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Notes on the HK crowdfunding law

May 22, 2014

I’ve started a wiki where I’ve brain-dumped what I know about HK crowdfunding law.  The goal of this is to come up with a structure for Hong Kong crowdfunding sites, that doesn’t step on an regulatory landmines while at the same time insuring that the good public policy things happen.

Near the end of the wiki page, I start going off on a bit of a rant.  I’ve been attending the Asia Business Angel Forum, and it’s been amazingly stimulating.  Too stimulating in fact that need to just calm down a bit and start coding.

The main takeaway is that I think a lot of the regulatory issues can be dealt with, if HK startups were funding through p2p lending rather than through equity.  Once you go into the law of loans, you end up with infinitely fewer headaches than the law of securities.  I do not quite understand why crowdfunding sites are focused on equity funding rather than debt funding, especially since a lot of crowdfunding involves raising money to get an item produced which can be used as security for a non-recourse loan.

A lot of this thinking comes from US securities law.  There is this game that US lawyers play, called “is this a security?”  You *really* don’t want something to be a security if you can avoid it, and the SEC has a systematic process by which you can get a letter saying that the SEC thinks that *X* is not a security.

So what crowdfunding sites need to do is to play this game, and come up with funding mechanisms in which it is obvious to everyone that the startup is “asking for a loan” and not “offering to issue a security.”   This becomes a big problem if the companies is offering a fraction of the company, but it can be avoided if the company is seeking a loan.  The loan can have equity like characteristics by being secured either by cash flow, by stock, and by being non-recourse, but ultimately it’s a loan.

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