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HK Regulation of Crowdfunding Sites

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joequant edited this page May 30, 2014 · 16 revisions

Hong Kong regulatory notes on crowdfunding

  • HK has English Common Law - Everything is permitted unless prohibited by law

  • General administrative standards

  • "natural justice" - private citizen should be given notice of any action and has a right to hearing

  • "Wednesbury Reasonableness" - court will strike down administrative action if no rational person could have made it. Very high bar for judicial intervention

  • Hong Kong local

  • Basic Law mandate to preserve international financial center

  • "Positive non-interventionism" -

  • HK government will only pass a regulation in response to an actual crisis. Therefore all HK financial regulations can be associated with a crisis or actual bad situation.

  • Look carefully at the definitions. General structure of HK ordinances. X is forbidden. Look at carefully at section where X is defined. Often X is does not use common definition of the term (example definition of security)

  • Stakeholders

  • HK has no general fund law and no statutory framework for funds. Should cooperate with hedge funds and FSDC to insure that any laws are "crowdfunding" friendly

  • Banking Ordinance Ch 155

  • DO NOT OFFER CHECKING, SAVING ACCOUNTS OR TAKE DEPOSITS

  • Until 1964, anyone could open a bank. Bank regulations were changed in response to banking runs in 1962 and another set of bank runs in 1982-1986.

  • Extremely high level of capital and compliance. VERY SME unfriendly

  • Regulatory goals - Prevent bank runs and bailouts. No small businesses

  • License required to undertake the banking business or to take deposits

  • Illegal to call oneself a "bank"

  • Banking business defined as means the business of either or both of the following-

    • (a) receiving from the general public money on current, deposit, savings or other similar account repayable on demand or within less than the period specified in item 1 of the First Schedule or with a period of call or notice of less than that period; (Amended 4 of 1997 s. 3)
    • (b) paying or collecting cheques drawn by or paid in by customers;

  • Taking deposits, where a deposit means

    • a) means a loan of money - (i) at interest, at no interest or at negative interest; or (ii) repayable at a premium or repayable with any consideration in money or money’s worth; but
    • (b) does not include a loan of money - (i) upon terms involving the issue, by any company, of debentures or other securities in respect of which a prospectus has been registered under the Companies Ordinance (Cap. 32); (ii) upon terms referable to the provision of property or services; or (iii) by one company to another (neither company being an authorized institution) at a time when one is a subsidiary of the other or both are subsidiaries of another company
    • Exceptions in Section 3). You can take deposits if the deposits are secured by a mortgage. Also you can take deposits from a money lender or pawn shop
    • HKMA says that they will not consider you to be in the business of taking deposits if you don't have more than five loans in 30 days. http://www.hkma.gov.hk/media/eng/doc/key-functions/banking-stability/guide-authorization/Chapter-2.pdf
    • Money broker defined as intermediary between "authorized institution" and

  • Securities Futures Ordnance - Cap 571

    • DO NOT ADVERTISE SECURITIES TO THE PUBLIC. DO NOT OFFER SECURITIES. DO NOT DEAL IN SECURITIES. DO NOT ISSUE STRUCTURED PRODUCTS. DO NOT OPERATE AN AUTOMATED TRADING SYSTEM.
    • Adopted in the early 1990's. Response to collapse and bailout in of HK Futures Exchange. Regulatory authority added in include "structured products" in response to Lehman mini-bonds
    • Recent history. Collapse of HK Merchantile Exchange as automated trading service
    • High level of capital and compliance. Less than banks, but still unfriendly to SME's
    • SFC can regulated "regulated activities" see http://www.sfc.hk/web/EN/regulatory-functions/intermediaries/licensing/guide-to-licence-application/regulated-activities.html
      • dealing in securities
      • advising in securities
      • "securities" defined as
        • shares, stocks, debentures, loan stocks, funds, bonds or notes of, or issued by, a body, whether incorporated or unincorporated, or a government or municipal government authority; (and other things)
      • "structured products" regulated by SFC. defined as
        • an instrument under which the return is determined by reference to the occurrence of an event, or changes in the price of any type of securities, commodity, index, property, interest rate, currency exchange rate or futures contracts. There are various exclusions from the definition, such as collective investment schemes, convertible debentures, variable interest rate debentures, depositary receipts, gambling products and insurance.
      • creating an "automated trading system"
        • automated trading services means services provided by means of electronic facilities, not being facilities provided by a recognized exchange company or a recognized clearing house, whereby-
        • (a) offers to sell or purchase securities or futures contracts are regularly made or accepted in a way that forms or results in a binding transaction in accordance with established methods, including any method commonly used by a stock market or futures market;
        • (b) persons are regularly introduced, or identified to other persons in order that they may negotiate or conclude, or with the reasonable expectation that they will negotiate or conclude sales or purchases of securities or futures contracts in a way that forms or results in a binding transaction in accordance with established methods, including any method commonly used by a stock market or futures market
      • asset management
    • Other regulated activities
      • offers of investment to the public (Section 103)
    • Policy limits by the SFC. As a matter of policy (and not law), the SFC generally will not intervene if one of the following is true. These are policy limits and the SFC is free to override them at will....
      • The offer is made only to professional investors
      • The offer is made to fewer than 50 people
      • The total amount of the offer is less than HKD 5,000,000
      • The minimum investment is greater than HKD 500,000
      • No HK residents are being offered or are participating in the investment

  • Cap 163 - Money Lending Ordinance

  • Offense to carry a business as a money lender

  • small business friendly - licensing designed for small businesses. No capital requirements.

  • administered by the Company Registry and the Hong Kong Police - http://www.cr.gov.hk/en/public/moneylender.htm

  • regulatory goal - prevent predatory lending. Look at moral character of lender

  • Exemption for money lending license for secured loans to companies

  • Cap 615 - Anti-Money Laundering and Counter-Terrorist Financing (Financial Institutions) Ordinance

  • Recommendations for crowdsourcers

    • Do not try to look like a bank or a securities firm if you don't want to be regulated like a bank or securities firm.
    • You want to look like a money lender or a currency transmitter
    • Loans are much easier to deal with from a HK regulatory standpoint since they are not securities. Do not offer securities. Do not advertise. Do not take deposits. The less automation and the more face-to-face interaction the better.
    • Don't think Central investment bank. Think Wan Chai pawnshop or currency exchanger. Think Hong Kong social club

  • Things you want to tell HK regulators

    • We aren't a bank
      • We don't accept cash deposits.
    • We don't touch securities
      • The products we deal with are loans or are things that clearly would not be traded on a securities exchange.
      • It helps if the products you deal with are not equity investments in a company. Example of something that would not be a security is a claim on the cash flow of a company.
    • OR We are touching securities but we are not a regulated business
      • We are not doing any advising, underwriting, or dealing in securities, and we are not operating an automated trading service
      • We are not making an offerings to the general public
    • OR We are touching securities but we are doing so under a policy/statutory limit
      • Non-HK residents. We are not talking to any HK residents or doing business in Hong Kong
      • Small offering. We are doing a private placement that is under the policy limits set by the SFC.
      • accreditted investors only.

  • Possible structure for crowd funding non-scalable business

    • Makes it easy for people to apply for money lending licenses.
    • Money lending licenses are administered by the Companies Registry. They should be open to "pre-packaged" forms.
    • Once someone is an licensed money lender, then you can take deposits from them. Also any notifications would not be considered public advertisements
    • Standardize the terms of the loan. Convertible note with the equity in the company as security for the loan.

  • Another possible structure

    • Don't touch the money. Don't take deposits at all
    • Match making services with a yearly subscription fee
    • Not public advertising

  • Miscellaneous

    • Marcus Goldman started as a money lender on the lower east side
    • Traditionally, people hated money lenders. Investment bankers did what they could not not look like money lenders, and become "respectible"
    • Now people hate investment banks. Maybe its time to go back to being pawn shops.
    • A money lender expects a 60%/year return. How much does a VC want? A money lender wants you to stay in business because otherwise he'll never get his money back.
    • Pawn shops and currency exchanges - dirty and messy -> LOW MARGINS
    • Need to kill margins
    • Need to look at Islamic financing. Islamic law contains a lot of tradition to avoid abuses of money lending.

  • Why the VC/Silicon Valley model is fundamentally broken for HK?

    • VC/Silicon Valley are wonderful but you cannot run an entire economy on VC's.
    • It's wonderful if you want to become the next multi-billionaire. But it's hell if you have an economy where you have to be the next multi-billionaire, because it's just impossible for everyone to be a multi-billionaire.
    • There can be only one google, and only one facebook. What do we do about the 6 billion - 2 people that aren't the CEO of google or facebook?
    • huge returns for a few businesses -> most businesses will fail
    • not all businesses are going to be google. We need financing solutions for small businesses that want to stay small businesses
    • small businesses + networks > big business
    • This is crazy. People talk about how terrible bureaucracies are, but the VC model forces people to dream of creating huge bureaucracies
    • Big companies will not generate employment. Employment will be generated by new SME's or SME's that become big companies
    • We have created a "lottery ticket" world
    • What ever happened to the middle class? We need economic systems that create a middle class.

  • Why chai chaan tings are the way to go....

    • Look at McDonald's. Every single McDonald's in the world is the same
    • Now look at the chai chaan ting's on a Hong Kong street. Every single chai chaan ting is different.
    • small businesses provide a sense of ownership. It's humble. It's not google. But it is yours.
    • you end up being high value by being different.

  • This can be applied to high technology

    • The Shenzhen cell phone market. The entire Shenzhen manufacturing infrastructure
    • insanely short cycles. Massive parallel computing.

  • What Bitquant Research Laboratory is doing

    • We need to make money lending a low margin, high service, highly personalized, high data business.
    • Making finance mobile. You shouldn't have to go to the money, the money should come to you. Because you cannot use mass-media to offer securities, you have to do things with word of mouth and face-to-face

http://www.onc.hk/pub/oncfile/publication/corporate/0610_EN_Regulation_for_Offering_Investments.pdf

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