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Progress Towards Equity Crowdfunding in China

29 January 2015

Draft regulations suggest a new era for crowdfunding in China.

In the past year, two platforms offering a (quasi) form of equity crowdfunding have launched in China.

The first, Yue Bao, is an investment platform managed by Alibaba that provides users with an opportunity to invest in a specific fund which is then used to produce a portfolio of film, games and TV shows. The second, Baifa Youxi, is a partnership between Chinese search-engine giant Baidu and Taiwan’s Central Picture Corporation, and enables investors to back local film productions.

There’s more. Chinese technology company Tencent also recently launched it’s own ‘Movies+’ filmproduction unit. Tencent say it is set to make use of crowdfunding to fund it’s upcoming portfolio of films for the new unit.

In a sector dominated by state owned enterprises, access to finance for independent producers is hard. But as these initiatives highlight, there is a big opportunity for the creative industries to access finance through crowdfunding and, specifically, equity crowdfunding.

The World Bank estimates the size of the Chinese crowdfunding market will reach $50 billion by 2025. Yet, crowdfunding in China has been slow to take off, in part due to a lack of clarity around the laws governing it. That is set to change as the Chinese government has quietly published draft regulations for equity crowdfunding for comment, in December.

The publication followed a State Council executive meeting in November, chaired by Premier Li Keqiang, where he discussed the use of equity crowdfunding to help SMEs lower the cost of financing and enabling access to overseas investment through the Shanghai Free Trade Zone.

The draft regulations indicate that the Chinese government aim to establish a limited accredited model of equity crowdfunding similar to that in the US. No more than 200 investors are allowed to invest in a single project and there is no limit on the size of a single investment per investor.

But there are strict criteria. In order to qualify as an accredited investor an individual must pass one of the following criteria; invest at least RMB 1 million in a single project (£100k; 114 EUR), have net assets of RMB 10 million or have net assets of RMB 3 million and an average annual income of RMB 500,000 for the past three years.

The original document containing the draft regulations is in Chinese and can be downloaded here. Or an unofficial English translation of the document is below.

This research is part of BOP’s work with the UK equity crowdfunding platform to investigate the potential of equity crowdfunding in China and to develop an equity crowdfunding solution for the Chinese and UK markets. It’s certainly an exciting time for the sector here.

- Conor Roche is an Associate Director at BOP China, based in our Shanghai office.

Unofficial English translation of draft equity crowdfunding regulations in China:

“Regulation on equity crowdfunding (EC), a draft for comment and discussion.

These regulations give guidance for the following areas:

• EC is only legal under an accredited investment model

• definition of an EC platform

• requirements for an eligible investor and

• responsibilities for entrepreneurs

An EC platform provides an online finance solution service between entrepreneurs and investors. The service includes publication of information, business matching, and assistance in financial transactions.

An EC platform needs to register at the Securities Association of China (SAC) and apply to be a member.

An EC platform has to be a legal Chinese company or a partnership enterprise.

This company has to have net assets of RMB 5 million or greater.

The platform must have a specialist in EC and at least two senior management staff with work experience in finance or IT of over three years.

The platform must have legal support and the appropriate technology facilities.

The platform must have appropriate project management standards.

The platform must have real-name authentication and perform due diligence on both the entrepreneurs and investors.

The platform has the responsibility to keep a record of all investments and transactions for at least 10 years.

The platform CANNOT offer its own company or other related companies as an investment opportunity on the platform.

The platform CANNOT provide guarantee or be a shareholding nominee for projects on the platform.

The platform CANNOT offer shares for resale.

The platform CANNOT publish investment information to unaccredited users.

The platform CANNOT offer underwriting securities services, investment advice, asset management, unless the company has a relevant license.

The platform CANNOT offer online P2P lending services at the same time.

Entrepreneurs CANNOT issue securities.

The number of investors per project is limited to less then 200.

Entrepreneurs CANNOT promise zero loss or guarantee a minimum return.

Entrepreneurs CAN only promote a project for investment on an EC platform but not through any other public venues or platforms, and CAN only showcase one project on one EC platform at a time.

An accredited investor must

1. invest at least RMB 1 million in a single project or

2. possess net assets of RMB 10 million or

3. possess financial assets of RMB 3 million and have an annual income of at least RMB 500,000 for the past 3 years”