Equity crowdfunding

Regulation and complaints
Collective investment scheme
Professional investor

With the rapid development of the internet and social media, crowdfunding activities have emerged internationally and locally over the past few years. Crowdfunding is an umbrella term describing the use of monetary contributions, obtained from a large number of individuals or organisations, to fund a project, a business, a company, a loan or a donation, and other needs through an online platform.

Equity crowdfunding (ECF) is a common type of crowdfunding activity where investors usually invest in a project or a business (often a start-up) through an online platform, typically in return for an interest in shares issued by a company.

How does ECF work?

Investors can visit the ECF platforms via the internet or mobile applications, which may show an overview of the projects/companies being pitched. Investors may need to register with the platforms in order to see further details of the pitches and other information (such as terms and conditions), or to invest in a project/company.

There are generally two types of ECF platforms. Entrepreneur-led platforms are the ones where business owners set the investment terms, including share price and the amount of equity to be offered. Investor-led platforms are the ones where lead investors negotiate investment terms with the business owner, invest their own money, and then open the investment for participation by other investors under the terms as negotiated by the lead investors.

ECF platforms usually charge a fee as a percentage of the total amount raised plus transaction fees. Some platforms also have application fees that a business has to pay, whether it's successful in raising the desired funds or not. Some platforms may charge a management fee that is payable by investors as well.

Risks associated with ECF(Note 1)

While ECF offers investors an opportunity to participate in an early-stage venture, this may involve very high risks. Investors may stand to lose all of their investments. Some of the key risks include:

  • Risk of bankruptcy of the issuer

    Failure rates of start-ups are estimated to range between 50%-90%. Unlike an investment in a mature business where there is a track record of revenue and income, the success of a start-up or early-stage venture often relies on the development of a new product or service that may or may not find a market. Also, investment horizons can be very long, further increasing the probability of failure.

  • Liquidity risk/lack of secondary market liquidity for the equity investments

    Securities purchased through ECF platforms may have very limited secondary market liquidity. Start-ups and small enterprises that are funded through ECF often do not meet the listing requirements for an IPO, thereby limiting exit avenues for investors. In comparison, listed securities generally provide greater opportunities for investors to exit their investments. Besides, the equity of start-ups/small enterprises may be difficult to value and may be subject to dilution by further issuance.

  • Risk of conducting unlicensed activities

    Some platforms may contend that they do not engage in regulated activities because they only provide information services. However, the Securities and Futures Commission (SFC) may take a different view and consider that the licensing requirements under the Securities and Futures Ordinance (SFO) are triggered. Platforms/platform operators carrying on business in regulated activities under the SFO without a licence is an offence under the SFO. Please refer to the section below "How is ECF regulated in Hong Kong?".

  • Disclosure risks

    Investment proposals on platforms may lack standardisation and provide less detail than securities in the public markets, making it harder for investors to understand the risks. For example, investors may not have sufficient information about the issuer and the offering, the company's business plan and use of proceeds. Even if the information is available, it may not be easily verifiable either. Investors may not be able to get full disclosure about the business or investment product before and after they invest in it.

  • Risk of collapse, fraud or malpractice by the platform

    In recent years, certain cases of platform fraud, collapse and closure have materialised and caused investor losses.

  • Cross-border risk

    A few platforms have started cross-border activities. It is often unclear in such cases under which law the investors can seek redress in case of fraud, default or bankruptcy. Even if a platform is licensed offshore, investors may have difficulty enforcing their rights and interests if anything goes wrong.

  • Cyber security

    Cyber-attacks may come in various forms, such as hacking, overloading a platform's infrastructure, confusing accounts, identity theft and/or stealing information including personal data.

  • Illegal activities

    Some platforms/users of platforms may be involved in illegal activities, such as fraud by parties making offers on the platform, money laundering or other illegal commerce that could lead to regulatory actions including suspension by relevant law enforcement agencies.

How is ECF regulated in Hong Kong?

As can be discerned from the description above, ECF typically involves the offering of shares issued by a company. Consequently, these business models may engage the application of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (CWUMPO) and of the SFO. The platform/platform operator may also need to be licensed under the SFO before it is permitted to carry on a business in its activities. In addition, depending on the specific structure and features of the arrangement, the investment offered on the platform may be subject to the restrictions on offers of investments under the SFO, and/or the prospectus-related requirements under the CWUMPO.

Due to the inherent risk of long term investment in unlisted securities, the SFC may consider that certain crowdfunding platforms are not suitable for retail investors and may only approve licensing applications with a condition that the crowdfunding platforms should limit their services to professional investors.(Note 2 & 3)

Key points for investors to take away

If you are an investor and interested in participating in ECF:

  1. Check if local or cross-border

    Check where the platform is incorporated/operating from. If it is operating from outside Hong Kong, Hong Kong investors will face additional cross-border issues when trying to recoup their investment in case of fraud, default or bankruptcy.

  2. Check if licensed or not

    Where a platform states that it is licensed by the SFC, you can check the public register on the website of the SFC to verify the platform's licensing status. Investors should be aware that only if the platform is duly licensed would it be covered by oversight by the SFC and by the SFO, and/or CWUMPO, and/or the regulations which the SFC administers.

  3. Investor limitations

    Understand the investor limitations. The platform may have a limitation (e.g. legal restriction or licensing condition) that only professional investors can invest in the products and services advertised.

  4. Read any terms and conditions

    Read the terms and conditions of the platform, any documentation that you are asked to sign, and any data privacy waivers very carefully.

  5. Understand the safeguards

    Understand how the platform is operated and the safeguards it adopts to protect your interests, including your investing interests as well as your data security interests.

  6. Understand the risks

    Understand the risks associated with ECF and carefully assess whether your personal circumstances allow you to take on the risks involved.

  7. Make informed investment decisions

    Be reminded that making uninformed investment decisions based on unverified information is highly risky and may lead to a total loss of your investments. You should not invest in any financial products or activities that you do not know or understand. You should seek professional advice if in doubt.



  1. Reference has been made to two IOSCO papers:

  2. Other types of crowdfunding (may or may not be in the form of equity-based) or alternative financing activities e.g. real estate crowdfunding, invoice and trade receivables trading (online), debt crowdfunding/peer-to-peer lending etc may also be subject to the provisions of the SFO and the CWUMPO depending on the specific structure and features of the arrangement. The platforms/platform operators may also need to be licensed under the SFO before they are permitted to carry on a business in these activities.

  3. Donation crowdfunding and reward-based crowdfunding may not engage the application of the CWUMPO/SFO. However, soliciting funds via such types of crowdfunding may engage the application of other laws or regulations, such as those governing the operating of charities and not-for-profit organisations.