Interpretation of the State Council's new regulations on dealing with illegal fund-raising: Be careful when it comes to virtual currency financial management and bear the losses yourself

Recently, the State Council promulgated the "Regulations on Preventing and Dealing with Illegal Fund-raising" (State Council Order No. 737, hereinafter referred to as "Document No. 737").

Document No. 737 consists of 5 chapters and 40 articles, and will come into effect on May 1, 2021.

Note: The picture is taken from the official website of the State Council Information Office

What does Document No. 737 say and what impact will it have? Let’s take a closer look.

What are the common illegal fund-raising methods?

Document No. 737 clarifies the definition of illegal fund-raising, which refers to the act of raising funds from unspecified persons by promising to repay principal and interest or provide other investment returns without the permission of the financial management department of the State Council in accordance with the law or in violation of national financial management regulations.

Before 2016, illegal fundraising was mainly concentrated in the Internet financial industry, with investment and financial management, non-financial guarantees, and P2P online lending as the most common areas. In recent years, it has gradually shifted to equity crowdfunding, wealth management, and new investments. Document No. 737 specifically named high-risk areas such as "equity, debt, funds, insurance products, virtual currency, and financial leasing."

Document No. 737 will be officially implemented on May 1. As you can imagine, there is a high probability that there will be a wave of investigations from regulatory authorities in the second half of the year. Some enterprises and individual businesses should pay attention, especially those whose business scope mentions words or contents such as "finance", "exchange", "trading center", "financial management", "wealth management", "equity crowdfunding", etc. They are likely to become the focus of investigations, and it is imperative to do a good job of compliance in advance.

Who was punished?

The main penalties are for two types of people: those responsible for illegal fund-raising and those who have the obligation to prevent illegal fund-raising.

There are two types of persons responsible for illegal fund-raising. The first type is illegal fund-raisers, i.e., units and individuals who initiate, lead or organize illegal fund-raising; the second type is illegal fund-raising assistants, i.e., units and individuals who knowingly provide assistance to illegal fund-raising and obtain economic benefits. Note that the requirement here is to obtain economic benefits, which excludes free and voluntary assistance.

The scope of persons who are obliged to prevent illegal fund-raising is wider, covering at least three major groups: advertising operators and publishers, Internet information service providers, and payment and settlement institutions. These three groups play a vital role in the large-scale spread and smooth progress of illegal fund-raising, so higher requirements are imposed on them.

If there is any violation of regulations in advertising for illegal fundraising activities, or if an online platform discovers illegal fundraising advertisements and fails to effectively prevent their spread, or if a payment settlement institution discovers large suspicious transfers and fails to fulfill its risk control reporting obligations, all of these individuals may be punished.

How to clear?

For the general public, the most important concern is whether they can get their principal back.

The principle of handling the funds raised is "actively clearing, no profit, and self-bearing of losses". How to understand? If there is any surplus money, it will be returned to the participants; for the part that cannot be returned, the participants can only bear the losses themselves.

Some people may ask, if there is any surplus money, can the interest be refunded? No. Because this is an illegal fundraising activity, it is not recognized and encouraged. No unit or individual can obtain economic benefits from illegal activities. This is a basic principle. In other words, if there is any surplus money after all the money is refunded, it will be fined first and then confiscated.

Where does the liquidation funds come from? The main sources are still two types of people: illegal fund-raising people and illegal fund-raising facilitators. Any assets related to illegal fund-raising activities may become liquidation funds, including advertising fees, endorsement fees, commissions, etc.

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