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Entry No 11
3rd
LRC Law Reform Essay Competition 2016
Should Hong Kong legislate on crowdfunding? If so, how?
23 February 2016
I. Introduction
New initiatives are introduced into the business sector in order to
enhance development. Crowdfunding is one of them.
Crowdfunding has become more popular ever since the first
crowdfunding website was created in 2001; and it has reached
global recognition over the past five years. However, specific
legislation regarding crowdfunding has not been promulgated yet
in Hong Kong. This paper seeks to argue that legislation on
crowdfunding in Hong Kong is needed.
I will begin with a general overview of crowdfunding, including an
introduction to what it is and its advantages and disadvantages.
After that, examples of relevant legislation overseas, in France, the
United States of America, Australia, New Zealand and Singapore,
will be discussed. This will then be followed by the central
argument as to whether legislation is required in Hong Kong, when
I will explore the current legal scene, and areas that should be
2
covered by the new legislation about crowdfunding. Some
suggestions on the content of regulations as well as penalties that
could be introduced are then set out.
II. Overview
A. What is crowdfunding?
Online crowdfunding first started in 1997 where the rock band
Marillion was unable to raise the funds needed to take the band on
tour after their new album was released. Their fans then helped to
raise money so that they could play at various locations in the US.
Afterwards, the band started to use this same initiative – eventually
funding three successive albums.1 This idea of raising finance by
people who invest money is called crowdfunding. To define what it
is in general, we can say crowdfunding refers to the use of small
amounts of money to fund a project, a business, or personal loan,
obtained from a large number of individuals or organizations,
through an online platform.2
Recently, crowdfunding has become popular worldwide. There
were over 500 online platforms in 2012, including famous websites
such as Indiegogo and Kickstarter. The first project that raised over
£1,000,000 was completed in February of the same year.
According to The Massolution crowdfunding report of 2015, in
2014, the global crowdfunding industry expanded by 167% to
1 Available at http://www.ukcfa.org.uk/what-is-crowdfunding (visited 19 January
2016). 2 “Notice on Potential Regulations Applicable to, and Risks of, Crowdfunding
Activities”, Securities and Futures Commission of Hong Kong, 7 May 2014.
3
reach US$16.2 billion, up from US$6.1 billion in 2013, and more
than double that amount was raised in 2015, reaching US$34.4
billion.3 It is clear that the amount of money involved is growing
rapidly every year.
This discussion will now consider the three types of crowdfunding,
namely: equity crowdfunding, peer-to-peer lending, and
donation/reward crowdfunding.4
i. Equity Crowdfunding
This type of crowdfunding refers to an exchange of equity
by the people who invest, in which their money is exchanged
for shares or a small stake in the project or business of a
company. Then, similar to other types of shares (other than
community shares), the value will then increase if it is
successful, and vice versa. This is usually used in small start-
ups businesses as they have limited access to funding
sources.
ii. Peer-to-peer Lending
This type allows money lending while sidestepping the
traditional method - through banks, also called debt
crowdfunding. This is a convenient way for start-ups that are
unable to borrow the money they need from banks. This
form works under online platforms, where they match
investors with issuers to provide loans. The investors are
3 Available at http://dazeinfo.com/2016/01/12/crowdfunding-industry-34-4-billion-
surpass-vc-2016/ (visited 16 February 2016). 4 See note 1 above.
4
repaid by recouping their money with principal plus interest
over a period of time, so the revenues are financial.
iii. Donation/ Reward Crowdfunding
This refers to an investment where people believe in the
cause of the project. By adopting reward crowdfunding,
investors receive tangible items or services such as event
tickets, free gifts and so on. However, with regard to
donation crowdfunding, donors “invest” under a social or
personal motivation for a charitable cause and they expect
nothing back in return.
B. What potential risks do crowdfunding bring?
Crowdfunding is like a social media version of fundraising. It helps
issuers to obtain a certain amount of money; and it provides start-
ups with a chance to roll out new products and services. It is said
that successful crowdfunding not only provides needed cash to a
certain project, but also builds a feeling of success for the
contributing investors. However, since most of the platforms, like
Kickstarter, only collect money when the goal is reached, it may be
regarded as a relatively time-consuming way in the business
industry because investors are tying their money up for an
unprofitable length of time. Additionally, there are a number of
inherent business risks (basically focusing on two types of
crowdfunding: equity and peer-to-peer) that investors are exposed
to, for example, risks in illiquidity, platform insolvency, default,
fraud, lack of transparency and other similar risks.5
5 See note 2 above.
5
First of all, there is a risk of illiquidity. Since there are relatively
few or even no secondary markets present for the investment
involved selling loan cases, thereby removing the loan, this would
lead to difficulties in liquidating positions in crowdfunding
investments.
Second, there is the possibility of platform insolvency. Investors
who invest in the debt type of crowdfunding should be typically
aware of this particular risk. Take the example of Emphas.is in
2013.6 Their platform was established in 2011, and went insolvent
after having accumulated a debt of more than €300,000, causing
the new capital in photojournalism to fail. So if a platform goes
insolvent, a total loss of investment is likely to occur.
Third, there is a risk of default because the project may fail if the
issuers are unable to fund enough money. In January 2013, a
project creator successfully raised money through Kickstarter but
the production ended up as a disaster, rendering him unable to fulfil
his backers’ pre-orders, and the matter was then brought before the
courts.7 So where investors are unsecured, they may lose their
investment entirely if the project fails.
Fourth, investors face the risk of fraud. Since internet platforms are
anonymously created, the risk of fraud is greatly increased;
examples are pre-empted fraud, stillborn fraud, attempted fraud,
6 Oliver Laurent, “Crowdfunding platform Emphas.is goes insolvent amid internal
conflicts”, British Journal of Photography, 14 October 2013. 7 Charles Luzzar, “Neil Singh Sets Record Straight on Kickstarter Lawsuit”,
Crowdfund Insider, 22 January 2013.
6
perceived fraud, etc.8 As mentioned above, the Kickstarter project
in 2013 is also a type of reward-based crowdfunding fraud as the
issuer was unable to fulfil the pre-orders of the investors. Therefore,
we can then see that investors face greater risks in losing their
entire investment.
Apart from the above four risks, investors need to be aware of the
potential danger that damages from lack of transparency of the
investment bring. The co-founder of one of the world’s first
investment crowdfunding sites, Symbid, stated, “there’s a danger
our industry is becoming short-sighted, prioritising interest rates
above all else. Crowdfunding platforms do not tell the whole risk-
return story, and investors don’t seem to understand why a 6%
interest rate can be attractive.”9 Why did he say 6%? It attracts the
investors, but it is dangerous when they do not understand what the
investments are for in a whole and investing merely because of the
attracting interests returns. Also, another risk of insufficient
transparency includes withholding information and not disclosing
valuation of investments to investors. So where platforms do not
have full disclosure of information, investors risk having
unknowingly participated in illegal activities, such as money
laundering or illegal commerce.10
China is one of the countries that have yet to introduce any
legislation on crowdfunding. Liu Zhangjun, the director-general of
8 CJ Cornell and Charles Luzar, “Crowdfunding Fraud: How Big is the Threat?”
Crowdfund Insider, 20 March 2014. 9 JD Alois, “Symbid States Investors are Ignoring Risks. Lack of Transparency &
High Interest Rates Creates Unsustainable Trajectory”, Crowdfund Insider, 3
November 2015. 10
See note 2 above.
7
the Inter-agency Anti-illegal Fund-raising Taskforce in China has
stated, “the fledgling sector faced higher ‘legal risks’ as it is
currently not controlled by legislation, its barriers to entry are low
and it relies on self-policing.”11
Thus, if investors accidentally
“join in” crowdfunding activities that have illegal purposes, they
may be subject to other laws and regulations.
Therefore, because of the numerous potential risks present, it is
clear that crowdfunding could be hazardous, as investors are not
protected by specific legislation and so risk of losing their
investments or other even worse consequences – participating in
illegal activities. In order to tackle the problem, legislation has
been introduced gradually in many jurisdictions; this will be
discussed next in part III (Other Jurisdictions).
III. Regulating Crowdfunding in Different Jurisdictions
Hong Kong is not the only jurisdiction that is considering
legislation on crowdfunding; a number of other countries around
the world are also aware of the issue, including Australia and
Singapore; and some have even introduced regimes to address this
matter, like France, USA and New Zealand.
A. France
France is one of the few largest crowdfunding markets in Europe,
with 70 active platforms and a €253 million market. With such
11
Samantha Hurst, “Chinese Taskforce Cracks Down Illegal Crowdfunding
Campaigns”, Crowdfund Insider, 24 April 2014.
8
large amounts of money flowing into crowdfunding, it was clear to
the European Union that specific legislation was needed to regulate
it, and keep it running smoothly and safely. Apart from the
“European Union scheme”12
, France also has introduced a new
regulatory regime for crowdfunding in October 2014.13
The French law allows only up to €1 million to be raised through
crowdfunding to finance a business. Also, the Internet platforms
must first register with the French authorities as an intermediary
called an IFP (intermédiaire en financement participatif), while
licenses must be obtained by those arranging securities as a
“crowd-sourced investment advisor”, called a CIP (conseil en
investissement participatif), or as a “financial services provider”,
called a PSI (prestataire de services d’investissement).
The new regime thus has specific laws regulating fixed rates,
maximum durations, maximum loan size, licensing, payments and
other obligations for both crowdlending (referral to an IFP) and
crowdfunding by issuance of securities (referral to a CIP). With
these new regulations, investors can now feel more safe and secure
when investing in crowdfunding projects as the platforms would be
licensed and protected under law.
B. U.S.A.
12
Gary A Gabison, “JRC Science and Policy Report - Understanding Crowdfunding
and its Regulations: How can Crowdfunding help ICT Innovation?” European
Commission (2015). 13
Reid Feldman, Kramer Levin Naftalis & Frankel, “The Legal Framework Of
Crowdfunding In France”, Renewable Energy Crowdfunding Conference, 27 October
2015.
9
North America is a developed country that has the highest GDP in
the world and a sophisticated technology-driven society. So, with
regards to new initiatives like crowdfunding, USA seldom lags
behind other countries. On 16 November 2015, the Securities and
Exchange Commission (SEC) adopted and published in the Federal
Register a set of specific rules to regulate crowdfunding, to become
effective 180 days later, which is 14 May 2016.14
Crowdfunding is
regulated under Title III of the Jumpstart our Business Startups
(JOBS) Act and the amended Securities Act, so as to assist small or
new start-up companies with a capital foundation while protecting
the investors who take part.
The new rules regarding crowdfunding involve investment limits,
disclosure, and licensing platforms.15
First, investors are permitted
to capitalize on securities-based crowdfunding dealings but are
subjected to certain maximum amounts, where companies are only
allowed to raise a maximum amount of US$1 million in a 12-
month period, while the amount of money allowed for individual
investors to invest must correspond to their annual income.
Second, disclosure of certain information is required from
companies about their corporate and securities crowdfunding
transactions, meaning they have to provide certain information to
prospective investors including the price, the target offering
amount, and the deadline for reaching the targeted amount.
14
Available at https://www.federalregister.gov/articles/2015/11/16/2015-
28220/crowdfunding (visited 1 February 2016). 15
“SEC Adopts Rules to Permit Crowdfunding – Purposes Amendments to Existing
Rules to Facilitate Intrastate and Regional Securities Offerings”, The Securities and
Exchange Commission, 30 October 2015.
10
Third, similar to France, a framework of governing intermediaries
facilitating those transactions has been created, whereby the
platforms are required to register with the SEC, and follow rules on
the disclosure of materials as well as take measures to reduce risks.
Previously, applications of federal securities laws may be triggered.
But after problems have emerged, specific laws are then proposed
for tackling them. By introducing specific laws, crowdfunding
parties are therefore safeguarded from many risks.
C. Australia
Unlike Europe and USA, Australia has not yet introduced
crowdfunding regulations, but in May 2014 the Corporations and
Markets Advisory Committee (CAMAC) issued a report on
crowdfunding, which they call “crowd sourced equity funding”
(CSEF).16
Small proprietary limited companies are restricted from engaging
in capital-raising activities like crowdfunding by the Corporation
Act 2011. CAMAC considered that the existing law in Australia
does not facilitate crowdfunding, and made four recommendations:
(i) altering the regulatory environment for proprietary companies;
(ii) limiting offers to a particular class of investors; (iii) adjusting
the fundraising provisions for other companies; (iv) introducing a
16
Leigh Schulz and Domenic Mollica, “ASK THE EXPERT The regulation of
crowdfunding in Australia: where are we and what’s to come?” Australia Banking &
Finance (August 2015), pp136-140.
11
new specifically designed regime to facilitate a new business
model meant for CSEF.17
CAMAC made a number of recommendations for the
implementation of the new regime. They suggested creating an
exempt public company for equity crowdfunding issuers and an
cap for investors that (i) limits individual investors to investing no
more than AU$2,500 in a particular project and no more than
AU$10,000 in total during a 12-month period; and that (ii) limits a
total of AU$2 million for total capital raised though equity
crowdfunding in a 12-month period. Also, online platforms must
be licensed by the Australian Securities and Investments
Commission. Additionally, more recently in May 2015 the
Minister for Communications Malcolm Turnbull suggested
adopting the New Zealand regime (will be discussed in part D).18
It is clear that even though there is no regulation on crowdfunding
in Australia, there are clear proposals and plans in place. It is
almost certain that there will be specific Australian crowdfunding
legislation introduced in the near future.
D. New Zealand
Regulations in regard to crowdfunding in New Zealand were
enacted by a combination of exemptions in the Securities Act 1978
17
Available at https://readyfundgo.com/australia-regulation-equity-crowdfunding/
(visited 19 January 2016). 18
Rose Powell, “Malcolm Turnbull says Australia could follow New Zealand
crowdfunding laws”, AFR Weekend, 19 May 2015.
12
and the introduction of the Financial Markets Conduct (FMC) Act
2013, passed on 1 April 2014, and which came into full effect in
December 2014.19
This is a rather liberal approach for allowing all
incorporated entities to raise capital through crowdfunding.
The Financial Markets Authority (FMA) regulates crowdfunding
under the new exemptions relating to licensing intermediaries,
controlling interests, maximizing amounts and duration.20
Although
investment statements are not required for the public, rules on
general fair dealing still apply. FMA requires platforms to provide
investors with certain information, including the disclosure of risks,
warnings and details in the proposed project, the complaints
process and for them to become members of a dispute resolution
scheme. Notice to FMA is needed before any attempt to raise
capital by crowdfunding, and the amount an issuer may raise is
limited to NZ$2 million in a 12-month period without issuing
investment statements. However, there is no limit on the amount
investors can invest, so they need to sign a risk acknowledgment
statement.
In New Zealand the regulations on crowdfunding provide clear
guidelines for parties as well as protection from the potential risks
discussed earlier.
E. Singapore
19
Available at https://fma.govt.nz/compliance/role/crowdfunding-platforms/who-
needs-to-comply/ (visited 18 February 2016). 20
Available at http://www.consumer.org.nz/articles/crowdfunding (visited 16
February 2016).
13
The Monetary Authority of Singapore (MAS) published a
consultation paper in February 2015 offering proposals to regulate
and facilitate securities-based crowdfunding from accredited
investors (AIs) and institutional investors (IIs). 21
MAS argued that AIs and IIs are more experienced and have more
resources to invest and greater capacity to make investment
decisions, while retail investors may not fully appreciate the high
risks of securities-based crowdfunding. So, while retail investors
can still invest in donation-based and reward-based crowdfunding,
initially the scope of securities-based crowdfunding has been
limited to AIs and IIS. The MAS proposed a regulatory approach
to lower the financial requirements for platforms to obtain licenses
(Capital Market Services license), by lowering the capital base to
S$50,000 and removing the requirements to maintain a security
deposit of S$100,000 with MAS. Also, the MAS clarifies the
advertising restrictions whereby whoever wishes to raise funds and
posts details on crowdfunding platforms would not be guilty of a
breach of the Advertising Restriction.22
So by taking the first step in proposing regulations on securities-
based crowdfunding, it appears that Singapore is on the road to the
removing of regulatory obstacles that would lead Singapore to
better growth in crowdfunding activities, and enhancing small and
medium enterprises as well as start-ups to raise funds from the
public.
21
“Consultation Paper – Facilitating Securities-Based Crowdfunding”, Monetary
Authority of Singapore (February 2015). 22
“MAS Sets Out Proposals for Securities-based Crowdfunding”, Monetary Authority
of Singapore, 16 February 2015.
14
IV. Argument on Legislation
A. The current legal scene in Hong Kong
Hong Kong has yet to introduce specific regulation regarding
crowdfunding. The opportunities for crowdfunding are therefore
relatively restricted due to the absence of legislation even though
there are still some existing regulatory provisions that may be
applicable.
According to the “Notice of Potential Regulations Applicable to,
and Risks of, Crowd-funding Activities”23
set out by the HHong
Kong Securities and Futures Commission’s (SFC), it mentioned
crowdfunding activities may be subject to: the Securities and
Futures Ordinance24
(SFO), the Companies (Winding Up and
Miscellaneous Provisions) Ordinance25
(C(WUMP)O), and the
Money Lending Ordinance26
(MLO). How are these ordinances
applicable to crowdfunding?
Firstly, section 103(1) of the SFO prohibits the issue of
unauthorized investment advertisements unless SFC authorizes it.
Secondly, there are restrictions to the offer of shares that is
regulated by the C(WUMP)O where detailed contents must be
complied to any prospectus. Thirdly, the MLO can be applied to
debt crowdfunding since it involves money lending business,
23
See note 2 above. 24
Securities and Futures Ordinance (Cap 571). 25
Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32). 26
Money Lending Ordinance (Cap 163).
15
where is requires moneylenders to apply for licenses; it also
regulates all kinds of money lending activities. So there are
existing laws that can apply to crowfunding projects.
However, since there are no specific rules regarding crowdfunding
activities, parties interested in participating in crowdfunding
projects are not protected against these risks.
B. Why should a crowdfunding law be imposed?
Hong Kong is an international finance centre, and crowdfunding is
a new initiative that can involve tremendous amounts of money.
We can clearly see that the above five jurisdictions had either
introduced specific legislation or proposed relevant proposals to
facilitate and regulate crowdfunding. If Hong Kong keeps lagging
behind in the regulation on crowdfunding, it could be harmful to
Hong Kong’s economic development as an international city.
Moreover, China has the biggest online population (about 600
million)27
, and Hong Kong, being an international city that border
with China, is likely to have many business prospects. But with the
absence of regulation on crowdfunding, companies might choose
other jurisdictions rather than Hong Kong and business
opportunities might gradually slip away.
Besides, crowdfunding is also becoming very popular in Hong
Kong. Fringebacker28
is a recent Hong Kong crowdfunding
platform, which has raised funds for over 200 projects.
Fringebacker has recently supported a project called FactWire,
27
See note 11 above. 28
Available at https://www.fringebacker.com/en/ (visited 16 February 2016).
16
which is an investigative news agency that has raised the
staggering total amount of HK$4,750,020.29
The above example clearly shows that not only is crowdfunding
becoming popular in Hong Kong but the amount of money
involved can be substantial also. In fact, according to the World
Bank’s estimation, funds raised through crowdfunding will keep on
increasing yearly; probably exponentially, and could reach US$96
billion within a decade.30
This means it is highly foreseeable that
Hong Kong’s numbers will also increase at a similar rate through
the coming years. If we do not regulate crowdfunding, large
amounts of funds may get into the wrong hands or even be used for
illegal purposes. As Liu Zhangjun points out, “crowdfunding has
the special characteristics of raising funds from the public, and
therefore should be governed by current laws and regulations.”
China Banking Regulatory Commission has been leading a push to
draft more specific rules for regulating crowdfunding activities as
well. 31
Participants are also unclear regarding the relevance of existing
regulations mentioned in part IV(A), and might risk breaking
certain rules. For example, ATV had a crowdfunding plan which
offers one share at HK10,000 last year, it was unfortunately said
that it may breach certain laws, such as the SFO and the
29
Available at https://www.fringebacker.com/en/t/factwire-a-news-agency/ (visited
16 February 2016). 30
“Hong Kong yet to catch up on crowdfunding boom”, ejinsight, 26 May 2015. 31
See note 11 above.
17
C(WUMP)O.32
This shows the lack of specific legislation may set
legal traps that discourage crowdfunding activities in Hong Kong.
Sadly, the absence of legislation will lead crowdfunding initiatives
falling into grey legal areas, which will be detrimental to Hong
Kong as a global finance centre, especially as most crowdfunding
sites clearly indicate that they are not responsible for assessing
risks or detecting fraud.33
Though there are risks as mentioned
above, Hong Kong enjoys a high-risk status as a site of illegal
activities in crowdfunding due to its border with China and the
absence of any restrictions on the amount of money that can be
invested in crowdfunding projects. Other risks are highlighted in a
media release from the International Organization of Securities
Commissions. The message is clear that the authorities should be
aware of such potential risks when monitoring the development of
crowdfunding since investors would be disinclined to invest in
projects in Hong Kong if risks are not regulated as in other
jurisdictions.
Consequently, the reason for legislating crowdfunding is because
in addition to protecting investors, the government should be
working to attract more investors to participate in Hong Kong
projects as a key platform for encouraging small firms and start-ups.
C. How should the law be crafted?
32
Vivienne Chow and Samuel Chan, “ATV crowdfunding plan could break company
laws, says legal expert”, South China Morning Post, 12 February 2015. 33
Hua Yang, “The crowds are getting bigger”, ChinaDaily Asia, 24 November 2014.
18
Hong Kong should have specific legislation on crowdfunding.
Faced with the various examples set by the jurisdictions discussed
above, how should crowdfunding legislation in Hong Kong be
crafted?
There are three parties involved in crowdfunding: investors,
entrepreneurs and online platforms. With other jurisdictions’
legislative examples for reference, the government or its legislative
arm should draft legislation to regulate who can invest and what is
the maximum amount of money that can be invested, as well as
how often businesses can invest. For entrepreneurs, we may
consider restricting which people can crowd-fund, the amount they
can raise and how frequently they can raise funds. As for the online
platforms, we may consider whether there should be capital
requirements, and whether licensing is needed. Plus, setting up
disclosure requirements and limitations on sizes and services may
also be indicated.34
From the LCQ1 government’s press release “Regulation of
Crowdfunding”35
, it seems that a steering group will be set up soon
to conduct studies into crowdfunding, a normal step prior to
proceeding along a legislative path. The steering group should
consider the different types of crowdfunding discussed above.
Since usually only “equity” and “peer-to-peer” are regulated, they
will need to be examined closely. There are three approaches to
legislate equity crowdfunding: (i) prohibit equity crowdfunding; (ii)
34
“Statement on Addressing Regulation of Crowdfunding”, International
Organization of Securities Commission (December 2015). 35
Press Releases. LCQ1: Regulation of Crowdfunding”, Financial Secretary and the
Treasury Bureau, 18 March 2015.
19
permit crowdfunding with high barriers to entry; and (iii) allow the
industry’s existence with strict limitations. 36
For peer-to-peer
lending, there are five approaches: (i) exempt or unregulated; (ii)
platforms as intermediaries; (iii) platforms regulated as banks; (iv)
adopt the US model, which includes two levels of regulation
(Federal regulation through the SEC and state level regulations
where state-by-state basis must be applied by platforms); and (v)
prohibit peer-to-peer lending.37
A new regulatory regime should be created in Hong Kong in
adapting to the crowdfunding trend. It is submitted in this paper
that Hong Kong should permit both equity crowdfunding and peer-
to-peer lending using approaches similar to the US and France,
where the regulation on equity crowdfunding should include the
permission of enterprises to raise funds through platforms that are
registered under a certain commission, which in the US is the SEC;
while peer-to-peer lending platforms should be regulated as
licensed intermediaries.
For the legislation of crowdfunding in Hong Kong, an ordinance
should be individually set up, which may be called as
“Crowdfunding Ordinance”; though it need not be lengthy, detailed
guidelines should be given as to the investors, entrepreneurs and
platforms regarding the amounts of money involved, frequency of
investing and fundraising, and licensing. Areas of risks discussed
in part II(B) of this paper, including risk of fraud and lack of
transparency, should also be covered. The ordinance is designed to
36
Eleanor Kirby and Shane Worner, “Crowd-funding: An Infant Industry Growing
Fast”, International Organization of Securities Commission, 1 February 2014, p5. 37
Ibid. at p6.
20
promote crowdfunding in Hong Kong, and is important in showing
prohibition towards both equity and peer-to-peer crowdfunding
through rules within. It is again essential to the promotion of a
safeguarded environment for crowdfunding activities.
Furthermore, it is recommended that a commission to control
crowdfunding activities could be put in place, similar to the
Competition Ordinance, which was set to go into full operation not
long ago (14 December 2015).38
The Competition Commission is
the authority, which is responsible for enforcing the Competition
Ordinance through enforcement proceedings before the
Competition Tribunal.39
Thus, SFC (or a branch from SFC
established for crowdfunding) may possibly become the authority
responsible for enforcing certain regulations on crowdfunding, and
to give effect to the provisions stated in the Crowdfunding
Ordinance. Hence, SFC would act as the indicator on the operation
of the ordinance, and also to build trust with the parties and
promote transparency, certification as well as licensing and
registering.
D. What about penalties?
To make it simple, penalties refer to punishments that are imposed
or incurred for violation of laws. So, after establishing a regulatory
body on crowdfunding, penalties may then be considered for rule
38
Available at
http://www.compcomm.hk/en/legislation_guidance/legislation/legislation/comp_ordin
ance_cap619.html (visited 18 February 2016). 39
Available at
http://www.compcomm.hk/en/legislation_guidance/legislation/overview.html (visited
18 February 2016).
21
breakers. There are two types of penalties in general, which are
civil and criminal. Court imposes civil penalties in determining
liability and assessing the penalty for a wrongful act and
encouraging people to comply with the law, which does not relate
to the nature of the wrongful conduct itself, including monetary
penalties, injunctions and license revocations.40
Criminal penalties refer to punishments like imprisonments for
more serious offences. When people break the law in relation to
crowdfunding, it is then for the court to consider what kinds of
penalties or punishments are appropriate. This also protects the
harmed party, since the law may offer compensation that may help
reduce their loss. It is therefore shown that the significance of
legislating can truly protect investors.
In all the jurisdictions discussed, which have introduced
crowdfunding legislation or proposals, it has been shown how
legislation can protect investors. However, since there are still not
enough cases from other jurisdictions to show how crowdfunding
penalties have been imposed, it is rather difficult to offer any
conclusive evidence. We may take the JOBS Act41
in USA and the
FMC Act42
in New Zealand as examples. From Subpart B §
227.205 of Title III of the JOBS Act in USA, it is stated that:
“(a) An issuer… shall be permitted to compensate… any
person to promote the issuer’s offerings… through
40
Available at http://assets.liuasiapacific.com/?LinkServID=E6B2A923-5056-A25B-
C60DDCECD714AC3C (visited 18 February 2016). 41
Jumpstart Our Business Startups Act. 42
Financial Market Conducts Act.
22
communication channels provided by an intermediary on the
intermediary’s platform….”43
Also, Subpart 3 of Part 8 of the FMC Act, civil liability, includes
declarations of contravention and pecuniary penalty, compensatory
orders, other civil liability orders, and defences.44
It is therefore
proposed that Hong Kong can refer to these two examples for
guidance.
The use of soft law (codes), which can be defined as “normative
provisions contained in non-binding texts”, 45
should also be
considered. Codes are not strictly binding law, but they do not lack
legal significance either. Setting up codes of practice can regulate
crowdfunding, further protecting the participants. In addition, this
brings us back to the issue of establishing a commission for
regulating crowdfunding events. For example, if SFC could
establish a branch responsible for crowdfunding, they can monitor
and supervise crowdfunding. Instead of civil and criminal penalties
granted by the courts, sanctions can be imposed for unlawful
behaviour, such as suspending the companies’ or platforms’
activities, withdrawing their license, or imposing fines.
V. Conclusion
Presently, there is no specific legislation regulating crowdfunding
in Hong Kong, although there are existing laws that could be
43
Available at https://www.sec.gov/rules/final/2015/33-9974.pdf (visited 23 February
2016). 44
Available at
http://www.legislation.govt.nz/act/public/2013/0069/latest/whole.html#DLM4091705
(visited 23 February). 45
Available at http://www.oxfordbibliographies.com/view/document/obo-
9780199796953/obo-9780199796953-0040.xml (visited 18 February 2016).
23
applied, like SFO, C(WUMP)O and MLO as mentioned, it is not
enough to protect investors; so it has yet to build a healthy and
secured environment for crowdfunding. Therefore, Hong Kong is
lagging behind other Asia Pacific region, like Singapore.
Accordingly, legislation should be introduced so that Hong Kong
can keep up with other jurisdictions and develop into an
international “financial technological hub”46
. It is hoped that after
setting up a steering group, legislation will be enacted in the near
future.
#444985
46
See note 35 above.
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