Menglu Zhang, MJIL Note & Comment Editor
Crowdfunding is new, but growing rapidly. Research shows that by 2016 the crowdfunding industry is on track to account for more funding than venture capital.[1] In China, equity crowdfunding dominates this segment.[2] As the world’s second-largest economy with a population of more than 1.3 billion, China continues to be one of the most popular investment destinations all over the world, and has a huge potential in this new funding mechanism. However, under the current Chinese legal regime, equity crowdfunding blurs the boundaries of illegal fund raising. This restricts the development of equity crowdfunding in China, since most broker-dealers are reluctant to take the risk. The legal statuses of equity crowdfunding platforms and activities are also an open question.
Although equity crowdfunding is at a nascent stage in China, its development has been far ahead of legislation reform. Fortunately, the Chinese official authorities have been aware of the huge conflict between the needs of start-up businesses and the legal dilemma faced by equity crowdfunding and are trying to eliminate it. For instance, in the 2015 Report of the Work on Government, the Premier of State Council expressed that the State Council shall advance the finance system reform, and launch equity crowdfunding pilot programs in 2015.[3] In an Opinion released on June 16, 2015, the State Council stated that its mission is to “support the development of internet finance, guide and encourage the development of crowdfunding platforms, establish pilot programs of small-amount equity crowdfunding to finance publicly, and strengthen risk control and standardized management (of new investment measures).”[4] And in guidance jointly released by the Ministry of Finance and nine other executive departments, it was restated that equity crowdfunding would become a part of the capital market under the premise of law and regulation compliance.[5]
Most notably, in the first draft of the new Securities Law of China, equity crowdfunding is expressly permitted.[6] Although the First Draft itself is not made public yet, the news has been confirmed by the press release of the National People’s Congress.[7] From the information provided by the State Council and the National People’s Congress, the public can get a glance of the future rules regarding equity crowdfunding: equity crowdfunding in China would be conducted through internet platform or similar intermediaries; the equity issuers would only be small or start-up businesses, and would truthfully publish their business model, management, finance, use of funds, and other key business information; each investment amount would be small; the investors would fully understand the risk involving in equity crowdfunding, also have certain abilities to bear the risk; and the CSRC would supervise the equity crowdfunding market.[8] It looks very similar with the U.S. Title III of the JOBS Act, just China might have some requirements to investors’ income, net assets or risk bearing abilities.
The market predicted that the First Draft would be released before August 2015, but as a result of the collapse of Chinese stock market in the summer 2015, the process of amending the Securities Law is delayed to 2016. However, one thing is certain — with the support of the government and the market, the equity crowdfunding permission will be a part of the new law. In the future, China will have an equity-crowdfunding-friendly legal environment.
[1] Chance Barnett, Trends Show Crowdfunding To Surpass VC In 2016, Forbes (June 9, 2015, 5:33 PM), http://www.forbes.com/sites/chancebarnett/2015/06/09/trends-show-crowdfunding-to-surpass-vc-in-2016/.
[2] See, McKinsey Global Institute, China’s digital transformation: The Internet’s Impact on Productivity and Growth 57 (2014), available at http://www.mckinsey.com/insights/high_tech_telecoms_internet/chinas_digital_transformation.
[3] Keqiang Li, zhengfugongzuobaogao [Report on the Work of the Government], The State Counsel of People’s Republic of China (Mar. 16, 2015, 22:44 PM), http://www.gov.cn/guowuyuan/2015-03/16/content_2835101.htm.
[4] Guowuyuanguanyutuijindazhongchuangyewanzhongchuangxinruoganzhengcecuoshideyijian [the Opinions of the State Council regarding the policies and measures of Advancing Enterprising and Innovation], The State Counsel of People’s Republic of China (Jun. 16, 2015), http://www.gov.cn/zhengce/content/2015-06/16/content_9855.htm.
[5] Renminyinhangdengshibuweifabuguanyucujinhulianwangjinrongjiankangfazhandezhidaoyijian, [The Ten Departments Jointly Released the Guidance on the Promotion of the Healthy Development of Internet Financing], The State Counsel of People’s Republic of China (Jul. 18, 2015, 11:15 AM), http://www.gov.cn/xinwen/2015-07/18/content_2899360.htm.
[6] See, Fangsongguanzhijiaqinagjianguan [Release Control, Strengthen Supervision], The Nat’l People’s Cong. of the People’s Republic of China (Apr. 21, 2015), http://www.npc.gov.cn/npc/xinwen/lfgz/2015-04/21/content_1933471.htm.
[7] See, Id.
[8] See, Id.