As a result of the 2008 financial crisis, major credit providers such as banks have become increasingly cautious about making loans for worthy investment projects, particularly to small and medium enterprises (SMEs). To overcome this problem, many jurisdictions have explored ways to expand equity investment in SMEs and start-ups, which are unable to raise capital through existing securities issuances, in order to stimulate growth and increase employment. One of these ways has been through the use of crowdfunding, which seeks to use technology, among other things, as an alternative mechanism to raise capital.
Crowdfunding is an umbrella term describing the use of small amounts of money, obtained from a large number of individuals or organizations, in order to raise funds for a project, business/personal loan or other financing needs through on-line web based platforms. Crowdfunding falls into three broad categories. The simplest sees investors hand over cash in return for goods and services (reward crowdfunding). The second is debt crowdfunding which allows investors to lend money that, in theory, they can receive back with interest. The third type is equity crowdfunding, whereby investors buy shares that they hope will be worth more in the future. This is essentially an offering of equity shares to a group of investors that, by analogy to an initial public offering (IPO), can be large enough to constitute a public offering or small enough to remain a private placement.
Given its growing popularity, certain jurisdictions, such as the US and UK, have introduced a legislative framework to regulate such activity, in order to protect investors from the potential risks of fraud, misconduct and negligence. In March 2016, the Financial Services Development Council (FSDC) of Hong Kong published a paper to explore whether Hong Kong should introduce a regulatory framework for equity crowdfunding.
My article, which will appear in the December 2016 issue of the Common Law World Review, is written against this background and contributes to the discussion in Hong Kong, as initiated by the FSDC proposal. In the article I seek to address some of the issues raised in the FSDC proposal and to explain why I am in favour of it. I examine what lessons and experiences Hong Kong can draw from its Anglo-American counterparts in regulating this activity.
Kong Shan John Ho is an Associate Professor in Law at the City University of Hong Kong.