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Crowdfunding controls in the pipeline

By Arthur Chan

Hong Kong, 6 January 2023: Stricter regulation of crowdfunding in Hong Kong is on the way, with the government proposing to set up a new body to oversee such activities. All campaigns of this nature will be required to register with the new authority, while fundraising efforts which jeopardise the public interest, public safety or national security will be outlawed.

The Financial Services and the Treasury Bureau (FSTB) has launched a three-month public consultation on the proposed legislation. Chief Executive John Lee, meanwhile, insists the initiative is necessary to fill in “gaps” in existing laws regarding online funding campaigns.

The practice of financing a project or venture by raising money from a large number of people has existed for centuries. But it has proliferated since the turn of the millennium with increased use of the internet and the advent of digital platforms that enable quick and easy online donations. Michael Sullivan, founder of FundaVlog, is credited with coining the term “crowdfunding” in 2006.

The global crowdfunding market was valued at US$1.49 billion in 2021 and is expected to balloon to US$5.53 billion by 2030, according to respected San Francisco-based survey and consulting company Grand View Research. That’s a compound annual growth rate of more than 16%.

In Hong Kong, crowdfunding has been a popular activity among pro-democracy politicians and activists seeking to pay the legal fees of citizens arrested in connection with the 2019 civil unrest or under the national security law.

In one high profile court case, online radio host Edmund “Giggs” Wan was jailed for two years and eight months after pleading guilty to money laundering and sedition. He had canvassed for donations via his website and on social media to support Hong Kong protesters who had fled to Taiwan. The following month, retired Catholic leader Cardinal Joseph Zen and five others were fined up to HK$4,000 each for failing to register the 612 Humanitarian Relief Fund as a society. The fund, now closed, raised some HK$243 million to support people arrested during the protests.

However, there is a flip side to every coin and crowdfunding scams present an imminent threat to investors or citizens alike. There are instances where fundraisers, through false pretences, mislead people into funding a particular project and take the invested money for personal use.

 The FSTB’s consultation paper sets out various recommendations for enhancing the transparency and accountability of crowdfunding activities. The key proposal involves setting up a Crowdfunding Affairs Office (CAO) to process regulatory and administrative matters. Other suggested measures include:

  • All fundraising campaigns must register with the CAO, regardless of their purpose or location.
  • The CAO will consider the honesty and reliability of an applicant and the scale of proposed fundraising, as well as risks to the public interest, public safety and national security.
  • The CAO will work with other government departments to streamline procedures for fundraising activities which are subject to existing regulation, such as flag days or lotteries.
  • The new legislation will not apply to commercial fundraising activities which are already overseen by financial regulators.
  • Exemptions will be allowed for widely recognised or charitable activities which address an urgent need.
  • Fundraisers must disclose their objectives and arrangements, use local bank accounts and keep proper records.
  • Consideration will be given to setting up a registration system for crowdfunding platforms.
  • Law enforcement agencies will be empowered to stop unlawful crowdfunding activities and prosecute offenders.

The FSTB insists Hong Kong’s lack of a clear mechanism for regulating crowdfunding poses a risk to the public interest. It says the proposals can “strengthen public confidence to participate in lawful and proper crowdfunding activities” and deter unlawful acts. Critics, however, are worried the new regime could stifle creativity and hurt cultural or artistic projects which, while contrary to government thinking, would not be considered a security threat.

The public consultation is a chance for all sectors of the community to have their say before the FSTB’s proposals are crystalised into a legislative bill. However, it would appear that only when the new crowdfunding regulatory regime is fully implemented will we have a better understanding of its impact on this dynamic and innovative public activity.

Arthur Chan is a Senior Associate with BC&C. He deals with Criminal Matters while also covering Civil and Commercial Litigation and handles cases involving personal injury and employment issues. He can be contacted at Arthur@boasecohencollins.com.

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