HK needs crowdfunding-friendly regulatory regime

In recent years, crowdfunding via the internet has taken the world financial market by storm, providing a platform for any startup with a business idea to pitch in front of a global audience of investors.
And in the face of the rising tide of crowdfunding, governments and financial regulatory authorities across the globe have been drawing up new laws to regulate it.
However, despite the fact that Hong Kong is one of the major global financial hubs, so far we still don't have clear guidelines or any specific regulatory regime for crowdfunding, thereby hindering the development of our tech industry.
Crowdfunding is the use of small amounts of capital from a large number of individuals, mainly via the internet, to finance either not-for-profit projects or new business ventures. Generally speaking, there are four types of crowdfunding activities: crowd-donation, reward-based crowdfunding and presales, equity crowdfunding as well as person-to-person lending (P2P lending).
At present, crowdfunding activities of a donation, reward-based or presales nature are usually unregulated in most countries since they don't involve financial returns. For example, crowd-donation is widely adopted by social enterprises, online media outlets or non-profit organizations as a means to raise funds to finance their operations.
Meanwhile, politicians and public office seekers are also raising funds to finance their election campaigns through online crowd-donation.
For instance, during the chief executive election in March this year, former financial secretary John Tsang raised a total of HK$5.14 million to fund his campaign through crowd-donation. In the meantime, some musicians would also raise money to finance their music projects or album production initiatives through online presales.
However, as far as equity crowdfunding and P2P lending are concerned, since they involve financial returns and yields, they are usually subject to legal regulation. Yet, in order to ride the global crowdfunding wave, major financial markets such as the US, Britain, Japan, South Korea, Singapore and Australia have all eased restrictions on crowdfunding in recent years.
At present, Hong Kong doesn't have a single and comprehensive piece of legislation that deals specifically with crowdfunding. Instead, it is regulated separately by different existing laws such as the Securities and Futures Ordinance, the Money Lenders Ordinance as well as the Companies Ordinance.
According to a recent study carried out by the Legco Secretariat and which I commissioned, crowdfunding activities around the world have been growing at a jaw-dropping pace over the past several years. In fact, between 2011 and 2015, the total amount of capital raised through crowdfunding in the global financial market increased by a whopping 90 times to US$140 billion (HK$1.09 trillion).
Nevertheless, according to the same study, Hong Kong is lagging far behind other major financial centers when it comes to crowdfunding volume. In 2015, we raised a mere US$9.3 million (HK$72 million) through crowdfunding compared to US$28.4 billion, US$4.33 billion, US$360 million and US$240 million in the US, Britain, Japan and Australia, respectively.
In 2015, the previous SAR administration told Legco about its plan to expedite its study into how to establish a proper regulatory regime for crowdfunding. The Financial Services Development Council also published a report on the same subject in March 2016.
However, two years on, it appears all the government did so far was talk the talk, but not walk the walk. And as a result, we are falling far behind our major competitors in terms of facilitating crowdfunding.
What the administration should do immediately is to strike a reasonable balance between financial innovation and protection for small individual investors and then draw up new legislation to regulate crowdfunding as soon as possible.
The new law should fulfil the function of facilitating the healthy development of crowdfunding on one hand, and safeguarding the interests of small investors on the other.
As such, I suggest that the new regulatory framework for crowdfunding be more flexible. For example, the administration can consider exempting crowdfunding initiatives that involve less than HK$20 million from certain requirements that currently apply to public companies such as the need to submit a prospectus to the Securities and Futures Commission for scrutiny before launching any investment offering for sale to the public.
In fact, one of the main reasons crowdfunding is not popular among start-ups and investors in Hong Kong is that our existing laws are simply too strict.
Therefore, in order to boost the healthy development of crowdfunding, the government must eliminate grey areas and vagueness in our law regarding this new breed of capital-raising tool in the short run, and establish a proper but relatively relaxed regulatory framework in the long run.
This article appeared in the Hong Kong Economic Journal on Sept. 18
Translation by Alan Lee
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