Hong Kong Lawyer

MARCH 2018

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Page 38 of 99

March 2018 • REGULATORY 監 管 www.hk-lawyer.org 37 A s start-ups and small businesses continue to crowdfund through the Internet, governments and regulators have had to respond. The United States created a tailored regime for crowdfunding. The United Kingdom and Singapore publicly consulted and clarified their regulatory approaches. The Hong Kong regulator has been less proactive, thus inviting criticisms that Hong Kong has fallen behind in enabling financial innovation and entrepreneurship. Are these criticisms fair and accurate? Not necessarily so. In my latest research paper, I ventured to show that gateways for crowdfunding already exist in Hong Kong. If these exemptions were fully utilised, Hong Kong would be broadly on a par with, or even ahead of, other international financial centres in allowing entrepreneurs to tap capital from professional (accredited) investors – the investor pool most coveted by entrepreneurs. How Far Did the United States Go? With a strong political will to create jobs and promote growth after the global financial crisis, the United States was the most ardent in enacting legislation to enable crowdfunding. The Jumpstart Our Business Startups Act ('JOBS Act') was passed in 2012 against this background. What often hit the headlines was Title III of the JOBS Act, which crafted a new exemption for securities crowdfunding for retail investors. Securities offerings not exceeding US$1.07 million over a 12-month period are exempted from SEC registration. The exemption comes with restrictions designed for investor protection – issuers are subject to substantial disclosure requirements, the offering must be conducted via regulated intermediaries, and retail investors are subject to an annual cap on their investments. Under these restrictions, Title III might not be as helpful for a fund raising avenue as its founding architects first envisaged. The unsung hero is in Title II of the JOBS Act, which liberalised the private placement exemption. Before Title II, private offerings to accredited investors under Rule 506 of Regulation D were exempt from SEC registration, but issuers could not advertise or promote their offerings. This created an information barrier, making it difficult for issuers to seek out and connect with latent angels and accredited investors. Given the reach of the Internet, the ban was particularly problematic. Title II and the new Rule 506(c) lifted the ban, allowing issuers to engage in general solicitation and advertising in respect of their private securities offerings. So long as an issuer takes reasonable steps to verify that all investors are accredited investors and they continue to be so at the time of sale, the offering comes within the exemption even if the advertisement reached non- accredited investors. There is no ceiling on the number of investors or the amount raised, and no requirement for disclosure (subject however to antifraud provisions in federal and state securities law). Accredited investors account for only 7.4 percent of all households in the U.S., but they control over 70 percent of the available capital. A significant portion of capital-raising in the U.S. comes from the non-public capital market. Given the relaxations in Title II, some anticipated that Title III will be much less used than Title II. It has been suggested that only issuers who failed to raise funds among accredited investors will resort to crowdfunding with retail investors, making the latter a "market for lemons". What have the United Kingdom and Singapore Done? The regulators in both markets consulted the public. In the end, neither regime introduced any new exemption for securities offerings through crowdfunding. These offerings must comply with applicable prospectus and registration requirements, unless one or more of the existing exemptions (eg private offerings to accredited investors and small-size offerings) are available. The traditional restrictions commonly applicable to private placements continue to apply with these offerings. Where is Hong Kong? (i) Offerings to Professional Investors In Hong Kong, the exemption for offerings to professional investors is in s. 103(3)(k) of the Securities and Futures Ordinance ('SFO'). While s. 103(1) SFO prohibits the issue to the public of any invitation, advertisement or document that offers or invites offers in respect of securities, structured products or interests in a collective investment scheme ('CIS'), s. 103(3)(k) provides that the s. 103(1) prohibition does not apply if the relevant investments "… are or are intended to be disposed of only to professional investors." A plain reading of s. 103(3)(k) suggests that a person may issue an invitation to the public or a sector of the public and still come within the s. 103(3)(k) exemption, provided that the investments in question are or are intended for professional investors only. Yet, not wanting to test the limits of the exemption lest they found themselves on the wrong side of the s. 103(1) prohibition, issuers and their advisers have followed the practice for private placements: no public advertising, small pool of recipients, existing or personal relationships with recipients, etc. This practice should be revisited in light of the Hong Kong Court of Final Appeal ('HKCFA') decision in the case of SFC v Pacific Sun Advisors Ltd. [2015] 18 HKCFAR 138 ('Pacific Sun case'). In the Pacific Sun case, an investment adviser sent emails to contacts on its

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