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posted 2 years ago
By Rossana Chu, Jacky Chan:
On 19 December 2022, the Hong Kong SAR government published proposals to enhance regulation of crowdfunding activities[1] and launched a three-month public consultation exercise. In this article, we will discuss what crowdfunding is, the existing regulations on fundraising activities, risks of the limitations in the current regime and the proposed measures in respect of crowdfunding.
What is crowdfunding?
Crowdfunding generally refers to activities conducted by an individual, a group or an organisation for openly appealing to a large number of individuals or organisations to each contribute a small amount of money for a specific fundraising purpose, so that the fundraiser may have sufficient funding to carry out a project, a business or meet a purpose. Crowdfunding has increased considerably due to the use of communications technology and online platforms.
The following are major common types of crowdfunding activities conducted in recent years:
Existing regulations of fundraising activities
Currently, Hong Kong has regulatory and administrative measures over certain activities that invite contribution of funds from the general public, such as charitable fundraising, non-charitable fundraising activities conducted in public places, and sale of lottery tickets. Also, equity or debt crowdfunding invitations are subject to authorisation from the Securities and Futures Commission of Hong Kong (SFC) unless it fulfils the exemption conditions. Where any peer-to-peer lending amounts to a money-lending business, the statutory licensing regime applies. If the lending platform issues notes or debentures, such instruments may be regarded as “securities” or interests in a collective investment scheme and therefore the platform may be regulated by the SFC.
Risks of the limitations in the current regime
With the increasing use of technology as well as the diverse nature of crowdfunding nowadays, many aspects of crowdfunding activities are not covered by the existing regulatory regime. For example, donation-based and non-charitable crowdfunding conducted online are not subject to the existing regulatory controls which cover mostly fundraising in public places. Besides, Hong Kong does not have specific regulatory measures over rewards/pre-sale crowdfunding activities, and currently the rights of fund contributors can only depend on whether a valid purchase-and-sale contract exists.
The absence of adequate supervision over such crowdfunding activities may bring about risks to fund contributors, such as:
Proposed measures to regulate crowdfunding activities
The government’s key proposed measures include:
Key takeaway
The proposed regulations affect wide groups of participants. While the safeguards can provide additional protection to fund contributors, they also imply enhanced compliance by fundraisers, platforms, media and financial institutions involved in the crowdfunding activities.
If the proposals are adopted, any individual or organisation (whether or not based in Hong Kong) intending to raise funds publicly from Hong Kong must seek the green light from the CAO beforehand, unless otherwise exempted or excluded. Such procedure is mandatory even if the crowdfunding initiative targets many other jurisdictions in addition to Hong Kong.
More importantly, crowdfunding activities which jeopardise Hong Kong’s public safety or China’s national security will be taken as unlawful even if they are conducted outside Hong Kong.
Note: This material has been prepared for general information purposes only and is not intended to be relied upon as professional advice for any cases. Should you need further information or legal advice, please contact us.
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[1] https://www.fstb.gov.hk/fsb/en/publication/consult/doc/Crowdfunding_consultation_paper_Eng_final.pdf
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