Is crowd-funding illegal in China?

Steven Iceberg was a fresh graduate from the Beijing Film Academy, where he majored in directing. One of his classmates, Ronald Dial was a writer with super fans on his ebooks about dinosaurs and Steven was also a big fan of his story.

Ronald decided to contribute his manuscripts to Steven for 30% of the profits from the movie, and Steven signed a partnership agreement with him. All was set apart from one problem: not enough budget to start the film. They tried lending money from classmates, but nobody was rich enough to provide the 500,000 RMB required.

Steven came up with a solution: He thought they should use crowdfunding to raise their film budget. They found an APP called “Cornucopia” on a website and quickly launched a crowd-fund committing to a 50-fold return in a one year period. Within a week, investors had pooled together the film budget.

After a year, the movie got onto the big screen. However, people didn’t really like the film as they thought that actual dinosaurs were harmed during the production of the movie. The film didn’t even meet the budget, and investors were furious. They expected a 50-fold return, and they didn’t get a penny back in return. The case was reported to the police.

What should Steven and Ronald do?

Law In A Minute

Steven and Ronald should return the pooled funds to the investors or they are very likely to be prosecuted.

The art of crowd-funding amounts to an act of absorbing funds from the public may be in violation of China’s Financial Regulations. If a person who commits an act satisfying all the four elements below:

i) Absorbing funds without the approval of the relevant authority

ii) Through the media, promotion, leaflets, mobile phone messages and other channels to the public

iii) The commitment to repay the interest or payback in a certain period of time in monetary, physical, equity and other ways

iv) The absorption of funds is from the public, it is a criminal offence under China’s Criminal Law. It is clear that i) Steven and Ronald had not sought any approval from a government authority; ii) “Cornucopia” is a social media link used to raise funds; iii) a 50-fold return for the amount invested and repayment within a year; iv) targeted for non-specific groups. Their crowd-funding falls into all four prongs and they have to act fast to avoid being put behind the bars.

Legal Basis

On December 13, 2010, Interpretation of the Supreme People’s Court on several issues concerning the specific application of the law relating to criminal cases of illegal fund-raising.

The act of absorbing funds from the public (including units and individuals) in violation of the provisions of the laws of the state financial management, with the following four conditions, shall, except as otherwise provided in the criminal law, be deemed to be the “unlawful absorption of public deposits or the disguised absorption of public deposits” as stipulated in Article 176 of Criminal Law:

(i) Absorbing funds without the approval of the relevant departments or by borrowing legal business

(ii) Through the media, promotion, leaflets, mobile phone messages and other channels to the public publicity

(iii) The commitment to repay the interest or payback in a certain period of time in monetary, physical, equity and other ways

(iv) The absorption of funds to the social public, i.e., to the world at large

If it is not publicized, it is not illegal to absorb or absorb the public deposit in the form of a person or family or a unit.

Edgar Choi is author of “Commercial Law in a Minute” and host of a legal-advice account “Law in a minute” on WeChat

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