Hong Kong plans to regulate crowdfunding activities

Financial Services and Treasury Secretary Christopher Hui (photo from South China Morning Post)

HONG KONG: The Hong Kong government is considering regulating crowdfunding campaigns to prevent the money being used for activities that endanger national security or for other illegal purposes.

Typically using digital platforms, crowdfunding raises funds from large numbers of people who contribute relatively smaller amounts, with the promise of providing products, services or equity to its backers.

Financial Services and Treasury Secretary Christopher Hui Ching-yu said on Thursday that a public consultation was underway for later this year to consider whether such platforms should be registered and required to carry out due diligence before countrisides.

“Should fundraisers be required to register or obtain permission before fundraising, as well as provide clear, accurate and fair information and reporting to funders?” he says on his official blog.

“How to establish a reporting system to identify and report suspicious transactions to prevent the risks of various illegal acts such as endangering national security, money laundering and raising funds for terrorists?”

Hui explained that a regulatory system was needed to prevent crowdfunding money from fueling activities that “jeopardize national security” and cut off their pipeline into funds “set up by criminals who fled to the foreigner”.

Last year, the financial services chief was questioned by pro-establishment lawmakers about the 612 Humanitarian Relief Fund, which had donated more than HK$243 million (1.04 billion baht) to those facing criminal charges or financial hardship as a result of government anti-protests.

Some accused Hui of not acting fast enough against fundraisers. The fund had stopped collecting donations last year after the National Security Police launched an investigation into its activities.

Hui cited four main types of crowdfunding: equity crowdfunding, which allows investors to put their money into projects or companies for shares; peer-to-peer lending, which connects borrowers with online lenders who offer unsecured loans; those of a paid nature, where fundraisers offer products or services in exchange for funding; and finally, charitable donations.

To some extent, crowdfunding is governed by the laws of Hong Kong. But without regulations specifically designed to oversee the process, some risks existed, he said. In addition to funding illegal acts, fundraisers and backers may not be able to recoup their investments if platforms go out of business due to insolvency. Donors’ personal information may also be subject to abuse.

“The crowdfunding platform is not responsible for the due diligence and ongoing monitoring of campaigns, and the funds raised may not ultimately be used for the purposes promised,” he stressed.

He said the government hopes that a public consultation this year will define the scope of activities and funding thresholds, as well as the creation of a body responsible for regulation and enforcement, adding that they could study the countries that already apply such laws.

In recent years, crowdfunding has often been used by non-governmental organizations or individuals to fund their work or operations.

An official from one such group had raised more than HK$4.6 million, ostensibly to help those arrested during the 2019 protests. But she allegedly spent the money on luxury handbags and investments, and last year was arrested on suspicion of money laundering.

In 2019, police froze around HK$70 million raised by fundraising platform Spark Alliance HK to support anti-government protesters and arrested four people suspected of money laundering.

Even so, Ivan Choy Chi-keung, a political scientist from China University, believes that there will not be a big reduction in crowdfunding activities even if such regulations are implemented, because the peak of crowdfunding is already passed.

“After the arrests [of people related to the 2019 government protests] suspected of money laundering, many groups fear that some of the crowdfunding money is coming from dubious sources, so they have already stopped crowdfunding,” he said.

“The chilling effect of national security law could have an even greater impact on these groups [than the regulations].”

He expected other organizations or individuals to also become more cautious when launching a crowdfunding campaign or using other methods to raise funds under the regulations.

Sara H. Byrd