“Crowdfunding” is one of the current buzz words of an adoring internet public, not least because of Joshua Wong advising that his new political party is to be funded in this way.
So what does this new social trend really mean, does it allow the Hong Kong public to support and or invest in projects and does it actually work in Hong Kong?
“Crowd-funding: An Infant Industry Growth Fast”, published by International Organization of Securities Commissions on 5th February 2014, defines “crowdfunding” as the use of a small amount of money, obtained from a large number of individuals or organizations, to fund a project, a business or personal loan, and other needs, through an online web based platform.
According to a survey carried out by the European Securities and Markets Authority, crowdfunding in Europe has been growing at yearly rates above 50% since 2009. Crowdfunding has, therefore, already emerged in Europe as an alternative funding source and a practical and convenient way to raise funds.
It is now generally accepted that there are four main types of crowdfunding activity:-
- equity crowdfunding: where investors invest in a project or a business which is usually a start-up, through an online platform, and in return are issued shares or debt issued by the company raising the money, or an interest in participating in the profits or income of the collective investment scheme;
- peer-to-peer lending: where online crowdfunding platforms try to “match” lenders (i.e. investors) with borrowers (i.e. issuers) to provide unsecured loans to individuals or projects;
- reward / pre-sale crowdfunding: where the payer receives returns in the form of physical goods or services in return for the money paid, e.g. funders can finance new movies, iPhone cases, video games, etc; and
- donation crowdfunding: where sums are raised through online crowdfunding platforms, but only for “charitable” causes.
Of course, the risks associated with crowdfunding activities, are the same as in other more traditional forms of funding and non exhaustively are :-
risk of default;
- risk of illiquidity of the investment and dilution of stock value;
- risk of platform failure and insolvency,
- risk of fraud;
- risk where the platforms operate outside Hong Kong;
- information asymmetry and lack of transparency;
- cyber security issues; and
- possible illegal activities.
The Recent International Trends
In the United Kingdom, the Financial Conduct Authority introduced a “10 percent rule”, whereby investors who were neither sophisticated, nor high net-worth individuals, had to certify that they were not committing more than a tenth of their net assets to any crowdfunding venture.
In the United States, the Government introduced the Jumpstart Our Business Startups Act which lifted restrictions on companies from selling shares to the general public through crowdfunding platforms.
Despite the growing popularity of crowdfunding elsewhere in the world, the Hong Kong Government has yet to introduce specific legislation to lighten the regulatory environment that currently controls the raising of funds in Hong Kong.
Hong Kong’s Existing Statutory Regulations and Requirements
Where a crowdfunding activity involves an offer to the Hong Kong public to acquire or purchase securities (e.g. shares, debt instruments or an interest in a collective investment scheme), that crowdfunding activity is subject to:-
- the prohibition on the issue of any advertisement, invitation or documents which to the issuer’s knowledge is or contains an invitation to the public to acquire securities or participate in a collective investment scheme, unless exemption applies or the Securities and Futures Commission grants an authorization to do so, under the SFO; and
- prospectus registration requirements under the C(WUMP)O in respect of any document offering shares in or debentures of a company to the public, unless an exemption applies.
The crowdfunding platform operator will also be subject to the licensing obligations, IF the crowdfunding activity and/or the business of the operator constitutes one or more of the following “regulated activities”, as defined under the SFO.
- Type 1: dealing in securities;
- Type 4: advising on securities;
- Type 6: advising on corporate finance;
- Type 7: providing automated trading services; and/or
- Type 9: asset management.
Moreover, there are certain requirements under Part III of the SFO relating to automated trading services and recognized exchange companies which may be applicable to those crowdfunding platforms that operate such business activities.
Young entrepreneurs in other countries are already tapping into the crowdfunding market to launch projects.
Perhaps in recognition of this, the Hong Kong Financial Securities Development Council released a paper in March of this year, where it provided a general overview of proposed regulatory possibilities for equity crowdfunding, but that paper did not include any timelines or concrete suggestions as to what might be implemented.
So, individuals and companies seeking to engage in crowdfunding activities in Hong Kong must be aware that such activities do involve significant risks and that as yet there is no specifically tailored regulatory environment.
This article is for information purposes only. Its contents do not constitute legal advice and no reader should regard this article as a substitute for detailed advice in individual circumstances instances.