
Our related client publication is available at:
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