Hong Kong’s First Real Estate Fund Security Token Offering: Potential and Challenges for Professional Investors

Hong Kong's First Real Estate Fund Security Token Offering: Potential and Challenges for Professional Investors

Tykhe Capital Group has launched Prince Token, marking Hong Kong’s first real estate fund security token offering (“STO”). This STO, the first to be allowed by the Securities and Futures Commission (“SFC”) of Hong Kong, presents a new way for investors to enter the real estate market..

The funds raised through the Prince Token STO will be used to acquire a five-unit retail property in Prince Edward, a popular tourist district in Kowloon, Hong Kong. This STO invites more investors to participate and promises greater liquidity and transparency.

Tokenisation: Democratizing Real Estate Investment

Prince Token STO has lowered the entry barrier for private real estate funds, requiring only HK$1,000 for minimum subscription instead of the usual US$1 million. Token holders are entitled to the annual distribution of rental income from the property and will also benefit from any future appreciation in the property’s value.

Once subscription documents are completed, Pioneer Asset Management Limited, a licensed asset management company will help investors set up a digital wallet for their tokens. These tokens are protected by virtual asset insurance from a Hong Kong insurer and are stored by a Tykhe subsidiary, a licensed and certified custodian.

Regulatory Dividend: An Opportunity for Investors and Issuers

The regulation of STOs provides a ‘regulatory dividend.’ As STOs fall within the existing securities legal frameworks of many jurisdictions, including Hong Kong, regulators can scrutinize the STO process more systematically. Hong Kong’s new virtual asset trading platform (“VATP”) regime stipulates the regulatory requirements of virtual assets trading on exchange platforms. VATPs are now required to be licensed and comply with additional governance, disclosure, anti-money laundering and counter-financing of terrorism, and onboarding requirements. Consequently, conducting legally compliant STOs in Hong Kong now alleviates the uneasiness of being deemed illegal, as was the case with initial coin offerings.

Capturing Investment Needs of High-Net-Worth and Institutional Investors

STOs align with the investment needs of high-net-worth and professional investors, who possess a higher risk tolerance and are open to innovative technologies and emerging asset classes. Given Hong Kong’s commitment to developing Web3 and its VATP licensing regime, the region has attracted numerous global fintech and blockchain firms. STOs also offer issuers an alternative way to raise capital, through fractional ownership of assets like collectibles, intellectual property, and real estate.

Additionally, unlike traditional funds where shareholdings are recorded by a book entry maintained by fund administrators, these tokens’ settlement finality will be on the public Ethereum blockchain. This innovation allows for an immediate secondary market via over-the-counter trading, offering even greater liquidity through 24/7 automated trading.

Regulatory Challenges: Uncertainty and Inconsistency of Compliance Requirements

Despite the promising benefits, regulations governing STOs vary between jurisdictions. This inconsistency can make it difficult for stakeholders to navigate varying laws and regulations. Additionally, the compliance requirements for STOs can differ based on the type of asset being tokenised and the type of investors involved. For instance, STOs in Hong Kong should comply with applicable securities laws, and security tokens are considering as “Complex Products”, which can only be offered to “professional investors” as defined in the SFO.

Despite these challenges, the launch of the Prince Token STO represents a significant development for real estate investment in Hong Kong. It highlights the potential for STOs to create a lucrative market for professional investors, while enhancing liquidity and transparency.

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Hong Kong’s First Real Estate Fund Security Token Offering: Potential and Challenges for Professional Investors
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