1

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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.