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Published: 23:29, May 23, 2022 | Updated: 10:12, May 24, 2022
Crowdfunding regulations should be enhanced to ensure healthy development
By Junius Ho and Kacee Ting Wong
Published:23:29, May 23, 2022 Updated:10:12, May 24, 2022 By Junius Ho and Kacee Ting Wong

Raising a small sum of money directly from a large group of individuals, crowdfunding has reshaped the intermediary-based fundraising architecture around the world. We can simply divide crowdfunding into two main types; namely, financial-return and nonfinancial-return crowdfunding. 

While equity and debt-based crowdfundings are classified as financial-return crowdfundings with significant financial risks, donation-based crowdfunding is a typical example of the latter type. In response to Ted Hui Chi-fung’s crowdfunding scandal in late 2020, Hong Kong police did a good job in freezing the bank accounts of Hui. They should continue to keep a watchful eye on crowdfunding activities that are related to anti-government activities in Hong Kong. Concerning financial-return crowdfunding, we suggest introducing new legislation to facilitate crowdfunding in the territory.

In the past 10 years, small donation-funded projects and causes have taken full advantage of crowdfunding activities brought about by the global winds of technological changes. Unlike statutory and subsidized charities, private and non-governmental charitable organizations in Hong Kong are generally allowed to operate autonomously under their own governing bodies and according to their own rules and regulations. Nevertheless, the Inland Revenue Department will from time to time call for accounts, annual reports or other documents for the purpose of conducting a review of their tax-exemption statuses. Further compliance requirements are imposed on those charities that are formed as a company incorporated under the Companies Ordinance. For example, they are required to file annual returns.

But donation-based crowdfunding has acted as a cocoon to shield small fundraisers from the above-mentioned oversight. It also bears emphasizing that donation-based crowdfunding is not regulated by financial-market laws because donors do not expect any financial returns from their donation. The huge financial risks associated with investment-based equity crowdfunding have dragged into the spotlight the need to regulate them by financial-market laws. The Securities and Futures Commission has issued a notice reminding the public of the potential risks of equity crowdfunding activities. The risks include business default, illiquidity, insufficient shareholder protection, misrepresentation, and platform failure. Debt-based crowdfunding is also regulated because of default risks and the use of illegal means to attract investment.

Not restrained by securities law and conventional controls imposed on charities, unfettered donation-based crowdfunding may fail to provide necessary support for meaningful cause and give a chance to abusers and fraudsters to gain unjust enrichment at the expense of public justice. In late 2020, Hui’s controversial crowdfunding incident raised a storm of controversy in the city. Being an influential leader of the Democratic Party, Hui successfully raised HK$3.6 million ($460,000) to initiate two unmeritorious private prosecutions against a police officer who was involved in a shooting incident in Sai Wan Ho and a taxi driver who was accused of deliberately plowing through a crowd of protesters in 2019. It is trite law that a private prosecutor’s right to prosecute may attract the intervention of the secretary for justice.

Both cases were dismissed by the courts because the secretary for justice ascertained that they had no evidential foundation. It was essentially an abuse of court process. According to Hui, all the money raised from crowdfunding has been saved in the law firm’s bank account and the audit report has been fully disclosed. He also attempted to draw a clear line between the funds and his personal/family’s accounts. What made Hui’s crowdfunding reprehensible was his allegedly malicious attempt to use the two private prosecutions as a cover for staging an anti-government disruptive movement in Hong Kong. Furthermore, the disproportionately high legal fees arising from the private prosecutions have not escaped the attention of critics.

Later, Hong Kong police froze the five bank accounts of Hui and his family on suspicion of misappropriating donations. At that time, Hui was in self-exile in the UK. According to Senior Superintendent Steve Li Kwai-wah, Hui may have diverted part of the donations away from their intended purpose for his own personal use. The police deserve great credit for keeping a watchful eye on these suspicious donations that are closely related to anti-government activities.

Following in the footsteps of Hui, Hinson Hung has launched a crowdfunding campaign to help with his mounting legal fees in an appeal case against the Court of First Instance’s decision that barred him from office in Kwun Tong District Council. Hung, who was elected as a district councilor in the Tsui Ping district of Kwun Tong, was disqualified by the Court of First Instance in early 2021 after his election opponent filed a legal challenge against the result of the 2019 District Council election. Hui’s crowdfunding scandal may have an adverse effect on the perceived trustworthiness of donations associated with a political agenda.

There is an eruption of concern over the strict laws and rules that regulate equity crowdfunding in Hong Kong. Equity crowdfunding has been marginalized to the edges of the fundraising architecture because the laws and rules are harsh and complicated. For example, small public companies often complain that the costs of equity crowdfunding are disproportionate to the amount of money raised. For a public company, it must issue a prospectus before offering shares or debentures to the public. The costs of preparing a prospectus are extremely high. It is also difficult for a public company to get an exemption from the prospectus requirement.

In view of the benefits of crowdfunding, the Hong Kong Financial Services Development Council published a report on reforming the regulations of equity crowdfunding in Hong Kong on March 18, 2016. The report suggests creating conditional exemptions for public companies from the prospectus requirement. The report does not make any recommendations on peer-to-peer lending. In order to facilitate equity crowdfunding, the Financial Market Conduct Act of New Zealand provides exemptions to the prospectus requirement.

To conclude, Hong Kong should introduce new legislation to facilitate equity crowdfunding and turn it into a cost-effective fundraising option for startups in Hong Kong. Last year, the number of startups reached an all-time high of 3,755. Small startups usually find it difficult to obtain financing from angel investors or venture capital firms. One notable benefit of using equity crowdfunding is that it could help startups grow their markets. The retail investors who contribute money to their crowdfunding campaigns are usually looking to be early adopters of the products that the startups want to develop.

Junius Ho Kwan-yiu is a Legislative Council member and a solicitor.

Kacee Ting Wong is a barrister, part-time researcher of Shenzhen University Hong Kong and the Macao Basic Law Research Center, and co-founder of the Together We Can and Hong Kong Coalition.

The views do not necessarily reflect those of China Daily.

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