What more natural place than Hong Kong to assume the role of Asia’s FinTech hub. Hong Kong has emerged as a global financial centre, having long acted as the capital formation centre for Mainland enterprises. Moreover, it will continue to benefit from its unique position as a “super-connector” between China and the rest of the world. But what about the regulation of Hong Kong’s financial sector?
Despite entrepreneurial activity in Hong Kong reaching new heights, regulation has not kept pace with innovation and technological change.
Hong Kong’s regulatory framework
Hong Kong does not have any specific crowdfunding rules and there are no laws that expressly allow or disallow platforms to operate. However, there do exist securities laws and regulations that may be relevant to crowdfunding.
The SFC’s notice on crowdfunding (May 2014) reminds the public that certain laws and regulations may be applicable to crowdfunding participants and operators. The SFC also highlights a substantial list of risks, including ones around the crowdfunding platforms themselves, such as the loss of investment, fraud, money laundering, and even identity theft.
Crowdfunding activities in Hong Kong may be subject to securities regulations if they involve an offer to the public to buy securities (e.g., shares, debt instruments or interests in collective investment schemes). These require:
- Preparing and registering a prospectus
- Not being allowed to advertise or invite the public to buy securities
- Getting a license under the securities ordinance if you are a crowdfunding platform advising or dealing in securities
- Potentially needing a money lender license for lending-based crowdfunding platforms
While certain exemptions exist, in practice they involve tight restrictions that make it challenging to fully take advantage for a crowdfunding platform:
- Limiting the offering to a maximum of 50 people
- Only offering to “professional investors” (basically institutions or high net worth investors only)
- Total offering size cannot be more than HK$5 million
- Minimum investment size of HK$500,000
Can Hong Kong remain competitive?
Crowdfunding offers SMEs and entrepreneurs a cost-effective and efficient route to financing, but existing regulations pose hurdles that make fundraising time-consuming and costly for SMEs. Furthermore, limiting the participation in securities crowdfunding to only a small number of institutional and high net worth investors is antithetical to the broad and open participation that crowdfunding is meant to represent. Hong Kong is already seen to be lagging behind other jurisdictions in Asia with regards to securities crowdfunding. Legal frameworks for crowdfunding are already in place in Malaysia, Thailand, and South Korea. Japan is creating a crowdfunding council to examine ways to relax regulations and Indonesia and Cambodia are working on adopting regulations. China’s leadership has also demonstrated support for crowdfunding, asserting that it is an important part of China’s “Internet Plus” strategy. The Philippines and Singapore have yet to finalize rules for crowdfunding although Singapore has sought industry and public comments following publication of a Consultation Paper by its Monetary Authority.
Apart from the SFC’s short notice on crowdfunding, Hong Kong has largely remained silent.
If Hong Kong is to truly become the global FinTech hub we hope it will, then we need regulations that reflect a shifting entrepreneurial landscape and that are focused on helping to promote small and medium enterprises. Adopting crowdfunding regulations would be one step in that direction.
By Yeone W. Moser Fok