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Thinking through HK financial regulation on SME and fintech

March 27, 2015

Thinking out loud about HK financial regulation and SME’s.

* Problems

** The HK regulatory system *actively* discourages innovation in financial technology and financial services.

** Deficiencies in the HK fintech sector cripple capital raising in other sectors.

** Hong Kong startups are finding it easier to simply bypassing Hong Kong and find sources of funding outside.  This causes the problem of “wild geese.”  Companies with Hong Kong founders are leaving Hong Kong.

** Massive misallocations of resource.  Money is being pumped into the property bubble.

* Why regulation is obsolete?

** Regulation assumes organized stock issuers and promoters issuing stock to naive consumers.

** Regulation doesn’t deal with an increasingly borderless world.

* Mainland China and US can get around deficiencies in the regulatory system but going “under the radar”.  This will not work in Hong Kong

** Hong Kong society is small and highly reputation oriented.  It is simply impossible to stay under the radar.  Once you lose your reputation in this city, you are finished.

** The internet and google makes it hard to stay under the radar.

** Funders in Hong Kong simply cannot go under the radar.  High net worth individuals have large assets and have much to lose by regulatory action or adverse publicity.  Middle class consists largely of financial service or legal employees which are covered under corporate compliance policies.

** Impossible to publicize “success stories” and to create networks.  There are many, many Hong Kong business success stories in fintech involving bitcoin, but as long as the regulators maintain a negative attitude toward bitcoin, no one will talk about them.

** Risk adversion.  Why take even *small* amounts of regulatory risk, when you can just pump money into the property bubble?

* Suggestions:

** State general principles

*** General regulatory statement that the SFC will take no action unless there is both an intent to defraud and a specific party that has been defrauded or is likely to be defrauded.

** Create regulatory safe harbours.

*** Activities undertaken outside of Hong Kong are not subject to SFC regulation so long as those activities do not specifically target Hong Kong investors.

*** Activities concerning publicity.  Informational postings by a Hong Kong company that they are seeking funding and the types of funding they are seeking, should are not considered a public offering.

* Magic bullet

** Redefine “professional investor”

*** Allow professional investors to be defined by through a licensure model, and professional qualifications.  (i.e. anyone that has an MBA, a CPA, or a position in a bank, should be presumed to be a professional investor.)

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