By matching investors to businesses, crowdfunding can use the power of many to fuel a business looking to grow. Though crowdfunding raised $34 billion globally in 2015, investors are faced with risks, such as financial intermediaries that have shut down and losing their money in start-ups that have defaulted. While Hong Kong and other Asian jurisdictions take their time to develop attractive crowdfunding regulations, for example based on equity, investors are looking elsewhere for opportunities, especially in the US and UK where crowdfunding regulations have been implemented.
One of the areas with high crowdfunding potential that has attracted more government support in Hong Kong has been the fintech sector, which is information and communication technology in financial services including digital payments, financial product investment and distribution platforms, data security technology and data analytics. A so-called fintech sandbox has been launched to allow banks to experiment with new technologies under a flexible set of regulations. Fintech in Hong Kong is limited to authorised institutions like banks. In the UK, there are large numbers of investors investing in a small amount.
Four approaches to crowdfunding
Based on the funding nature, crowdfunding can be divided into four main types:
- donation based where the funds collected are for charitable causes;
- reward/presales based where goods and services are delivered in exchange for the fund contribution;
- equity based where investors receive shares for their financial contribution;
- peer to peer lending where debts are issued to borrowers for interest in return.
Regulations triggered by crowdfunding
Equity crowdfunding and peer to peer lending have attracted the attention of Hong Kong regulators since they involve financial returns. In Hong Kong, regulations that affect crowdfunding include the Securities and Futures Ordinance (SFO), the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O), the Money Lenders Ordinance (MLO) and the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (AMLO).
The SFO prohibits the issue of unauthorised invitations to the public. Even if exemptions are met, crowdfunding platforms may commit an offence by carrying on a business without being licensed by the SFC. Some of the activities that need licensing include dealing and advising in securities, asset management and providing automated trading services.
Crowdfunding platforms would trigger the content requirements for C(WUMO)O in offering shares to the public for purchase or subscription. Although there are exemptions, they are limited to offers of shares to not more than 50 people, offers made only to professional investors and offers where the minimum consideration payable is not more than HK$500,000 ($64,500).
Peer to peer lending platforms may require a money lender licence under the MLO if the platform provides borrowers directly with loans. Detailed record keeping and reporting of suspicious transactions would be required by the AMLO.
While there is a burgeoning crowdfunding sector, the platforms are limited in scope. An example of an equity crowdfunding platform is Investable. This invite-only platform is limited to professional investors with an investment portfolio of at least $1 million. Another one is BigColors, which focuses on Asia Pacific start-ups in incubation and seed stage but is not open to public investment.
Regulations in the US and UK
In the US and UK, important features of crowdfunding regulation include:
- the need for platform authorisation with the regulatory authority
- the requirement for fundraising companies to raise no more than certain amounts through crowdfunding platforms within a 12-month period;
- business promotion limited to high net-worth or sophisticated investors; and
- investment ceilings based on income levels or investible assets
For peer to peer lending, debt issuers have to comply with securities regulation and consumer protection, data privacy and anti-money laundering laws.
To encourage crowdfunding in the future, Hong Kong would need to introduce regulation targeting equity crowdfunding or issuing an interpretation and exemptions from existing regulation. Investors will continued to be deterred from Hong Kong with the barriers that they continue to face.