Hong Kong regulation of crowd funding
- In his 2015-16 budget speech, HK Financial Secretary John Tsang Chun-wah set out the government’s intention to set up a steering group to study how to develop Hong Kong into a financial technology hub which will also looking into issues relating to crowdfunding in Hong Kong.
- Hong Kong has yet to introduce specific regulations to lighten the regulation of crowdfunding in order to improve financing for start-ups and tech companies.
- In the UK, specific regulations have been introduced to facilitate loan-based crowdfunding platforms which are perceived to be less risky than other types of crowdfunding.
- Online crowdfunding platforms operating in Hong Kong are governed by Hong Kong’s existing regulatory regime for offering securities and money lending and the opportunities are thus fairly limited.
What is Crowdfunding?
- Definition: use of small amounts of money, obtained from a large number of individuals or organisations, to fund a project, a business or personal loan, and other needs through an online web-based platform*.
- 4 main sub-categories:
* Definition used in the OICU-IOSCO Research Paper “Crowdfunding: An Infant Industry Growing Fast” by Eleanor Kirby and Shane Worner (March 2014)
Peer-to-peer lending (P2P Lending)
- Online platforms match lenders (investors) with borrowers (issuers) to provide unsecured loans to individuals or projects.
- either be a business or an individual
- P2P Lenders
- typically involves a number of lenders providing money for small parts of the overall loan required by the borrower
- loan parts are then aggregated by the online platform
- when there is enough to cover the required loan, the loan is originated and paid to the borrower
- interest rate
- Usually set by the platform and the borrower will repay the loan with interest
- typically higher than the savings rate available to the lender but lower than a traditional loan available to the borrower, depending on the borrower’s evaluated risk
- paid to the lender until the loan matures, or the borrower repays early or defaults.
- Smaller P2P Lending platforms cater to niche markets
- g. platforms specialising in real estate transaction financing, venture capital, business-to-business, graduate financing, art project financing, tech start-ups or consumer to consumer loans for transactions such as eBay purchases.
- 2 key types of P2P Lending business models: notary model & client segregated account model
- The crowdfunding platform acts as an intermediary between the lender and the borrower, matching them to each other
- The loan is originated by a bank and the platform issues a note to the lender for the value of their contribution to the loan
- In many jurisdictions, this note is considered to be a security which shifts the risk of non-repayment of the loan from the bank to the lenders themselves
- Both lenders and borrowers pay a fee to the crowdfunding platform.
Client Segregated Account Model
- The crowdfunding platform matches an individual lender with an individual borrower and a contract is entered into between them with little involvement by the intermediary platform.
- Lenders can bid on loans in an auction style and all funds of the lenders and borrowers are separated from the crowdfunding platform’s balance sheet and go through a legally segregated client account, over which the platform has no claim in the event that the platform collapses.
- The contractual obligations between borrower and lender thus continue despite any collapse or failure of the crowdfunding regulation.
- Both lenders and borrowers pay a fee to the platform.
- The platform provides the service of collecting loan repayments and performing preliminary assessments of borrowers’ creditworthiness.
- A variation on this model uses a trust fund
- lenders purchase units or shares in a trust structure, with the platform acting as the trustee who manages the fund
- the platform uses the fund to match borrowers and lenders and the platform administers the loan repayments
- as it is a trust, it is legally separate from the platform itself which prevents the investors suffering loss if the platform fails.
- invest in a project or business (normally a start-up); and
- in return receive an interest in shares or debt instruments issued by a company or a share of the profits or income generated from the relevant crowdfunding arrangement managed by 3rd party
- Enables a number of investors to invest through an online platform and gain an interest in the business
- Normal Use: early stage small start-ups with limited access to other funding sources due to their small size and maturity
- Investments involve a number of risks, particularly
- a relatively high risk of failure;
- dilution of initial shareholdings through further issues; and
- the absence of a secondary market making equity stakes illiquid.
- Currently a small sector, often with many regulatory impediments preventing small public equity raisings or strict limits on the size of retail investments.
Reward/ pre-sale crowdfunding
- Payer receives returns in the form of physical goods or services in return for sums paid.
- Sums are raised for charitable causes.
- Regulatory perspective: reward/pre-sale crowdfunding and donation crowdfunding differ from the first two types.
- They do not provide a financial return in the form of a yield or return on investment.
Approaches to P2P Lending Regulation
- Regulation of crowdfunding activities varies across jurisdictions
- Currently 5 key regulatory approaches to P2P Lending:
- Activities are either exempt or unregulated due to lack of definition;
- Crowdfunding platforms are regulated as intermediaries;
- Crowdfunding platforms are regulated as banks;
- The US model under which there are two levels of regulation: Federal regulation through the Securities and Exchange Commission and state level regulations, where platforms must apply on a state-by-state basis; and
- Prohibition of P2P lending.
- Other possible form of regulation:
- regulation as a collective investment scheme (CIS) where a platform actively manages investors’ money and automatically invests their money while providing them with a limited choice.
Approaches to Equity Crowdfunding Regulation
- There are 3 main approaches to regulation:
- Regulation that prohibits crowdfunding completely;
- Regulation that permits crowdfunding but creates high barriers to entry; and
- Regulation allowing the industry to exist within strict limits.
- Some have sought to treat equity crowdfunding as exempt, or lighten the regulation of the issuing of shares in return for crowdfunding investment in order to provide funding for SMEs
- Some consider P2P Lending in particular to be an efficient vehicle for funding start-ups and SMEs
- Some are seeking to encourage the practice but without compromising investor protection through specific, targeted regulation
- e.g. UK
Hong Kong Regulation of Crowdfunding
- Has not introduced specific laws or regulations in relation to crowdfunding.
- Crowdfunding activities such as peer-to-peer lending in Hong Kong and equity crowdfunding are potentially subject to the following Hong Kong regulatory provisions:*
- restrictions on offers of shares or debentures to the public under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (C(WUMP)O);
- prohibition on the issue of Unauthorised Invitations to the Public under s.103(1) of the SFO;
- prohibition on carrying on a “regulated activity” under the SFO without being licensed/registered to do so by the SFC; and
- prohibition on carrying on a money lending business without a money lender’s licence under s.7 of the Hong Kong Money Lenders Ordinance (MLO) (Cap. 163).
* Securities and Futures Commission’s (SFC) May 2014 “Notice on Potential Regulations Applicable to, and Risks of, Crowdfunding Activities”
Restrictions on Offers of Shares or Debentures to the Public under the (C(WUMP)O)
- The offer of shares or debentures to the “public” is regulated by C(WUMP)O
- For Hong Kong incorporated companies, any prospectus issued (s.38 C) by or on behalf of the company, and in the case of overseas companies, any prospectus distributed in Hong Kong (s.342) must:
- comply with the detailed contents requirements of C(WUMP)O (notably the Third Schedule); and
- be registered with the Registrar of Companies.
- A “prospectus” is defined as any prospectus, notice, circular, brochure, advertisement or other document which:-
- offers any shares or debentures of a company to the public for purchase or subscription; or
- is calculated to invite offers by the public to subscribe for or purchase any shares or debentures of a company.
- A company which issues a prospectus which does not comply with the disclosure and registration requirements, and every person who is knowingly a party to the issue, commits an offence under C(WUMP)O.
- The provision of information on the internet in relation to investment-based crowdfunding (involving investment in equity or debt securities) is likely to constitute the issue of a prospectus in breach of C(WUMP)O.
- Exemptions (17th Schedule to C(WUMP)O):
- Consider whether these exemptions are available and suitable for particular crowdfunding platforms
- Most require access to the information to be restricted which poses difficulties for online crowdfunding platforms in practice
- Offers to not more than 50 persons
- Limitation is on the number of offers made (not offers accepted) thus the exemption would only apply to an online crowdfunding platform if access could be restricted to 50 persons.
- Upper limit of 50 takes into account offers by the same person in reliance on the same exemption made in the preceding 12 months which prevents offers being staggered to make offers to larger numbers of investors.
- Offers only to professional investors (as defined in SFO)
- Professional investors under the SFO fall into two main categories:
- institutional investors – e.g. regulated banks, investment intermediaries, funds, insurers, pension schemes etc.; and
- “high net worth investors” as defined under the the Securities and Futures Professional Investor Rules (the PI Rules).
- High net worth investors include:
- an individual, who either alone or with any of his or her associates on a joint account, has a portfolio of > HK$8 million or its equivalent in any foreign currency at the relevant date (an “associate” in relation to an individual, means the spouse or child of the individual);
- a corporation or partnership with:
- a portfolio of > HK$8 million or its equivalent in any foreign currency; or
- total assets of >HK$40 million or its equivalent in any foreign currency; and
- any corporation the sole business of which at the relevant date is to hold investments and which at the relevant date is wholly owned by any one or more of the following persons: an individual who, either alone or with any of his or associates on a joint account, falls within the description in (1); or (ii) a corporation or partnership that falls within the description in (2).
- Professional investors under the SFO fall into two main categories:
- Offers for which the total consideration payable < HK$5 million
- reliance is likely to be problematic
- restriction is on the number of offers made (which is potentially unlimited where the information is available on the internet) rather than the number of offers accepted
- upper limit of HK$5 million takes into account offers by the same person in reliance on the same exemption made in the preceding 12 months.
- Offers where the minimum consideration payable (for shares) or the minimum principal amount to be subscribed (for debentures) < HK$500,000
- exemption requires a minimum investment amount of HK$500,000
- Offers to not more than 50 persons
Prohibition on the Issue of Unauthorised Invitations to the Public under s.103(1) SFO
- 103(1) SFO prohibits the issue, or possession for the purposes of issue, of an advertisement, invitation or document containing an invitation to the public (together “investment advertisement”):
- to enter into or offer to enter into:
- an agreement to acquire, dispose of, subscribe for or underwrite securities; or
- a regulated investment agreement; or
- to acquire an interest in or participate in, or offer to acquire an interest in or participate in, a collective investment scheme,
unless the issue is authorised by the SFC.
- to enter into or offer to enter into:
- 103(10) contains deeming provisions whereby:
- any advertisement, invitation or document which consists of or contains information likely to lead, directly or indirectly, to the doing of any act referred to in s.103(1)(a) or (b) is regarded as an advertisement, invitation or document which is or contains an invitation to do such act; and
- any advertisement, invitation or document which is or contains an invitation directed at, or the contents of which are likely to be accessed or read (whether concurrently or otherwise) by, the public is deemed to be or contain an invitation to the public.
- Information inviting investment in equity or debt securities or in a CIS available on a website is likely to be regarded as an “invitation to the public” requiring SFC authorisation in the absence of an available exemption.
- Offers exempt under the Seventeenth Schedule to C(WUMP)O
- Offers of shares or debentures which fall within any of the exemptions in the 17th Schedule to C(WUMP)O are exempt from the s.103(1) SFO prohibition by virtue of s.103(2)(ga) SFO.
- Offers only to professional investors
- The issue of investment advertisements in respect of securities, structured products or interests in a collective investment scheme only to professional investors are exempt by virtue of s.103(k) SFO.
- Reliance on this exemption raises the same issues as the professionals exemption under C(WUMP)O (see Pg.13)
- Offers not to the public
- although not strictly an exemption, since the prohibition is of invitations to the public, an offer would not contravene this provision if it is structured not to be a public offer.
- no bright line test set as to how many offerees are considered to constitute the public.
- reliance would require access to the information to be restricted.
Unlicensed Carrying on of a Regulated Activity under the SFO
- Even where an exemption is available in respect of an offer or invitation of investment products under C(WUMP)O or the SFO, operators of crowdfunding platforms may commit an offence for conducting “regulated activities” as defined in the SFO without being licensed or registered to do so.
- Types of regulated activities potentially involved in crowdfunding which require licensing include:
- Type 1: Dealing in Securities
- Type 4: Advising on Securities
- Type 6: Advising on Corporate Finance
- Type 7: Providing Automated Trading Services
- Type 9: Asset Management
- Consideration how and whether operators of crowdfunding platforms would need to be licensed or registered with the SFC
- There are few, if any exemptions, currently available
- e.g. the regulated activity of “dealing in securities” is widely defined.
- A person “deals in securities” if he, whether as principal or agent, makes or offers to make an agreement with another person, or induces or attempts to induce another person to enter into or offer to enter into an agreement to acquire, dispose of, subscribe for or underwrite securities.
- Information posted in relation to investment-based crowdfunding is likely to be within that definition.
- Exemption for dealing with professional investors in paragraph (v) A of the definition of dealing in securities in Schedule 5 SFO would not be available:
- available only to a person who acts as principal in the transaction (this would not cover a crowdfunding platform)
- applies only to dealings with institutional investors (the definition of professional investors applicable to the exemption does not apply to professional investors under the PI Rules (such as high net worth investors).
- Exemption where a person as principal, acquires, disposes of, subscribes for or underwrites securities (para. (v) B of the definition of dealing in securities in Schedule 5 SFO) would not apply as:
- requires the person to act as principal; and
- there is doubt that “disposes of” would extend to cover marketing activities.
Code of Conduct Requirements
- Where a crowdfunding platform carries on a regulated activity for which a licence is required, the platform would also be required to:
- comply with the requirements of the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC which contain provisions requiring licensed intermediaries to establish clients’ financial situation and investment experience etc.; and
- ensure that investment products recommended to the client are suitable for the particular client.
- Crowdfunding activities may constitute the carrying on of a money lending business requiring a money lender licence under s.7 of the MLO.
- In Hong Kong, platforms such as WeLend and BestLend both facilitate online lending but are not pure Hong Kong P2P Lending platforms.
- has apparently facilitated nearly HK$1 billion in loans since it founded in July 2013
- however describes itself as an online lender rather than a pure Hong Kong P2P Lending platform as it only accepts loans from lenders in the company’s private network
- apparently has a number of big-name investors including Li Ka-shing’s TOM Group and US-based Sequoia Capital*
- Welend’s online platform (https://www.welend.hk/en/about-us) only enables borrowers to apply for loans online
- loans which can be applied for include personal loans of amounts ranging from HK$3,000 to HK$300,000 at rates as low as 1.00% APR and with maturities of between 14 days to over 4 years
- specific categories of loans include debt consolidation loans to allow the clearing of loan and credit card debt, wedding loans and mobile phone purchase and prepaid mobile expense loans
- Welend is a licensed money lender so that the loans made to borrowers are regulated by the MLO.
*China Daily. “Strictly Among Peers”. Luo Weiteng. 6 February 2015. (
The Money Lenders Ordinance *Haitong/Bestlend Press Release “Haitong International Sets Foot in Internet Finance by Launching First P2P Online Lending Platform in Hong Kong”. 22 January 2015. (http://www.htisec.com/english/aboutus/press/20150209115340.pdf) The Money Lenders Ordinance Regulation of Money Lenders Transactions Consequences of Failure to Comply with the Money Lenders Ordinance Anti-Money Laundering and Counter-Terrorist Financing Regulation *FSTB Press release LCQ1: Regulation of Crowdfunding. Wednesday, March 18, 2015 The United Kingdom UK Regulation of Crowdfunding Investment-based Crowdfunding Restriction on Direct Offer Financial Promotions to Retail Clients * Policy Statement PS14/4 on the “FCA’s Regulatory Approach to Crowdfunding over the Internet and the Promotion of Non-readily Realisable Securities by other Media” Media” Transitional arrangements Scope of Application of the New Rules Regulations * Financial Services Compensation Scheme (FSCS) set up under the Financial Services and Markets Act 2000: http://www.fscs.org.uk/ The FSCS currently does not cover loan-based crowdfunding unless the P2P firm operating the platform in question in in default. * The types of financial resources that a firm must hold to meet their capital requirement are detailed in IPRU(INV)12.3.2R.
CONC Unregulated and Exempt Activities * “A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-readily Realisable Securities by Other Media”
the new regulated activity.
Hong Kong Regulation of Crowdfunding
Crowdfunding in Hong Kong
P2P Lending Hong Kong legal advice
P2P lending in Hong Kong
Peer-to-peer lending in Hong Kong
Hong Kong P2P Lending platforms
Hong Kong Money Lenders Ordinance
Peer to Peer Borrowing
Peer to Peer Lending Sites
Peer to Peer Lending Companies
Hong Kong Ordinance
The Money Lenders Ordinance
*Haitong/Bestlend Press Release “Haitong International Sets Foot in Internet Finance by Launching First P2P Online Lending Platform in Hong Kong”. 22 January 2015. (http://www.htisec.com/english/aboutus/press/20150209115340.pdf)
The Money Lenders Ordinance
Regulation of Money Lenders Transactions
Consequences of Failure to Comply with the Money Lenders Ordinance
Anti-Money Laundering and Counter-Terrorist Financing Regulation
*FSTB Press release
LCQ1: Regulation of Crowdfunding. Wednesday, March 18, 2015
The United Kingdom
UK Regulation of Crowdfunding
Restriction on Direct Offer Financial Promotions to Retail Clients
* Policy Statement PS14/4 on the “FCA’s Regulatory Approach to Crowdfunding over the Internet and the Promotion of Non-readily Realisable Securities by other Media” Media”
Scope of Application of the New Rules
* Financial Services Compensation Scheme (FSCS) set up under the Financial Services and Markets Act 2000: http://www.fscs.org.uk/
The FSCS currently does not cover loan-based crowdfunding unless the P2P firm operating the platform in question in in default.
* The types of financial resources that a firm must hold to meet their capital requirement are detailed in IPRU(INV)12.3.2R.
Unregulated and Exempt Activities
* “A Review of the Regulatory Regime for Crowdfunding and the Promotion of Non-readily Realisable Securities by Other Media”