On 19 December 2022, the Financial Services and Treasury Bureau published a consultation paper on the proposal to enhance the regulation of crowdfunding activities and launched a 3-month public consultation exercise.
The main proposals are:
the setting up of a Crowdfunding Affair Office (“CAO”) to centrally process regulatory and administrative matters relating to crowdfunding activities.
all fundraising activities, whether online or offline, that raise funds publicly from individuals or entities in Hong Kong, or individuals or entities located in Hong Kong, are required to apply in advance to the newly proposed CAO.
when processing the application, the CAO will consider factors including the honesty, reputation, and reliability of the applicant whether the purpose of the crowdfunding activity is proportional to its scale, as well as risks brought about by the activity to the public interest, public safety, and national security.
Equity and debt funding are excluded from such proposal because they are already well-regulated by the Securities and Futures Ordinance. Under that Ordinance, any advertisement, invitation, or document containing an invitation to the public for acquiring, disposing of… securities or acquiring an interest in a collective investment scheme is prohibited unless authorized by the Securities and Futures Commission. A prospectus needs to be issued under Companies (Winding Up and Miscellaneous Provisions) Ordinance (quite an onerous exercise). There are other exclusions proposed including donations for religious purposes, crowdsourcing etc.
The Government’s proposal is to be welcomed as it adds transparency and accountability to crowdfunding activities. However, there is the issue of timing. Most donation-based crowdfunding is in response to sudden events and timing is critical, so the Government shall need to fast-track applications in such events. Furthermore, applications for crowdfunding by recognized charities should also be fast-tracked.
With regard to equity fundraising, the Securities and Futures Ordinance contains very strict regulations. The main exemption to the authorization requirement for the offer of investment applies if all investors are “Professional Investors”, the offer is made to no more than 50 persons within a period of 12 months or the total consideration payable for the shares or debentures does not exceed HK$5m within a period of 12 months.
As equity crowdfunding, which is normally initiated by start-ups, is very different from with equity fundraisings like IPOs or private equity investment, will it be possible that equity crowdfunding for start-ups and small projects be approved by CAO instead? Limits may be set on the contribution of each investor and limits on total fund size. Each investor should declare that he/she is aware of the risks and that he/she may lose the whole contribution. Certain terms on the protection of investment can be incorporated, for example, pre-audit financial reports and exit mechanism.