In his 2015-2016 budget speech, HK Financial Secretary John Tsang Chun-wah set out the government’s intention to develop Hong Kong into a financial technology hub by investigating issues relating to crowd-funding in Hong Kong.
Unlike other commonwealth jurisdictions such as the UK and New Zealand, Hong Kong has yet to introduce regulations which specifically address the control or facilitation of crowd-funding activities. At present, the operation of online platforms for financial-returns crowd-funding (See Crowd-funding activities) are indirectly regulated as a form of ‘non-application of or exemptions under the Securities and Futures Ordinance (Cap 571) (SFO), the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (C(WUMP)O), and the Money Lenders Ordinance (Cap 163) (MLO).
Notice on Potential Regulations Applicable to, and Risks of, Crowd-funding Activities
Securities and Futures Commission’s (SFC) May 2014 “Notice on Potential Regulations Applicable to, and Risks of, Crowd-funding Activities”
Under the SFO
Offers of investments in securities/collective investment scheme
It is an offence under section 103(1) of the SFO for a person to issue any advertisement, invitation or document which to his knowledge is or contains an invitation to the public to enter into an agreement to acquire securities, or acquire an interest or participate in a collective investment scheme, unless the issue has been authorised by the SFC or an exemption under the SFO applies.
The term ‘collective investment scheme’ is defined broadly in Schedule 1 to the SFO and broadly encompasses four relevant elements:
- it must involve arrangements in respect of any ‘property’ (note: the word ‘property’ is widely defined in section 1 of Part 1 of Schedule 1 to the SFO to include money, goods, choses in action and land in Hong Kong or elsewhere)
- investors in the scheme do not have day-to-day control over the management of the property even if they have the right to be consulted or to give directions about the management of the property
- the property is managed as a whole by or on behalf of the person operating the arrangements, and/or the contributions of the investors and the profits or income from which payments are made to them are pooled, and
- the purpose or effect of the arrangements is for the investors to participate in or receive:
- profits, income or other returns from the acquisition, holding, management or disposal of the property, or
- payments or other returns from: the acquisition, holding or disposal of, the exercise of any right in, the redemption of, or the expiry of, any interest in property
Reference: SFO, Sch 1
For example, information made available on an online platform (e.g., a crowd-funding website) inviting public investors to invest in listed shares or in the shares of a company with more than 50 shareholders may be regarded as an ‘invitation to the public’ to subscribe ‘securities’ for the purpose of section 103 of the SFO requiring authorisation by the SFC unless an exemption applies.
Reference: FAQ under ‘Collective investment schemes involving interests in real property’
As another example, information made available on an online platform (e.g., a crowd-funding website) inviting public investors to invest in real estate properties in Hong Kong or overseas while the administration and management of the investment scheme is centrally managed by the persons selling the scheme, may be regarded as an ‘invitation to the public’ to subscribe a ‘collective investment scheme’ for the purpose of section 103 of the SFO requiring authorisation by the SFC unless an exemption applies.
SFC licensing requirements
Crowd-funding platform operators may also be subject to the licensing obligations under the SFO if the operators are regarded as carrying on a business in a regulated activity as defined under the SFO. The regulated activity concerned is likely to be ‘dealing in securities’ as provided for in Part 1 of Schedule 5 to the SFO. The term ‘securities’ is widely defined in section 1 of Part 1 of Schedule 1 to the SFO to cover shares, debentures, interests in collective investment schemes and structured product, etc. It is an offence under section 114 of the SFO for a person to carry on business in a regulated activity without a licence issued by the SFC, unless an exemption applies.
Reference: SFO, s 114
There are 12 types of regulated activities under the Fifth Schedule of the SFO, covering a wide range of activities. For example, the operation of an Equity Crowd-funding platform for the sale of debt securities will likely fall within the definition of Type 1 regulated activity (Dealing in Securities) and thus requires the operator to be a Type 1 licensed person under the SFO.
Reference: SFO, Sch 5
Besides, if a crowd-funding platform triggers the licensing requirement, all relevant codes, rules and guidelines issued by the SFC from time to time will be triggered and thus be applicable to the operation of such platform. In particular, the crowd-funding platform would be required to comply with the SFC’s Code of Conduct for Persons Licensed by or Registered with the SFC (the “SFC Code of Conduct”), which ensures that investment products recommended to client are suitable for that client.
Reference: Licensing and registration – ongoing obligations and the SFC Code of Conduct
Further, crowdfunding platforms which amount to operating of a ‘stock market’ and/or providing of ‘automated trading services’ may also be subject to the authorisation regime under Part III of the SFO.
Reference: SFO, Sch 1, ss 19, 95
Under the C(WUMP)O
Offers of investments in shares and debentures
A document offering shares in or debentures of a company to the public is subject to contents requirements and prospectus registration requirements under the C(WUMP)O unless an exemption applies. It is an offence for the company and any person who is knowingly a party to the issue to issue a prospectus which does not comply with the relevant disclosure and registration requirements under the C(WUMP)O.
Reference: C(WUMP)O, ss 38, 38B, 38D
Examples of exemptions afforded by the Seventeenth Schedule of the C(WUMP)O includes:
(i) offers made to not more than 50 persons
(ii) offers made only to professional investors as defined in the SFO
Professional investors under the SFO includes:
(a) institutional investors including authorized banks, licensed investment intermediaries; authorized funds; authorized insurers; authorized pension schemes etc; and
(b) “high net worth investors” who are categorized as professionals by the Securities and Futures Professional Investor Rules (the “PI Rules”).
Under the PI Rules, “high net worth investors” includes:
(a) an individual who has a portfolio of not less than HK$8 million at the relevant date;
(b) a corporation or partnership which has a portfolio of not less than HK$8 million or total assets of not less than HK$40 million at the relevant date; or
(c) a corporation which, at the relevant date, has as its principal business the holding of investments and is wholly owned by any one or more of the persons as specified above.
(iii) offers for which the total consideration payable does not exceed HK$5 million
(iv) offers where the minimum consideration payable (in the case of shares) or the minimum principal amount to be subscribed (in the case of debentures) does not exceed HK$500,000
Reference: C(WUMP)O, Sch 17, SFO and PI Rules
For example, the provision of information on an online crowd-funding platform for investment in in the shares or debt securities of a company will likely amount to an issuance of prospectus in accordance with the C(WUMP)O. Consideration, however, would need to be given to whether the exemptions as listed under Schedule 17 of the C(WUMP)O are available to and suitable for any particular crowdfunding platform.
Under the MLO
Money lender’s licensing requirements
It is an offence under the MLO for a person to carry on business as a money lender without a money lender’s licence granted under the MLO, unless one of the exceptions specified by Schedule 1 to the MLO applies. P2P Lending operators, having an ordinary business primarily or mainly involves the lending of money, might be considered an unlicensed money-lender in contravention of the MLO.
Reference: MLO, Sch 1, ss 2, 7, 29
Under the regulations for Anti-Money Laundering and Counter-Terrorist Financing
There are several legislations which deals with the combat of money laundering and terrorist financing, and are also applicable in the case of crowdfunding:
(a) the Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance (the “AMLO”);
(b) the Drug Trafficking (Recovery of Proceeds) Ordinance (the “DTROP”);
(c) the Organized and Serious Crimes Ordinance (the “OSCO”); and
(d) the United Nations (Anti-Terrorism Measures) Ordinance (the “UNATMO”).
The AMLO requires that a financial institution should conduct customer due diligence and conduct ongoing monitoring of client accounts and information. On the other hand, the DTROP, OSCO and UNATMO require financial institutions to report suspicious transactions to the Joint Financial Intelligence Unit.
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