Consultation paper on proposals to enhance the regulation of crowdfunding activities
Introduction
The Financial Services and the Treasury
Bureau (the “FSTB”) issued a
consultation paper on proposals to enhance regulation
of crowdfunding activities (the “Consultation”)
in December 2022.
Existing regulation of
fundraising activities
Crowdfunding refers to activities
conducted by an individual, a group or an organization for openly appealing to a large number of individuals or organizations to each contribute
usually a small amount of money for a specific fundraising purpose(“Crowdfunding Activity” or “Crowdfunding Activities”). These activities are currently subject to certain existing
regulations in Hong Kong insofar as such regulations are relevant.
Regulation of fundraising activities in public places
Certain fundraising activities conducted
in public places that seek to raise funds from the general public require
fundraisers to obtain a permit or licence from the relevant government
authority. For example, under the current regime, charitable fundraising
activity permits are issued by the Director of Social Welfare; permits for non-charitable
fundraising activities conducted in public are issued by the Secretary for Home
and Youth Affairs; lottery licenses are issued by the Office of the Licensing
Authority to charitable or non-profit making organizations which plan to sell
lottery tickets to support charitable activities etc. The regulatory measures mentioned
above do not cover activities such as placing donation boxes in schools or
offices.
Regulation of online
fundraising activities
For the purpose of this Consultation, the FSTB identifies four
major types of crowdfunding activities:
·
equity or debt
crowdfunding
– fund contributors invest in a specific project or business, typically a
start-up, in return for equities or debt issued by a company, or profits or
income of a collective investment scheme;
·
peer-to-peer (P2P)
lending
– fund contributors provide unsecured loans to individuals or projects through
online platforms that match them with borrowers, on which they earn interest;
·
donation-based
crowdfunding
– fund contributors make donations to charitable causes or non-charitable
causes (such as political campaigns or activities) without receiving any
specific returns; and
·
reward/pre-sale
crowdfunding
– fund contributors provide funds to fundraisers to help them develop or
produce physical goods or services and receive the goods or services in return.
In the case of equity and debt
crowdfunding, unless otherwise exempted, a person (including a crowdfunding
platform or a fundraiser) must obtain authorization from the Securities and
Futures Commission (the “SFC”) for
the issue of an online or offline advertisement or document which contains an invitation to the public to acquire or
sell securities, or acquire an interest in or participate in a collective
investment scheme.
For P2P lending, if the making of or offer
of loans to borrowers via an online lending platform amounts to the operation
of a “money-lending business”, the person carrying on such business is subject
to the regulation of the Money Lenders Ordinance (Cap.163) and must obtain a
money lender’s licence.
Yet, donation-based crowdfunding conducted
entirely online is not subject to any existing regulations There are also
currently no specific regulatory measures over reward/pre-sale crowdfunding activities.
Proposals to regulate Crowdfunding Activities
Crowdfunding Affairs
Office
A Crowdfunding
Affairs Office (“CAO”) will be set
up to centrally process and coordinate regulatory and administrative matters related to crowdfunding
activities, and monitor the conduct of such activity. The major
responsibilities of the CAO will include:
·
receiving all applications submitted for conducting crowdfunding activities;
·
referring applications to relevant regulatory authorities and government departments based on the types of crowdfunding activities;
·
processing crowdfunding applications not covered by existing legislation;
·
coordinating the
approval process of a crowdfunding application (including seeking
views of relevant government departments and law enforcement
agencies);
·
acting as the
central authority to register approved crowdfunding activities and establishing a database for public inspection;
·
issuing guidelines on the conduct of crowdfunding
activities; and
·
collecting the
completion records of crowdfunding activities and publishing these records for public inspection
Application for
permission
The FSTB
proposes that a fundraiser must apply to, and obtain permission from the CAO before
it commences or
publicises Crowdfunding Activities. Otherwise, relevant law enforcement
agencies would be authorised to issue a prohibition order to cease the activity
and, in appropriate circumstances, fine or prosecute the fundraiser.
Fundraisers
who are “widely recognised” by the community or have both extensive
crowdfunding experience and a good track record will be able to apply under
simplified procedures in certain specified circumstances, for example, where the
fundraiser has obtained permits issued by relevant government departments to
conduct fundraising activities, or where the fundraiser applies to conduct a
Crowdfunding Activity for the second time which is similar to the one previously approved by the CAO which
was completed without contravening any laws or regulations, etc.
In
determining whether to approve a crowdfunding application, the CAO will assess:
·
the size of the fund for the Crowdfunding Activity and the number of
fund contributors involved (the larger the fund size and the greater the
number of fund contributors, the stricter the
requirements);
·
whether the purpose of
the Crowdfunding Activity is proportionate to the fundraising scale;
·
whether the nature of the Crowdfunding Activity will jeopardise
public interests and public safety and be contrary to the interests of national
security; and
·
the honesty, reputation and reliability
of the applicant.
Nevertheless, the CAO’s approval will depend on whether the
Crowdfunding Activity is conducted according to appropriate and sound
procedures, the reliability of the individuals involved and the risks of the
activity giving rise to illegal conduct or endangering public interests, public
safety and
national security.
Excluded fundraising
activities
The new
regulatory regime will not apply to commercial fundraising activities in the
market which are already well regulated by financial regulators (including the
SFC) under existing legislation. For example:
·
any fundraising
through the issuance of equity or debt securities, P2P lending business involving collective investment schemes, or any fundraising
activities which constitute regulated activities, which are regulated by the
SFC under the SFO,;
·
banking activities (e.g. deposit-taking
and the making of loans and advances (including syndicated loan arrangements))
undertaken by banks, which are regulated by the Hong Kong Monetary Authority
under the Banking Ordinance (Cap. 155); and
·
private fundraising
activities that raise funds from professional or institutional investors only.
Furthermore, the
FSTB will also exclude certain activities of a different nature from
Crowdfunding Activity from the approval requirement, for example, calls made by
religious bodies to their followers for donations on religious grounds, recognised
associations soliciting funds from members to promote the welfare and needs of
respective trade members, etc. Even if an activity falls under the excluded
categories, the CAO will have the overriding right to direct the fundraiser to
apply for approval if, having regard to the purpose of the Crowdfunding
Activity and/or the background of the fundraiser, it deems it to be necessary.
Key takeaways
The new
framework, if adopted, no doubt places more stringent compliance requirements
on fundraisers, platforms, media and financial institutions involved in the
crowdfunding activities. Any individual or organization (whether or not based
in Hong Kong) intending to raise funds through Crowdfunding Activities must obtain
an approval from the CAO unless otherwise exempted or excluded. More
importantly, it should be noted that Crowdfunding Activities which jeopardise
Hong Kong’s public safety or China’s national security will be treated as
unlawful even if they are conducted outside Hong Kong.
For enquiries, please feel free to contact us at: |
E: regcom@onc.hk T: (852) 2810 1212 19th Floor, Three Exchange Square, 8
Connaught Place, Central, Hong Kong |
Important: The law and procedure on this subject are very
specialised and complicated. This article is just a very general outline for
reference and cannot be relied upon as legal advice in any individual case.
If any advice or assistance is needed, please contact our solicitors. |
Published by ONC Lawyers © 2023 |