(Chinese Version)

“No institution or individual shall conduct equity-based crowd funding without the permission of CSRC.”

It is a big warning for current crowd funding platforms in China, because on the one hand, all the projects designed by crowd funding institutions do not have the permission of CSRC; on the other hand, such statement suggests that in the future crowd funding could face strong scrutiny.

A few days ago, CSRC inspected major financing institutions and agencies in China.

As the inspection goes, a detailed regulation is expected to come soon. The future of equity-based crowd funding in China is undecided.

A change in regulation: equity-based crowd funding is narrowed to specific public offering

On December 18th, 2014, the Securities Association of China (SAC) published a notice, asking for opinions on regulations for private equity financing from the public.

The notice is regarded as the first regulation for equity-based crowd funding in China. Meanwhile, a lot of institutions including JD Finance, Ant Small & Micro Financial Services Group, Ping An Group, CITIC Securities, Renren Crowd Funding and 36 krypton immediately established their own crowd funding platforms.

The Sate Council has talked about pilot crowd funding programs for a long time. But the CSRC seems to be very cautious about the pilot plan.

Equity-based crowd funding means a lot to Chinese online finance market. Now according to the CSRS regulation, the range has been largely narrowed.

A spokesman from CSRS told us that public offering and private funding was the key to defining a qualified equity based crowd funding.

According to CSRS, equity-based crowd funding financing gathers funds from the public via the Internet. To be specific, entrepreneurs could collect money through such platforms.

Under the new regulation, equity based crowd funding is confined to public offering rather than private equity, because the latter is defined as private equity fund raising behavior.

Equity-based crowd funding platforms going from files system to license system

According to the sixth article of the regulation, equity-based crowd funding platform shall register under SAC and become a member of SAC.

It sounds like a really simple plan because institutions only have to become members of SAC while no actual scrutiny is imposed.

CSRS, however, pointed out that without its permission no institution should conduct equity based crowd funding. To put it in a simple way, either the establishment of platform or the crowd funding should gain permission from CRSR.

The change from files system to license system spells a severe “tornado” for crowd funding platforms in China.

If the regulation comes into effect, the current platforms could face closure if they cannot get the license in the near future.

Some media agencies reported that the first three pilot platforms have been settled, namely JD Finance, Qianhai crowd funding under Ping An Group and Ant crowd funding under Ant Small & Micro Financial Services Group.

However, such news has not been confirmed by CRSR.

It has been estimated that the number of licenses to be issued is likely to be anywhere from 3 to 10.

Regulation conflicts between the local and central.

On July 18th, the Central Bank teamed up with 10 central institutions and published a notice that the surveillance of equity-based crowd funding should be conducted by CRSR.

According to the notice, equity-based crowd funding is defined as small equity financing through the Internet. Only qualified platforms are allowed to do so.

Equity based crowd funding has been labeled as “open” “small” and “public”.

But way before the regulation being put forward, some provinces have already started their own pilot programs. For example, Guangzhouhou launched its own plan on July 21th,.

After publishing the regulation, CRSR asked local governments to ban any institution or individual from crowd funding.

There have been some conflicts in the definition of equity based crowd funding between the local and central government. The questions lies in whether non public equity financing or private equity belongs to equity based crowd funding.

Indeed, local regulations need to be adjusted in order to eliminate such difference.

Equity-based crowd funding might face unexpected changes

Although the detailed regulations have not come into effect, the inspection conducted by CRSR makes people wonder what the regulation will look like.

First of all, the number of investors that define public offering might increase. SAC defined equity based crowd funding as private equity last year. Now it has been clearly stated that equity based crowd funding was small equity financing through the Internet, which belongs to public offering.

Public views towards equity based crowd funding change as well. Now the number of investors might exceed 200 and the threshold for investors might be lowered. In the past, an investor is required to invest in at least 1 million RMB for one project or have at least 3 million RMB financial asset.

The participants in financing are confined to entrepreneurs and small and micro enterprises;

Under such regulation, many famous enterprises that conducted crowd funding are not allowed to do so anymore.

On Qiku’s product conference, its CEO Zhou Hongyi once announced that he would use parts of company’s stock to exchange money from the public. Now if Qiku does not fit the “small and micro enterprise” criteria, it is not allowed to do so.

In another word, even though some companies only use equity based crowd funding as a gimmick for marketing, their behaviors are not legal from right now.

That being said, though some platforms might not get the license from CRSR soon, they will not necessarily die.

They could continue their businesses in non-public equity financing or private equity but they cannot advertise or convince customers with the name of “equity based crowd funding”. They could also focus on product-based, service-based crowd funding.

[The article is published and edited with authorization from the author @Li Junhui, please note source and hyperlink when reproduce.]

Translated by Jackie Jia (Senior translator at Echo)