SFC weighing new British approach that legitimises crowd funding for start-ups

PUBLISHED : Tuesday, 22 March, 2016, 9:05pm
UPDATED : Tuesday, 22 March, 2016, 9:05pm

The Securities and Futures Commission is studying the recommendations of a government-appointed advisory body on whether to follow the British model for a new regulatory framework that would broaden fund raising channels for start-ups to include crowd funding and other social media channels.

Financial Services Development Council member Laurence Li, who was part of the advisory panel, gave the thumbs up to the British model, which made changes to accommodate crowd funding into existing regulations.

Crowd funding refers to individuals or companies using the internet or social media to raise money to help set up their businesses. Hong Kong does not allow equity crowd funding while US, UK and certain western countries in recent years have introduce regulation that permit these activities.

“Hong Kong could chose to do nothing but it is what the other markets have been doing. Hong Kong has to catch up and take the first mover advantage on developing crowd funding,” Li said.

“This would be useful for the many newly starts up in the mainland to raise funds in the city. If Hong Kong could not offer such platforms, these mainland companies would go elsewhere,” he said.

In 2012 the US introduced a new law on crowd funding but he doubts the model would appropriate for Hong Kong. Instead, he said the British regulatory framework is easier and quicker to adopt.

The British Financial Conduct Authorities grant licenses and issues conduct and financial requirements for the operators to run crowd funding activities. It also regulates who can lend money via crowd sourcing, such that only sophisticated investors can channel up to 10 per cent of their net investible financial assets in securities offered via the crowd funding channels.

Li said the SFC could give conditional exemptions for the issuers so that they do not need to issue a prospectus for the crowd funding offering. The SFC could also consider whether to issue licenses for crowd funding platform operators requiring them to determine how much a sophisticated investor could invest the platform.

A SFC spokesman told the Post on Tuesday that the commission takes a close interest in all Fintech developments, including crowd funding.

“We agree with the FSDC that any approach to crowd funding must pay attention to investor protection and also take into account which innovations may operate for the benefit of investors, consumers and the economy,” the spokesman said.

“We now have a Fintech Contact point and we are setting up an industry committee to discuss the interaction between regulation and Fintech,” he added.

David Donald, a professor of law at The Chinese University of Hong Kong, who was involved in the FSDC study on crowd funding, said investors should also understand the risks of crowd funding investment. The British experience has shown only 55 per cent of start-ups that raised funds via crowd funding were successful while the rest failed.

“Introducing a regulatory framework for crowd funding would not improve the successful rate of new start-ups. It is a risky business which is only suitable for sophisticated investors who understand the high risks of these investments,” Donald said.