(Note: this is generally available public knowledge. For the specifics on how Chinese platforms are regulated and how the regulations work, please contact a licensed Chinese attorney.)
The Chinese Company Law and Securities Law are applicable to EBCIs in China and the Chinese Securities Regulatory Commission (CSRC) has over 50 rules and regulations on securities and future markets. In addition, there are hundreds of circulars on the topic and other laws such as Property Rights Law, Criminal Law, Enterprise Bankruptcy Law, and Anti-Money Laundering Law that may also apply.
Technology and emergence of equity based crowdfunding has blurred the line between public offerings and private placements. Under Article 10 of China's Securities Law, public offerings of securities must be approved by the regulatory bodies. Public offerings are defined to include any issuance of securities to more than 200 non-specific targets. The issuer must be a LLC that has been authorized to issue shares.
Chinese EBCI platforms seem to get around the securities regulations by arranging investment deals as private contracts on an ad hoc basis. For example, Make V, a media start-up company underwent two rounds of crowdfunding on Taobo (a retail website similar to Amazon and eBay) and raised 1.2 RMB for 6% of the company. The deals were structured as private contracts where investors hold the shares and dividends are paid according to the contracts. Supposedly, Make V consulted a law firm and the Beijing Municipal Lawyers Association before they undertook the crowdfunding efforts. They knew such issuance of securities were illegal but went ahead with it anyway and promised to buy-back the shares that were illegally purchased if the government should crack down on their crowdfunding efforts.
Similarly, Mirror Fun, a retail store operating off Taobao, recently raised 15 million RMB through 红岭 (“Hong Ling”). Hong Ling is an interesting entity because they seem to be an online crowdfunding service. Although they do not specifically list their services as such, and they avoid stating any laws re securities, they do blatantly list investment opportunities as sort of private lending and governed under Contract laws of China.
There are a number of risks in issuing and buying public offerings in China. While there are not specific criminal provisions dealing with illegal fundraising, there are a number of provisions that may be interpreted to sanction the activity. Going forward, equity platforms will have to be very careful in issuing securities publicly without approval, in an disguised form, or exceeding the other regulatory requirements. However, the bulk of the work are for the regulators to clarify the line between public offerings and private placements, clarify the definition of equity platform offerings and specify how they should be regulated, and balance the interest in promoting capital formation and equity ownership by the rising middle class with the risk of fraud and the crowd effect of following the wrong investment trends. The consumers will also have to be cautious and educate themselves on the various interplays between securities offering and their potential high risk nature. The regulators must promote transparency, but the crowd must develop its own independent compass with respect to the success potential of fundraising enterprises.
Despite the potentials, Chinese platforms and potential investors face cultural, economic, and institutional forces that suppress entrepreneurial activity. Specifically, the World Bank found perception and understanding of entrepreneurship, education, and cost of doing business and resolving insolvency correlate with the number of crowdfund investment platforms (there is a small negative correlation between cost of starting a business and number of platforms and a slightly positive correlation between number of platforms and cost of resolving insolvency). Social normative variables such as face-saving and collectively mentality translates to risk-averse behaviors negatively impacting the number of investment vehicles in high risk ventures. World Bank also found infrastructure such as Internet access, social medial penetration, and hiring and firing efficiency positively correlate with the number of EBCI platforms. However, remittance inflows and the amount of venture capital transactions negatively correlate, slightly, with EBCI platform count.
I reserve my hopes for China and crowdfunding at the moment. Until the culture and moral values of Chinese businesses align with a sense of social responsibility, I do not see crowdfunding successful or purposeful in China.