Is crowd-funding illegal in China?

Story 4

Criminal Law

Steven Iceberg was a fresh graduate from the Beijing Film Academy, and 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 film budget. They tried lending money from classmates, but nobody was rich enough to provide RMB500,000 needed.

Steven came up with a solution: using crowdf-unding to raise their film budget. They found an APP called “Cornucopia” on a website, launching a crowd-funding committing a 50-fold return in a year period. Within a week, investors have 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 which may be in violation of the 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 pay back in a certain period of time in monetary, physical, equity and other ways; and iv) the absorption of funds is from the public, it is a criminal offence under China’s Criminal Law. It is clearly that i) Steven and Ronald have not sought any approval from government authority; ii) “Cornucopia” is a social media 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 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 pay back 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.

//About the Author//

Edgar Choi is the author of four books, viz: Commercial Law in a Minute; Economic Law in a Minute; Intellectual Property Law in a Minute and The Miracles Of Finance. These books shall be in print by early 2020. 

Edgar is a law graduate of the Fudan University with a mission is to promote law to serve better mankind, and he believes that legal literacy is a key factor to success. Since his childhood, Edgar has been taking joy in writing fiction and short stories. He hopes that through reading his legal stories, the traditional, passive way of learning law in class can be disrupted and readers can experience a brand new world by taking an active role and spending a few minutes every day in this series to have fun and actually remember what was read. 

Edgar can be contacted by scanning the QR code below, searching WeChat ‘edgarwlchoi’, and by email ‘[e-mail]’.