: Criminal Liabilities for Illegal Fund Raising in China

01-19-2011, 10:07 PM
In China, raising fund from public must be conducted strictly in accordance with laws to avoid criminal liabilities. Chinas Criminal Law (1997) criminalize some public fundraising conducts and imposes severe criminal punishments on violators.
Private equity investment is a relatively new method of financing emerging companies in China. The business has grown so fast that outpaces the development of the laws regulating and protecting its operations. For the restrictions of laws, raising fund from unselected members of public must be strictly avoided by the private equity funds in China. However, unlike securities investment funds, trusts or public offering of securities, there are no clear rules of law guiding the fundraising practice of private equity funds. This situation has posted serious risks to both the business and to the professionals engaging fundraising in China. Despite the legal line is invisible and sometimes even unstable, funds must always be aware of the risks relating to public fundraising and ensure all their conducts are on the safe side.
Recently, criminal liabilities for illegal public fundraising receive some clarifications from the Supreme Peoples Court of China (SPC). On 13 December 2010, the SPC issued the Judicial Interpretations on Several Issues Concerning Implementation of Laws in Trial of Criminal Cases Relating Illegal Fundraising (Fa Shi [2010] No.18) (Judicial Interpretation) to clarify the criminal charges and punishments relating to illegal public fundraising. Among other issues, the Judicial Interpretations explicitly state that by violating national provisions, issuing shares of fund to public without approval should be charged for illegal operation of business. Below is a summary of some key clarifications brought by the Judicial Interpretations:-

1. The Judicial Interpretations clarify the constitution of the criminal charge of Illegally taking savings from public or such an equivalent activity, a crime provided under Article 176 of the Criminal Law. According to the Judicial Interpretations, the offence is an act of taking capital from social public including both entities and individuals. Such an act was in violation of Chinas financial administration laws. It must satisfy all the four requirements:- (1) the fundraising must have not been approved by the relevant authority(ies) or was so conducted under a legal cover; (2) the fundraising was published to the social public through channels such as social media, promotion meetings, leafleting, sending SMS to public etc.; (3) the fundraiser promises to repay, after a specific period of time, the capital and interests, or investment returns in other names in cash, properties in kind, shares etc.; (4) the public members targeted in raising fund must be indefinite members of social public. If the fundraising is targeted to the definite persons or entities, such as family members or definite members within an entity only, the act does not constitute the crime and therefore shall not be punished under the Criminal Law.

The Judicial Interpretations exemplify ten typical circumstances that shall be charged with the crime under Article 176 of the Criminal Law. In addition, they also specify several important thresholds that qualify the crime, including the amount of fund illegally raised, the numbers of fundraising targets, the damages caused to victims, the impacts of the crime to the society etc.

2. The Judicial Interpretations explained about the criminal charge for the severe offense of issuing shares of fund to public without obtaining approvals and in violation of laws, as well as how to punish the offenders. The Criminal Law does not have a direct and independent charge for this offense. The Judicial Interpretations explicate that the offenders be charged for illegal operation of business, and punished according to Article 225 of the Criminal Law. The Judicial Interpretations do not further explain the meaning of the fund.

3. The Judicial Interpretations also elaborate on the constitution of the criminal charge of fundraising by fraud. Pursuant to the Judicial Interpretations, a key factor that qualifies this charge is that the offenders raise the fund with the intention of personally possessing it rather than use it for business. Seven specific circumstances in which this crime shall be convicted and punished are provided in the Judicial Interpretations.

4. In addition to the above, the Judicial Interpretations define the criminal charges for issuing corporate shares or bonds without obtaining required approvals and advertising for promoting illegal fundraising. The constitutional elements of these crimes and the related punishments corresponding to the severity of the offenses are also interpreted by the SPC.

The Judicial Interpretations came into effect on 4 January 2011.

Steven Wei Su is a partner at Guo Lian PRC Lawyers. His practice focuses on private equity/venture capital fund formation and operation, mergers and acquisitions, general corporate and commercial dispute settlement.

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