Friday, January 06, 2023

[Diplomat] Hong Kong’s Crowdfunding Regulations Could Have Global Ramifications

Hong Kong’s Crowdfunding Regulations Could Have Global Ramifications

Regulating crowdfunding in Hong Kong is all about political vetting – extended around the world.

The Financial Services and the Treasury Bureau of the Hong Kong government initiated a three-month consultation on the regulation of crowdfunding activities in mid-December and proposed to establish a dedicated Crowdfunding Affairs Office to oversee these activities. This could have far-reaching effects on future of the territory as a financial hub and innovation center.

Over the last decade, aided by the internet, social media, and other technology platforms, the concept of crowdfunding has empowered millions to raise capital for their concepts, projects, or products, typically at the early stage of development, all while overcoming obstacles erected by financial intermediaries, such as banks, and other forms of bureaucracy. It also enabled and facilitated individuals to support innovative product development, niche cultural activities, as well as popular (or not so popular) social causes.

The borderless nature of the internet and the activities carried out on it indeed present new challenges to regulations previously designed for more traditional forms of solicitations for donations, investments, loans, or product sales. But that does not mean that crowdfunding activities are unregulated. Indeed, the consultation paper pointed out various existing laws and regulations in Hong Kong, such as the Securities and Futures Ordinance and the Money Lenders Ordinance, that would provide jurisdiction over such activities, particularly crowdfunding for equity, debt, or peer-to-peer lending.

The paper even states that, in general, anyone engaging in any online or offline fundraising to “engage in unlawful acts (such as money laundering, fraud, theft, acts and activities endangering national security, or inciting, aiding, abetting or providing pecuniary or other financial assistance or property for other persons to commit offenses that endanger national security)” is already subject to prosecution under criminal laws in Hong Kong. So why is there such an urgent need for erecting further safeguards?

That obviously has to do with the flurry of crowdfunding initiatives in Hong Kong during the 2019 protests, with the most notable case being the 612 Humanitarian Relief Fund. The fund was originally set up to provide financial support for those injured or arrested during the unrest. Cardinal Joseph Zen and ex-lawmakers Margaret Ng and Cyd Ho were among the high-profile fund trustees who were later arrested, prosecuted, and recently convicted. Indeed, the consultation makes reference to individuals who claimed “they would use the funds raised to help people in need, but they turned out to be using the funds for purposes which were unlawful and jeopardized public interests, public safety, as well as national security.”

Political Vetting, Extended Globally 

The proposed Crowdfunding Affairs Office (CAO) will require prior applications for any crowdfunding activity that “raises funds from individuals or entities of Hong Kong, or individuals or entities located in Hong Kong.” That condition is further explained in the paper to include not only those located or registered in Hong Kong: “the location of publicizing such activities can be any places, including Hong Kong and other places, and with declared purposes that are related to Hong Kong or not.” In other words, the regulation applies to anyone, anywhere, for anything, as solely determined by the CAO. The government also proposes to further specify the police’s power to request financial information; enter, search, and detain properties including financial assets; and cut off or halt electronic messages.

While the paper acknowledges that “crowdfunding activities are already subject to the regulation of various authorities and existing legislation,” and so, duplication of efforts should be avoided, that may be exactly what the CAO ends up being. The new office is not about enforcing new legislation, but only serves to ensure that there is a centralized mechanism to vet against certain undesirable political activities that are practically non-existent since the imposition of the National Security Law in July 2020. Indeed, the paper made repeated mentions of “public interests, public safety, and national security” as the justification for the proposed regulations.

On the other hand, ironically, it actually states clearly that the CAO’s decision to approve any activity or not has nothing to do with its outcome or success, and contributors to even an approved fundraising activity must themselves “carefully examine the credibility and success rate of the activity to be supported to avoid unnecessary losses” — a disclaimer by the government that what the CAO does is not about donor or investor rights protection. It’s just political vetting, extended globally.

Everyone Will Have Something to Lose

So what should crowdfunding platforms, financial institutions, internet platforms, those seeking funding support, and potential donors or contributors to projects be worried about? A lot.

The paper proposes the introduction of a “real name” system for donors, and fundraisers will have to keep that register of donors along with other details of their activities for auditing as well as inspection by the CAO and other law enforcement agencies. The additional bureaucracy and potential liabilities will turn off fundraisers, and the required disclosure of identities will cause a chilling effect, deterring donors and contributors from giving.

It is also still unclear whether income-generating creator activities by so-called key opinion leaders, journalists, or former political figures on platforms such as YouTube and Patreon will fall under the definition of “crowdfunding” in the proposed regulation. The paper cites “commercial activities on online media and the like that involve income from subscriptions or online rewards” as among some activities that will be exempted from the regulation. But it may still depend on whether the CAO in the end subjectively classifies such activities as purely “commercial” or not. Even though many of these creators are no longer in Hong Kong, the borderless nature of the proposed regulation means pressure can still be applied first to the Hong Kong offices of the platforms, such as Google for YouTube, followed by contacting those companies without a Hong Kong presence.

For the first time, the paper also proposes targeted regulations for “online platforms specifically designed for crowdfunding purpose” 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 would be the first instance of such “local designated representative” requirements for internet-related regulations in Hong Kong, and it bears a disturbing resemblance to the provision under India’s controversial IT Rules 2021. The so-called “hostage-taking law” that mandates platforms to register local representatives in India to be held liable if the platforms do not perform according to the government’s censorship requests. Sadly, this first for Hong Kong may not be the last.

This pressure may be felt by more than just the crowdfunding platforms often used by Hong Kong individuals, organizations, or entrepreneurs, such as GoFundMe, Indiegogo, and Kickstarter, but also subscription or advertising based content platforms such as Patreon, Medium, and YouTube, as well as payment platforms like PayPal and Square. Social media platforms such as Facebook, Instagram, or Twitter will also face more enforcement notices to remove contents or links. Fundraisers and platforms alike will have to re-evaluate the growing liabilities of their presence in Hong Kong.

For those services without a Hong Kong presence, it is unlikely that they will register with the CAO: They may simply choose not to provide services to Hong Kong-related entities and causes. This would be similar what happened when the National Security Law was enacted in 2020; shortly afterwards some virtual private network (VPN) providers simply chose to shut down their Hong Kong servers.

Unlike other consultation papers in the past, this one provides no comparison with similar practices in other jurisdictions, especially common law ones. Very likely there are none. By disregarding the need to balance ease of access, openness, convenience, and the rights of the fundraisers, contributors, and platforms in favor of the so-called “public interests, public safety and national security,” all in the subjective eyes of the authority, Hong Kong is again making itself a harder place to do business for firms local and overseas. This proposal from its financial services policy bureau doesn’t bode well for all the areas that Hong Kong says it strives to succeed in: innovation, technology, and even financial services itself.

Published: The Diplomat, January 5, 2023

https://thediplomat.com/2023/01/hong-kongs-crowdfunding-regulations-could-have-global-ramifications/

2 Comments:

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For those services without a Hong Kong presence, it is unlikely that they will register with the CAO:

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