Whilst Hong Kong has always had regulations controlling fundraising activities, it has never enacted specific legislation to regulate crowdfunding. As a fairly effective method of alternative finance, crowdfunding characteristics are defined by their purposes such as “reward-based”, “debt-based”, “equity”, “debt”, “donation-based” and “litigation-based”. Newer forms such as digital security and P2P lending have also found highly effective reach to potential investors, with the use of internet platforms.

What does current law regulate?

As the law stands, fundraising from the public is subject to statutory control and covers charitable/non-charitable fundraising, sales of goods for fundraising and lotteries. Nonetheless, matters become problematic where other types of fundraising are involved which do not sit comfortably or clearly within the current legislative framework. These grey areas create uncertainty which either leave investor protection loopholes, or disincentivise genuine ventures or causes from trying to raise money.

Current law regulates equity or debt crowdfunding through securities legislation, by requiring that a fundraiser be authorised by the Hong Kong Securities and Futures Commission to issue invitations to invest, by restricting offers to investors other than professional investors, by prospectus requirements and control of “collective investment schemes”. Lending is controlled by banking legislation which also operates a licensing regime for “authorised institutions” to carry on the lending business, while P2P lending is controlled by money lending legislation. There is, however, no current regulatory control over reward-based crowdfunding or online fundraising platforms.

Risks

Online crowdfunding raises efficiencies but increases risk. Project information is delivered online without any assurance of truthfulness or accuracy. Aggrieved investors who have parted with money through a platform risk the platform’s collapse, with no access to the ultimate fundraiser and no visibility of how the funds are being applied.

Crowdfunding Affairs Office (CAO)

Under the proposed new legislation, the Crowdfunding Affairs Office will centrally process and coordinate regulatory and administrative matters related to crowdfunding activities, including the approval of all crowdfunding activities not currently covered by existing legislation. Conducting a crowdfunding activity (whether or not taking place in Hong Kong) for a declared purpose that raises funds from individuals or entities of Hong Kong, or those located in Hong Kong, requires licensing by the CAO. Based on the purpose and nature of the fundraising activity, information to be disclosed will include the set-up and arrangement of the activity, target beneficiaries, the use of the funds raised, and the method and details of the crowdfunding platform to be used. As an ongoing obligation, fundraisers will need to keep proper records of fund movements and disclose the use of funds raised, and provide relevant records and other information upon request by the CAO and relevant law enforcement agencies. A fundraiser who conducts crowdfunding activities prior to receiving consent may receive a prohibition order, fine or be subject to prosecution.

There is room for fundraisers who are well recognised with good track records to enjoy a simplified application procedure, and certain types of fundraising, such as donations to religious bodies or to recognised associations for member benefits, may be exempted.

The CAO responsibilities are suggested to include processing applications or referring them to the relevant regulatory bodies according to the type of activity, acting as the central registrar of approved crowdfunding activities, issuing conduct guidelines, monitoring crowdfunding conduct, and referring non-compliance cases to law enforcement agencies for prosecution. Guidelines from the CAO would apply to general crowdfunding activities and additional requirements would be provided for specific activities where necessary, so as to ensure adequate transparency in the disclosure of activity details by fundraisers.

Crowdfunding platforms will, subject to appropriate coverage and operational practicality, be subject to a registration system with the CAO if funds are raised from individuals or organisations of or in Hong Kong, irrespective of the domicile of the platform itself.

Law enforcement

For effective action against unlawful crowdfunding, it is envisaged that law enforcement agencies will have powers to issue orders to stop activities, prosecute persons responsible, require local host service provider or network service provider to take restrictive actions against the platform in question and prohibit public access, require financial institutions to stop fund movements, investigate persons and bank accounts involved, as well as confiscate funds. Funds collected must be paid into a local bank so as to bring the funding movements within the ambit of regulations governing financial institutions in Hong Kong, including laws which impose requirements on banks and their staff on matters such as dealing in property known or suspected to be proceeds of crime, reporting suspicious transactions, conducting due diligence on customers and record-keeping. The Financial Services and Treasury Bureau also intends to monitor the development of the use of emerging payment services in crowdfunding, and review whether additional regulatory measures are required.

In addition, it is proposed that the police should be empowered to request financial institutions receiving and transferring funds to provide fund records of the crowdfunding activities, and client information, powers of entry, search and seizure, as well as detention of property (including digital currency and non-fungible tokens). It is also proposed that the crime of organising unlawful crowdfunding activities be included as an indictable offence, thereby allowing law enforcement agencies to make use of the Organised and Serious Crimes Ordinance (Cap. 455) to prosecute persons who illegally transfer and use unlawful crowdfunding funds.

This article was first published on Hong Kong Lawyer.