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.

 

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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