Equity Crowdfunding in China: Current Practice and Important Legal Issues

Abstract

By studying two leading Chinese equity crowdfunding portals, namely, Renrentou and Zhongou8, this paper provides the very first empirical evidence on the practice and regulation of equity crowdfunding in China. In the case of Renrentou, I examine a hand-collected sample consisting of the investment documentation of the 53 crowdfunding projects that are successfully completed as of June 30, 2016 on the portal. It is found that the utmost task of the contractual terms in these agreements is to secure the investors’ right of return. Control on the part of investors is rather minimal, and most of the time only encompasses the basic information and monitoring rights. Although investors are not first pooled to form a new entity before investing, it is still a prevalent practice for projects to commission a third party manager to manage the investment for the crowdfunders and exercise monitoring rights in the project entity on their behalf. In the Zhongtou8 case study, I go beyond the margins of investment contracts and explore the operation of the business with a both broader and deeper view. It is found that, the leading investors of crowdfunding projects are very often served by entities that are in some ways related to the founder of the portal. In addition, the portal is also identified to have financial interests in many projects besides that. While these practices do raise concerns about potential conflicts of interests, the regulatory solutions proposed by the Crowdfunding Measures are nevertheless overly cautious and effectually not enforceable. It is therefore argued that the regulator should rather focus on ensuring effective disclosure from the parties with better information, so that the investors can use it to make effective decisions. Furthermore, by setting down high entry thresholds for qualified investors, the Crowdfunding Measures fail to establish equity crowdfunding as a new financing alternative, but rather create a minimized version of the NEEQ private placement. As such, it would be meaningful for China to consider lowering the investor qualifications and allow crowds to participate, so that equity crowdfunding can grow into a true new alternative for entrepreneurs to avail in addition to existing fundraising channels.