Introduction

On 19 December 2022, the Financial Services and the Treasury Bureau (the FSTB) published a consultation paper (the Consultation) on proposals to enhance the regulation of crowdfunding activities in Hong Kong.

The Consultation includes various recommendations on enhancing the transparency and accountability of crowdfunding activities in Hong Kong, and includes a requirement for persons who wish to raise funds from the Hong Kong public to obtain prior approval from a new Crowdfunding Affairs Office (the CAO).  In addition, the Consultation recommends measures to ensure sufficient transparency during and after the conduct of crowdfunding activities.

Commercial fundraising activities that are already regulated by financial regulators under existing legislation will not be subject to the proposed crowdfunding regulatory regime.

Existing regulation of fundraising activities in Hong Kong

Currently, fundraising activities conducted in public places that invite contribution of funds from the public require fundraisers to obtain the following permits or licenses:

• fundraising activity permits issued under the Summary Offences Ordinance (Cap. 288):
  • charitable fundraising activity permits issued by the Director of Social Welfare; or 
  • permits for non-charitable fundraising activities to be conducted in public places issued by the Secretary for Home and Youth Affairs;
• temporary hawker’s license for the sale of goods in public places for fundraising purposes issued by the Director of Food and Environmental Hygiene under the Hawker Regulation (Cap. 132AI); or
• a lottery license for lottery fundraising activities that support charitable activities organised by charitable organisations or raise funds for NGOs, regardless of whether the activities involve the sale of lottery tickets in public places, issued by the Office of the Licensing Authority (the OLA) under the Home Affairs Department. The sale of lottery tickets in public streets requires fundraisers to make separate applications to the OLA.

Definition of “crowdfunding”

The Consultation defines “crowdfunding” as fundraising activities conducted by an individual, a group or an organisation appealing publicly for funds from Hong Kong permanent residents, individuals located in Hong Kong, body corporates incorporated, registered or located in Hong Kong or organisations having a place of business in Hong Kong, regardless of the purpose or location of such activities (Crowdfunding Activities).

Common types of Crowdfunding Activities in Hong Kong

The FSTB identified the major types of Crowdfunding Activities as follows:

1. Equity or debt crowdfunding: Fund contributors invest in a specific project or business, such as a start-up company, in return for equity in or by way of debt issued by a company, or profits or income of a collective investment scheme (a CIS).
2. Peer-to-peer (P2P) lending: Fund contributors provide unsecured loans to individuals or projects through online platforms that match them with borrowers, from which interest is earned by the fund contributors.
3. Donation-based crowdfunding: Fund contributors make donations for charitable or non-charitable causes, such as political campaigns or activities, or personal or social values, without receiving any specific returns.
4. Rewards-based / pre-sale crowdfunding: Fund contributors provide funds to fundraisers to help them develop or produce goods or services and receive those goods or services in return.

Plugging the “holes” in Hong Kong’s fundraising / crowdfunding regulations

Hong Kong’s existing regulatory regime regulates equity and debt-based crowdfunding and P2P lending.

Equity and debt-based crowdfunding falls within the regulatory ambit of the Securities and Futures Commission (the SFC) under the Securities and Futures Ordinance (Cap. 571) and the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32).

P2P lending may fall within the Money Lenders Ordinance (Cap. 163) if the making of or offering of loans via an online lending platform constitutes the carrying on of a money lending business in Hong Kong, which requires a money lender’s license. If a P2P lending platform manages or pools client monies or issues securities (including notes or debentures), or where part of the loans the lenders participate in is regarded as interests in a CIS or other types of securities, the platform will also be subject to regulation by the SFC.

Donation-based crowdfunding conducted online is not subject to the existing regulatory regime that applies only to fundraising activities conducted in public places. Rewards-based / pre-sale crowdfunding is also not subject to the existing regulatory regime on fundraising.

The FSTB considers that the lack of regulation of many aspects of crowdfunding activities poses risks to the community (e.g. in relation to the recoverability of funds where a crowdfunding platform ceases operations or where funds are raised to support illegal activities, etc.).   

Specific proposals to enhance regulation of crowdfunding activities

The major features of the proposed regulatory regime for regulating crowdfunding activities include:

1. Application to the CAO for approval to conduct Crowdfunding Activities
   • A person must apply to the CAO for approval before conducting a Crowdfunding Activity (whether conducted online or offline).
   • As part of the licencing process, fundraisers will be required to submit the following information to the CAO:
     • personal particulars of the applicant;
     • background information of the fundraising organisation (if applicable), such as articles of association and registration records;
     • particulars of the local bank account designated for the proposed Crowdfunding Activity;
     • purpose of the Crowdfunding Activity and a statement confirming that such activity will not involve unlawful activities;
     • estimated start and completion dates of the activity;
     • target fund size, target beneficiaries and use of the funds raised;
     • how the Crowdfunding Activity will be conducted and whether there is any crowdfunding platform involved; and
     • any other information required by the CAO.
   • When processing applications, the CAO will consider factors including the honesty, reputation and reliability of the applicant, proportionality of the purpose of the Crowdfunding Activity to its scale, and risks brought about by the activity to public interests, public safety and national security.
   • Approval of the application will depend on whether the proposed Crowdfunding Activity is conducted according to appropriate and sound procedures, the reliability and reputation of the fundraisers involved and the risks of the activity giving rise to unlawful activities.
   • As some fundraising activities are already subject to existing regulation (e.g. lottery sales), to avoid duplication of efforts, the CAO will co-ordinate with the relevant government departments and regulatory authorities to streamline the process for fundraising activities that are already regulated.
2. Simplified procedures for applications to the CAO
   • Fundraisers “widely recognised” by the community or those with extensive crowdfunding experience and good track records will be able to apply to the CAO under a simplified procedure.  This includes the ability to launch an online fundraising in specified circumstances that only require prior registration of the activity details with the CAO.  This streamlined registration route would be available where the crowdfunding is a repeat fundraise of a previously approved event, or it involves urgent fundraising to respond to a natural disaster. 
3. Fundraising activities exempt from the proposed Crowdfunding regime
   • The FSTB considers certain fundraising activities to be different in nature to the Crowdfunding Activities. The FSTB therefore proposes to exclude the following from the approval requirement:
     • 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;
     • buying and selling goods readily available on the market, even if conducted online or involving the recruitment of people to buy as a group; and
     • commercial activities conducted via online media that involve income from subscriptions or online rewards.
   • Even if an activity falls under the above exempted categories, the CAO may, if it considers to be necessary, direct the fundraiser to apply for approval under the normal procedures.
4. Requirements for conducting Crowdfunding Activities
   • The proposal is to authorise the CAO to publish specific guidelines applicable to Crowdfunding Activities and to impose additional requirements for certain activities.
   • For example, the CAO may mandate fundraisers raising funds above a specified amount to require contributors to disclose their names and to have the financial documents of such fundraisers audited by accounting professionals. Fundraisers will also be required to disclose objectives and arrangements of their Crowdfunding Activities, use local bank accounts, keep proper records of fund movements and produce records and information relating to their Crowdfunding Activities to the CAO and law enforcement agencies on request.
5. Other proposals
   • A registration system for online crowdfunding platforms is being considered.
   • It is proposed that the relevant law enforcement agencies may take the following action against Unlawful Crowdfunding Activities[1]:-
     • issue an order to stop such activity;
     • suspend the processing of an application made to the CAO until the CAO is reasonably satisfied that such work may resume;
     • prosecute persons responsible for the Unlawful Crowdfunding Activities;
     • direct the removal of messages concerning the Unlawful Crowdfunding Activity from the crowdfunding platform, social medial and other types of media that publish the message;
     • direct the relevant financial institution to discontinue the Unlawful Crowdfunding Activity and investigate against the person and bank account involved; and
     • specify by notice that an activity is an Unlawful Crowdfunding Activity and issue a warning that persons providing funds to such activity, dealing with the funds and assisting in the conduct of such activity may be prosecuted.  

The consultation period ends on 20 March 2023. If you would like to discuss the above, please contact Etelka Bogardi (etelka.bogardi@nortonrosefulbright.com) or Conrad Lam (conrad.lam@nortonrosefulbright.com).

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[1] An “Unlawful Crowdfunding Activity” refers to a crowdfunding activity:- (a) that has been publicized and conducted without applying to the CAO in advance; (b) that, after making an application to the CAO, has been publicized and conducted without a consent notice in circumstances where the simplified procedures do not apply; (c) that continues despite being subject to a prohibition order or refusal by the CAO; (d) conducted in Hong Kong that the CAO and relevant law enforcement agencies have reason to believe that the continued conduct of the activity will jeopardise public interests, public safety or national security in Hong Kong, regardless of whether the CAO has issued a consent notice, or whether the fundraiser has applied to the CAO; (e) conducted outside Hong Kong, where the relevant law enforcement agencies have reason to believe that it will jeorpardise public interests, public safety or national security in Hong Kong; and (f) where, without reasonable grounds, the actual use of funds raised is inconsistent with the originally declared purpose of the Crowdfunding Activity.