Hui Jing and Dejian Li on The Accountability of Non-charitable Donation-based Crowdfunding Platforms in China (HKLJ)

"The Accountability of Non-charitable Donation-based Crowdfunding Platforms in China"
Dejian Li and Hui Jing
Hong Kong Law Journal, Vol. 54, Part 1 of 2024, pp.231 - 252

Abstract: Due to the wide application of internet tools, non-charitable donation-based crowdfunding platforms (NDCPs) serving personal requests for help have been developing rapidly in China. However, due to the lack of a specific regulatory framework for the administration of donation funds by NDCPs, risks regarding the misuse of donation funds by beneficial objects and the mismanagement of donation funds by NDCPs have been frequently realised. To address these risks, Chinese legislators intend to authorise the Ministry of Civil Affairs and related departments to establish a systemic regulatory framework for NDCPs. Against this backdrop, this article explores one specific question: What measures can be implemented to ensure that NDCPs are held accountable for their administration of donation funds in China? This is the first English-language article to explore this question in the Chinese law context. First, it analyses the emergence of NDCPs in China and identifies the problems inherent in the administration of donation funds by these NDCPs. Second, it proposes a trust law framework to regulate the administration of donation funds by NDCPs.

Please click here to view the full article on SSRN.

Hui Jing on Regulating donation-based crowdfunding platforms in Hong Kong: A trust law framework (Common Law World Review)

"Regulating donation-based crowdfunding platforms in Hong Kong: A trust law framework"
Hui Jing
Common Law World Review
Published online: March 2024

Abstract: With the advance of technology, several crowdfunding platforms have emerged in Hong Kong to host informal public donation appeals. Unlike charitable crowdfunding activities, these appeals focus on crowdfunding to provide relief to specific individuals or groups in need. Due to the recent emergence of online informal public donation appeals and their lack of public benefit, regulatory bodies have not paid much attention to their regulation. However, recent media coverage highlighting scandals of maladministration of donation funds in the context of informal public donation appeals has impelled regulators to establish a systemic framework to govern crowdfunding platforms that host informal public donation appeals. This article addresses two main aspects of this topic. First, it discusses the operation of crowdfunding platforms that host informal public donation appeals and the risks associated with them. Second, it explores the feasibility of utilising trust law to regulate the administration of donation funds by these crowdfunding platforms.

Julius Yam's CCPL Working Paper: Response Paper to the Financial Services and the Treasury Bureau’s Public Consultation on Regulation of Crowdfunding Activities

Response Paper to the Financial Services and the Treasury Bureau’s Public Consultation on Regulation of Crowdfunding Activities

Julius Yam
February 2023

Executive Summary: The adoption of new technologies like crowdfunding in commerce and for social and political purposes has created new opportunities as well as risks. Crowdfunding fosters innovation, but can also be used for unlawful or illegitimate purposes.

      This paper responds to the Financial Services and the Treasury Bureau’s (“FSTB”) public consultation on regulation of crowdfunding activities, and considers whether it is necessary to introduce a new regulatory regime for crowdfunding. It argues that existing laws are capable of addressing most ⎯ if not all ⎯ of the risks that crowdfunding activities pose. Even if the government decides that regulatory intervention is necessary, this paper suggests that its approach should be guided by principles of regulatory certainty, minimizing user inconvenience and administrative feasibility. This enables the benefits crowdfunding offers to be maintained.

     The paper identifies issues raised by the FSTB’s proposal for regulating crowdfunding (“the proposal”) that need to be addressed. It makes six broad recommendations which are summarized as

follows:

1. Identifying the specific risks posed by non-investment-based crowdfunding in Hong Kong and developing solutions that mitigate those risks [paras 14-16].

2. Narrowing the scope of the proposal, including, for example, by [paras 24-26]:

a. Covering only fundraisers that have Hong Kong bank accounts or are companies or other entities registered in Hong Kong.

b. Targeting campaigns that are expected to raise over a certain amount.

c. Broadly interpreting the exceptions proposed.

3. Clarifying the definition, the scope of responsibility and consequences of online crowdfunding platforms under the proposal [paras 31-33].

4. Streamlining the approval system’s procedures [para 44], for example, by:

a. Simplifying application processes.

b. Making assistance from regulators readily available.

c. Creating reasonable time frames for the application process.

5. Providing sector-specific agencies with regulatory powers instead of setting up a centralized approval system [paras 45-46].

6. Setting aside the issue of crowdfunding for litigation purposes [para 50].

We hope that this paper provides a constructive platform for all stakeholders involved to formulate an approach that best meets the interests of Hong Kong as an international financial center.

Emily Lee on Equity Crowdfunding in Hong Kong (J Corp L Studies)

"Equity crowdfunding in Hong Kong: potential, challenges and investor protection"
Emily Lee
The Journal of Corporate Law Studies
July 18 2018, published online

Abstract: Equity crowdfunding is a relatively new investment format that allows investors to purchase unlisted securities from a company that does not meet listing requirements for an initial public offering. Equity crowdfunding offers investment rewards but also has risks of fraud, herding, insolvency and dilution of shareholder equity. Regulation is a natural response to negative externalities like systemic risk caused by asymmetric information, adverse selection and lemon problems. While the US and the UK have extensive crowdfunding regulations, Hong Kong does not, although crowdfunding is not specifically banned under the Securities and Futures Ordinance. This article focuses on the current state of equity crowdfunding in Hong Kong but draws inspiration from legal requirements for equity crowdfunding in the US, the UK and Singapore, as well as the Korea Startup Market in South Korea. The author makes regulatory suggestions for consideration by Hong Kong’s law-makers and policy-makers.

Alexa Lam on Regulatory Responses to Crowdfunding and the Hong Kong Model (HKLJ)

"Less is More? Different Regulatory Responses to Crowdfunding and Why the Hong Kong Model Stacks Up Well" 
Alexa Lam
Hong Kong Law Journal
2018, Vol. 48, Part 1, pp. 191-232

Abstract: This article debunks the myth that securities regulation in Hong Kong is less accommodating to crowdfunding (CF) activities when compared to regulation in other international financial centres. While the Securities and Futures Commission has been less proactive in responding to calls for lighter regulation on CF, this article shows that Hong Kong’s existing securities regulation does not lag behind in providing gateways for CF activities. Among the gateways available, while the small-size offering exemption threshold is lower than those provided in other jurisdictions such as the United Kingdom or Singapore, when it comes to raising capital from accredited investors — the type of investors most coveted by entrepreneurs and start-ups — the Hong Kong regime is more friendly. In fact, it is arguably broadly on the same page as the accredited investor exemption regime in the United States. This article examines how the key exemptions to securities regulation in Hong Kong can be fully utilised in the context of CF, especially after the recent Court of Final Appeal decision in Securities and Futures Commission v Pacific Sun Advisors Ltd. As it appears that the market has not fully grasped the purport of Pacific Sun, this article attempts to untangle the regulatory thicket. Hopefully, small and emerging companies will see the potentials of Hong Kong as a platform for capital raising via the Internet.

Alexa Lam on Crowdfunding in Hong Kong (HK Lawyer)

"Crowdfunding in Hong Kong - there are Sufficient Gateways"
Alexa Lam
Hong Kong Law Journal
March 2018, pp. 36-38

As start-ups and small businesses continue to crowdfund through the Internet, governments and regulators have had to respond.  The United States created a tailored regime for crowdfunding.  The United Kingdom and Singapore publicly consulted and clarified their regulatory approaches.  The Hong Kong regulator has been less proactive, thus inviting criticisms that Hong Kong has fallen behind in enabling financial innovation and entrepreneurship.
     Are these criticisms fair and accurate?  Not necessarily so.  In my latest research paper, I ventured to show that gateways for crowdfunding already exist in Hong Kong.  If these exemptions were fully utilised, Hong Kong would be broadly on a par with, or even ahead of, other international financial centres in allowing entrepreneurs to tap capital from professional (accredited) investors - the investor pool most coveted by entrepreneurs.
     With a strong political will to create jobs and promote growth after the global financial crisis, the United States was the most ardent in enacting legislation to enable crowdfunding.  The Jumpstart Our Business Startups Act ('Jobs Act') was passed in 2012 against this background...
   The HKCFA's clarification of the application of s.103(3)(k) has potentially far-reaching implications.  There are 200,000 high net worth individuals in Hong Kong holding US$1.1 trillion in wealth.  Start-ups will likely prefer a smaller number of keen professional investors to a large number of random retail investors.  It has been reported that angel investors tend to stay away from companies that have crowdfunded from retail - a company with too many investors is difficult to manage.   The HKCFA decision will make it easier for issuers to locate and connect with these business angels.  There is speculation that the authorities may consider legislating to reverse the HKCFA decision.  That would be regrettable.  As Fok PJ succinctly explained in his judgment in the Pacific Sun case, "if the investment products are not in fact sold or intended to be sold to the general public and instead are sold or intended to be sold only to professional investors, there is no necessity for protection to be afforded to the general public since they are not exposed to any material risk."  ...

     The HK$5 million small-scale offer exemption is slightly lower than the US$1.07 million small-scale offering exemption in the United States.  The Hong Kong regime however comes with a lighter touch.  There is effectively no particular disclosure requirement (subject however to provisions in the SFO governing false or misleading statements).  One should not underestimate the potential of this exemption for small or initial capital-raising, such as seed funding.  Note however that the exemption is available to companies only.  This exemption is not available to projects that are structured in the form of a non corporate CIS or a structured project.
     As demonstrated, Hong Kong is not falling behind in the gateways there are available for securities crowdfunding.    Yet, because the prohibitions and exemptions in the securities offering regime are fraught with difficulties, and the penalties for contravention severe, market players have been hesitant in making full use of the exemptions.
       We have heard endless debates on why and how the Hong Kong regulatory rules should kick-start their projects by making purposeful use of existing exemptions.  As the market starts to mature, regulators will have a fuller sense of how best to facilitate and regulate the crowdfunding space.  In the meanwhile, there is sufficient room for going forward. Click here to read the full text. 

Syren Johnstone on the Regulation of Equity Crowdfunding in Hong Kong (IFLR)

"Equity crowdfunding: caveat emptor?"
Syren Johnstone
International Financial Law Review
May 2016, pp. 43-45
A recent paper by the Hong Kong Financial Services Development Council (FSDC Paper No 21) suggests legislative changes are not needed to establish a robust equity crowdfunding (ECF) market in the city-state. Titled Introducing a Regulatory Framework for Equity Crowdfunding in Hong Kong, it states that regulatory oversight is sufficient for the practice to ‘operate safely and efficiently’ while allowing it ‘to develop in an environment that provides a level of protection and supervision appropriate to the risk presented to investors’. 

     The suggested approach, arrived at after comparison with the US, UK, China and Singapore, comprises four key elements. ECF platforms would be brought within an existing category of activity regulated by the Securities and Futures Ordinance (SFO) to provide a basis for regulatory oversight of the platform. Offering securities to the public would be sub- ject to additional exemptions, tailored to ECF, from Hong Kong’s prospec- tus law being granted by the Securities and Futures Commission (SFC) under its existing powers. Issuers would be subjected to disclosure require- ments either by being incorporated in Hong Kong, and so subject to the requirements of the new Companies Ordinance (CO), or be required to offer equivalent disclosure. And the extent to which retail investors may participate in ECF offerings would be determined by primarily financial measures. 

     Within this broad framework, a number of difficult implementation questions fall to the SFC to determine in view of its overarching regulatory objectives... Click here to read the full article.