The new security law punishes anything China considers subversion, secession, terrorism and collusion with foreign forces with up to life in prison.
Critics say it crushes freedoms, while supporters say it will bring stability after prolonged pro-democracy protests last year.
Lai had been a frequent visitor to Washington, where he has met officials, including Secretary of State Mike Pompeo, to rally support for Hong Kong democracy, prompting Beijing to label him a "traitor".
Hong Kong police said they had arrested seven men, aged 39-72, on suspicion of breaching the new security law, without naming them, adding that further arrests were possible.
Apple Daily, which posted on its Facebook page a livestream of police officers roaming through its newsroom and rifling through files, reported Jimmy Lai was taken away from his home early on Monday.
The live feed showed staff being asked to show identity documents. Some executive offices were sealed off with red cordons.
The police later wheeled in stacks of empty plastic containers.
Lai himself was brought back to the office later, initially in handcuffs.
"We can't worry that much, we can only go with the flow," Lai said, before being escorted into a police vehicle.