Karl Zhang
On January 26, 2021, the State Council promulgated the Regulations on the Prevention and Handling of Illegal Fundraising (the “Regulations”), which will go into force on May 1, 2021 and are highlighted below:
1. Definition and applicable scope of illegal fundraising
Illegal fundraising means an act of absorbing funds from unspecific targets by undertaking to repay principal with interest or other investment returns, without a lawful license from the financial authorities of the State Council or in violation of financial administration regulations issued by the state. The Regulations shall apply to the prevention of illegal fundraising and the administrative agencies’ handling of illegal fundraising. If any law or administrative regulation otherwise provides for unlawful banking, securities, insurance, foreign exchange and other financial business activities, such other law or administrative regulation shall apply. An illegal fundraiser shall refer to an entity or individual that promotes, leads or organizes the implementation of illegal fundraising; and an “illegal fundraising assistant” shall refer to an entity or individual with clear knowledge of the illegality of the fundraising activity but nevertheless assists in such illegal fundraising and obtains economic benefits.
2. Prevention of illegal fundraising
Market regulatory authorities shall strengthen their administration of the business registration of enterprises and individual industrial and commercial households regarding their names and business scope, among others. Except as otherwise prescribed by law, administrative regulations and the state, an enterprise or individual industrial and commercial household shall not use wordings such as “finance,” “exchange,” “trading center,” “investment management,” “wealth management,” “equity crowdfunding,” or any other word or content in its name or business scope.
Except as otherwise prescribed by the state, no entity or individual may publish an advertisement containing fundraising content or otherwise distribute publicity material for fundraising to the public. The market regulatory authority shall, in conjunction with the lead authority for handling illegal fundraising, strengthen the monitoring of advertisements that are suspected to be related to illegal fundraising. An advertising agent or advertisement publisher shall check relevant supporting documents and verify the contents of advertisements in accordance with laws and administrative regulations.
Financial institutions and non-banking payment institutions shall establish and improve an internal management system, strengthen public education on preventing illegal fundraising, and strictly implement the large transaction and suspicious transaction reporting system in accordance with law.
3. Handling of illegal fundraising
In case of any suspected illegal fundraising acts in an administrative region, the lead authority for handling illegal fundraising shall promptly organize the relevant industry authorities, regulatory departments and branches, and the dispatched institutions of the financial administrative authority of the State Council to investigate and make findings. In case of suspected cross-administrative region illegal fundraising, if the illegal fundraiser is an entity, the lead authority for handling illegal fundraising in the place of the entity’s registration shall organize the investigation efforts; If illegal fundraiser is an individual, the lead authority for handling illegal fundraising in his/her place of domicile or of habitual residence shall organize the investigation efforts.
The lead authority may conduct its investigation by entering the premises suspected of illegal fundraising and collect evidence, question entities and individuals related to the incident under investigation, review and copy the relevant documents, materials, electronic data, etc., and inquire about the relevant accounts suspected of illegal fundraising. Meanwhile, depending on the need to dispose of the illegal fundraising, the lead authority may take administrative measures, such as the seizure of relevant business premises, attaching or seizing relevant assets, and ordering the illegal fundraisers and assistants to recover and sell assets at prevailing market prices to return the raised funds, as well as restricting those relevant personnel from leaving this country.
Illegal fundraisers and assistants shall return the funds so raised to the fundraising sources. The refund process should be supervised by the lead authority for handling illegal fundraising. For enterprises, individual industrial and farmers’ professional cooperatives that were set up for illegal fundraising, the market regulatory authority will revoke their business license. For online instances such as websites or mobile applications that were established or developed for illegal fundraising, the competent telecommunications authority shall shut them down in accordance with law.
4. Legal liability for illegal fundraising
The lead authority for handling illegal fundraising will impose a fine of 20% to 100% of the illegally raised funds on the illegal fundraiser. If the illegal fundraiser is an entity, it may be ordered to suspend production or operation, depending on the severity of the circumstances, and the relevant authorities will revoke the permit, business license or registration certificate, as well as issue warnings to, or impose a fine of RMB 500,000 to RMB 5,000,000 on, its main legal representatives, the supervisors directly in charge and other directly responsible personnel. If a crime is constituted, the criminal liability will be prosecuted. As to illegal fundraising assistants, the lead authority will issue a warning or impose a fine of 100% to 300% of the illegal proceeds and prosecute criminal liability if a crime is constituted.
For Internet information service providers failing to fulfill their obligations to prevent and dispose of suspected illegal fundraising information, the competent authorities shall order rectification, issue a warning or confiscate the illegal proceeds. Failure to comply or in case of a serious violation, a fine of RMB 100,000 to RMB 500,000 will be imposed, and the offender may be ordered to temporarily suspend business, shut down for reorganization, close its website or have its relevant business permits or business license revoked, depending on the severity of the circumstances. In addition, a fine of RMB 10,000 to RMB 100,000 may be imposed on the directly responsible supervisors and other directly responsible personnel.
For advertising operators and publishers who fail to check the relevant supporting documents and verify the content of advertisements in accordance with applicable requirements, the market supervision and administrative authority will order rectification and impose a penalty in accordance with the Advertising Law of the People’s Republic of China.
For financial institutions and non-banking payment institutions failing to perform their obligation to prevent illegal fundraising, the financial regulatory authority of the State Council or its branches and dispatched agencies will order rectification, issue warnings or confiscate their illegal proceeds pursuant to their scope of authority. In case of serious consequences, a fine of RMB 1,000,000 to RMB 5,000,000 will be imposed; the supervisors directly in charge and other directly responsible personnel will further receive a warning and a fine of RMB 100,000 to RMB 500,000.