LCQ16: Enhancing regulation of crowdfunding activities
26.4.2023

Following is a question by the Hon Joephy Chan and a written reply by the Secretary for Financial Services and the Treasury, Mr Christopher Hui, in the Legislative Council today (April 26): Question: On December 19 last year, the Financial Services and the Treasury Bureau launched a three-month public consultation exercise on the proposal to enhance regulation of crowdfunding activities. The public consultation ended on the 20th of last month. In this connection, will the Government inform this Council: (1) as paragraph 2.2 of the consultation document for the aforesaid public consultation exercise (consultation document) proposes that "in-principle a person must make an application to the Crowdfunding Affairs Office before conducting a crowdfunding activity that raises funds from individuals or entities of Hong Kong, or individuals or entities located in Hong Kong", how the Crowdfunding Affairs Office (CAO) ensures compliance with the relevant requirements by such crowdfunding activities which are initiated by individuals or entities outside Hong Kong and/or in places outside Hong Kong; (2) as paragraph 2.6 of the consultation document proposes that "if a person starts to conduct a crowdfunding activity before making an application in accordance with the established procedures or before obtaining prior consent, the relevant law enforcement agencies will be authorised to issue a prohibition order to discontinue the activity and may, as the case requires, impose a fine on or take prosecution action against the fundraiser", in respect of non-compliance with the requirements by such crowdfunding activities which are initiated by individuals or entities outside Hong Kong and/or in places outside Hong Kong, how the authorities will pursue the legal liabilities of the individuals or entities concerned, such as whether they will request the relevant places outside Hong Kong to extradite the individuals concerned to Hong Kong to stand trial; how the Government will deal with the situation where the places outside Hong Kong do not have extradition arrangements with Hong Kong or refuse to cooperate with the law enforcement agencies of Hong Kong; (3) of the preliminary staffing establishment proposal of CAO; whether, in order to eliminate the national security risks posed by unlawful crowdfunding activities, the authorities will consider inviting the National Security Department of the Hong Kong Police Force and/or the Office for Safeguarding National Security of the Central People's Government in the Hong Kong Special Administrative Region to deploy staff to participate in the vetting and approval of crowdfunding applications and the subsequent monitoring work; (4) as paragraph 2.8 of the consultation document proposes that a crowdfunding activity which is donation-based and involves only an offline activity conducted in a public place should remain under the regulation of the existing responsible government departments and legislation, whether the authorities have considered regulating all online and offline fundraising activities under one single piece of legislation, and requiring that prior application must be made and approval be obtained before such activities can be conducted; (5) given that paragraph 2.10 of the consultation document proposes that fundraising activities conducted on the grounds, among others, of religion, promotion of the welfare and needs of respective trade members by recognised associations, buying and selling of goods or services readily available in the market, and commercial activities on online media and the like that involve income from subscriptions or online rewards, may be excluded from the crowdfunding approval and registration system, but as pointed out in paragraph 1.8 of the consultation document, some individuals had in the past raised funds on grounds as stated above, and yet they turned out to be using the funds for purposes which were unlawful and jeopardised public interests, public safety, as well as national security, whether the authorities have put in place any gatekeeping measures to avoid people abusing the aforesaid exclusion mechanism and giving rise to regulatory loopholes; (6) as paragraph 2.14 of the consultation document proposes that CAO be authorised to publish guidelines that apply to general crowdfunding activities, so as to ensure the transparency of crowdfunding activities, whether CAO will consider keeping information on the application details, accounts, donors' registers, etc. of crowdfunding activities and making them available for public inspection; and (7) as paragraph 2.19 of the consultation document proposes that consideration be given to the establishment of a registration system for online platforms designed for crowdfunding purpose, in respect of online crowdfunding platforms set up outside Hong Kong which refuse to register with CAO and conduct crowdfunding activities that raise funds from individuals or entities of Hong Kong, or individuals or entities located in Hong Kong, of the law enforcement actions to be taken by the authorities, as well as the penalties involved; whether the authorities will consider setting up a single official online crowdfunding platform, and requiring social platforms operating in Hong Kong to prohibit their users from initiating crowdfunding activities privately, so as to eliminate regulatory loopholes and facilitate the public to easily identify lawful crowdfunding activities? Reply: President, In recent years, crowdfunding activities of diverse purposes and nature have emerged in Hong Kong. Many of these crowdfunding activities are newly emerging ones which are conducted by using communications technology or online platforms. While we have certain regulatory measures in place for charitable fundraising activities in the community, we do not have a regulatory regime to comprehensively deal with crowdfunding activities, in particular those conducted online. We published a public consultation paper in December last year, proposing a clear application and regulatory regime to enhance the transparency and legality of crowdfunding activities, with a view to preventing lawbreakers from engaging in unlawful acts that are fraudulent, jeopardising public interest, or endangering public safety or even national security in the name of crowdfunding. In consultation with the Security Bureau and the Department of Justice, my consolidated reply to the Member's questions is as follows: We propose setting up a Crowdfunding Affairs Office (CAO) to centrally handle regulatory and administrative matters related to crowdfunding activities, including receiving applications, co-ordinating approval process, registering approved activities and crowdfunding platforms, building a database for public inspection, keeping track of completion records of crowdfunding activities and publishing these records as appropriate for public inspection, issuing guidelines and best practices, as well as conducting publicity and education. As some crowdfunding activities are already subject to the regulation of different government departments and existing laws (e.g. offline fundraising activities in public places), the CAO will formulate appropriate arrangements to segregate duties by referring the applications concerned to relevant departments for handling. The regulatory regime proposed in the consultation paper recommends that crowdfunding activities raising funds publicly from individuals or entities of Hong Kong, or individuals or entities located in Hong Kong, are required to apply to the CAO and obtain prior approval before commencement. As regards law enforcement, we propose empowering the relevant law enforcement agencies to issue a prohibition order in respect of any unlawful crowdfunding activity; take prosecution action against the person responsible for the activity depending on the circumstances; direct the removal of the message concerning the activity from the crowdfunding platform, social media and other communications technology media that published the message; direct the relevant financial institution(s) to discontinue or stop the fund movements related to the activity, and conduct investigation against the person(s) and bank account(s) involved; as well as specify by notice that an activity is an unlawful crowdfunding activity, and warn that people providing funds to the activity, dealing with the funds, and assisting in the conduct of the activity, etc., may be criminally liable. It is essential for the proposed regulatory regime to cover relevant crowdfunding activities conducted outside Hong Kong so as to safeguard public interest, public safety and national security. We have to stop any person or organisation from raising funds inside or outside Hong Kong through crowdfunding for activities endangering national security. If it comes to the CAO's attention that a fundraiser of a crowdfunding activity conducted outside Hong Kong has not filed an application to the CAO in accordance with the proposed regulatory regime, it may ask for information from the fundraiser for a better understanding of the matter, and remind the fundraiser to file a crowdfunding application under the regime. If the fundraiser refuses to cooperate, the law enforcement agencies will, depending on the circumstances, take appropriate follow-up action in accordance with the enforcement mechanism. The Government can also send a clear message to the public through issuing a notice, warning the general public to stay vigilant against such unlawful crowdfunding activity and must not donate to it. There are some fundraising or financing activities going on in the community that are substantially different in nature from the crowdfunding activities intending for the proposed enhanced regulation. When formulating the approval and registration system of crowdfunding activities, we will consider exempting these activities of different nature or providing facilitation measures. That said, if someone raises funds for purposes other than those exempted under the guise of such exempted activities, the CAO will reserve the right to direct that an application needs to be filed in respect of the activity to the CAO under normal procedure having regard to the purpose of activity and background of the fundraiser. If any unlawful act is identified, the CAO will refer the matter to law enforcement agencies for appropriate follow-up action. We proposed in the consultation paper to introduce a registration system for crowdfunding platforms whereby online crowdfunding platforms accepting crowdfunding activities which raise funds from individuals or entities of Hong Kong, or individuals or entities located in Hong Kong, irrespective of whether these platforms are domiciled in or outside Hong Kong, should register with the CAO. This recommendation aims to enhance transparency of crowdfunding activities, in particular that some crowdfunding platforms first collect funds on behalf of the fundraisers. If there are issues with the crowdfunding platforms, the fundraisers and contributors may suffer loss and could not seek redress. When considering a particular crowdfunding application, the CAO will take into consideration whether the activity is going to be held on a registered crowdfunding platform. The public consultation on enhancing regulation of crowdfunding activities completed on March 20 this year and a total of 60 submissions and responses were received during the consultation period. We are now consolidating and analysing the views received, and will discuss details with relevant policy bureaux and departments, including the scope of the regulatory regime, law enforcement arrangements and relevant penalties, establishment of the CAO, etc. We will report progress to the Panel on Financial Affairs of the Legislative Council in due course.