Mr Lai’s aide said he was held under China’s new security law on Monday. The entrepreneur has been a key supporter of the pro-democracy protest which sparked in Hong Kong last year.
Mark Simon, an executive at Mr Lai’s media firm Next Digital, said: “Jimmy Lai is being arrested for collusion with foreign powers at this time.”
Hong Kong police have also reportedly entered Mr Lai’s media company building, searching the offices.
Earlier this year, Mr Lai was charged with illegal assembly and intimidation.
Hong Kong police confirmed seven people were arrested on Monday under suspicion of breaching the national security law.
Hong Kong police have said the operation is ongoing with further arrests possible.
Before Monday, 15 other people had been arrested under the security law.
The arrests included four people aged 16-21 late last month over social media posts.
Mr Lai founded the newspaper Apple Daily which is frequently critical of mainland Chinese leadership in Hong Kong.
In June, when the security law was passed, Mr Lai said that this “spells the death knell for Hong Kong”.
The entrepreneur said Hong Kong would become as corrupt as mainland China as “without the rule of law, people who do business here will have no protection”.
Mr Lai has also previously said: “I’m prepared for prison.
“If it comes, I will have the opportunity to read books I haven’t read.
“The only thing I can do is to be positive.”
The new security law reduces Hong Kong’s autonomy and makes it easier to punish pro-democracy protesters.