Hong Kong Crowdfunding: Strong Potential Requires Action
By Henry Flood
As one of the world’s leading financial investment centres Hong Kong has tremendous potential in the field of crowdfunding. They are looking to capture a slice of the international crowdfunding market as part of a broader plan to develop their Financial Technology industry.
As part of their development drive Professor K C Chan, Secretary for Financial Services and the Treasury, as well as Chairman of the Steering Group on Financial Technologies, released his report on the Hong Kong Fintech industry earlier this year. He is buoyed by the opportunity for crowdfunding growth and wants to improve how innovation and the supply of technological talent are viewed in the region.
Although crowdfunding is growing in Hong Kong there are some regulatory hurdles to overcome. There is particular uncertainty over how existing legislation covers crowdfunding activity. The Companies (Winding Up and Miscellaneous Provisions) Ordinance, the Securities and Futures Ordinance and the Collective Investment Scheme can all interact with the various forms of crowdfunding. However most of the legal space crowdfunding takes place in exists in the exemptions of existing legislation. Uncertainty over whether legislation applies may be contributing to underinvestment in Hong Kong crowdfunding. The type of crowdfunding, the size of the pool of investors contributing and whether or not they are professional investors all impact which regulations are activated.
The Government is aware that start-ups do not have the resources of incumbent financial institutions to navigate the regulatory landscape. Consequently there is discussion about the need for dedicated channels of communication for new entrants in the Hong Kong market but it is unclear how these channels will work in practice and there is concern over a delayed timeline of implementation. However the Steering Group has emphasised the need for an open mind regarding the possibility of new legislation being introduced specifically for crowdfunding.
The current environment favours professional high net worth investors who are seen as a vibrant pool of investment opportunity for start-ups. Hong Kong is one of the richest cities in the world in terms of the number of millionaires that reside there – clearly capital is available. However crowdfunding is built on a culture of many investors each contributing a little and regulations do not favour lower net worth investors. The concern is that non-professional investors won’t adequately appreciate the risks of peer to peer lending and crowdfunding. However as crowdfunding increasingly moves into the mainstream internationally there is likely to be more and more enthusiasm for non-professional investors to get involved.
Currently a lot of start-up funding comes from the Government’s Innovation and Technology fund which has helped over 5000 projects since its inception in 1999. However if Hong Kong could draw on the private sector through crowdfunding the financing options for start-ups would be significantly improved.
Whilst there are some hurdles to overcome the current environment has produced some notable successes such as PIECE. PIECE is a credit card sized smartphone accessory allowing a phone to use two SIMs, most useful for travellers. The device can be stored in a wallet or attached to the back of the phone. Crucially the device has an antitheft component where it beeps if moved more than 10m from the phone. The device received over 10 times its original financing goal, receiving over $500,000 USD.
The VOMO electric scooter is another successful Hong Kong crowdfunded project. It looks to revolutionise transport in crowded cities. The project raised over $290,000 USD. The scooter has a 350W motor and can reach speeds over 30km/h. When folded up the scooter can be rolled behind the user in much the same was as a wheeled suitcase.
Ultimately Hong Kong has considerable prospects for crowdfunding however there are issues to address. A recent report developed by EY ranked Hong Kong behind the UK, Singapore, California, New York, Australia and Germany for Fintech. The four categories of comparison were talent, capital, policy and demand. Whilst talent and capital availability in Hong Kong is strong, policy is an issue which needs to be addressed.
Importantly some informal regulation is developing in the form of Codes of Practice, such as that produced by the Hong Kong Crowdfunding Association. It focuses on transparency and good business practice. However the situation may still require specific new legislation to declutter the regulatory environment. Clearly fraud risk and default risk are central concerns for the Hong Kong Government. Waiting too long to reform legislation in this growing sector however may cause Hong Kong to continue losing crucial ground to other Fintech jurisdictions.