Hong Kong’s crowdfunding rules could have global implications – The Diplomat

Hong Kong Government Financial Services and Treasury initiated three-month consultation on the regulation of crowdfunding activities in mid-December and proposed the creation of a special department for crowdfunding affairs to oversee these activities. This could have far-reaching implications for the territory’s future as a financial and innovation hub.

Over the past decade, through the use of the internet, social media, and other technology platforms, the concept of crowdfunding has enabled millions of people to raise capital for their concepts, projects, or products, usually at an early stage of development, while overcoming the hurdles that arise. financial intermediaries such as banks, and other forms of bureaucracy. It also allowed and helped people to support innovative product development, niche cultural events, and popular (or not so popular) social initiatives.

The limitless nature of the Internet and the activities that take place on it does present new challenges to the rules previously developed for more traditional forms of donations, investments, loans or the sale of goods. But this does not mean that crowdfunding activities are not regulated. Indeed, the consultation paper identifies various existing laws and regulations in Hong Kong, such as the Securities and Futures Ordinance and the Moneylenders Ordinance, which provide jurisdiction over such activities, in particular equity, debt or peer-to-peer crowdfunding. lending

The document even states that, as a general rule, any person participating in any online or offline fundraising to “engage in illegal activities (such as money laundering, fraud, theft, acts and activities that threaten national security, or incitement, aiding, abetting, or providing monetary or other financial aid or property for the commission of crimes endangering national security by others)” is already subject to prosecution under Hong Kong criminal law. So why is there such an urgent need to create additional guarantees?

This is apparently due to the flurry of crowdfunding initiatives in Hong Kong during the 2019 protests, most notably the 612 Humanitarian Aid Fund. The fund was originally set up to provide financial support to those injured or arrested during the riots. Cardinal Joseph Zen and former MPs Margaret Ng and Sid Ho were among the foundation’s senior trustees who later arrested, prosecuted and recently convicted. Indeed, the consultation mentions individuals who claimed that “they would have used the funds raised to help those in need, but it turned out that they used the funds for purposes that were illegal and endangered the public interest, public safety, and also national security.” “.

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Political verification extended worldwide

The proposed Crowdfunding Authority (CAO) would require pre-applications for any crowdfunding activity that “raises funds from individuals or entities in Hong Kong or individuals or entities located in Hong Kong.” The document further clarifies that this condition does not only include those located or registered in Hong Kong: “the place of publication of such activities may be any place, including Hong Kong and other places, and with or without Hong Kong-related stated purposes.” In other words , the regulation applies to anyone, anywhere, and for anything that is solely determined by the CAO.The government also proposes to clarify police powers to request financial information; enter, search, and store properties, including financial assets; and disable or stop electronic communications.

While the document acknowledges that “crowdfunding activities are already subject to regulation by various authorities and applicable laws” and therefore duplication of efforts should be avoided, this may be what CAO will eventually become. The new office is not intended to enforce new legislation, but only serves to provide a centralized scrutiny mechanism for certain unwanted political activities that have been virtually non-existent since the implementation of the National Security Law in July 2020. Indeed, the document repeatedly referred to “the public interest, public safety, and national security” as the rationale for the proposed rules.

On the other hand, paradoxically, it actually states clearly that the CAO’s decision to approve or disapprove of an activity has nothing to do with its outcome or success, and participants in even an approved fundraising activity must themselves “carefully examine the validity and degree of success of the activity.” activities that should be supported in order to avoid unnecessary losses” – a statement by the government that the activities of the CAO are not related to the protection of the rights of donors or investors. It’s just a political test, spread all over the world.

Everyone has something to lose

So what should crowdfunding platforms, financial institutions, internet platforms, those seeking financial support, and potential donors or project participants be concerned about? Many

The paper proposes a “real name” system for donors, and fundraisers will be required to maintain this donor register, along with other details of their activities, for verification, as well as verification by the CAO and other law enforcement agencies. Additional bureaucracy and potential liabilities will deter fundraisers, and mandatory disclosure of identity will have a deterrent effect, deterring donors and donors from donating.

It is also still unclear whether the income-generating creative activities of so-called key opinion leaders, journalists or former political figures on platforms such as YouTube and Patreon fall under the definition of “crowdfunding” in the proposed regulation. The document mentions “business activities in online media and the like related to subscription or online rewards income” as among some of the activities that will be exempted from regulation. But this may still depend on whether the CAO eventually subjectively classifies such activities as purely “commercial” or not. Even though many of these creators are no longer based in Hong Kong, the borderless nature of the proposed regulation means that pressure can still be applied to the Hong Kong offices of platforms like Google for YouTube first and then contact those companies without Hong Kong. The presence of Kong Kong.

The document also proposes, for the first time, targeted rules for “online platforms specifically designed for crowdfunding purposes” to register with the CAO, including providing “at least one person with a physical address in Hong Kong” as the designated representative of the platform. This will be the first time such a “locally designated representative” requirement for Internet-related regulations has been encountered in Hong Kong, and bears an alarming similarity to the position of India’s controversial 2021 IT regulations. So called “hostage law”, which obliges platforms to register local representatives in India to be held liable if the platforms do not operate in accordance with government censorship requests. Unfortunately, this is the first for Hong Kong, perhaps not the last.

This pressure can be felt not only by crowdfunding platforms often used by Hong Kong individuals, organizations or entrepreneurs such as GoFundMe, Indiegogo and Kickstarter, but also by subscription or ad-based content platforms such as Patreon, Medium and YouTube. as well as payment platforms such as PayPal and Square. Social media platforms such as Facebook, Instagram, or Twitter will also face additional notifications for forced removal of content or links. Fundraisers and platforms will need to reassess the growing commitment of their presence in Hong Kong.

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It is unlikely that those services that are not represented in Hong Kong will be registered with the CAO: they may simply decide not to provide services to organizations and for reasons related to Hong Kong. This will be similar to what happened when the National Security Act was passed in 2020; shortly thereafter, some virtual private network (VPN) providers simply decided shut down your Hong Kong servers.

Unlike other consultation papers in the past, this one does not provide comparison with similar practice in other jurisdictions, especially common law countries. Most likely they are not. Ignoring the need to balance the ease of access, openness, convenience and rights of fundraisers, contributors and platforms in favor of the so-called “public interest, public safety and national security”, all this in the subjective eyes of the Hong Kong authorities is once again making it difficult for local and foreign firms to do business. The proposal by his Financial Services Policy Bureau does not bode well for all the areas Hong Kong says it seeks to excel in: innovation, technology and even financial services themselves.