Ways for Hong Kong Startups to Fundraise

For every startup, fundraising is number one priority. No juice, no game. In startup communities, you may come across thousands of stories detailing the ups and downs of startup founders going through search for VCs, interviews, bargaining with investors. The funding road is never an easy way.

Co-author: Brian Wong

If you think a capitalist city like Hong Kong is friendlier to founders, then you are totally wrong. Investors in Hong Kong tend to think from a slightly different angle than traditional VCs from China or the States. Sophisticated VCs look for a combination of factors when they evaluate the startups — the potential exponential growth of the business model, scalability of the technical stack a startup offers, track record of the team, and the execution power of the team. However, most investors in Hong Kong find it difficult to valuate a startups if there lacks an immediate profit-making plan and projections. Thus, short-term profitability is a must for any startup investment plan in Hong Kong.

1. Government fundings

Governmental bodies like the Science Park and Cyberport provide different kinds of funding and accelerator programme. You may visit this website for a list of government funds and programmes that are open for application. (Link： 創業懶人包). Of course, going through a government programme implies a lot of paper works and administrative work to handle in the process.

2. Private fundings

So you may wonder, why can’t I just look for investors myself instead of joining programmes after programmes. If you are a rich guy, then congratulations, you solve the most imminent problem and you can build your startup by bootstrapping in Hong Kong. However, for an early-stage startup, tapping into the funds may be an insurmountable hurdle.

As startup founders, you need to understand what are the regulatory requirements for private fund raisings in Hong Kong. In recent years, fund raising activities in Hong Kong outside of the public markets have been on the rise. From startups looking for investments to establish a foothold to mature businesses looking to diversify, short to medium-term funding is most sought-after. But first let’s take a look at the relevant regulations in Hong Kong before considering finding fundings.

The Funding Regulation in Hong Kong

In Hong Kong, when your company is still private, you are not permitted to do a public sale. Generally, when you are doing a public sale of your equity, laws will require you to issue a prospectus, listing out all your histories and financials for public scrutiny, just like one of those Initial Public Offerings (“IPOs”) in the stock market. In essence, no person may issue a “prospectus” to offer shares or debentures in a company to the public unless the document is exempted or has been registered in accordance with the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”)¹. Most market players turn to specific carve-outs from the definition of “prospectus” that are listed in Schedule 17 of CWUMPO, which are commonly referred to as safe harbors. Currently, four types of safe harbors have been commonly relied on to facilitate private placement in Hong Kong namely:

• An offer made only to “professional investors”²;
• An offer to not more than 50 persons;
• Offers for which the total consideration payable for the relevant shares does not exceed HK$ 5 million (or its foreign currency equivalent);
• An offer in respect of which the minimum investment amount payable by an investor is not less than HK$500,000.

Fundraising for Startups in Hong Kong — Private Placement

Hong Kong’s long-standing legal restrictions on raising capital from “members of the public” complicate the process of approaching potential investors, but it is possible to raise the capital you need without breaking the law whether you are intending to issue convertible bonds or shares. The most popular and useful exemptions require you to only raise money on a private placement basis or from “professional investors”. One popular route is to raise fund through organizations like Hong Kong Business Angel Network³, whose members are already verified to be Professional Investors (“PI”)². These Angel Investors can provide a seed-round funding and it is entirely compliance-free for finding any of these Angel Investor. On the demand side, emerging high-net-worth individuals or family offices are more open to less traditional investment options that provide more attractive, fixed income returns.

These private channels for a private placement from an Investor is the most direct way as investors are the most direct group that are interested in putting in money into your startup idea. However, the hassle with private placement lies with the management of the Investors. With a private placement, investors will always go through your business plans and the conditions of your company, which means startups will have to go through the lengthy due diligence and founders will have to bargain the terms in the investment term sheets with the investors. Also even after the initial fundings are promised, there will be another round of negotiations about the shareholders’ agreement governing the relationship between the founders and the investors and the daily management of the company. This procedure may suck up a significant portion of your previous time.

Fundraising from VCs that most startup founders are familiar with is also going through this route. You can take a look at Startmeup’s Website to check out all the active VCs in this region. Of course if founders are looking for relative smaller amount of subsidy-type of funding, the government has schemes like Innovation and Technology Fund to help, which is not strictly classified as fundraising.

Fundraising for Startups in Hong Kong — Offerings to the Public

It is normal to consider private placement is too cumbersome, yet selling to the public does not mean easier process. Small-scale retail crowdfunding has always been an option⁴. Under Part 1 of Schedule 17 of Companies (Winding Up and Miscellaneous Provisions) Ordinance (‘CWUMPO’), offers of securities not exceeding HK$5 million over a 12-month period are exempted from the prospectus requirement under CWUMPO. Issuers need only state on the document that it has not been reviewed by any Hong Kong regulatory authority. Under s. 103(2)(ga) SFO, these exempt offers are also exempted from the s. 103(1) prohibition. The combined effect of these provisions is that small-scale offers can be made to the public without the disclosures in a compliant prospectus.

The HK$5 million small-scale offer exemption is slightly lower than the US$1.07 million small-scale offering exemption in the United States. The Hong Kong regime however comes with a lighter touch. There is effectively no particular disclosure requirement (subject however to provisions in the SFO governing false or misleading statements). One should not underestimate the potential of this exemption for small or initial capital-raising, such as seed funding. Note however that the exemption is available to companies only. This exemption is not available to projects that are structured in the form of a non corporate collective investment scheme (“CIS”) or a structured product.

So hypothetically speaking, besides doing an IPO, you can fundraise from the public anything below HK$5mil, but can a startup even advertise the investment opportunity on Facebook or mass media or online crowdfunding intermediary platform? For that we need to look at the crowdfunding regulation in Hong Kong.

References:

1. https://www.winston.com/images/content/1/0/v2/106558/KeepYourCounsel-DEC2015v2.html#article4
2. 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.

3. https://www.hkban.org/a-list/14811-eng

4. http://www.hk-lawyer.org/content/crowdfunding-hong-kong-%E2%80%93-there-are-sufficient-gateways

Disclaimer: The contents of this article are for reference only and do not constitute any investment advice or solicitation. Please do not rely on this document for investment decisions. Investment involves risks. The authors have tried to ensure the accuracy and reliability of the information provided, including the data, but it does not mean that such information can be used as a guide for investors. Any inaccuracies or omissions in the information will cause any loss to investors. Or damage, no liability is assumed.