FSTB consults on regulation of crowdfunding activities

Presentation team in Hong Kong Office Area

The Financial Services and the Treasury Bureau published a consultation document at the end of last year seeking views on proposals relating to the enhanced regulation of crowdfunding activities in Hong Kong. The proposed amendments aim to bridge the gap in current activities by covering unregulated crowdfunding, both online and offline. They also address the growing trend seen in the region.

The Financial Services and the Treasury Bureau (FSTB) consultation on regulation of crowdfunding activities closes on the 20th of March in 2023. The proposed amendments include the establishment of a Crowdfunding Affairs Office – or CAO – for crowdfunding approval, registration and administrative framework, principles to be considered when determining a crowdfunding application, requirements on people conducting fundraising activities, registration requirement for the use of crowdfunding platforms and online media, unlawful crowdfunding activities and law enforcement powers.

Enhancing the existing regulatory framework on crowdfunding activities can increase the transparency and accountability of the activities and protects the public interest. It also gives clear guidance to the fundraisers when designing a project plan in Hong Kong to help them meet their goals successfully and legally.

Transparency and safeguarding

In recent years, there is an emerging trend in crowdfunding activities of diverse purposes and nature in Hong Kong, which may engage in unlawful acts (such as money laundering, fraud, activities endangering national security, etc). As the existing measures do not sufficiently address the online and offline fundraising activities, the proposed regime aims to increase the transparency and accountability of these activities to prevent unlawful acts and safeguard the interests of all those involved.

Key takeaways from the consultation

The consultation paper seeks comments on key areas of regulation of crowdfunding activities.

Approvals before conducting a crowdfunding activity

Crowdfunding activity refers to activity that raises funds from individuals or entities of Hong Kong, or individuals or entities located in Hong Kong. It is proposed that fundraising activities, which amount to SFC regulated activities or banking activities regardless of whether it is conducted online or offline, shall continue to be subject to the existing laws and regulations, while the making of or offer of loans to borrowers amounts to an operation of moneylending business will be subject to licensing requirement and regulation under the  Money Lenders Ordinance.

Responsibilities of the proposed CAO

Examples of proposed responsibilities include co-ordinating the approval process, issuing guidelines on the conduct of crowdfunding activities, monitoring the conduct of crowdfunding activities and referring any identified non-compliance to law enforcement agencies for prosecution or whether CAO should be given enforcement powers to prosecute on its own.

Situations applying simplified application procedures and exemptions

The consultation proposed some situations that may apply simplified applications (for example, fundraising application for a second time with similar purpose and arrangement) and exemptions (for exampe, calls that religious bodies make to their followers for donations on religious grounds). The document proposed that some fundraising or financing activities would be subject to enhanced regulation.

Factors to consider when approving an application

The CAO’s approval of a crowdfunding activity are proposed to consider the reliability and reputation of the applicant, reasonability of the fundraising scale, whether the crowdfunding activity is conducted according to appropriate and sound procedures, risk of the activity giving rise to illegal conducts or endangering public interests, public safety and national security.

Registration for the use of crowdfunding platforms and online media

It’s proposed that a registration system should be established for crowdfunding platforms to register with the CAO if they accept crowdfunding activities which raise funds in Hong Kong.

Unlawful crowdfunding activities and law enforcement powers

Lists of unlawful crowdfunding activities and actions taken by the relevant law enforcement agencies as well as the relevant ordinance are suggested.

Responsibilities of financial institutions

Given the crowdfunding activities involve the pooling and transfer of funds, the consultation proposes that it should be a requirement for funds collected in this way in Hong Kong to be paid into a designated account with a local bank. They would impose requirements on banks and their staff relating to reporting suspicious transactions, conducting due diligence on customers and record .

The proposed regime is currently in the initial stages of consultation. Nevertheless, if you have any plans to raise funds from individuals or entities in Hong Kong, you should understand the existing regulatory framework and its development in the future to ensure you comply with the local requirements.

How we can help

We can advise you on the regulatory requirements proposed in the above crowdfunding activity consultation by conducting reviews and assessments on your existing framework.

Our dedicated Global Capital Markets team can assist you with the implementation of enhanced customer onboarding procedures, amongst other regulatory compliance support while sharing relevant insights with you and your team. Get in touch to find out more.

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