Generation 40s – 四十世代

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Crowd funding in Hong Kong not likely any time soon

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South China Morning Post
Comment›Insight & Opinion
THE VIEW
2015-11-05

Stephen Vines

The prospects for delay are endless

Online crowd funding has taken a big step forward in the United States as regulators have decided to allow a far greater number of Americans to invest in what are mainly start-up companies looking for capital.

In many ways crowd funding has been an enormous success not only in providing capital for struggling entrepreneurs but also for people in the creative industries and non-profit organisations. The World Bank estimates that this form of investment could reach US$96 billion by the end of the decade. If this is only partially correct it means an enormous funding expansion.

However the thrill of contributing to, say, the production of a new movie, is rather different from the incentive to be part of a new business that, at least in theory, is more likely to produce solid financial returns.

The new US regulations reflect a level of caution to protect investors’ interests. Thus, for example, annual fund raising is capped at $1 million and investments have to be channelled through a Securities and Exchange Commission registered intermediary. It is not hard to see why some caution is required here, nor should there be any surprise when we start hearing more and more stories of online crowd funding abuse.

We know this will happen because in essence crowd funding is hardly a new concept, on the contrary today’s developments are highly reminiscent of the pioneering days of stock markets which were populated by large numbers of small investors furnishing cash for start-up companies and providing financial backing for new ideas.

The so-called railway mania that gripped Victorian British investors was but one manifestation of the enormous popularity and risks in infant stock exchanges that channelled widespread public enthusiasm for new products into hard cash transactions. And then came the scams…

It should be pointed out that earlier versions of crowd funding for the arts also shows that this is less than a novel idea. Public subscriptions helped put on plays, funded books and so on hundreds of years before a click of a computer mouse made diverse funding schemes a whole lot easier.

What has not changed is the basic concept of harnessing public enthusiasm for new concepts and projects. The risks of equity investments in start-ups are there for all to see, so there is no cause for complaint if the outcome is a high failure rate. More complex is the matter of handling success. At this point there are spoils to be distributed and issues of control to be addressed.

The experience of stock markets clearly demonstrates that success breeds a growing detachment form the modest investors who helped provide the seed money. Control rapidly moves in the direction of bigger investors and the professional managers.

This is unavoidable but, as history proves, it generates an ever more complex demands for accountability and transparency that are far more easily managed among a relatively small group of people, preferably without the presence of lawyers. But it is in the nature of successful companies to grow and when they do the big guys are less attentive to their small investors.

In Asia, not least in Hong Kong, most public companies are tightly controlled by their founding families and only go public when these families wish to realise some of the accumulated value of their investments but less keen to cede any of the control they previously wielded.

This all seems rather far removed from the modest world of crowd funding, yet its antecedents in stock markets are much the same so it is reasonable to assume that the outcomes will not be that much different.

Meanwhile it is important not to loose sight of the excitement and creativity of crowd funding because not only does it fill an important gap in the provision of risk capital but it also provides entrepreneurial opportunities for people not able to be entrepreneurs themselves but with inclinations in this direction. This is healthy for society as a whole and should not be hampered by excessive regulation.

Hong Kong has yet to establish specific crowd funding regulations but on-line platforms are controlled by more general securities and money lending laws that have the affect of limiting the growth of this business.

In the last budget speech the Financial Secretary made passing reference to addressing this issue but as ever, the local bureaucracy is very slow to embrace innovations of this kind so don’t expect anything to happen soon.

Yet if the government is really serious about creating what it fancifully calls a financial technology hub, crowd funding should be an important component. Stand by for committees to be established to study this matter; the usual suspects who belong to all other government committees will undoubtedly be called upon again to do their worst. The prospects for delay are endless.

Stephen Vines runs companies in the food sector and moonlights as a journalist and a broadcaster

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