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351 CHAPTER 18 CROWDFUNDING AND ITS REGULATION IN HONG KONG: ROOM FOR INERTIA? Lareina J Chan* I INTRODUCTION The pace at which technology is developing and revolutionising the way we do things accelerates exponentially. With the blink of an eye, the world is presented with further technological advances that make what we thought was revolutionary yesterday, no longer so revolutionary. "Traditional" businessmen, policymakers, regulators and other stakeholders struggle to keep up to pace, and it is difficult to jump onto the bandwagon when it is difficult to find a suitable place take the leap. From a broader perspective, disruptive technologies – like the Internet was and is – transform the way we live and work, enable new business models, and provide an opening for new players to upset and disrupt the established order. 1 Policymakers need to prepare for future technology, equipped with a clear understanding of how such technology may shape the global economy and society over the coming decade.2 Governments need to create an environment in which citizens can continue to prosper, even as emerging technologies "disrupt" their lives.3 Regulators will be challenged and pressured to achieve the fine balance of protecting the rights and privacy of citizens, while providing room for such an ecosystem promoting upward societal growth. It will be too late for businesses, policymakers and citizens to plan their responses only after disruptive technologies have fully exerted their influence on * Barrister-At-Law, Garden Chambers, Hong Kong. 1 See McKinsey Global Institute (May 2013), Preface. 2 Ibid at p 1. 3 Ibid. 352 HARMONISING TRADE LAW the economy and society as a whole. 4 In fact – it is clear to see how digital advances are already pervading every aspect of our professional, personal and social lives. Policymakers and regulators need to look ahead – particularly in light of the lengthy convoluted process involved in reforming the regulatory rubric – to determine how to shape markets and policies in ways that will serve the best interests of society today. 5 Though the digital universe seems to have been colonised by the millennials,6 baby boomers need to catch on if they have not already.7 Technological advances are moving from just video games and smartphone apps to developments that will have profound and helpful impacts on all aspects of our lives.8 In recent years, innovation in entrepreneurial finance emerged both as a result of imbalances between the supply and demand of capital and as a consequence of improvements in technology.9 Financial technology ("fintech") has seen a threefold increase in global investment, from under US$930 million in 2008 to over US$2.97 billion in 2013, and is being touted as a game changer for the global financial industry. 10 Investments in 122 Asia-Pacific fintech deals reached US$3.46 billion in the first 9 months of 2015, up from US$879 million spent on 117 projects for the whole of 2014.11 The participation of large, non-traditional financial services companies as investors in innovative payment ventures have boosted the overall value of fintech projects in the Asia-Pacific region in the second half of 2015.12 Global investments in fintech are predicted to surge to over US$46 billion in 2020.13 The fintech industry targets hundreds of millions of people who may not be independently wealthy, and may be based in emerging markets, or a long way from 4 Ibid at p 148. 5 Ibid at Preface. 6 See Dodwell (28 February 2016). 7 See John C Tsang, Hong Kong 2016-2017 Budget Speech at §65, "Entrepreneurship is not exclusive to the young. Older people with societal experience and professional expertise can join the ranks of entrepreneurs to bring forth new possibilities by applying creativity and technology". 8 See Dodwell, above n 6. 9 See Bruton, Khavul, Siegel and Wright (2015) at p 10. 10 See Yeung (10 March 2015). 11 See Perez (4 November 2015). 12 Ibid. 13 See Tsang, Hong Kong 2016-2017 Budget Speech, above n 7 at §57. CROWDFUNDING AND ITS REGULATION IN HONG KONG 353 big cities, or running SMEs.14 Fintech by its nature takes the middleman out of traditional banking services and ideally, does this with a lower cost base, robust compliance, leading edge technology and oftentimes, aggressive social media marketing. 15 Fintech enterprises create significant reach by delivering these services through easy-to-access mobile and web-based platforms.16 The fintech revolution is being driven by two very different populations: radical new start-up disrupters who exploit the potential of new technologies to develop fundamentally new ways of living our financial lives; and incumbent behemoths that have on the one hand recognised that unstoppable forces have been unleashed, and on the other, have seen economies and efficiencies embedded in the new technologies that can save them big money, improve services for customers, and help them retain their hard-fought competitive leadership.17 Amongst the "new age" forms of entrepreneurial finance and innovative technological solutions,18 crowdfunding has emerged at the forefront. Experience from other jurisdictions suggests that crowdfunding will happen and indeed flourish whether one regulates it or not, and the best response is to facilitate development within some rules.19 II DEFINITION OF CROWDFUNDING Crowdfunding is an umbrella term describing the use of small amounts of money, obtained from a large number of individuals or organisations, to fund (for example) a project, a business or personal loan, through an online web-based platform.20 The concept itself is far from new and has been embedded in human culture since its early days – historically, mainly in the area of charitable donation campaigns. 21 However, the term crowdfunding today typically denotes raising funds through the use of the Internet.22 14 See Spence (28 December 2015). 15 Ibid. 16 Ibid. 17 See Dodwell, above n 6. 18 See Yeung, above n 10. 19 See Hong Kong FSDC (18 March 2016) at §4. 20 See IOSCO at p 8; cited in Hong Kong SFC (7 May 2014). 21 See European Commission (2014) at p 1. 22 Ibid. 354 HARMONISING TRADE LAW The emergence of "modern" crowdfunding dates back more than a decade, although the use of a dedicated platform for several crowdfunding campaigns has only gained traction in recent years.23 The development of entrepreneurship, the creation of start-ups and the growth of SMEs are considered important contributors to the global economy in terms of innovation, competitiveness and growth.24 Crowdfunding adds value to this movement of economic growth and development by generating additional revenue from a much wider audience or by providing capital to start-ups and SMEs.25 Additionally, the social network angle that fuels crowdfunding platforms brings together market participants from across the globe who – in an offline and historic context – would not have the opportunity to come together.26 Crowdfunding can be divided into 2 broad categories, each with 2 sub- categories:27 (1) Community Crowdfunding (a) "Donation-based crowdfunding", where people give money to enterprises or organisations whose activities they want to support; and (b) "Pre-payment or rewards-based crowdfunding", where people give money in return for a reward, service or product. (2) Financial Return Crowdfunding (a) "Peer-to-peer lending" ("P2P lending"), or loan-based debt crowdfunding, where individuals or companies lend money in return for interest payments and a repayment of capital over time; and (b) "Equity crowdfunding", or investment-based crowdfunding, where individuals or companies invest directly or indirectly in new or established businesses 28 by investing in the company or campaign, through a variety of forms. It is to be noted that besides the abovementioned categories of crowdfunding, there may be other subcategories or different permutations and combinations of 23 Ibid. 24 Ibid. 25 Ibid. 26 Ibid. 27 See IOSCO at p 8; and UK FCA (2014). 28 Such businesses may be called "investees". CROWDFUNDING AND ITS REGULATION IN HONG KONG 355 subcategories, particularly as the market develops and evolves. Hong Kong is still at an infant stage of development.29 Community crowdfunding involves fundraising for charitable causes, such that donors do not receive any financial return in the form of a return on investment.30 Rewards-based crowdfunding receives little attention from regulators as it is a form of pre-sale and enjoys traditional consumer protection, such as breach of contract if a product is not delivered.31 The focus of governments and regulators has predominantly been on P2P lending and equity crowdfunding – which form the focus of this Paper – due to the securities regulatory implications. Both P2P lending and equity crowdfunding involve fundraising through online platforms, thus having a multi-jurisdictional reach. P2P lending directly "competes" with banks, which are facing increasingly stringent regulations post-financial crisis. It has been said that equity crowdfunding presents the biggest risk for fraud and failure, and usually involves higher risks.32 2.1 P2P Lending P2P lending involves the matching of lenders (investors) with borrowers (issuers) for the provision of unsecured loans through an online platform. 33 Investors can provide money for small fragments of the overall loan capital required by a borrower. The loan parts are aggregated by the online platform until funds have accumulated to cover the total loan capital required by the borrower.34 The loan is then originated and paid to the borrower.35 The P2P business model is different from that of traditional banks, in that P2P platforms do not lend their own funds to borrowers. 36 The platform matches borrowers with lenders/investors who purchase notes or securities backed by notes issued by the P2P platforms. 37 The P2P platform generates revenue from 29 See Yeung, above n 10.

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