Overview
We are a holding company
that, through our wholly-owned subsidiaries, Benefactum Alliance Holdings Company Limited, a British Virgin Islands company (“
Benefactum
Alliance
”), Benefactum Sino Limited, a Hong Kong company (“
Benefactum Sino
”) and Benefactum Alliance
(Shenzhen) Investment Consulting Company Limited, a People’s Republic of China company (“
Benefactum Shenzhen
”
or “
WFOE
”) and our contractually controlled and managed company, Benefactum Alliance Business Consultant (Beijing)
Co., Ltd., a People’s Republic of China company (“
Benefactum Beijing
”), operate an electronic online financial
platform, www.hyjf.com, which is designed to match investors with small and medium-sized enterprises (“
SMEs
”)
and individual borrowers in China. We believe our services provide an effective financial credit facility solution to under-served
SME and individual borrowers. From the launch of our marketplace in December 2013 through December 31, 2016, we have facilitated
over RMB 10.33 billion (approximately $1.5 billion) in loans. As of December 31, 2016, we had more than 200,000 registered investors
and 12 institutional partners.
We generate revenue
from our services in connection with matching investors with individual and SME borrowers. We typically charge borrowers a service
fee of between 1.5% and 3% of the loan amount depending on the term of the loan. Additionally we charge a 0.3% monthly maintenance
fee of the loan amount on active accounts (i.e. accounts with outstanding loans). We are an online lending marketplace only and
do not use our own capital to invest in loans facilitated through our marketplace.
Due to PRC legal restrictions
on foreign ownership and investment in, among other areas, value-added telecommunications services, which include internet content
providers, or ICPs, we, similar to all other entities with foreign-incorporated holding company structures operating in our industry
in China, have to operate our internet businesses and other businesses in which foreign investment is restricted or prohibited
in the PRC through wholly foreign-owned enterprises, majority-owned entities and variable interest entities.
Accordingly, we plan
to continue operating our online financial platform in China through Benefactum Beijing, which is wholly-owned by two Chinese shareholders.
The contractual arrangements
between WFOE and Benefactum Beijing collectively enable us to exercise effective control over, and realize substantially all of
the economic risks and benefits arising from Benefactum Beijing. See “Corporate History and Structure — Contractual
Arrangements with Benefactum Beijing.” The contractual arrangements may not be as effective in providing operational control
as direct ownership. See “Risk Factors — Risks Related to Our Corporate Structure.” As a result, we include the
financial results of Benefactum Beijing in our consolidated financial statements in accordance with generally accepted accounting
principles in the United States, or U.S. GAAP, as if it were our wholly-owned subsidiary.
We conduct our business
primarily in Beijing, Shanghai and Shandong Province, People’s Republic of China. Our principal executive offices are located
at Rooms 2401, 2402, 2403, 2404 and 2412 on 2299 Yan’an West Road, Shanghai, China.
Corporate History and Structure
We were incorporated
as “Tapioca Corp.” in the State of Nevada on April 18, 2014. We were previously in the business of selling bubble tea
from mobile stands in Romania. However, we have not been very successful in implementing our business plan and only recognized
$1,180 in revenue for the year ended December 31, 2015 and no revenues and operations since then. Accordingly, we were re-classified
as a “shell company” under Rule 405 of the Securities Act of 1933, as amended.
On February 22, 2016,
Slav Serghei, our previous sole director, President, Treasurer and Secretary, and holder of 3,500,000 shares of the Company’s
common stock representing approximately 64% of our issued and outstanding securities, entered into a stock purchase agreement to
sell his shares equally to Ms. Zhixian Jiang and Mr. Zhenqi Zhao for an aggregate cash consideration of $182,400 (the “
Sale
”).
The Sale was consummated on March 2, 2016.
As a result of the
Sale on March 2, 2016, a change in control occurred in the Board of Directors and executive management of the Company. Slav Serghei,
our previous sole director, President, Treasurer and Secretary resigned from all of his positions with the Company effective March
1, 2016. Concurrently therewith, Mr. Jing Xie was appointed to serve as our then sole director, Chief Executive Officer, Chief
Financial Officer and Secretary.
Effective April 18,
2016, we amended our Articles of Incorporation (i) to change our name from “Tapioca Corp.” to “Sino Fortune Holding
Corporation”; (ii) to increase our authorized capital stock from 75,000,000 shares to 3,000,000,000 shares; and (iii) to
designate 10,000,000 of our authorized capital stock as preferred stock (the “
Preferred Stock
”), with the designations,
rights, preferences or other variations of each class or series within each class of the shares of Preferred Stock be designated
by the Board of Directors at a later time without shareholder approval.
On May 13, 2016, we
entered into a share exchange agreement (the “
Share Exchange Agreement
”) and on September 14, 2016, we entered
into an amendment to the Share Exchange Agreement (the “A
mendment
”) with Benefactum Alliance and all the shareholders
of Benefactum Alliance, namely, Mr. Bodang Liu, Avis Genesis Inc. and Manor Goldie Inc. (each a “
Shareholder
”
and collectively the “
Shareholders
”), to acquire all the issued and outstanding capital stock of Benefactum
Alliance in exchange for the issuance to the Shareholders an aggregate of 337,500,000 restricted shares of our common stock (the
“
Reverse Merger
”).The Reverse Merger closed on September 29, 2016.
Immediately after the
closing of the Reverse Merger, we had a total of 342,960,000 issued and outstanding shares of common stock, all of which are held
by the Shareholders. As a result of the Reverse Merger, Benefactum Alliance is now our wholly-owned subsidiary.
Upon closing of the
Reverse Merger, Mr. Jing Xie resigned from all officers and director positions he held with the Company and Mr. Bodang Liu was
appointed as the Chief Executive Officer and sole director of the Company. In addition, Ms. Wei Zheng was appointed as the Chief
Financial Officer of the Company.
Benefactum Alliance
is a holding company incorporated under the laws of British Virgin Islands on March 15, 2016. On April 7, 2016, Benefactum Alliance
incorporated Benefactum Sino in Hong Kong SAR. Benefactum Sino, in turn, incorporated Benefactum Shenzhen, or the WFOE in the People’s
Republic of China with a registered capital of RMB100,000 on April 21, 2016. WFOE has entered into a series of contractual agreements
with Benefactum Beijing, a company incorporated in the People’s Republic of China on September 10, 2013 with a registered
capital of RMB50,000,000.
The following diagram
illustrates our current corporate structure:
Contractual Arrangements with Benefactum
Beijing
Due to PRC legal restrictions
on foreign ownership and investment in value-added telecommunications services, and internet content provision services in particular,
we currently conduct these activities through Benefactum Beijing, which we effectively control through a series of contractual
arrangements. These contractual arrangements allow us to:
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·
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exercise effective control over Benefactum
Beijing;
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receive substantially all of the economic
benefits of Benefactum Beijing; and
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·
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have an exclusive option to purchase all
or part of the equity interests in Benefactum Beijing when and to the extent permitted by PRC law.
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As a result of these
contractual arrangements, we have become the primary beneficiary of Benefactum Beijing, and we treat Benefactum Beijing as our
variable interest entity under U.S. GAAP. We have consolidated the financial results of Benefactum Beijing in our consolidated
financial statements in accordance with U.S. GAAP.
The following is a
simplified illustration of the ownership structure and contractual arrangements that we have in place for Benefactum Beijing and
a summary of the currently effective contractual arrangements by and among our wholly-owned subsidiary, Benefactum Shenzhen, our
consolidated variable interest entity, Benefactum Beijing, and the shareholders of Benefactum Beijing.
Each of the contractual
agreements is described in detail below:
Trademarks, Technologies & Management
and Consulting Service Agreement
Pursuant to the Trademarks,
Technologies & Management and Consulting Service Agreement between WFOE and Benefactum Beijing, Benefactum Beijing has transferred
all its rights to its trademarks, technologies and other intellectual property to WFOE. Additionally, Benefactum Beijing has engaged
WFOE as its exclusive management consultant to provide client management, marketing counseling, corporate management, finance consulting
and personnel training services. As consideration for the provision of such services, Benefactum Beijing pays WFOE a management
and consulting fee equivalent to its net profits after tax.
The Trademarks, Technologies
& Management and Consulting Service Agreement remains effective until the date when the WFOE terminates this agreement or when
Benefactum Beijing ceases to exist.
The Equity Interest Pledge Agreement
Under the Equity Interest
Pledge Agreement by and among WFOE, the shareholders of Benefactum Beijing (the “
Benefactum Beijing Shareholders
”)
and Benefactum Beijing, WFOE has lent RMB200 to the Benefactum Beijing Shareholders, who, in turn, pledged all of their equity
interests in Benefactum Beijing to WFOE to guarantee the performance of their obligations to repay the loan. The term of the loan
is for 100 years and repayment of the loan can only occur on the loan maturity date or if WFOE decides to receive the repayment.
Under the terms of
the agreement, WFOE, as pledgee, will be entitled to all the dividends generated by the pledged equity interests.
Exclusive Right and Option to Purchase
Agreement
Under the Exclusive
Right and Option to Purchase Agreement, the Benefactum Beijing Shareholders irrevocably granted WFOE an exclusive option to purchase
all assets and equity interests of Benefactum Beijing. The purchase price for the said assets and equity interests shall be the
lowest price allowed by the laws and regulations of the People’s Republic of China.
When WFOE
considers it necessary, feasible under the laws and regulations of the People’s Republic of China and mandatory at the
request of the U.S. Securities and Exchange Commission, WFOE shall exercise this exclusive right and option. When excising
its exclusive right, WFOE shall serve written notice to the Benefactum Beijing Shareholders. Within 7 days of receiving the
written notice from WFOE, the Benefactum Beijing Shareholders and Benefactum Beijing shall provide necessary assistance to
transfer the assets and equity interest.
Equity Interest Holders’ Voting
Rights Proxy Agreement
Under the Equity Interest
Holders’ Voting Rights Proxy Agreement, the Benefactum Beijing Shareholders have agreed to authorize a representative/representatives
designated by WFOE to exercise their voting rights at a general meeting of equity interest holders of Benefactum Beijing to, amongst
other things, appoint the Chairman and directors of Benefactum Beijing. Additionally, the Benefactum Beijing Shareholders have
undertaken not to transfer any of their equity interests except to either WFOE or its representative(s). The term of this agreement
shall be the same term as the Equity Interest Pledge Agreement.
Recent Developments
On October 18, 2016,
we entered into subscription agreements with an aggregate of two hundred and seven (207) investors (the “
Investors
”)
for the purchase and sale of an aggregate of 18,860,246 shares of common stock of the Company, at prices ranging from $0.40 to
$0.41 and $0.425 per share for total gross proceeds of RMB 51,252,322 (approximately, $7,878,670) (the “
Offering
”).
The proceeds from the Offering will be used for general corporate purposes, including infrastructure, product development, marketing,
investments and sales and working capital. We completed this Offering pursuant to Rule 903 of Regulation S of the Securities Act
on the basis that the sale of the shares was completed in “offshore transactions”, as defined in Rule 902(h) of Regulation
S. We did not engage in any “directed selling efforts”, as defined in Regulation S, in the United States in connection
with the sale of the shares. The investors represented to us that the investors were not U.S. persons, as defined in Regulation
S, and were not acquiring the shares for the account or benefit of a U.S. person.
In connection with
the Offering, the Investors also agreed to place the shares issued in the Offering in an escrow account until October 18, 2018.
On November 7 and December
16, 2016, we entered into two short-term entrusted financial management contracts with Shandong Wenye Investment Co., Ltd. (“
Wenye
”).
Pursuant to the contracts, we entrusted RMB 50 million (approximately $7.52 million) and RMB 7 million (or approximately $1.0 million)
to Wenye to make investments in purchasing principal guaranteed wealth products for the Company. The term of the contracts is six
months from the date of execution and can be extended for additional six months with both parties’ consent. Wenye and its
shareholders provided an irrevocable guaranty on the return of principal and payment of 5% investment return and will be jointly
and severally liable for the payment.
In
March 2017, we engaged Jiangxi Bank to provide fund depository services for our marketplace, pursuant to which Jiangxi Bank will
set up separate accounts for borrowers and investors, and assume fund depository functions including settlement, accounting and
safeguarding online lending capital. Third-party payment agents operate as the payment channels and only transfer funds to and
from fund depository accounts. Relevant Chinese regulations require us to enter into fund depository agreement with only one commercial
bank to provide fund depository services. For more details, see “Regulations on Peer-to-Peer Lending Service Provider.”
Our Business
We are a holding company
that, through our wholly-owned subsidiaries, Benefactum Alliance, Benefactum Sino and Benefactum Shenzhen and our contractually
controlled and managed company, Benefactum Beijing, operate an electronic online financial platform,
www.hyjf.com
(“
website
”),
which is designed to match investors with SME and individual borrowers in China. We have developed user-friendly mobile applications
for borrowers and investors (“
mobile apps
”, collectively with our website, the “
platform
”),
which enable borrowers and investors alike to access our platform at any time or location that is convenient. We launched our
first mobile application in September 2015. In 2015 and 2016, we facilitated over RMB55.53 million ($8.08 million)and RMB1.28
billion ($186.25 million) in loans through our mobile apps, respectively, representing 1.67% and 22.54 % of the total amount of
loans facilitated through our marketplace in the respective periods.
We generate revenue
from our services in connection with matching investors with individual and SME borrowers. We typically charge borrowers a service
fee of between 1.5% to 3% of the loan amount, depending on various factors, including, but not limited to, the term of the loan.
Additionally we charge a 0.3% monthly maintenance fee of the loan amount on active accounts (i.e. accounts with outstanding loans).
We are an online lending marketplace only and do not use our own capital to invest in loans facilitated through our marketplace.
Our platform is also
accessible to those who act as guarantors for the loans to our borrowers (“
third party cooperative partners
”).
Apart from acting as guarantors on loans from our platform, these third party cooperative partners may, if they so choose, also
use our platform for purposes of transferring their creditor rights on loans made by them outside our platform (“
outside
loans
”). For this service, we charge these third party cooperative partners similar service fees and maintenance fees.
We currently have 12
third-party cooperative partners, consisting of pawn shops, loan companies and guarantee companies that frequently serve as guarantors
of loans on our platform.
The following diagram illustrates our current
business model:
Our Marketplace
Our platform embraces
the significant opportunities presented by a financial system that leaves many creditworthy individuals and SMEs underserved. Our
platform matches borrowers with investors by having the qualified borrowers’ profiles readily available for investors. Once
the investor decides to proceed with a specific loan, and once an investor accepts the terms of the loan, our system automatically
generates electronic loan contracts for execution. Once the closing conditions are satisfied, our system directs the investors
to the third party payment platform to consummate the loan.
In addition, our platform
allows third party cooperative partners to assign outstanding loans to other registered investor on our platform.
The loans we facilitate
are usually short term loans with terms ranging from one month to twelve months and interest rates ranging from 6.5% to 14%.
Loan Transaction Process
We provide a
streamlined application process combining both online and offline features. To borrowers and investors alike, we have
designed the process to appear simple, seamless and efficient utilizing sophisticated, proprietary technology to make it
possible. The entire process from posting the loan application on our platform to disbursement of funds lasts no more
than 19 days but typically takes 3-5 days. Below is a description of the steps in a typical online loan transaction.
Step 1: Online Application
Submission and Initial Assessment.
In order to access
the services provided by our online financial platform, potential borrowers would have to open an account with us and complete
an online loan application form.
Our risk control department
will determine whether the potential borrower meets our minimum requirements based on initial discussions between our risk control
department and the prospective borrower. We evaluate each borrower’s application and decide if we should process his/her
application on a case-by-case basis. As part of this process, we conduct an analysis of the borrower’s financial conditions,
loan amount and term, business industry and proposed use of the funds.
If the prospective
borrower meets our minimum requirements, then the application will be forwarded to our third-party cooperative partners who will
guarantee the borrower’s loan after reviewing its application materials.
As an alternative,
the borrower may also propose a third-party guarantor to guarantee the repayment of its loan. In these instances, we also conduct
an assessment of the referred guarantor’s credit-worthiness and financial standing using the same matrix as that for the
borrower. The third party guarantor will be jointly and severally liable with the borrower for its debt.
In some instances,
we may deem certain prospective borrowers to be credit-worthy, and if we determine that a guarantor is not necessary, we may then
directly contact them for additional documentation to support their application. These application materials will be then be forwarded
to our risk management department.
Typically, as part
of this process, prospective borrowers will be asked for documents to prove their identity and financial standing, including but
not limited to business licenses, tax reports, audited financial statements and appraisal reports (for enterprise borrowers), national
identification card and bank statements (for individual borrowers).
Step 2: Offline
Anti-Fraud Investigation and Credit Assessment
Our risk control department
then reviews all the borrower application materials and conducts its own due diligence, including third party verification and
onsite visits, and a review of the sufficiency of collateral provided. Our risk management model utilizes big data capabilities
to systematically evaluate a borrower’s credit characteristics.
Upon verifying the
authentication of the documents submitted by the borrower, we will assign a credit score to the borrower based on its credit history,
the business it is in and its assets. Borrowers who do not meet our minimum grade of 70 (out of 100) will have their application
denied.
We have stringent requirements
for the collateral in order to protect the investors’ interests better. Generally, we only accept collaterals that are adequate
to repay the loan amount and highly liquid. Those who intend to use real estate to secure their loans will first need to have the
real estate appraised by qualified appraisers. The loan amount cannot be more than 80% of the value of the real estate.
Although we typically
do not accept personal property as collateral, we may do so under exceptional circumstances and only with personal property that
will be pledged and only where the loan amount is no more than 70% of the appraised value of the personal property.
Step 3: Approval
Once the borrower is
approved, we will categorize the borrower’s credit facility into one or more of the following loan products and post it on
our platform:
Product
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Target
Investors
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Term of
Loan
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Expected
Return
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Minimum
investment
amount
(RMB)
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Maximum
investment
amount
(RMB)
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Fund-raising
period
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Repayment of
Loan
(for borrowers)
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Assignability
(Yes/No)
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Xin Shou Hui
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For investors who have made no investments in any products on our platform
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30 days
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Generally 10%
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100
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10,000
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No more than 19 days
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Repay capital with interest when the loan is due
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No
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Hui Zhi Tou
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For all registered platform users
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One – twelve months
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6.5% - 12%
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1
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-
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No more than 19 days
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Repay capital with interest when the loan is due
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Yes, but only after holding this product for at least 30 days
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Hui Xiao Fei
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For all registered platform users
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12 months
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14%
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1
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-
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No more than 19 days
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Repay fixed average capital plus interest every month
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Yes, but only after holding this product for at least 30 days
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Zun Xiang Hui
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Premium customers and private business customers
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6–12 months
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12%
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100,000
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-
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No more than 19 days
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Repay capital with interest when the loan is due
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Yes, but only after holding this product for at least 30 days
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Hui Zhuan Rang*
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For all registered platform users
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Depending on the investment products
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N/A
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1
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-
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N/A
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Repay capital with interest when the loan is due
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Yes, but only after holding this product for at least 30 days and there will be a 0.5% assigning fee
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*Hui Zhuan Rang is a service that allows
investors to transfer their creditors’ rights. The minimum outstanding loan amount requirement before creditor rights may
be transferred is not less than RMB 1,000. After holding an investment product for at least 30 days, the investor may then transfer
this product at a price of at least 95% of the original price.
We will also post the
relevant third party guarantor’s information and its letter of guarantee.
The information is
accessible to all investors who have registered on our platform. They will have the option of accepting the credit facility per
the terms offered online.
Once a credit facility
is accepted by an investor, our platform automatically prepares the necessary loan documents for execution by the parties online.
The electronic signatures generated on platform are certified by China Financial Certification Authority, a financial security
certification authority designated by People’s Bank of China.
Step 4: Funding
We have contracted
with a licensed third party online payment service, Hui Fu Tian Xia Limited Company (“
ChinaPnR
”), to assist
in the disbursement and repayment of loans. Both investor and borrower open accounts with ChinaPnR and authorize ChinaPnR to manage
their accounts. The investor will fund the loan amount in his/her account under ChinaPnR, which would then disburse this loan amount
to the borrower net of our service fees, which it will remit to us.
When the borrower repays
the loan to ChinaPnR, he/she will deposit the monthly account maintenance fee along with the principal loan amount and interest.
ChinaPnR will then disburse the principal loan amount and interest back to investor and account maintenance fee to us.
Currently, investors
are not charged for the service provided by ChinaPnR. However, individual borrowers are charged a processing fee by ChinaPnR in
the amount of 0.11% to 0.25% (which varies depending on the bank they use) of the loan amount when it is deposited in their ChinaPnR
account. For SME borrowers, they pay RMB 10 per deposit. When borrowers withdraw money from their ChinaPnR account, they would
have to pay a processing fee of 0.05% of the withdrawing amount plus RMB1 or just RMB1, depending on how soon they wish for the
withdrawal to be effected. When the loan is repaid to ChinaPnR, ChinaPnR will disburse the loan and interest back to the investor.
Step 5: Post-Funding
Supervisory
Our risk control department
will continue to supervise the borrowers’ financial activities and condition post funding. In the event of any material development
resulting in a negative turn in a borrower’s financial standing and potential ability to repay its loan, our management will
determine the proper action to take to avert or minimize the risk of non-payment.
A week before the loan
is due, the risk control department will inform ChinaPnR, our third-party cooperative partners and the borrower and supervise the
repayment of the loan.
Step 6: Collections
Our platform is capable
of monitoring and tracking payment activity. With built-in payment tracking functionality and automated missed payment notifications,
the platform allows us to monitor the performance of outstanding loans on a real-time basis. Although we are not exposed to credit
risks, we assist the investors in collection as a service to the investors.
In the event of a non-
or partial repayment of a loan by the borrower, the third party guarantor will primarily be responsible for the payment of the
outstanding amount.
In the event the third
party guarantor defaults on the payment, we will pay the investor the sum owed from the reserve fund (See description of
Reserve
Fund
below) and then commence our collection proceeding. We may assist the guarantor with the sale or auction of collateral
or directly initiate actions to recover payment from the guarantor and/or borrower.
Third Party Cooperative Partners
Loan Assignment Process
The process described
above also applies to our third party cooperative partners (“
Creditor Partner(s)
”) that seek to sell their rights
as creditors on third party loans with third party borrowers (“
Original Borrowers
”). While the transaction process
for Creditor Partners is largely similar to those for individuals and SME borrowers, there are certain procedural differences,
as follows:
Step 1: Online Application
Submission and Initial Assessment.
Similar to individual
and SME borrowers, Creditor Partners are required to open an account with us and send us the applications materials before a third
party loan may be listed and sold on our platform. However, as we have established cooperative relationships with these Creditor
Partners, a prior determination has already been made that they have met our minimum requirements and no additional verification
is conducted during the application process. Nonetheless, we re-evaluate these partners’ creditability from time to time,
usually every one to three months.
Step 2: Offline
Anti-Fraud Investigation and Credit Assessment
Since these Creditor
Partners use our platform in order to transfer their rights on third party loans that were made outside of our platform, they are
responsible for conducting their own due diligence investigation in the Original Borrower’s credit-worthiness. Nonetheless,
our risk control department will also conduct its own due diligence on the creditor’s rights sought to be sold and the Original
Borrower’s credit-worthiness, using the same standards discussed above. As part of this process, our risk control department
will review the loan contract between the Creditor Partner and the Original Borrower to determine whether the Original Borrower
has agreed to the proposed sale of creditor’s rights. We will then directly contact the Original Borrower to ensure that
they have received notice of proposed sale from the Creditor Partner.
Step 3: Approval
Once the Creditor Partner
is approved, we will categorize the partner’s credit facility into one or more of the loan products discussed under “Step
3: Approval” above and post the loan on our platform. Investors will then have access to information regarding the Original
Borrower, the rights that are being transferred, the collateral that secures the amounts borrowed and other details related to
the right to transfer. We will also post the Creditor Partner’s “letter of promise”, which promises that they
will pay off the loan principal and interest when the loan matures.
Once a credit facility
is accepted by an investor, our platform automatically prepares the necessary assignment documents for execution by the parties
online.
Steps 4 to 6; Funding,
Post-Funding Supervisory and Collections
The procedures of Funding,
Post-Funding Supervisory and Collections are similar with those discussed above for individuals and SME’s. However, because
the Creditor Partners usually have a high credit-rating because of their pre-established cooperative relationship with us, and
because the loans from the Original Borrowers are secured by collaterals or guarantors, we do not require them to provide additional
guarantees when they seek to sell their creditor rights on our platform. Therefore, in the event the Creditor Partner defaults
on the payment, we will pay the investor the sum owed from the reserve fund (See description of
Reserve Fund
below).
Fees
We typically charge
borrowers and Creditor Partners a service fee of between 1.5% to 3% of the loan amount (or proceeds of sale of the creditors’
rights, as the case may be) depending on, among other things, the term of the loan. The service fee is payable when the borrowers
or Creditor Partners receive the loans (or in the case of Creditor Partners, the proceeds of the sale of their creditors’
rights) in their accounts with ChinaPnR, which will separate the service fee from the loan amount (or proceeds of sale, as the
case may be) and send it to our account. Additionally we charge a monthly maintenance fee of 0.3% of the loan amount on active
accounts (i.e. accounts with outstanding loans). The maintenance fee is payable when the borrower or Creditor Partner repays its
loan. In addition to the loan amount, they would have to deposit the 0.3% maintenance fee to their accounts with ChinaPnR, which
will send the loan repayment to the investors’ accounts and maintenance fee to our account. Currently, we do not charge any
service fees to our investors.
Risk Management
Traditional risk management
tools and the types of consumer finance data available in developed economies, such as widely available consumer credit reporting
services, are currently at an early stage of development in China. We believe our industry leading risk management capabilities
provide us with a competitive advantage in attracting capital to our marketplace by providing investors with the comfort that they
are investing in high quality loans through a sustainable marketplace.
We manage the credit
risk on behalf of the investors primarily in the following:
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i.
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We evaluate the borrower’s repayment ability via our pre-transaction credit assessment and
fraud detection using our big data credit assessment system. Our risk management model utilizes big data capabilities to automatically
evaluate a borrower’s credit characteristics. Potential borrowers who do not meet our credit assessment grade will be denied
loans.
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ii.
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We offer a risk reserve fund which is 2-5% of all the credit extended to the borrowers.
|
|
iii.
|
Each loan transaction facilitated on our platform is guaranteed by a third party guarantor who
is jointly and severally liable for the loan and/or secured by collateral provided by borrowers.
|
In addition, our risk
control department monitors the borrowers’ financial activities and condition post funding. In the event of any material
development resulting in a negative turn in a borrower’s financial standing and potential ability to repay its loan, our
management will determine the proper action to take to avert or minimize the risk of non-payment.
Finally, if enforcement
action needs to be taken, we will assist the investors in taking all legal recourse against the defaulted party. As an intermediary
between the borrower and the investor, we deem ourselves to be independent from the debtor-creditor relationship and do not believe
that we are a proper party to any lawsuits arising from the borrowers’ and/or guarantors’ defaults. However, we may
offer necessary assistance to the investors, such as by disclosing the information of the borrowers and/or guarantors, provided
that such disclosure is permitted under any relevant agreement and pertinent laws.
Reserve Fund
In order to
better protect our investors’ interests, we have a risk reserve fund which generally equates to 2-5% of all credit
extended to borrowers. This reserve account is maintained with the China Construction Bank. Under our risk reserve fund
arrangement, if a loan is delinquent for a certain period of time, usually within 3 business days, we will withdraw a sum
from the risk reserve fund to repay the investor.
Prior to an application
for credit being made on our platform, borrower (or if a guarantor is needed for the borrower, the guarantor) is required to provide
an amount equal to 2-5% of the amount being loaned, which shall be deposited directly into the reserve fund account. If the borrower
cannot be matched with an investor within the fundraising period (usually 19, all amounts deposited by the borrower or guarantor,
as the case may be, into the risk reserve fund will be returned. If the borrower is successfully matched with an investor, then
the risk reserve fund will also be refunded to the borrowers if the loan is paid in full at maturity.
In the case that a
borrower defaults in repaying the loan when it is due, we will advise the guarantor of such default. If the guarantor cannot make
the repayment within the period as stipulated (usually 3 days), we will withdraw a sum equivalent to the outstanding loan amount
from the risk reserve fund to repay investors within three business days.
When more than one
loan becomes delinquent and the borrower and/or guarantor fail(s) to repay investors, we will use the risk reserve fund to cover
the loans in the order in which they become due. If the reserve fund is insufficient to repay investors, the fund shall be allocated
on a pro rata basis. The defaulting borrower and/or guarantor is/are obligated to reimburse the risk reserve fund account up to
the outstanding loan amount owed with interest and penalty at a rate of 0.06% per day on the outstanding loan amount.
We have not
experienced any default of loans since the launch of our platform. As of December 31, 2016, our risk reserve fund was
approximately RMB 50.68 million ($7.3 million).
Our Products
As discussed
above (under step 3 of the transaction process), we categorize the borrower’s credit facility into one or more of loan
products and post it on our platform. Those products include Hui Zhi Tou, Xin Shou Hui, Zun Xiang Hui, Hui Xiao Fei, and Hui
Zhuan Rang. For more detail regarding these products, please refer to the table listed under the “Step 3:
Approval” of the transaction process.
Customers
Our customers comprise
mainly of Chinese individuals and SMEs. All our investors are individuals while our borrowers include both individuals and SMEs.
Our SME borrower clients are mainly from the heavy industry, wholesale, public transportation and restaurant industries. No one
customer or group of customers accounts for 10% or more of our revenue. For the year ended December 31, 2016, SME borrowers and
individual borrowers accounted for approximately 82% and 18% of the loan amounts facilitated through our platform, respectively.
Currently, most of
our borrowers are in Shanghai, Shandong, Inner Mongolia, Anhui and Henan provinces. Currently, most of our investors are currently
in Shandong province.
Marketing
We acquire borrowers
and investors primarily via two means, our own platform and referrals from third party guarantors. The general public may get access
to our platform and submit a borrower profile online. We also acquire borrowers through referrals from financial institutions we
partner with. As of December 31, 2016, we have entered into cooperation agreements with six pawn shops in Shandong, Jilin, Inner
Mongolia, Hubei provinces, three guarantor institutions, one micro credit company, one asset management company, and one financial
leasing company. Additionally, in April 2016, Benefactum Beijing and Shanghai Nami Financial Consulting Co., Ltd (“
Nami
”)
entered into a co-operative agreement, pursuant to which Nami will refer potential investors to Benefactum Beijing, and in turn
Benefactum Beijing will pay Nami a service fee based on the amount of loans it refers to Benefactum Beijing.
Seasonality
We experience seasonality
in our business, reflecting seasonal fluctuations in internet usage and traditional personal consumption patterns, as our individual
borrowers typically use their borrowing proceeds to finance their personal consumption needs. For example, we generally experience
lower transaction value on our online consumer finance marketplace during national holidays in China, particularly during the Chinese
New Year holiday season in the first quarter of each year. While our rapid growth has somewhat masked this seasonality, our results
of operations could be affected by such seasonality in the future.
Employees
As of March 28, 2017,
we have 135 employees, located in Shanghai, Beijing and Shandong province in China. The following table sets forth the number of
our employees by function as of the same date:
Functional Area
|
|
Number of
Employees
|
|
% of Total
|
Senior management
|
|
4
|
|
7.96%
|
Product and service
|
|
8
|
|
5.93%
|
Marketing
|
|
12
|
|
8.89%
|
Human resources and administrative
|
|
19
|
|
14.07%
|
IT
|
|
48
|
|
35.56%
|
Accounting
|
|
6
|
|
4.44%
|
Legal
|
|
3
|
|
2.22%
|
Risk management
|
|
16
|
|
11.85%
|
Operations
|
|
19
|
|
14.07%
|
Total
|
|
135
|
|
100%
|
As required by regulations
in China, we participate in various employee social security plans that are organized by local governments, including pension,
unemployment insurance, childbirth insurance, work-related injury insurance, medical insurance and housing insurance. We are required
under Chinese law to make contributions to employee benefit plans at specified percentages of the salaries, bonuses and certain
allowances of our employees, up to a maximum amount specified by the local government from time to time.
We believe that we
maintain a good working relationship with our employees and to date, we have not experienced any significant labor disputes.
Competition
The
online financial platform industry in China is intensely competitive and we compete with other online financial platforms. In
light of the low barriers of entry in the online consumer finance industry, more players may enter this market which would
result in increasing competition. We anticipate that more established internet, technology and financial services companies
that possess large, existing user bases, substantial financial resources and established distribution channels may enter the
market in the future. Based on our research conducted in the database of Wang Dai Zhi Jia, a third-party information platform
that specializes in providing information in the internet finance industry, we believe the following companies are our major
competitors in the various business segments set forth below:
Shanghai Lujiazui International
Financial Assets Trading Market Inc. (“
Lujin
”) - Lujin is the only financial assets trading information service
platform that runs its practice through the trading platform of the State Counsel of China. It provides investment and financing
service to SMEs and individuals. As of December 31, 2016, it had approximately 29.9 million registered users. Lujin offers what
is known as “financial instruments beneficial rights transfer” information services to financial and non-financial
companies. Financial instruments beneficial rights transfer is a process in which the borrowers (usually companies) pledge their
bank acceptance bills, and then transfer the beneficial interests to investors. Lujin’s role is an informational intermediary
between the holders of bank acceptance bills and the investors.
Yirendai Ltd. –
Yirendai is a leading online consumer financial platform in China connecting investors and individual borrowers. According to Yirendai
Reports, they facilitated RMB 32.30 billion ($4.70 billion) in loans from their inception in March 2012 through December 31,
2016.Leveraging the extensive experience of their parent company CreditEase, they have large client bases consisting of underserved
investors and individual borrowers in China.
Dianrong.com –
Dianrong focuses its business in online credit assessment and loaning. It provides its clients with discount rates for obtaining
a loan and favorable rates of return for making an investment.
Yooli.com – Yooli
provides its clients with financial products that mostly focusing on the microfinance between individuals. Yooli’s online
platform connects potential investors to safe and secured individual financial products, which allows them to manage their idle
funds and earn a monthly return from their investment.
We
also compete with other financial products and companies that attract borrowers, investors or both. With respect to borrowers,
we compete with other online financial platform and traditional financial institutions, such as consumer finance business units
in commercial banks, credit card issuers and other consumer finance companies. With respect to investors, we primarily compete
with other investment products and asset classes, such as equities, bonds, investment trust products, bank savings accounts and
real estate.
Intellectual Property
Trademark
Our
business is dependent on a combination of trademarks, trademark application, trade secrets and industry know-how, copyright and
patent, in order to protect our intellectual property rights. We have submitted trademark and patent applications for “Benefactum
Beijing” in mainland China.
Set
forth below is a detailed description of our trademarks under application.
* Classes
Class 9
Scientific, nautical,
surveying, photographic, cinematographic, optical, weighing, measuring, signaling, checking (supervision), life-saving and teaching
apparatus and instruments; apparatus and instruments for conducting, switching, transforming, accumulating, regulating or controlling
electricity; apparatus for recording, transmission or reproduction of sound or images; magnetic data carriers, recording discs;
compact discs, DVDs and other digital recording media; mechanisms for coin-operated apparatus; cash registers, calculating machines,
data processing equipment, computers; computer software; fire-extinguishing apparatus.
Class 35
Advertising; business
management; business administration; office functions.
Class 36
Instalment loans;
capital investment; financial loans; financial evaluation (insurance, banking, real estate); financial service; financial management;
mortgage loan; financial analysis; financial consultation; fund investment.
Class 38
Telecommunications
services; chat room services; portal services; e-mail services; providing user access to the Internet; radio and television broadcasting.
Class 42
Scientific and
technological services and research and design relating thereto; industrial analysis and research services; design and development
of computer hardware and software; computer programming; installation, maintenance and repair of computer software; computer consultancy
services; design, drawing and commissioned writing for the compilation of web sites; creating, maintaining and hosting the web
sites of others; design services.
Patent
As
of the date of this report, we have submitted ten patent applications. Set forth below is a detailed description of our patents
under application.
Country
|
|
Patent
|
|
Application
Number
|
|
Type
|
|
Status
|
Mainland China
|
|
The Certifying System, Device and Method that Are Based on the Random Instructive Distribution
|
|
201610401023.2
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Certifying System that Are Based on the Random Instructive Distribution
|
|
201620551196.8
|
|
Utility model
|
|
In process
|
Mainland China
|
|
The Random Encrypted Physical Information Block-Chain Secured Method, System and Device
|
|
201610401213.4
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Random Encrypted Physical Information Block-Chain Secured Device
|
|
201620551307.5
|
|
Utility model
|
|
In process
|
Mainland China
|
|
The Community Block Polypeptide Chain and Intelligent Processing System
|
|
201610441383.5
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Community Block Polypeptide Chain and Intelligent Processing Device
|
|
201610441834.5
|
|
Invention
|
|
In process
|
Mainland China
|
|
Physical Information Random Verification Block-Chain Secured Method, System and Device
|
|
201610472450.X
|
|
Invention
|
|
In process
|
Mainland China
|
|
The Certifying System, Device and Method that Are Based on the Local Node Random Instructive Distribution
|
|
201610479798.1
|
|
Invention
|
|
In process
|
Mainland China
|
|
A Block Chain Consensus and Synchronization Method, System and Device
|
|
201610501761.4
|
|
Invention
|
|
In process
|
Mainland China
|
|
Asymmetrical Encrypted Block Chain Identification Verification Method and Device
|
|
201610413635.3
|
|
Invention
|
|
In progress
|
In addition, Benefactum
Beijing operates an electronic online financial platform at our website www.hyjf.com.
Copyright
As of the date
of this report, we have registered with National Copyright Administration of China six pieces of our artwork and received a Copyright
Certificate for each of them. Set forth below is a detailed description of our copyrights.
Artwork Copyright
Country
|
Name of Work
|
Work
|
Registration Number
|
Type
|
Mainland China
|
Hui Ying Jin Fu (Whale)
|
|
2016 – F – 00288618
|
Artwork
|
Mainland China
|
Hui Ying Jin Fu APP
|
|
2016 – F – 002886187
|
Artwork
|
Mainland China
|
Jin Ding Hui Ju
|
|
2016 – F – 00337813
|
Artwork
|
Mainland China
|
Si Hai Yi Xin
|
|
2016 – F –00337814
|
Artwork
|
Mainland China
|
Zhong Guo Jin Kong
|
|
2016 – F – 00338579
|
Artwork
|
Mainland China
|
Hui Ju Tian Xia
|
|
2016 – F – 00338580
|
Artwork
|
Software Copyright
Country
|
|
Name of Work
|
|
Date of First
Publication and
Date
of Registration
|
|
Registration Number
|
|
Type
|
Mainland China
|
|
Hui Ying Jing Fu Financial Investment Platform
|
|
January 19, 2016;
August 4, 2016
|
|
2016SR205944
|
|
Computer software
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
Hui Ying Jing Fu Investment Management System (WeChat version)
|
|
June 28, 2016;
August 18, 2016
|
|
2016SR224313
|
|
Computer software
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
Hui Ying Jing Fu Mobile Client Access Software (Android)
|
|
March 20, 2016;
August 18, 2016
|
|
2016SR224323
|
|
Computer software
|
|
|
|
|
|
|
|
|
|
Mainland China
|
|
Hui Ying Jing Fu Mobile Client Access Software (ios)
|
|
March 20, 2016;
August 1, 2016
|
|
2016SR199404
|
|
Computer software
|
Domain Name
Benefactum
Beijing has two domain names,
www.hyjf.com
and
www.huiyingdai.com
. Both domain names lead to one website,
www.hyjf.com
,
and they have the same ICP Record No.: 13050958.
Benefactum
Beijing registered its website, www.hyjf.com, with the Ministry of Industry and Information Technology (Record No. 13050958) for
the provision of non-commercial internet information services on August 28, 2015. Prior to August 17, 2016, because our website
only provides online users with
free
public and commonly-shared financial information, it is categorized as a
non-commercial information service provider under Chinese law, and therefore a simple website registration is wholly compliant
and sufficient for Benefactum Beijing to carry out its business operations.
However,
on August 17, 2016, The Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries
(the “
Interim Measures
”) were promulgated with immediate effect and require all peer-to-peer lending platforms
to apply for value-added telecommunications business licenses in accordance with the relevant provisions of telecommunications
authorities after filing with a local financial regulator. Although the Interim Measures took effect on August 17, 2016, peer-to-peer
platforms are given up to 12 months to adjust their practices to comply with them. For more details, please see “Regulations
- Regulations on Value-Added Telecommunication Services” and “Regulations on Peer-to-Peer Lending Service Provider”).
Regulation
This section sets forth
a summary of the most significant rules and regulations that affect our business activities in China.
As an online financial
platform connecting investors with individual borrowers, we are regulated by various government authorities, including, among others:
|
·
|
the Ministry of Industry and Information
Technology, or the MIIT, regulating the telecommunications and telecommunications-related activities, including, but not limited
to, the internet information services and other value-added telecommunication services;
|
|
·
|
the People’s Bank of China, or the
PBOC, as the central bank of China, regulating the formation and implementation of monetary policy, issuing the currency, supervising
the commercial banks and assisting the administration of the financing;
|
|
·
|
China Banking Regulatory Commission, or
the CBRC, regulating financial institutions and promulgating the regulations related to the administration of financial institutions.
|
|
·
|
the Ministry of Public Security, taking
the lead in security supervision of the internet services of internet lending information intermediaries, and penalizing violations
of laws and regulations on network security, and cracking down on financial crimes and relevant crimes involved in internet lending.
|
|
·
|
the State Internet Information Office,
supervising financial information services and the content of internet information.
|
Regulations Relating to Foreign Investment
The Draft PRC Foreign Investment
Law
In January 2015, the
PRC Ministry of Commerce (“
MOC
” or “
MOFCOM
”) published a discussion draft of the proposed
Foreign Investment Law for public review and comments. The draft law purports to change the existing “case-by-case”
approval regime to a “filing or approval” procedure for foreign investments in China. The State Council will determine
a list of industry categories that are subject to special administrative measures, which is referred to as a “negative list,”
consisting of a list of industry categories where foreign investments are strictly prohibited, or the “prohibited list”
and a list of industry categories where foreign investments are subject to certain restrictions, or the “restricted list.”
Foreign investments in business sectors outside of the “negative list” will only be subject to a filing procedure,
in contrast to the existing prior approval requirements, whereas foreign investments in any industry categories that are on the
“restricted list” must apply for approval from the foreign investment administration authority.
The draft for the first
time defines a foreign investor not only based on where it is incorporated or organized, but also by using the standard of “actual
control.” The draft specifically provides that entities established in China, but “controlled” by foreign investors
will be treated as FIEs (“
Foreign Invested Enterprises
”). Once an entity is considered to be an FIE, it may
be subject to the foreign investment restrictions in the “restricted list” or prohibitions set forth in the “prohibited
list.” If an FIE proposes to conduct business in an industry subject to foreign investment restrictions in the “restricted
list,” the FIE must go through a market entry clearance by the MOC before being established. If an FIE proposes to conduct
business in an industry subject to foreign investment prohibitions in the “prohibited list,” it must not engage in
the business. However, an FIE that conducts business in an industry that is in the “restricted list,” upon market entry
clearance, may apply in writing for being treated as a PRC domestic investment if it is ultimately “controlled” by
PRC government authorities and its affiliates and/or PRC citizens. In this connection, “control” is broadly defined
in the draft law to cover the following summarized categories: (i) holding 50% or more of the voting rights of the subject entity;
(ii) holding less than 50% of the voting rights of the subject entity but having the power to secure at least 50% of the seats
on the board or other equivalent decision making bodies, or having the voting power to exert material influence on the board, the
shareholders’ meeting or other equivalent decision making bodies; or (iii) having the power to exert decisive influence,
via contractual or trust arrangements, over the subject entity’s operations, financial matters or other key aspects of business
operations. According to the draft, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled”
by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on
what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether
or not these companies are controlled by Chinese parties.
The draft emphasizes
on the security review requirements, whereby all foreign investments that jeopardize or may jeopardize national security must be
reviewed and approved in accordance with the security review procedure. In addition, the draft imposes stringent ad hoc and periodic
information reporting requirements on foreign investors and the applicable FIEs. Aside from investment implementation report and
investment amendment report that are required at each investment and alteration of investment specifics, an annual report is mandatory,
and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant
with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities,
and the persons directly responsible may be subject to criminal liabilities.
In September 2016,
the Standing Committee of the National People’s Congress (the “
SCNPC
”) published
The Decision
on Amending Four Laws including the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises
(the
“
Decision
”). According to the Decision, one provision is added to the Foreign Invested Enterprise Law, Sino-Foreign
Joint Venture Law, Sino-Foreign Cooperative Enterprise Law and the Law on Protection of Investment by Taiwanese Compatriots. Under
this new provision, foreign investments in business sectors outside of the “negative list” will only be subject to
a filing procedure, in contrast to the existing prior approval requirements, whereas foreign investments in any industry categories
that are on the “restricted list” must apply for approval from the foreign investment administration authority. This
Decision means that the existing “case-by-case” approval regime has been changed to a “filing or approval”
procedure for non-”negative list” foreign investments in China.
Also in September 2016,
the MOC drafted
The Provisional Measures for Filing Administration for the Establishment and Changes of Foreign-invested
Enterprises
for public review and comments.
The draft is now open
for public review and comments. It is still uncertain when the draft would be signed into law and whether the final version would
have any substantial changes from the draft. When the Foreign Investment Law becomes effective, the trio of existing laws regulating
foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture
Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations,
will be abolished. See “Risk Factors—Risks related to Doing Business in China—“Substantial uncertainties
exist with respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law””.
Industry Catalog Relating to Foreign
Investment
Investment activities
in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog,
which was promulgated and is amended from time to time by the MOC and the National Development and Reform Commission. Industries
listed in the Catalog are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalog
are generally deemed as constituting a fourth “permitted” category. Establishment of wholly foreign-owned enterprises
is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint
ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition,
restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries
in the prohibited category. Industries not listed in the Catalog are generally open to foreign investment unless specifically restricted
by other PRC regulations.
Our PRC subsidiary,
Benefactum Shenzhen is mainly engaged in providing investment and financing consultations and technical services, which fall into
the “encouraged” or “permitted” category under the Catalog. Benefactum Shenzhen has obtained all material
approvals required for its business operations. However, industries such as value-added telecommunication services (except e-commerce),
including internet information services, are restricted from foreign investment. We provide the value-added telecommunication services
that are in the “restricted” category through our consolidated variable interest entity, Benefactum Beijing.
Regulations on Loans between Individuals
The PRC Contract Law
governs the formation, validity, performance, enforcement and assignment of contracts. The PRC Contract Law confirms the validity
of loan agreement between individuals and provides that the loan agreement becomes effective when the individual lender provides
the loan to the individual borrower. The PRC Contract Law requires that the interest rates charged under the loan agreement must
not violate the applicable provisions of the PRC laws and regulations. In accordance with the Provisions on Several Issues Concerning
Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court on August 6, 2015, or the Private
Lending Judicial Interpretations, which came into effect on September 1, 2015, private lending is defined as financing between
individuals, legal entities and other organizations. When private loans between individuals are paid by wire transfer, through
online peer-to-peer lending platforms or by other similar means, the loan contracts between individuals are deemed to be validated
upon the deposit of funds to the borrower’s account. In the event that the loans are made through an online peer-to-peer
lending platform and the platform only provides intermediary services, the courts shall dismiss the claims of the parties concerned
against the platform demanding the repayment of loans by the platform as guarantors. However, if the online peer-to-peer lending
service provider guarantees repayment of the loans as evidenced by its web page, advertisements or other media, or the court is
provided with other proof, the lender’s claim alleging that the peer-to-peer lending service provider shall assume the obligations
of a guarantor will be upheld by the courts. The Private Lending Judicial Interpretations also provide that agreements between
the lender and borrower on loans with interest rates below 24% per annum are valid and enforceable. As to loans with interest rates
per annum between 24% and 36%, if the interest on the loans has already been paid to the lender, and so long as such payment has
not damaged the interest of the state, the community and any third parties, the courts will turn down the borrower’s request
to demand the return of the interest payment. If the annual interest rate of a private loan is higher than 36%, the excess will
not be enforced by the courts. A certain percentage of the loan transactions facilitated over our platform are between individuals
currently. The fixed interest rates for the term loans on our platform currently range from 6.5% to 14%.The transaction fee rates
we charge borrowers for our services range from 1.5% to 3%. The interest rate component, which is stipulated in the loan agreements,
does not and is not expected to exceed the mandatory limit for loan interest rates.
Pursuant to the PRC
Contract Law, a creditor may assign its rights under an agreement to a third party, provided that the debtor is notified. Upon
due assignment of the creditor’s rights, the assignee is entitled to the creditor’s rights and the debtor must perform
the relevant obligations under the agreement for the benefit of the assignee. We operate a secondary loan market on our platform
where investors can transfer the loans they hold to other investors before the loan reaches maturity. To facilitate the assignment
of the loans, the loan agreement applicable to the lenders and borrowers specifically provides that a lender has the right to assign
his/her rights under the loan agreement to any third parties and the borrower agrees to such assignment.
In addition, according
to the PRC Contract Law, an intermediation contract is a contract whereby an intermediary presents to its client an opportunity
for entering into a contract or provides the client with other intermediary services in connection with the conclusion of a contract,
and the client pays the intermediary service fees. Our business of connecting investors with individual borrowers may constitute
intermediary service, and our service agreements with borrowers and investors may be deemed as intermediation contracts under the
PRC Contract Law. Pursuant to the PRC Contract Law, an intermediary must provide true information relating to the proposed contract.
If an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion of
the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees and
is liable for the damages caused.
Regulations on Illegal Fund-Raising
Raising funds by entities
or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid
administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business
Operations promulgated by the State Council in July 1998, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising
issued by the General Office of the State Council in July 2007, explicitly prohibit illegal public fund-raising. The main features
of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing
stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (ii) promising a return of
interest or profits or investment returns in cash, properties or other forms within a specified period of time, and (iii) using
a legitimate form to disguise the unlawful purpose.
To further clarify
the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the
Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the
Illegal Fund-Raising Judicial Interpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations
provide that a public fund-raising will constitute a criminal offense related to “illegally soliciting deposits from the
public” under the PRC Criminal Law, if it meets all the following four criteria: (i) the fund-raising has not been approved
by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs general solicitation
or advertising such as social media, promotion meetings, leafleting and SMS advertising; (iii) the fundraiser promises to repay,
after a specified period of time, the capital and interests, or investment returns in cash, properties in kind and other forms;
and (iv) the fund-raising targets at the general public as opposed to specific individuals. An illegal fund-raising activity will
be fined or prosecuted in the event that it constitutes a criminal offense. Pursuant to the Illegal Fund-Raising Judicial Interpretations,
an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public
or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000 ($154,373), (ii)
with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising targets exceeding RMB500,000
($77,187), or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to other severe
consequences. An individual offender is also subject to criminal liabilities but with lower thresholds. In addition, an individual
or an entity who has aided in illegal fund-raising from the general public and charges fees including but not limited to agent
fees, rewards, rebates and commission, constitute an accomplice of the crime of illegal fund-raising. In accordance with the Opinions
of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on Several Issues
concerning the Application of Law in the Illegal Fund-Raising Criminal Cases, the administrative proceeding for determining the
nature of illegal fund-raising activities is not a prerequisite procedure for the initiation of criminal proceeding concerning
the crime of illegal fund-raising, and the administrative departments’ failure in determining the nature of illegal fund-raising
activities does not affect the investigation, prosecution and trial of cases concerning the crime of illegal fund-raising.
We have taken measures
to avoid conducting any activities that are prohibited under the illegal-funding related laws and regulations. We act as a platform
for borrowers and investors and are not a party to the loans facilitated through our platform. In addition, we do not directly
receive any funds from investors in our own accounts as funds loaned through our platform are deposited into and settled by a third-party
online payment service Hui Fu Tian Xia Limited Company.
Regulations on Peer-to-Peer Lending
Service Provider
In July 2015,
ten PRC central government ministries and regulators, including the PBOC, the CBRC, the Ministry of Finance, the Ministry of Public
Security and the Cyberspace Administration of China, together released the Guidelines to
Promote
the Healthy Growth of Internet Finance (the “
Guidelines
”)
, which identified the CBRC as the supervisory
regulator for the online lending industry. According to the Guidelines, online marketplace lending platforms shall only serve as
intermediaries to provide information services to borrowers and investors, and shall not provide credit enhancement services or
illegally conduct fundraising. The Guidelines also outlined certain regulatory propositions, which would require Internet finance
companies, including marketplace lending platforms, to (i) complete website registration procedures with the administrative
departments overseeing telecommunications; (ii) use banking financial institutions’ depository accounts to hold lending
capital, and engage an independent auditor to audit such accounts and publish audit results to customers; (iii) improve the
disclosure of operational and financial information, provide sufficient risk disclosure, and set up thresholds for qualified investors
to provide better protections to investors; (iv) enhance online security management to protect customers’ personal and
transactional information; and (v) take measures against anti-money laundering and other financial crimes.
In
August 2016, the CBRC, the MIIT, the Ministry of Public Security and the State Internet Information Office jointly promulgated
the Interim Measures
. Apart from what had already been emphasized in the Guidelines
and other previously released guidance, the Interim Measures include (i) general principles; (ii) filing administration; (iii)
business rules and risk management guidelines; (iv) protection measures for investors and borrowers; (v) rules on information disclosure;
(vi) supervision and administrative mechanisms; and (vii) legal liabilities.
Under
the general principles and filing administration sections, the Interim Measures provide that online lending intermediaries shall
not engage in credit enhancement services, direct or indirect cash concentration or illegal fundraising. The sections also stipulate
a supervisory system and list the administrative responsibilities of different supervisory authorities, including the CBRC and
its local counterpart and local financial regulators. Furthermore, these sections require online lending intermediaries to file
with the local financial regulators, to apply for value-added telecommunications business licenses thereafter in accordance with
the provisions of the relevant telecommunications authorities and to include serving as an Internet lending information intermediary
in its business scope.
Under
the business rules and risk management guidelines section, the Interim Measures stipulate that online lending intermediaries shall
not engage in or be commissioned to engage in thirteen prohibited activities, including: (i) directly or indirectly financing its
own projects; (ii) directly or indirectly receiving or collecting lenders’ funds; (iii) directly or indirectly offering guarantees
to lenders or guaranteeing principal and interest payments; (iv) commissioning or authorizing a third party to advertise or promote
financing projects at any physical locations other than through electronic channels such as the Internet and mobile phones; (v) providing
loans (unless otherwise permitted by laws and regulations); (vi) dividing the term of financing projects; (vii) offering its own
wealth management products or other financial products to raise funds or act as a proxy in the selling of banks’ wealth management
products, brokers’ asset management products, funds, insurance or trust products; (viii) providing services similar to asset-based
securitization services or conducting credit assignment activities in the form of asset packaging, asset securitization, asset
trusts or fund shares; (ix) mixing with, bundling with or acting as a proxy in relation to investment, sales agent and brokerage
services of other businesses (unless permitted by laws and regulations); (x) fabricating or exaggerating the authenticity or earnings
outlook of a financing project, concealing its flaws and risks, falsely advertising or promoting a project with intentional ambiguity
or other deceptive means, or spreading false or incomplete information to damage the commercial reputation of others, or to mislead
lenders or borrowers; (xi) providing intermediary services for loans used to invest in high-risk financing projects such as stocks,
over-the-counter margin financing, futures contracts, structured products and other derivatives; (xii) operating equity-based crowd-funding;
and (xiii) other activities prohibited by laws and regulations. The Interim Measures, under the business rules and risk management
section, also stipulate specific obligations or business principles of online lending intermediaries, including but not limited
to online dispute resolution services, examination and verification functions, anti-fraud measures, risk education and training,
information reporting, anti-money laundering, anti-terrorist financing, systems, facilities and technologies, service fees, electronic
signatures and loan management. In addition, the Interim Measures stipulate that online lending intermediaries shall not operate
businesses other than risk management and necessary business processes such as information collection and confirmation, post-loan
tracking and pledge management in accordance with online-lending regulations, via offline physical locations. Furthermore, the
Interim Measures provide that online lending intermediaries shall, based on their risk management capabilities, set upper limits
on the loan balance of a single borrower borrowing both from one online lending intermediary and from all online lending intermediaries.
In the case of natural persons, this limit shall not be more than RMB200,000 for one online lending intermediary and not more than
RMB1 million in total from all platforms, while the limit for a legal person or organization shall not be more than RMB1 million
for one online lending intermediary and not more than RMB5 million in total from all platforms.
In
the protection for investors and borrowers section, the Interim Measures require that online lending intermediaries (i)
separate their own capital from funds received from lenders and borrowers and (ii) select a qualified banking financial
institution as their funding depository institution, which shall perform depository and administration responsibilities as
required. In the remaining sections, the Interim Measures provide for other miscellaneous requirements for online lending
intermediaries, including but not limited to, risk assessment and disclosure, auditing and authentication, industry
association, reporting obligations, information security and disclosure and legal liabilities. Online lending intermediaries
established prior to the effectiveness of the Interim Measures have a transition period of twelve months to rectify any
activities that are non-compliant with the Interim Measures, except with respect to criminal activity, which must be
terminated immediately.
In October 2016, several
regulations on Internet finance were publicly announced, including but not limited to, the Notice of the General Office of the
State Council on the Issuance of Special Rectification Implementation Plan regarding Internet Finance, Special Rectification Implementation
Plan regarding Online Marketplace Lending Risks, Special Rectification Implementation Plan for Risks of Asset Management Business
through the Internet and Trans-subject Business, Special Rectification Implementation Plan for Risks regarding Non-Bank Payment
Institutions, Special Rectification Implementation Plan for Risks of Internet Financing Advertising and Financial Activities in
the form of financial investment (together the “
Special Rectification Implementation Plans
”). The Special Rectification
Implementation Plans emphasize principles and rules in related to Internet financial regulations, and stipulate that (i) “look-through”
supervision method shall be adopted, and (ii) companies in the same group that hold a number of financial business qualifications
shall not violate rules of related party transactions and other related business regulations.
In
November 2016, the CBRC, the MIIT and the Industry and Commerce Administration Department, jointly issued
the
Guidance to the Administration of Filling and Registration of Online Lending Information Intermediaries, or
the Guidance
of Administration, which provides the general filing rules for online lending intermediaries, and delegates the filing authority
to local financial authorities. The Guidance of Administration sets forth that online lending intermediaries are approved locally.
Under the general filing procedures for online lending intermediaries, before an filing application is submitted to local financial
regulators, the online lending intermediaries may be required to: (i) rectify any breach of applicable regulations as required
by local financial regulators; and (ii) apply to the Industry and Commerce Administration Department to amend or register such
entity’s the business scope.
The
CBRC also authorizes local financial regulators to make detailed implementation rules regarding filing procedures. However, relevant
local financial regulators are also in the process of making such implementation rules, which may require us to complete filing
records under such future requirements within a grace period.
In
February 2017, the CBRC released the Guidance to regulate funds depositories for online lending intermediaries. The Guidance defines
depositories as commercial banks that provide online lending fund depository services, and stipulates that the depositories shall
not be engaged in offering any guarantee, including: (i) offering guarantees for lending transaction activities conducted by online
lending intermediaries, or undertaking any liability for breach of contract related to such activities; (ii) offering guarantees
to lenders, guarantying principal and dividend payments or bearing the risks associated with fund lending operations for lenders.
The
Guidance also stipulates certain conditions that must be met before depositories are entitled to develop an online lending fund
depository business, including: (i) having a good credit record and not having been included on the List of Enterprises with Abnormal
Operations or the List of Enterprises with Serious Illegal and Dishonest Acts; (ii) satisfying various requirements relating to
the technological systems of such entity’s depository fund business and general operations, including but not limited to
assuming fund administration responsibilities and not outsourcing or assigning such entity’s responsibilities to third parties
to set up accounts, process trading information or verify trading passwords; and (iii) setting up special deposit accounts to hold
online lending capital and sub-accounts for online lenders and borrowers as well as guarantors, and in order to assure fund security,
use separate accounts to hold private capital of online lending intermediaries. In addition, the Guidance prohibits depositories
from outsourcing or assigning their responsibilities to set up capital accounts, deal with transaction information, verify trading
passwords and various other services to third parties, provided, however, that certain cooperation regarding payment services with
third-party payment companies and depository banks is permitted in accordance with clarifications by the CBRC.
Apart
from the requirements set forth in the Interim Measures and the Guidance of Administration, the Guidance imposes certain responsibilities
on online lending intermediaries, including requiring them to enter into fund depository agreements with only one commercial bank
to provide fund depository services, organize independent auditing on funds depository accounts of borrowers and investors and
various other services. The Guidance also provides that online lending intermediaries are permitted to develop an online lending
fund depository business only after satisfying certain conditions, including: (i) completing registration, filing records and obtaining
a business license from the Industry and Commerce Administration Department; (ii) filing records with the local financial regulator;
and (iii) applying for a corresponding value-added telecommunications business license pursuant with the relevant telecommunication
authorities. The Guidance also requires online lending intermediaries to perform various obligations, and prohibits them advertising
their services with the information of their depository except for in accordance with necessary exposure requirements, the interpretation
and applicability of which is unclear, as well as oversight requirements. The Guidance also raises other business standards and
miscellaneous requirements for depositories and online lending intermediaries as well. Online lending intermediaries and commercial
banks conducting the online depository services prior to the effectiveness of the Guidance have a six-month grace period to rectify
any activities not in compliance with the Guidance.
Some
elements of our marketplace may not currently be operating in full compliance with the Guidelines, the rules proposed by the Interim
Measures and other principles that have been announced in recent years. Moreover, the Interim Measures also stipulated a 12-month
transition period from the time of its effectiveness for online lending intermediaries to adjust their business models.
Foreign Investment in Value-Added
Telecommunication Services
The Provisions on Administration
of Foreign Invested Telecommunications Enterprises promulgated by the State Council in December 2001 and subsequently amended in
September 2008 prohibit a foreign investor from owning more than 50% of the total equity interest in any value-added telecommunications
service business in China and require the major foreign investor in any value-added telecommunications service business in China
have a good and profitable record and operating experience in this industry. The Guidance Catalog of Industries for Foreign Investment
amended in 2015 and Circular 196 promulgated by MIIT in June 2015 allow a foreign investor to own more than 50% of the total equity
interest in an E-Commerce business.
In July 2006, the Ministry
of Information Industry, the predecessor of MIIT, issued the Circular on Strengthening the Administration of Foreign Investment
in the Operation of Value-added Telecommunications Business, pursuant to which a domestic PRC company that holds an operating license
for value-added telecommunications business is prohibited from leasing, transferring or selling such license to foreign investors
in any form and from providing any assistance, including resources, sites or facilities, to foreign investors that conduct a value-added
telecommunications business illegally in China. Further, the domain names and registered trademarks used by an operating company
providing value-added telecommunications services must be legally owned by that company or its shareholders. In addition, the value-added
telecommunication business license holder must have the necessary facilities for its approved business operations and to maintain
the facilities in the regions covered by its license.
In light of the above
restrictions and requirements, we operate our website through Benefactum Beijing, our consolidated variable interest entity. Before
the Interim Measures were adopted on August 17, 2016, Benefactum Beijing operated the business without a value-added telecommunication
business license. According to our PRC counsel, we were not required to hold a value-added telecommunication business license
because our platform provided free non-commercial internet services and we did not charge our online users for information we
provide on our platform. Benefactum Beijing registered its website
www.hyjf.com
with the Ministry of Industry
and Information Technology (Record No. 13050958) for the provision of non-commercial internet information services on August 28,
2015.
The
Interim Measures took effect immediately on August 17, 2016 and the regulations are now changed to require peer-to-peer lending
platforms to apply for value-added telecommunication business licenses for providing telecommunication services. An online lending
intermediary information agency is not allowed to provide telecommunication services without such licenses. We plan to apply for
the appropriate value-added telecommunication business license immediately after we have rectified incompliance with applicable
regulations as required by local financial regulators
, provided that the relevant telecommunication
authority clarify which sub-set of telecommunication business certificates need to be obtained by market lending platforms and
how to apply for such certificate.
Anti-Money Laundering Regulations
The PRC Anti-money
Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable
to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption
of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’
identification information and transactions records, and reports on large transactions and suspicious transactions. According to
the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions,
trust investment companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions
as listed and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations
will be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and
regulations to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions,
such as payment institutions. However, the State Council has not promulgated the list of the non-financial institutions with anti-money
laundering obligations.
The Guidelines jointly
released by ten PRC regulatory agencies in July 2015, purport, among other things, to require internet finance service providers,
including online peer-to-peer lending platforms, to comply with certain anti-money laundering requirements, including the establishment
of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information
and transaction records, and the provision of assistance to the public security department and judicial authority in investigations
and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the
anti-money laundering obligations of internet finance service providers.
The Interim Measures
require the online lending information intermediaries to comply with anti-money laundering and antiterrorism fund raising requirements,
including identifying their clients, reporting suspicious transactions, documenting and storing client identification information
and transaction records. We cannot assure you that our current risk control procedures will be deemed to be in full compliance
with any anti-money laundering laws and regulations that may become applicable to us in the future.
Regulations on Value-Added Telecommunication
Services
The Telecommunications
Regulations promulgated by the State Council and its related implementation rules, including the Catalog of Classification of Telecommunications
Business issued by the MIIT, categorize various types of telecommunications and telecommunications-related activities into basic
or value-added telecommunications services, and internet information services, or ICP services, are classified as value-added telecommunications
businesses. In 2009, the MIIT promulgated the Administrative Measures on Telecommunications Business Operating Licenses, which
set forth more specific provisions regarding the types of licenses required to operate value-added telecommunications services,
the qualifications and procedures for obtaining such licenses and the administration and supervision of such licenses. Under these
regulations, a commercial operator of value-added telecommunications services must first obtain a license for value-added telecommunications
business from the MIIT or its provincial level counterparts.
The Guidelines jointly
released by ten PRC regulatory agencies in July 2015, purport, among other things, to require internet finance service providers,
including online peer-to-peer lending platforms, to complete registration with the relevant local counterpart of the MIIT in accordance
with implementation regulations that may be promulgated by the MIIT or/and the Office for Cyberspace Affairs pursuant to the Guidelines.
On August 17, 2016, the Interim Measures were promulgated to implement and enforce the principles set out in the Guidelines.
Pursuant to the Circular
issued on November 28, 2016, internet lending information intermediaries are required to register with the local financial regulatory
agency and with such registration, they can apply for the value-added telecommunication business licenses in accordance with the
relevant provisions of the telecommunication department.
As discussed above,
Benefactum Beijing, our consolidated variable interest entity, does not have the value-added telecommunication business license
yet. Because the Interim Measures took effect immediately on August 17, 2016, peer-to-peer lending platforms are required to hold
licenses for providing telecommunication services. Although the Interim Measures took effect immediately on August 17, 2016, peer-to-peer
platforms are given a year to adjust their practices to comply with them.
Regulations on Internet Information
Security
Internet information
in China is also regulated and restricted from a national security standpoint. The National People’s Congress, China’s
national legislative body, has enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal
punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate
politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual
property rights. The Ministry of Public Security has promulgated measures that prohibit use of the internet in ways which, among
other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an internet information service
provider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license
and shut down its websites.
In addition, the Guidelines
jointly released by ten PRC regulatory agencies in July 2015 purport, among other things, to require internet finance service providers,
including peer-to-peer lending platforms, to improve technology security standards, and safeguard customer and transaction information.
The PBOC and other relevant regulatory authorities will jointly adopt the implementing rules and technology security standards.
On
November 7, 2016, the Standing Committee of the National People’s Congress released the Cyber Security Law, which will take
effect on June 1, 2017. The Cyber Security Law requires network operators to perform certain functions related to cyber security
protection and the strengthening of network information management. For instance, under the Cyber Security Law, network operators
of key information infrastructure generally shall, during their operations in the PRC, store the personal information and important
data collected and produced within the territory of PRC.
Regulations
on Internet Advertising
The
Interim Measures for Administration of Internet Advertising, or the Internet Advertising Measures, were adopted by the State Administration
for Industry and Commerce and became effective on September 1, 2016. The Internet Advertising Measures regulate Internet advertising
activities. According to the Internet Advertising Measures, Internet advertisers are responsible for the authenticity of the content
of advertisements. The identity, administrative license, cited information and other certificates that advertisers are required
to obtain in publishing Internet advertisements shall be true and valid. Internet advertisements shall be distinguishable and prominently
marked as “advertisements” in order to enable consumers to identify them as advertisements. Publishing and circulating
advertisements through the Internet shall not affect the normal use of the Internet by users. It is not allowed to induce users
to click on the content of advertisements by any fraudulent means, or to attach advertisements or advertising links in the emails
without permission. The Internet Advertising Measures also impose several restrictions on the forms of advertisements and activities
used in advertising. “Internet advertising” as defined in the Internet Advertising Measures refers to commercial advertisements
that directly or indirectly promote goods or services through websites, web pages, Internet applications or other Internet media
in various forms, including texts, pictures, audio clips and videos. Where Internet advertisements are not identifiable and marked
as “advertisements”, a fine of not more than RMB100,000 may be imposed in accordance with Advertising Law. A fine ranging
from RMB5,000 to RMB30,000 may be imposed for any failure to provide a prominently marked “CLOSE” button to ensure
“one-click closure”. Advertisers who induce users to click on the content of advertisements by fraudulent means or
without permission, attach advertisements or advertising links in the emails shall be imposed a fine ranging from RMB10,000 to
RMB30,000. We are in the process of complying with the new Internet Advertising Measures during our advertising activities.
Regulations on Privacy Protection
In recent years, PRC
government authorities have enacted laws and regulations on internet use to protect personal information from any unauthorized
disclosure. Under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in
December 2011, an ICP service operator may not collect any user personal information or provide any such information to third parties
without the consent of a user. An ICP service operator must expressly inform the users of the method, content and purpose of the
collection and processing of such user personal information and may only collect such information necessary for the provision of
its services. An ICP service operator is also required to properly maintain the user personal information, and in case of any leak
or likely leak of the user personal information, the ICP service operator must take immediate remedial measures and, in severe
circumstances, make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on
Strengthening the Protection of Online Information issued by the Standing Committee of the National People’s Congress in
December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in
July 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles
of legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also
keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information,
or selling or providing such information to other parties. An ICP service operator is required to take technical and other measures
to prevent the collected personal information from any unauthorized disclosure, damage or loss. Any violation of these laws and
regulations may subject the ICP service operator to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation
of filings, closedown of websites or even criminal liabilities. The Guidelines jointly released by ten PRC regulatory agencies
in July 2015 also prohibit internet finance service providers, including online peer-to-peer lending platforms, from illegally
selling or disclosing customers’ personal information. The PBOC and other relevant regulatory authorities will jointly adopt
the implementing rules. Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the National People’s
Congress in August 2015 and becoming effective in November, 2015, any internet service provider that fails to fulfill the obligations
related to internet information security administration as required by applicable laws and refuses to rectify upon orders, shall
be subject to criminal penalty for the result of (i) any dissemination of illegal information on a large scale; (ii) any severe
effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe
situation, and any individual or entity that (i) sells or provides personal information to others in a way violating the applicable
law, or (ii) steals or illegally obtain any personal information, shall be subject to criminal penalty in a severe situation.
In operating our online
platform, we collect certain personal information from borrowers and investors, and also need to share the information with our
business partners such as third-party online payment service and third-party cooperative partners for the purpose of facilitating
loan transactions between borrowers and investors over our platform. We have obtained consent from the borrowers and investors
on our platform to collect and use their personal information, and have also established information security systems to protect
the user information and privacy. However, as the implementing rules of the Guidelines have not been published, there is uncertainty
as to how the requirements for protecting customers’ personal information in the Guidelines will be interpreted and implemented.
We cannot assure you that our existing policies and procedures will be deemed to be in full compliance with any laws and regulations
that may become applicable to us in the future.
Regulation on Intellectual Property
Rights
Patent.
Patents
in the PRC are principally protected under the Patent Law of the PRC. The duration of a patent right is either 10 years or 20 years
from the date of application, depending on the type of patent right.
Copyright.
Copyright
in the PRC, including copyrighted software, is principally protected under the Copyright Law of the PRC and related rules and regulations.
Under the Copyright Law, the term of protection for copyrighted software is 50 years.
Trademark.
Registered
trademarks are protected under the Trademark Law of the PRC and related rules and regulations. Trademarks are registered with the
Trademark Office of the SAIC. Where registration is sought for a trademark that is identical or similar to another trademark which
has already been registered or given preliminary examination and approval for use in the same or similar category of commodities
or services, the application for registration of such trademark may be rejected. Trademark registrations are effective for a renewable
ten-year period, unless otherwise revoked.
Domain
names.
Domain name registrations are handled through domain name service agencies established under the relevant regulations,
and applicants become domain name holders upon successful registration.
Regulations
Relating to Dividend Withholding Tax
Pursuant
to the Enterprise Income Tax Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment
in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization
or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. Pursuant to the Arrangement
between Mainland China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and Tax Evasion on
Income, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced
to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to the
Notice of the State Administration of Taxation on the Issues concerning the Application of the Dividend Clauses of Tax Agreements,
or Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced
withholding tax: (i) it must directly own the required percentage of equity interests and voting rights in the PRC resident enterprise;
and (ii) it must have directly owned such percentage in the PRC resident enterprise throughout the 12 months prior to receiving
the dividends. There are also other conditions for enjoying the reduced withholding tax rate according to other relevant tax rules
and regulations. In August 2015, the State Administration of Taxation promulgated the Administrative Measures for Non-Resident
Taxpayers to Enjoy Treatments under Tax Treaties, or Circular 60, which became effective on November 1, 2015. Circular 60 provides
that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced
withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation
that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file
necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by
the relevant tax authorities. Accordingly, Benefactum Sino, our Hong Kong subsidiary, may be able to enjoy the 5% withholding tax
rate for the dividends they receive from Benefactum Shenzhen, our PRC subsidiary, if it satisfies the conditions prescribed under
Circular 81 and other relevant tax rules and regulations. However, according to Circular 81 and Circular 60, if the relevant tax
authorities consider the transactions or arrangements we have are for the primary purpose of enjoying a favorable tax treatment,
the relevant tax authorities may adjust the favorable withholding tax in the future.
Regulations
Relating to Foreign Exchange
Regulation
on Foreign Currency Exchange
The
principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently
amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions,
interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior
approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate
government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital
account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments
in securities outside of China. On February 28, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the
Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on
June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas
direct investment from SAFE, entities and individuals will be required to apply for such foreign exchange registrations from qualified
banks. The qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration.
In
August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the
Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion
by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used.
SAFE Circular 142, provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise
may only be used for purposes within the business scope approved by the applicable government authority and may not be used for
equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted
from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without
SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not
been used. Violations may result in severe monetary or other penalties.
In
November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign
Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular,
the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange
capital accounts and guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance
of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval
or verification of SAFE, and multiple capital accounts for the same entity may be opened in different provinces, which was not
possible previously. In addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE
or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks
must process foreign exchange business relating to the direct investment in the PRC based on the registration information provided
by SAFE and its branches.
In
July 2014, SAFE issued SAFE Circular 36, which purports to reform the administration of settlement of the foreign exchange capitals
of foreign-invested enterprises in certain designated areas on a trial basis. Under the pilot program, some of the restrictions
under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested enterprises established
within the designated areas and the enterprises are allowed to use its RMB capital converted from foreign exchange capitals to
make equity investment. On March 30, 2015, the SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came
into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to make
equity investments by using RMB fund converted from foreign exchange capital. However, Circular 19 continues to, prohibit foreign-invested
enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business
scope, providing entrusted loans or repaying loans between non-financial enterprises.
On
January 26, 2017, SAFE issued SAFE Circular 3, which stipulates several capital control measures with respect to the outbound remittance
of profit from domestic entities to offshore entities, including (i) under the principle of genuine transaction, banks shall check
board resolutions regarding profit distribution, the original version of tax filing records and audited financial statements; and
(ii) domestic entities shall hold income to account for previous years’ losses before remitting the profits. Moreover, pursuant
to SAFE Circular 3, domestic entities shall make detailed explanations of the sources of capital and utilization arrangements,
and provide board resolutions, contracts and other proof when completing the registration procedures in connection with an outbound
investment.
Regulations
on Dividend Distribution
Under
our current corporate structure, our Nevada holding company may rely on dividend payments from Benefactum Shenzhen, which is a
wholly foreign-owned enterprise incorporated in China, to fund any cash and financing requirements we may have. The principal regulations
governing distribution of dividends of foreign-invested enterprises include the Foreign-Invested Enterprise Law, as amended in
October 2000, and its implementation rules. Under these laws and regulations, wholly foreign-owned enterprises in China may pay
dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations.
In addition, wholly foreign-owned enterprises in China are required to allocate at least 10% of their respective accumulated profits
each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises.
Wholly foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting
standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends.
Regulations
on Overseas Listings
Six
PRC regulatory agencies, including the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises
by Foreign Investors, or the M&A Rules, which became effective in September 2006. The M&A Rules, among other things, require
offshore special purpose vehicles, or SPVs, formed for overseas listing purposes through acquisitions of PRC domestic companies
and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on
an overseas stock exchange.
While
the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC counsel, S&D Partners, that
our contractual arrangements are in compliance with the M&A Rules. However, as there has been no official interpretation or
clarification of the M&A Rules, there is uncertainty as to how this regulation will be interpreted or implemented.
Regulations
Relating to Employment
The
PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees.
If an employer fails to enter into a written employment contract with an employee within one year from the date on which the employment
relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee
and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date
of establishment of the employment relationship to the day prior to the execution of the written employment contract. All employers
must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law
and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may
result in criminal liabilities.
Enterprises
in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance
funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and
a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages
of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations
where they operate their businesses or where they are located. Failure to make adequate contributions to various employee benefit
plans may be subject to fines and other administrative sanctions.
Although
we have made significant contributions to employee benefits plans, we do not believe those are adequate contributions as required
by applicable PRC laws and regulations. See “Risk Factors—Risks Related to Doing Business in China—Failure to
make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.”
Emerging Growth Company Status
We
are an “emerging growth company”, as defined in the Jumpstart Our Business Startups Act enacted on April 5, 2012 (the
“
JOBS Act
”). For as long as we are an emerging growth company, we may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not emerging growth companies, including,
but not limited to, not being required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding advisory “say-on-pay” and “say-when-on-pay” votes on executive compensation
and stockholder advisory votes on golden parachute compensation. Under the JOBS Act, we will remain an emerging growth company
until the earliest of:
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the last day of the fiscal year during
which we have total annual gross revenues of $1 billion or more;
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the last day of the fiscal year following
the fifth anniversary of the date of the first sale of our common stock;
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the date on which we have, during the
previous three-year period, issued more than $1 billion in non-convertible debt; or
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the date on which
we are deemed to be a “large accelerated filer” under the Securities Exchange Act of 1934 (the “
Exchange Act
”)
(we will qualify as a large accelerated filer as of the first day of the first fiscal year after we have (i) more than $700 million
in outstanding common equity held by our non-affiliates and (ii) been public for at least 12 months; the value of our outstanding
common equity will be measured each year on the last day of our second fiscal quarter
The JOBS Act also provides
that an emerging growth company may utilize the extended transition period provided in Section 7(a)(2)(B) of the Securities Act,
for complying with new or revised accounting standards. However, we are choosing to “opt out” of such extended transition
period, and, as a result, we will comply with new or revised accounting standards on the relevant dates on which adoption of such
standards is required for companies that are not emerging growth companies. Section 107 of the JOBS Act provides that our decision
to opt out of the extended transition period for complying with new or revised accounting standards is irrevocable.
An investment in our common stock involves
a high degree of risk. You should carefully consider the risks described below and the other information contained in this report
before deciding to invest in our common stock.
Risks Related to Our Business and Industry
We have a limited operating history
in a new and evolving market, which makes it difficult to evaluate our future prospects.
We launched our online
financial platform in September 10, 2013 and have a limited operating history. In addition, the market for China’s financial
services is new and may not develop as expected, which could substantially harm our earning potential. Further, due to the fact
that the industry in which we operate is relatively new, potential borrowers may not be familiar with the services we provide and
may have difficulty distinguishing our services from those of our competitors. Convincing potential new borrowers of the value
of our services is critical to expand our operations.
In addition, we are
in a new and evolving market, and the regulatory framework for this may remain uncertain for the foreseeable future. As our business
develops in response to new regulatory requirements, or in response to competition, we may introduce new services or make adjustments
to our existing services or business model. Any significant change to our business model may not achieve expected results and may
have a material and adverse impact on our financial conditions and results of operations. In response to general economic conditions,
we may impose more stringent borrower qualifications to ensure the quality of loans on our platform, which may negatively affect
the growth of our business. It is therefore difficult to effectively assess our future prospects. You should consider our business
and prospects in light of the risks and challenges we encounter or may encounter in this developing and rapidly evolving market.
These risks and challenges include our ability to, among other things:
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navigate an evolving regulatory environment;
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expand the base of our cooperative companies;
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expand the base of borrowers and investors
served on our market place;
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enhance our risk management capabilities;
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improve our operational efficiency;
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attract, retain and motivate talented
employees;
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maintain the security of our platform
and the confidentiality of the information provided and utilized across our platform; and
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defend ourselves against regulatory, litigation,
privacy or other claims.
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If we fail to educate
potential borrowers and investors about the value of our services, if the market for our services does not develop as we expect,
or if we fail to address the needs of our target market, or other risks and challenges, our business and results of operations
will be harmed.
Our historical financial results
may not be indicative of our future performance.
Our business has achieved
rapid growth since our inception. Our net revenue increased from approximately$11.97 million for the year ended December 31, 2015
to approximately $24.68 million for the year ended December 31, 2016, representing an increase of 106%. We recorded a net income
of approximately$3.57 million for the year ended December 31, 2016, as compared to a net income of $0.16 million for the year ended
December 31, 2015. Our historically high growth rate and the limited history of business make it difficult to evaluate our prospects.
We may not be able to sustain our historically rapid growth or may not be able to grow our business at all, and we may continue
to suffer loss.
Our reputation
and brand recognition is crucial to our business. Any harm to our reputation or failure to enhance our brand recognition may materially
and adversely affect our business, financial condition and results of operations
.
Our
reputation and brand recognition, which depends on earning and maintaining the trust and confidence of individuals or enterprises
that are current or potential clients, are critical to our business. Our reputation and brand are vulnerable to many threats that
can be difficult or impossible to control, and costly or impossible to remediate. Regulatory inquiries or investigations, lawsuits
initiated by clients or other third parties, employee misconduct, perceptions of conflicts of interest and rumors, among other
things, could substantially damage our reputation, even if they are baseless or are satisfactorily addressed. In addition, any
perception that the quality of our internet finance services may not be the same as or better than that of other internet finance
service providers can also damage our reputation. Moreover, any misconduct or allegations of misconduct by our third-party cooperative
partners could result in negative publicity that could affect our reputation and erode the confidence of our clients. Furthermore,
any negative media publicity about the financial service industry in general or service quality problems of other companies in
the industry, including our competitors, may also negatively impact our reputation and brand. If we are unable to maintain a good
reputation or further enhance our brand recognition, our ability to attract and retain clients and key employees could be harmed
and, as a result, our business and revenues would be materially and adversely affected.
If we fail to promote and maintain
our brand in an effective and cost-efficient way, our business and results of operations may be harmed.
We believe that developing
and maintaining awareness of our brand effectively are critical to attracting new and retaining existing borrowers and investors
to our platform. Successful promotion of our brand and our services depend largely on the effectiveness of our marketing efforts
and the success of the channels we use to promote our services. Our efforts to build our brand have caused us to incur significant
expenses, and it is likely that our future marketing efforts will require us to incur significant additional expenses. These efforts
may not result in increased revenues in the immediate future or at all and, even if they do, any increases in revenues may not
offset the expenses incurred. If we fail to successfully promote and maintain our brand while incurring substantial expenses, our
results of operations and financial condition would be adversely affected, which may impair our ability to grow our business.
Successful strategic relationships
with the third party cooperative partners are important for our future success.
Our operations are
heavily dependent on the relationship with our third party cooperative partners. We anticipate that we will continue to leverage
our strategic relationships with the existing third party cooperative partners to grow our business while we will also pursue new
relationships with other financial institutions. Identifying, negotiating and documenting relationships with these partners require
significant time and resources. Our competitors may be more effective in providing incentives to our partners. Certain types of
partners may devote more resources to support their own competing businesses. In addition, we may have disagreements or disputes
with such partners, which could adversely affect our brand, reputation and services. If we cannot successfully maintain effective
strategic relationships with these third party cooperative partners, our business will be harmed.
Fraudulent
activity on our platform could negatively impact our operating results, brand and reputation and cause the use of our loan products
and services to decrease.
We
are subject to the risk of fraudulent activity both on our platform and associated with borrowers, investors and third parties
handling borrower and investor information. Our resources, technologies and fraud detection tools may be insufficient to accurately
detect and prevent fraud. Significant increases in fraudulent activity involving our platform could negatively impact our brand
and reputation, reduce the volume of loan transactions facilitated through our platform and lead us to take additional steps to
reduce fraud risk, which could increase our costs. High profile fraudulent activity could even lead to regulatory intervention,
and may divert our management’s attention and cause us to incur additional expenses and costs. Although we have not experienced
any material business or reputational harm as a result of fraudulent activities in the past, we cannot rule out the possibility
that any of the foregoing may occur causing harm to our business or reputation in the future. If any of the foregoing were to occur,
our results of operations and financial conditions could be materially and adversely affected.
We may not
be able to collect the payment when a borrower becomes delinquent in the payment of his/her outstanding obligation.
Although
we maintain a risk control system what supervises the borrower’s financial conditions and the repayment process, we are
subject to risks that we may not be able to collect the payment of loan from the borrower or guarantor. In addition, the
value of the collateral for the loan may decrease during the loan period and may not be sufficient to cover the payment of
the loan when it is due. More than half of the loans have a loan term that is shorter than three months and as such, we are
subject to high risks and pressures to collect those payments of loans within three months. If we failed to do so, we may not
be able to repay our investors when their investments become due.
If we are
unable to maintain low default rates for loans facilitated by our platform, our business and results of operations may be materially
and adversely affected.
Investments
in loans on our marketplace involve inherent risks as the return of the principal on a loan investment made through our platform
is not guaranteed, although we aim to limit investor losses due to borrower defaults to within an industry acceptable range through
various preventive measures we have taken or will take. Our ability to attract borrowers and investors to, and build trust in,
our marketplace is significantly dependent on our ability to effectively evaluate a borrower’s credit profile and maintain
low default rates. To conduct this evaluation, we have employed a series of review and assessment procedures. If our review and
assessment procedures contain errors, are ineffective or the data provided by borrowers or third parties is incorrect or stale,
our loan pricing and approval process could be negatively affected, resulting in misclassified or mispriced loans or incorrect
approvals or denials of loans. If we are unable to effectively and accurately assess the credit profiles of borrowers, segment
borrowers into appropriate grade in the pricing grid, or price loans on our platform appropriately, we may either be unable to
offer attractive fee rates to borrowers and returns to investors, or unable to maintain low default rates of loans facilitated
by our platform. In addition, once a loan application is approved, we do not further monitor certain aspects of the borrower’s
credit profile, such as changes in the borrower’s credit report and the borrower’s purchasing pattern with online merchants.
If the borrower’s financial condition deteriorates, we may not be able to take measures to prevent default on the part of
the borrower and thereby maintain low default rates for loans facilitated by our platform. Although we offer investor protection
in the form of a risk reserve fund, if widespread defaults were to occur, investors may still incur losses and lose confidence
in our marketplace and our business and results of operations may be materially and adversely affected.
If
default rates were to increase, we may set aside additional cash in our risk reserve fund and recognize additional expenses and
liabilities on our financial statements, which could have a material adverse effect on our working capital, financial conditions,
results of operations and business operations. We also may not have or generate sufficient cash to replenish our risk reserve fund
when necessary.
We have limited experience operating
our risk reserve fund. If it is under- or over-funded, or if we fail to accurately forecast the expected risk reserve payouts or
otherwise implement the risk reserve fund successfully, our financial results and competitive position may be harmed.
We have limited experience
operating our new risk reserve fund, which was launched in December 2013. We set aside a certain amount of cash in an interest-bearing
custody account. In the event that a loan defaults, we withdraw funds from the custody account to repay investors the principal
and accrued interest for the defaulted loan.
Since we commenced
our internet finance business only in December 2013, we have limited information regarding the default rates on loans facilitated
through our platform. In addition, given our limited operating history and recent introduction of new products, we have limited
information on historical charge-off rates, and we may not be able to accurately forecast charge-offs for our target borrower group.
Given these challenges, it is possible that we will under- or over-fund our risk reserve fund. If we under-fund our risk reserve
fund, and we do not or are unable to replenish the risk reserve fund to a sufficient level in time, investors may not be fully
protected from loss. This may result in negative sentiment among investors, potentially hindering our ability to retain existing
investors as well as to attract new investors, and investors may bring claims against us, whether or not they have legal rights
to seek damages from us, which could lead to additional expenses and distract management’s attention from our business operation.
Conversely, if we over-fund our risk reserve fund, this will reduce the amount of our working capital, as we cannot use the funds
set aside in the risk reserve fund for our operations, and cause us to lose business opportunities. Should any of the foregoing
occur, our competitive position as well as our results of operations could be materially and adversely affected.
Credit and
other information that we receive from third parties about a borrower may be inaccurate or may not accurately reflect the borrower’s
creditworthiness, which may compromise the accuracy of our credit assessment.
For
the purpose of credit assessment, we obtain borrower credit information from third parties, such as financial institutions and
e-commerce providers, and assess applicants’ credit and assign credit scores to borrowers based on such credit information.
Although we will conduct due diligence work and assess applicants’ credit, a credit score assigned to a borrower may not
reflect that particular borrower’s actual creditworthiness because the credit score may be based on outdated, incomplete
or inaccurate consumer reporting data, and our due diligence work may not be able cover sufficient applicants’ background
information due to our limited resources. Additionally, there is a risk that, following our obtaining a borrower’s credit
information, the borrower may have:
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become delinquent in the payment of an
outstanding obligation;
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defaulted on a pre-existing debt obligation;
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taken on additional debt; or
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sustained other adverse financial events.
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Such
inaccurate or incomplete borrower credit information could compromise the accuracy of our credit assessment and adversely affect
the effectiveness of our control over our default rates, which could in turn harm our reputation and materially and adversely affect
our business, financial condition and results of operations.
In
addition, our business of connecting investors and individual borrowers may constitute an intermediary service, and our contracts
with these investors and borrowers may be deemed as intermediation contracts, under the PRC Contract Law. Under the PRC Contract
Law, an intermediary may not claim for service fee and is liable for damages if it conceals any material fact intentionally or
provides false information in connection with the conclusion of an intermediation contract, which results in harm to the client’s
interests. See “Regulations—Regulations on Loans between Individuals.” Therefore, if we fail to provide material
information to investors, or if we fail to identify false information received from borrowers or others and in turn provide such
information to investors, and in either case if we are also found to be at fault, due to failure or deemed failure to exercise
proper care, such as to conduct adequate information verification or employee supervision, we could be held liable for damages
caused to investors as an intermediary pursuant to the PRC Contract Law. In addition, if we fail to complete our obligations under
the agreements entered into with investors and borrowers, we could also be held liable for damages caused to borrowers or investors
pursuant to the PRC Contract Law. On the other hand, we do not assume any liability solely on the basis of failure to correctly
assign a loan grade to a particular borrower in the process of facilitating a loan transaction, as long as we do not conceal any
material fact intentionally or provide false information, and are not found to be at fault otherwise. However, due to the lack
of detailed regulations and guidance in the area of peer-to-peer lending services and the possibility that the PRC government authority
may promulgate new laws and regulations regulating peer-to-peer lending services in the future, there are substantial uncertainties
regarding the interpretation and application of current or future PRC laws and regulations for the peer-to-peer lending service
industry, and there can be no assurance that the PRC government authority will ultimately take a view that is consistent with us.
Our business model could be negatively
affected by changes and fluctuation in the banking industry.
Our business model
is premised on the fact that SMEs and microenterprises are generally underserved by the banking industry because commercial banks
in China have been reluctant to transact with SMEs and microenterprises that have no credit support, such as third-party guarantees,
or adequate collateral of tangible assets, and we believe that they will remain so in the foreseeable future. This has created
opportunities for us to develop and expand our business. However, new trends in the banking industry or the applicable regulatory
requirements may alleviate the high transaction costs or the lack of collateral and public information generally associated with
bank financing to our target clients or otherwise make this business more attractive to banks. In the event that commercial banks
begin to compete with us by making loans directly to our target clients without our facilitation, we may experience less demand
for and greater competition with respect to our business. Furthermore, any such direct competition with our cooperating banks will
undermine our relationship with them and may adversely affect our business, results of operations and prospects.
Misconduct, errors and failure to
function by our management and employees and third-party service providers could harm our business and reputation.
We are exposed to
many types of operational risks, including the risk of misconduct and errors by our management, employees and third-party
service providers. Our business depends on our management, employees and third-party service providers interacting with
potential borrowers, conducting sufficient due diligence review and collecting borrowers’ information, all of which
involve the use and disclosure of personal information. We could be materially adversely affected if transactions were
redirected, misappropriated or otherwise improperly executed, if personal information was disclosed to unintended recipients
or if an operational breakdown or failure in the processing of transactions occurred, whether as a result of human error,
purposeful sabotage or fraudulent manipulation of our operations or systems. In addition, the manner in which we store and
use certain personal information and interact with borrowers and banks is governed by various PRC laws. It is not always
possible to identify and deter misconduct or errors by management and employees or third-party service providers, and the
precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or
losses. If any of our management and employees or third-party service providers take, convert or misuse funds, documents or
data or fail to follow protocol when interacting with borrowers and investors, we could be liable for damages and subject to
regulatory actions and penalties. We could also be perceived to have facilitated or participated in the illegal
misappropriation of funds, documents or data, or the failure to follow protocol, and therefore be subject to civil or
criminal liability.
The laws and regulations governing
the financial advisory service industry in China are developing and evolving and subject to changes. If our practice is deemed
to violate any PRC laws or regulations, our business, financial conditions and results of operations would be materially and adversely
affected.
Due to the relatively
short history of the internet finance industry in China, the PRC government has not adopted a clear regulatory framework governing
the industry. On July 18, 2015, the PBOC together with nine other PRC regulatory agencies jointly issued a series of policy measures
applicable to the internet finance industry titled the Guidelines on Promoting the Healthy Development of Internet Finance, or
the Guidelines. The Guidelines introduced formally for the first time the regulatory framework and basic principles for internet
finance industry in China, including but not limited to internet payment, online lending, equity crowd-funding, internet fund sales,
internet insurance, internet trust and internet consumer finance. However, the Guidelines only set out the basic principles for
internet finance industry, and on August 17, 2016, the Interim Measures were adopted to implement and enforce the principles set
out in the Guidelines.
As of the date of this
report, we have not been subject to any material fines or other penalties under any PRC laws or regulations including those governing
the financial advisory service industry in China. However, if our practice is deemed to violate any rules, laws or regulations,
we may face injunctions, including orders to cease illegal activities, and may be exposed to other penalties as determined by the
relevant government authorities as well. If such situations occur, our business, financial condition and prospects would be materially
and adversely affected. In addition, given the evolving regulatory environment in which we operate, we cannot rule out the possibility
that the PRC government will institute a licensing regime covering our industry. If such a licensing regime were introduced, we
cannot assure you that we would be able to obtain any newly required license in a timely manner, or at all, which could materially
and adversely affect our business and impede our ability to continue our operations.
If we do not compete effectively,
our results of operations could be harmed.
The online consumer
finance platform industry in China is intensely competitive and evolving. We compete with a large number of consumer finance platforms.
We also compete with financial products and companies that attract borrowers, investors or both. With respect to borrowers, we
primarily compete with traditional financial institutions, such as consumer finance business units in commercial banks, credit
card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment products
and asset classes, such as equities, bonds, investment trust products, bank savings accounts, real estate and alternative asset
classes.
Our competitors operate
with different business models, have different cost structures or participate selectively in different market segments. They may
ultimately prove more successful or more adaptable to new regulatory, technological and other developments. Some of our current
and potential competitors have significantly more financial, technical, marketing and other resources than we do and may be able
to devote greater resources to the development, promotion, sale and support of their platforms. Our competitors may also have longer
operating histories, more extensive borrower or investor bases, greater brand recognition and brand loyalty and broader partner
relationships than us. Additionally, a current or potential competitor may acquire one or more of our existing competitors or form
a strategic alliance with one or more of our competitors. Our competitors may be better at developing new products, offering more
attractive investment returns or lower fees, responding faster to new technologies and undertaking more extensive and effective
marketing campaigns. In response to competition and in order to grow or maintain the volume of loan transactions facilitated through
our platform, we may have to offer higher investment return to investors or charge lower transaction fees, which could materially
and adversely affect our business and results of operations. If we are unable to compete with such companies and meet the need
for innovation in our industry, the demand for our platform could stagnate or substantially decline, we could experience reduced
revenues or our platform could fail to achieve or maintain more widespread market acceptance, any of which could harm our business
and results of operations.
Our business
is subject to risks related to lawsuits and other claims brought by our clients
.
We are subject to lawsuits
and other claims in the ordinary course of our business. In particular, we may face arbitration claims and lawsuits brought by
our clients who have bought internet finance products, such as suits alleging misconduct by the managers of our Credit Partners
that we have recommended or made available to our clients. In connection with our facilitating small short-term loans, we may encounter
complaints alleging breach of contract or potentially usury claims in our ordinary course of business. We may also encounter complaints
alleging misrepresentation on the part of our relationship managers or other employees or that we have failed to carry out a duty
owed to them. This risk may be heightened during periods when credit, equity or other financial markets are deteriorating in value
or are volatile, or when clients or investors are experiencing losses. Actions brought against us may result in settlements, awards,
injunctions, fines, penalties or other results adverse to us, including harm to our reputation. Even if we are successful in defending
against these actions, we may incur significant expenses in the defense of such matters. Predicting the outcome of such matters
is inherently difficult, particularly where claimants seek substantial or unspecified damages, or when arbitration or legal proceedings
are at an early stage. A substantial judgment, award, settlement, fine, or penalty could be materially adverse to our operating
results or cash flows for a particular future period, depending on our results for that period.
Our failure
to respond to rapid product innovation in the financial industry in a timely and cost-effective manner may have an adverse effect
on our business and operating results.
The
financial industry is increasingly influenced by frequent new service introductions and evolving industry standards. We believe
that our future success will depend on our ability to continue to anticipate service innovations and to offer additional services
that meet evolving standards on a timely and cost-effective basis. There is a risk that we may not successfully identify new service
opportunities or develop and introduce these opportunities in a timely and cost-effective manner. In addition, products and services
that our competitors develop or introduce may render our products and services less competitive. As a result, failure to respond
to product and service innovation that may affect our industry in the future may have a material adverse effect on our business
and results of operations.
Our operating
history may not provide an adequate basis to judge our future prospects and results of operations.
We
commenced our business in 2013 as an online financial platform focusing on online peer-to-peer lending services. We seek to develop
new internet finance products, but it is difficult to predict whether our new products will be well-accepted by our customers.
Although we recorded net income in the prior year, we cannot assure you that our results of operations will not be adversely affected
in any future period. We have limited operating history and as a result limited experience in delivering services, which makes
the prediction of future results of operations difficult, and therefore, past results of operations achieved by us should not be
taken as indicative of the rate of growth, if any, that can be expected in the future. As a result, you should consider our future
prospects in light of the risks and uncertainties experienced by early stage companies in a rapidly evolving and increasingly competitive
market in China.
The proper
functioning of our technology platform is essential to our internet finance business. Any failure to maintain the satisfactory
performance of our website and systems could materially and adversely affect our business and reputation.
We are constantly upgrading
our platform to provide increased scale, improved performance for both PC and mobile version of our internet finance platform.
The satisfactory performance, reliability and availability of our technology platform are critical to our success and our ability
to attract and retain customers and provide quality customer service. To adapt to new products and upgrade our technology infrastructure
requires significant investment of time and resources, including adding new hardware, updating software and recruiting and training
new engineering personnel. Maintaining and improving our technology infrastructure require significant levels of investment. Adverse
consequences could include unanticipated system disruptions, slower response times, impaired quality of clients’ experiences
and delays in reporting accurate operating and financial information. Any system interruptions caused by telecommunications failures,
computer viruses, hacking or other attempts to harm our systems that result in the unavailability or slowdown of our website or
reduced performance could reduce the number of loans transacted and the attractiveness of product offerings on our platform. Our
servers may also be vulnerable to computer viruses, physical or electronic break-ins and similar disruptions, which could lead
to system interruptions, website slowdown or unavailability, delays or errors in transaction processing, loss of data or the inability
to accept and fulfill customer orders. Security breaches, computer viruses and hacking attacks have become more prevalent in our
industry. We can provide no assurance that our current security mechanisms will be sufficient to protect our IT systems from any
third-party intrusions, viruses or hacker attacks, information or data theft or other similar activities. Any such future occurrences
could reduce customer satisfaction, damage our reputation and our financial condition, results of operations and business prospects,
as well as our reputation, could be materially and adversely affected.
Any deficiencies in China’s
internet infrastructure could impair our ability to consummate loans over our website and mobile apps, which could cause us to
lose customers and harm our operating results.
Our internet finance
business depends on the performance and reliability of the internet infrastructure in China since substantially all of our computer
hardware is currently located in China. The availability of our website depends on telecommunications carriers and other third-party
providers for communications and storage capacity, including bandwidth and server storage, among other things. If we are unable
to enter into or renew agreements with these providers on commercially acceptable terms, or if any of our existing agreements with
such providers are terminated as a result of our breach or otherwise, our ability to provide our services to our customers could
be adversely affected. Almost all access to the internet in China is maintained through state-owned telecommunication carriers
under administrative control, and we obtain access to end-user networks operated by such telecommunications carriers and internet
service providers to give customers access to our website. We may experience service interruptions in the future, which are typically
caused by service interruptions at the underlying external telecommunications service providers, such as the internet data centers
and broadband carriers from which we lease services. Service interruptions prevent consumers from accessing our website and mobile
apps and consummating loans, and frequent interruptions could frustrate customers and discourage them from attempting to consummate
loans, which could cause us to lose customers and harm our operating results.
If we fail
to adopt new technologies or adapt our website, mobile apps and systems to changing customer requirements or emerging industry
standards, our internet finance business may be materially and adversely affected.
To remain competitive
in the internet finance business, we must continue to enhance and improve the responsiveness, functionality and features of our
website and mobile apps. The internet finance industry in China is characterized by rapid technological evolution, continual changes
in customer requirements and preferences, frequent introductions of new products and services embodying new technologies and the
emergence of new industry standards and practices, any of which could render our existing technologies and systems obsolete. The
success of our internet finance business will depend, in part, on our ability to identify, develop, acquire or license leading
technologies useful in our business, and respond to technological advances and emerging industry standards and practices, such
as mobile internet, in a cost-effective and timely way. The development of websites, mobile apps and other proprietary technology
entails significant technical and business risks. We cannot assure you that we will be able to use new technologies effectively
or adapt our website, mobile apps, proprietary technologies and systems to meet evolving customer requirements or emerging industry
standards. If we are unable to adapt in a cost-effective and timely manner in response to changing market conditions or customer
requirements, whether for technical, legal, financial or other reasons, the overall prospects, financial condition and results
of operations of our internet finance business may be materially and adversely affected.
A severe or prolonged downturn in
the Chinese or global economy could materially and adversely affect our business and financial condition.
Any prolonged slowdown
in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In
particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and
unemployment rates, may affect borrower willingness to seek loans and investor ability and desire to invest in loans. Economic
conditions in China are sensitive to global economic conditions. The global financial markets have experienced significant disruptions
since 2008 and the United States, Europe and other economies have experienced periods of recession. The recovery from the lows
of 2008 and 2009 has been uneven and there are new challenges. There is considerable uncertainty over the long-term effects of
the expansionary monetary and fiscal policies adopted by the central banks and financial authorities of some of the world’s
leading economies, including the United States and China. There have also been concerns about the economic effect of the tensions
in the relationship between China and surrounding Asian countries. Adverse economic conditions could also reduce the number of
qualified borrowers seeking loans through us. Should any of these situations occur, the amount of loans facilitated through us
and our net revenues will decline, and our business and financial conditions will be negatively impacted. Additionally, continued
turbulence in the international markets may adversely affect our ability to access the capital markets to meet liquidity needs.
We may not
be able to prevent unauthorized use of our intellectual property, which could reduce demand for our products and services, adversely
affect our revenues and harm our competitive position.
We rely primarily on
a combination of copyright, trade secret, trademark and anti-unfair competition laws and contractual rights to establish and protect
our intellectual property rights in our research reports, our services and other aspects of our business. We cannot assure you
that the steps we have taken or will take in the future to protect our intellectual property or piracy will prove to be sufficient.
Implementation of intellectual property-related laws in China has historically been lacking, primarily due to ambiguity in the
PRC laws and enforcement difficulties. Accordingly, intellectual property rights and confidentiality protection in China may not
be as effective as in the United States or other countries. Current or potential competitors may use our intellectual property
without our authorization in the development of products and services that are substantially equivalent or superior to ours, which
could reduce demand for our solutions and services, adversely affect our revenues and harm our competitive position. Even if we
were to discover evidence of infringement or misappropriation, our recourse against such competitors may be limited or could require
us to pursue litigation, which could involve substantial costs and diversion of management’s attention from the operation
of our business.
Confidentiality
agreements with employees, product providers and others may not adequately prevent disclosure of our trade secrets and other proprietary
information.
We require our employees,
product providers, cooperating partners and others to enter into confidentiality agreements (or agreements that contain confidentiality
terms) in order to protect our trade secrets and other proprietary information and, most importantly, our client information. These
agreements might not effectively prevent disclosure of our trade secrets, know-how or other proprietary information and might not
provide an adequate remedy in the event of unauthorized disclosure of such confidential information. In addition, others may independently
discover trade secrets and proprietary information, and in such cases we could not assert any trade secret rights against such
parties. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights,
and failure to obtain or maintain trade secret protection could adversely affect our competitive position.
We may face
intellectual property infringement claims, which could be time-consuming and costly to defend and may result in the loss of significant
rights by us.
Although we have not
been subject to any litigation, pending or threatened, alleging infringement of third parties’ intellectual property rights,
we cannot assure you that such infringement claims will not be asserted against us in the future.
Intellectual property
litigation is expensive and time-consuming and could divert resources and management attention from the operation of our business.
If there is a successful claim of infringement, we may be required to alter our services, cease certain activities, pay substantial
royalties and damages to, and obtain one or more licenses from, third parties. We may not be able to obtain those licenses on commercially
acceptable terms, or at all. Any of those consequences could cause us to lose revenues, impair our client relationships and harm
our reputation.
Our future
success depends on the continuing efforts to retain our existing management team and other key employees as well as to attract,
integrate and retain highly skilled and qualified personnel, and our business may be disrupted if we lose their services.
Our future success
depends heavily on the continued services of our current executive officers and senior management team. We also rely on the skills,
experience and efforts of other key employees, including management, marketing, support, research and development, technical and
services personnel in our internet finance businesses. Qualified employees are in high demand in the internet finance industries
in China, and our future success depends on our ability to attract, train, motivate and retain highly skilled employees and the
ability of our executive officers and other members of our senior management to work effectively as a team.
If one or more of our
executive officers or other key employees are unable or unwilling to continue in their present positions, we may not be able to
find replacements easily, which may disrupt our business operations. We do not have key personnel insurance in place. If any of
our executive officers or other key employees joins a competitor or forms a competing company, we may lose clients, know-how, key
professionals and staff members. In addition, although each of our executive officers has entered into an employment agreement
with us, not all of them contain non-competition provisions. Even for those executive officers whose employment agreements contain
confidentiality and non-competition provisions, we cannot assure you of the extent to which any of these agreements could be enforced
in China if any dispute arises between them and us because of the uncertainties of China’s legal system.
Our revenues
and operating results can fluctuate from period to period, which could cause the price of our common stock to fluctuate.
Our revenues and operating
results have fluctuated in the past and may fluctuate from period to period in the future due to a variety of factors, many of
which are beyond our control. Factors relating to our business that may contribute to these fluctuations include the following
factors, as well as other factors described elsewhere in this annual report:
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negative public perception and reputation
of the internet finance industry;
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changes in laws or regulatory policy that
could impact our ability to provide internet finance services to our clients;
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failure to enter into contracts with new
financial institutions;
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cancellations or non-renewal of existing
contracts with financial institutions; and
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changes in the number of clients who decide
to effectively terminate their relationship with us.
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As
a result of these and other factors, the results of any prior quarterly or annual periods should not be relied upon as indications
of our future revenues or operating performance.
If we fail to implement and maintain
an effective system of internal controls, we may be unable to accurately report our results of operations or prevent fraud, and
investor confidence and the market price of our common stock may be materially and adversely affected.
As a public company
in the United States, we are subject to the Sarbanes-Oxley Act of 2002. Section 404 of the Sarbanes-Oxley Act of 2002, or Section
404, requires that we include a report from management on the effectiveness of its internal control over financial reporting in
our annual report on Form 10-K. In addition, our independent registered public accounting firm must attest to and report on the
effectiveness of our internal control over financial reporting.
Our management has
concluded that our internal control over financial reporting is not effective as of December 31, 2016. As a result, our financial
statements could contain material misstatements and we could fail to meet our reporting obligations, which would likely cause investors
to lose confidence in our reported financial information. This could in turn limit our access to capital markets, harm our results
of operations, and lead to a decline in the trading price of our common stock.
We may need additional capital, and
financing may not be available on terms acceptable to us, or at all.
Although we believe
that our anticipated cash flows from operating activities will be sufficient to meet our anticipated working capital requirements
and capital expenditures in the ordinary course of business for the next 12 months, we cannot assure you this will be the case.
We may need additional cash resources in the future if we experience changes in business conditions or other developments. We may
also need additional cash resources in the future if we find and wish to pursue opportunities for investment, acquisition, capital
expenditure or similar actions. If we determine that our cash requirements exceed the amount of cash and cash equivalents we have
on hand at the time, we may seek to issue equity or debt securities or obtain credit facilities. The issuance and sale of additional
equity would result in further dilution to our shareholders. The incurrence of indebtedness would result in increased fixed obligations
and could result in operating covenants that would restrict our operations. We cannot assure you that financing will be available
in amounts or on terms acceptable to us, if at all.
From time to time we may evaluate
and potentially consummate strategic investments or acquisitions, which could require significant management attention, disrupt
our business and adversely affect our financial results.
We may evaluate and
consider strategic investments, combinations, acquisitions or alliances to further increase the value of our platform and better
serve borrowers and investors. These transactions could be material to our financial condition and results of operations if consummated.
If we are able to identify an appropriate business opportunity, we may not be able to successfully consummate the transaction and,
even if we do consummate such a transaction, we may be unable to obtain the benefits or avoid the difficulties and risks of such
transaction.
Strategic investments
or acquisitions will involve risks commonly encountered in business relationships, including:
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difficulties in assimilating and integrating
the operations, personnel, systems, data, technologies, products and services of the acquired business;
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inability of the acquired technologies,
products or businesses to achieve expected levels of revenue, profitability, productivity or other benefits;
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difficulties in retaining, training, motivating
and integrating key personnel;
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diversion of management’s time and
resources from our normal daily operations;
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difficulties in successfully incorporating
licensed or acquired technology and rights into our platform and loan products;
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difficulties in maintaining uniform standards,
controls, procedures and policies within the combined organizations;
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difficulties in retaining relationships
with customers, employees and suppliers of the acquired business;
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risks of entering markets in which we
have limited or no prior experience;
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regulatory risks, including remaining
in good standing with existing regulatory bodies or receiving any necessary pre-closing or post-closing approvals, as well as being
subject to new regulators with oversight over an acquired business;
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assumption of contractual obligations
that contain terms that are not beneficial to us, require us to license or waive intellectual property rights or increase our risk
for liability;
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failure to successfully further develop
the acquired technology;
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liability for activities of the acquired
business before the acquisition, including intellectual property infringement claims, violations of laws, commercial disputes,
tax liabilities and other known and unknown liabilities;
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potential disruptions to our ongoing businesses;
and
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unexpected costs and unknown risks and
liabilities associated with strategic investments or acquisitions.
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We may not make any
investments or acquisitions, or any future investments or acquisitions may not be successful, may not benefit our business strategy,
may not generate sufficient revenues to offset the associated acquisition costs or may not otherwise result in the intended benefits.
In addition, we cannot assure you that any future investment in or acquisition of new businesses or technology will lead to the
successful development of new or enhanced loan products and services or that any new or enhanced loan products and services, if
developed, will achieve market acceptance or prove to be profitable.
Competition for employees is intense,
and we may not be able to attract and retain the qualified and skilled employees needed to support our business.
We believe our success
depends on the efforts and talent of our employees, including risk management, software engineering, financial and marketing personnel.
Our future success depends on our continued ability to attract, develop, motivate and retain qualified and skilled employees. Competition
for highly skilled technical, risk management and financial personnel is extremely intense. We may not be able to hire and retain
these personnel at compensation levels consistent with our existing compensation and salary structure. Some of the companies with
which we compete for experienced employees have greater resources than we have and may be able to offer more attractive terms of
employment.
In addition, we invest
significant time and expenses in training our employees, which increases their value to competitors who may seek to recruit them.
If we fail to retain our employees, we could incur significant expenses in hiring and training their replacements, and the quality
of our services and our ability to serve borrowers and investors could diminish, resulting in a material adverse effect to our
business.
If we cannot maintain our corporate
culture as we grow, we could lose the innovation, collaboration and focus that contribute to our business.
We believe that a critical
component of our success is our corporate culture, which we believe fosters innovation, encourages teamwork and cultivates creativity.
As we develop the infrastructure of a public company and continue to grow, we may find it difficult to maintain these valuable
aspects of our corporate culture. Any failure to preserve our culture could negatively impact our future success, including our
ability to attract and retain employees, encourage innovation and teamwork and effectively focus on and pursue our corporate objectives.
We face risks related to natural
disasters, health epidemics and other outbreaks, which could significantly disrupt our operations.
We are vulnerable to
natural disasters and other calamities. Fire, floods, typhoons, earthquakes, power loss, telecommunications failures, break-ins,
war, riots, terrorist attacks or similar events may give rise to server interruptions, breakdowns, system failures, technology
platform failures or internet failures, which could cause the loss or corruption of data or malfunctions of software or hardware
as well as adversely affect our ability to provide products and services on our platform.
Our business could
also be adversely affected by the effects of Zika virus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, Severe Acute Respiratory
Syndrome, or SARS, or other epidemics. Our business operations could be disrupted if any of our employees is suspected of having
Zika virus, Ebola virus disease, H1N1 flu, H7N9 flu, avian flu, SARS or other epidemic, since it could require our employees to
be quarantined and/or our offices to be disinfected. In addition, our results of operations could be adversely affected to the
extent that any of these epidemics harms the Chinese economy in general.
Risks Related to Our Corporate Structure
If the PRC government deems that
the contractual arrangements in relation to our variable interest entity (Benefactum Beijing) do not comply with PRC governmental
restrictions on foreign investment, or if these regulations or the interpretation of existing regulations changes in the future,
we could be subject to penalties or be forced to relinquish our interests in those operations.
Foreign ownership of
certain types of internet businesses, such as internet information services, is subject to restrictions under applicable PRC laws,
rules and regulations. For example, foreign investors are generally not permitted to own more than 50% of the equity interests
in a value-added telecommunication service provider. Any such foreign investor must also have experience and a good track record
in providing value-added telecommunications services overseas. All our revenue is generated by contractually controlled and managed
entity, Benefactum Beijing.
The contractual arrangements
give us effective control over Benefactum Beijing and enable us to obtain substantially all of the economic benefits arising from
it as well as consolidate the financial results of it in our results of operations. Although the structure we have adopted is consistent
with longstanding industry practice, and is commonly adopted by comparable companies in China, the PRC government may not agree
that these arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with
requirements or policies that may be adopted in the future.
In the opinion of SD
& Partners, our PRC counsel, the ownership structures of our material wholly-foreign owned enterprise and our material variable
interest entity in China, do not and will not violate any applicable PRC law, regulation or rule currently in effect; and the contractual
arrangements between our material wholly-foreign owned enterprise, our material variable interest entity and their respective equity
holders governed by PRC law are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations
currently in effect and will not violate any applicable PRC law, rule or regulation currently in effect. However, SD & Partners
has also advised us that there are substantial uncertainties regarding the interpretation and application of current PRC laws,
rules and regulations. Accordingly, the PRC regulatory authorities and PRC courts may in the future take a view that is contrary
to the opinion of our PRC legal counsel.
It is uncertain whether
any new PRC laws, rules or regulations relating to variable interest entity structures will be adopted or if adopted, what they
would provide. If we or our variable interest entity are found to be in violation of any existing or future PRC laws, rules or
regulations, or fail to obtain or maintain any of the required permits or approvals, the relevant PRC regulatory authorities would
have broad discretion to take action in dealing with such violations or failures, including revoking the business and operating
licenses of our PRC subsidiary or variable interest entity, requiring us to discontinue or restrict our operations, restricting
our right to collect revenue, blocking one or more of our websites, requiring us to restructure our operations or taking other
regulatory or enforcement actions against us. The imposition of any of these measures could result in a material adverse effect
on our ability to conduct all or any portion of our business operations. In addition, it is unclear what impact the PRC government
actions would have on us and on our ability to consolidate the financial results of our variable interest entity in our consolidated
financial statements, if the PRC government authorities were to find our legal structure and contractual arrangements to be in
violation of PRC laws, rules and regulations. If the imposition of any of these government actions causes us to lose our right
to direct the activities of any of our material variable interest entity or otherwise separate from it and if we are not able to
restructure our ownership structure and operations in a satisfactory manner, we would no longer be able to consolidate the financial
results of our variable interest entity in our consolidated financial statements. Any of these events would have a material adverse
effect on our business, financial condition and results of operations.
Substantial uncertainties exist with
respect to the enactment timetable, interpretation and implementation of draft PRC Foreign Investment Law.
The MOFCOM, published
a discussion draft of the proposed Foreign Investment Law in January 2015 aiming to, upon its enactment, replace the major existing
laws and regulations governing foreign investment in China While the MOFCOM solicited comments on this draft earlier this year,
substantial uncertainties exist with respect to its enactment timetable, interpretation and implementation. The draft Foreign Investment
Law, if enacted as proposed, may materially impact the entire legal framework regulating foreign investments in China.
Among other things,
the draft Foreign Investment Law purports to introduce the principle of “actual control” in determining whether a company
is considered a foreign invested enterprise, or an FIE. The draft Foreign Investment Law specifically provides that entities established
in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction,
but cleared by the MOFCOM as “controlled” by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic
entity for investment in the “restriction category” on the “negative list.” In this connection, “control”
is broadly defined in the draft law to cover any of the following summarized categories:
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holding 50% or more of the voting rights
or similar equity interest of the subject entity;
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holding less than 50% of the voting rights
or similar equity interest of the subject entity but having the power to directly or indirectly appoint or otherwise secure at
least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to materially influence
the board, the shareholders’ meeting or other equivalent decision making bodies; or
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having the power to exert decisive influence,
via contractual or trust arrangements, over the subject entity’s operations, financial, staffing and technology matters.
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Once an entity is determined
to be an FIE, and its investment amount exceeds certain thresholds or its business operation falls within a “negative list”
purported to be separately issued by the State Council in the future, market entry clearance by the MOFCOM or its local counterparts
would be required.
The “variable
interest entity” structure, or VIE structure, has been adopted by many PRC-based companies, including us, to obtain necessary
licenses and permits in the industries that are currently subject to foreign investment restrictions in China. Under the draft
Foreign Investment Law, variable interest entities that are controlled via contractual arrangements would also be deemed as FIEs,
if they are ultimately “controlled” by foreign investors. For any companies with a VIE structure in an industry category
that is in the “restriction category” on the “negative list,” the existing VIE structure may be deemed
legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state owned enterprises or agencies,
or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the variable interest entities
will be treated as FIEs and any operation in the industry category on the “negative list” without market entry clearance
may be considered as illegal.
Based on the definition
of “control” in the draft Foreign Investment Law as currently proposed, we believe that there are strong basis for
a determination that we and our variable interest entity is ultimately controlled by PRC citizens for the following reasons:
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Benefactum Alliance effectively takes
full control of Sino Fortune and the shareholders of Benefactum Alliance own 337,500,000 shares of our common stock;
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One of the shareholders of Benefactum
Alliance is a PRC citizen or national. The remaining shareholders of Benefactum Alliance are Seychelles companies, however, their
shareholders are also PRC citizens or nationals;
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Because Benefactum Alliance indirectly
controls Benefactum Shenzhen which, in turn, via a series of contractual arrangements, has the right to appoint the Chairman and
directors of Benefactum Beijing, Benefactum Alliance effectively controls the board and all management decisions of Benefactum
Beijing. Effectively, Benefactum Alliance also has the power to exert decisive influence over its operations, financial, staffing
and technology matters.
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However, there are
significant uncertainties as to how the control status of our company, our variable interest entity and our equity investees with
a VIE structure would be determined under the enacted version of the Foreign Investment Law. In addition, it is uncertain whether
any of the businesses that we currently operate or plan to operate in the future through our consolidated entities and the businesses
operated by our equity investees with a VIE structure would be on the to-be-issued “negative list” and therefore be
subject to any foreign investment restrictions or prohibitions. We also face uncertainties as to whether the enacted version of
the Foreign Investment Law and the final “negative list” would mandate further actions, such as MOFCOM market entry
clearance, to be completed by companies with existing VIE structure and whether such clearance can be timely obtained, or at all.
If we or our equity investees with a VIE structure were not considered as ultimately controlled by PRC domestic investors under
the enacted version of the Foreign Investment Law, further actions required to be taken by us or such equity investees under the
enacted Foreign Investment Law may materially and adversely affect our business and financial condition.
In addition, our corporate
governance practice may be materially impacted and our compliance costs could increase if we were not considered as ultimately
controlled by PRC domestic investors under the enacted version of the Foreign Investment Law. For instance, the draft Foreign Investment
Law as proposed purports to impose stringent ad hoc and periodic information reporting requirements on foreign investors and the
applicable FIEs. Aside from investment implementation report and investment amendment report that would be required for each investment
and alteration of investment specifics, a prospectus would be mandatory, and large foreign investors meeting certain criteria would
be required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations
could potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible could
be subject to criminal liabilities.
Our contractual arrangements may
not be as effective in providing control over the variable interest entities as direct ownership.
We rely on contractual
arrangements with our variable interest entity to operate our electronic platform in China and other businesses in which foreign
investment is restricted or prohibited. For a description of these contractual arrangements, see “History and Corporate Structure
— Contractual Arrangements with Benefactum Beijing.” These contractual arrangements may not be as effective as direct
ownership in providing us with control over our variable interest entity.
If we had direct ownership
of the variable interest entity, we would be able to exercise our rights as an equity holder directly to effect changes in the
boards of directors of the entity, which could effect changes at the management and operational level. Under our contractual arrangements,
we would be able to change the members of the boards of directors of the entity only by exclusively exercising the equity holders’
voting rights and would have to rely on the variable interest entity and the variable interest entity equity holders to perform
their obligations in the contractual arrangements in order to exercise our control over the variable interest entity. The variable
interest entity equity holders may have conflicts of interest with us or our shareholders, and they may not act in the best interests
of our company or may not perform their obligations under these contracts. For example, our variable interest entity and its equity
holders could breach their contractual arrangements with us by, among other things, failing to conduct their operations, including
maintaining our website and using our domain names and trademarks which the relevant variable interest entity has exclusive rights
to use, in an acceptable manner or taking other actions that are detrimental to our interests. Pursuant to the option, we may replace
the equity holders of the variable interest entity at any time pursuant to the contractual arrangements. However, if any equity
holder is uncooperative and any dispute relating to these contracts or the replacement of the equity holders remains unresolved,
we will have to enforce our rights under the contractual arrangements through the operations of PRC law and arbitral or judicial
agencies, which may be costly and time-consuming and will be subject to uncertainties in the PRC legal system. See “Any failure
by our variable interest entity or its equity holders to perform their obligations under the contractual arrangements would have
a material adverse effect on our business, financial condition and results of operations.” Consequently, the contractual
arrangements may not be as effective in ensuring our control over the relevant portion of our business operations as direct ownership.
Any failure by our variable interest
entity or its equity holders to perform their obligations under the contractual arrangements would have a material adverse effect
on our business, financial condition and results of operations.
If our variable interest
entity or its equity holders fail to perform their respective obligations under the contractual arrangements, we may have to incur
substantial costs and expend additional resources to enforce such arrangements. Although we have entered into an option agreement
in relation to our variable interest entity, which provides that we may exercise an option to acquire, or nominate a person to
acquire, ownership of the equity in that entity or, in some cases, its assets, to the extent permitted by applicable PRC laws,
rules and regulations, the exercise of the option is subject to the review and approval of the relevant PRC governmental authorities.
We have also entered into an equity interest pledge agreement with respect to the variable interest entity to secure certain obligations
of such variable interest entity or its equity holders to us under the contractual arrangements. However, the enforcement of such
agreement through arbitral or judicial agencies may be costly and time-consuming and will be subject to uncertainties in the PRC
legal system. Moreover, our remedies under the equity pledge agreement are primarily intended to help us collect debts owed to
us by the variable interest entity equity holders under the contractual arrangements and may not help us in acquiring the assets
or equity of the variable interest entity.
In addition, although
the terms of the contractual arrangements provide that they will be binding on the successors of the variable interest entity equity
holders, as those successors are not a party to the agreements, it is uncertain whether the successors in case of the death, bankruptcy
or divorce of a variable interest entity equity holder will be subject to or will be willing to honor the obligations of such variable
interest entity equity holder under the contractual arrangements. If the relevant variable interest entity or its equity holder
(or its successor), as applicable, fails to transfer the shares of the variable interest entity according to the relevant call
option agreement or equity pledge agreement, we would need to enforce our rights under the call option agreement or equity pledge
agreement, which may be costly and time-consuming and may not be successful.
The contractual arrangements
are governed by PRC law and provide for the resolution of disputes through arbitration or court proceedings in China. Accordingly,
these contracts would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal
procedures. The legal system in the PRC is not as developed as in some other jurisdictions, such as the United States. Moreover,
there are very few precedents and little formal guidance as to how contractual arrangements in the context of a variable interest
entity should be interpreted or enforced under PRC law, and as a result it may be difficult to predict how an arbitration panel
or court would view such contractual arrangements. As a result, uncertainties in the PRC legal system could limit our ability to
enforce the contractual arrangements. Under PRC law, if the losing parties fail to carry out the arbitration awards or court judgments
within a prescribed time limit, the prevailing parties may only enforce the arbitration awards or court judgments in PRC courts,
which would require additional expense and delay. In the event we are unable to enforce the contractual arrangements, we may not
be able to exert effective control over the variable interest entities, and our ability to conduct our business, as well as our
financial condition and results of operations, may be materially and adversely affected.
We may lose the ability to use, or
otherwise benefit from, the licenses, approvals and assets held by our variable interest entity, which could severely disrupt our
business, render us unable to conduct some or all of our business operations and constrain our growth.
Our variable interest
entity, Benefactum Beijing, holds licenses and approvals and assets that are necessary for our business operations, to which foreign
investments are typically restricted or prohibited under applicable PRC law. The contractual arrangements contain terms that specifically
obligate variable interest entity equity holders to ensure the valid existence of the variable interest entities and restrict the
disposal of material assets of the variable interest entities. However, in the event the variable interest entity equity holders
breach the terms of these contractual arrangements and voluntarily liquidate our variable interest entity or our variable interest
entity declares bankruptcy and all or part of its assets become subject to liens or rights of third-party creditors, or are otherwise
disposed of without our consent, we may be unable to conduct some or all of our business operations or otherwise benefit from the
assets held by the variable interest entity, which could have a material adverse effect on our business, financial condition and
results of operations. Furthermore, if our variable interest entity undergoes a voluntary or involuntary liquidation proceeding,
its equity holders or unrelated third-party creditors may claim rights to some or all of the assets of such variable interest entity,
thereby hindering our ability to operate our business as well as constrain our growth.
The equity holders, directors and
executive officers of our variable interest entity, as well as our employees who execute other strategic initiatives may have potential
conflicts of interest with our company.
PRC laws provide that
a director and an executive officer owe a fiduciary duty to the company he or she directs or manages. The directors and executive
officers of the variable interest entity, Bodang Liu and Wei Zheng, must act in good faith and in the best interests of the variable
interest entity and must not use their respective positions for personal gain. On the other hand, as a director of our company,
Mr. Liu has a duty of care and loyalty to our company and to our shareholders as a whole under Nevada law. We control our variable
interest entity through contractual arrangements and the business and operations of our variable interest entity are closely integrated
with the business and operations of our subsidiaries. Nonetheless, conflicts of interests for these individuals may arise due to
dual roles both as directors and executive officers of the variable interest entity and as directors or employees of our company.
We cannot assure you
that these individuals will always act in the best interests of our company should any conflicts of interest arise, or that any
conflicts of interest will always be resolved in our favor. We also cannot assure you that these individuals will ensure that the
variable interest entity will not breach the existing contractual arrangements. If we cannot resolve any such conflicts of interest
or any related disputes, we would have to rely on legal proceedings to resolve these disputes and/or take enforcement action under
the contractual arrangements. There is substantial uncertainty as to the outcome of any such legal proceedings. See “Any
failure by our variable interest entity or its equity holders to perform their obligations under the contractual arrangements would
have a material and adverse effect on our business, financial condition and results of operations.”
The contractual arrangements with
our variable interest entity may be subject to scrutiny by the PRC tax authorities. Any adjustment of related party transaction
pricing could lead to additional taxes, and therefore substantially reduce our consolidated net income and the value of your investment.
The tax regime in China
is rapidly evolving and there is significant uncertainty for taxpayers in China as PRC tax laws may be interpreted in significantly
different ways. The PRC tax authorities may assert that we or our subsidiaries or the variable interest entity or their equity
holders owe and/or are required to pay additional taxes on previous or future revenue or income. In particular, under applicable
PRC laws, rules and regulations, arrangements and transactions among related parties, such as the contractual arrangements with
our variable interest entity, may be subject to audit or challenge by the PRC tax authorities. If the PRC tax authorities determine
that any contractual arrangements were not entered into on an arm’s length basis and therefore constitute a favorable transfer
pricing, the PRC tax liabilities of the relevant subsidiaries and/or variable interest entity and/or variable interest entity equity
holders could be increased, which could increase our overall tax liabilities. In addition, the PRC tax authorities may impose late
payment interest. Our net income may be materially reduced if our tax liabilities increase.
Risks Related to Doing Business
in the People’s Republic of China
Changes
in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition
and results of operations and may result in our inability to sustain our growth and expansion strategies.
All of our operations
are conducted in the PRC and all of our revenue is sourced from the PRC. Accordingly, our financial condition and results of operations
are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs
from the economies of most developed countries in many respects, including the extent of government involvement, level of development,
growth rate, control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing
the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment
of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by
the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing
industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources,
controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions
and providing preferential treatment to particular industries or companies.
While the PRC economy
has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors
of the economy. The PRC government has implemented various measures to encourage economic growth and guide the allocation of resources.
Some of these measures may benefit the overall PRC economy, but may also have a negative effect on us. Our financial condition
and results of operation could be materially and adversely affected by government control over capital investments or changes in
tax regulations that are applicable to us. In addition, the PRC government has implemented in the past certain measures, including
interest rate increases, to control the pace of economic growth. These measures may cause decreased economic activity, which in
turn could lead to a reduction in demand for our services and consequently have a material adverse effect on our businesses, financial
condition and results of operations.
There are
uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Most of our operations
are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiaries are subject to laws, rules
and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes.
Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government
began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect
of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment
in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may
not sufficiently cover all aspects of economic activities in China or may be subject to significant degree of interpretation by
PRC regulatory agencies and courts. In particular, because these laws, rules and regulations are relatively new, and because of
the limited number of published decisions and the non-precedential nature of such decisions, and because the laws, rules and regulations
often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws,
rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based
in part on government policies and internal rules, some of which are not published on a timely basis or at all, and which may have
a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence
of the violation.
Any administrative
and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention.
Since PRC administrative and court authorities have significant discretion in interpreting and implementing statutory and contractual
terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection
we enjoy than in more developed legal systems. These uncertainties may impede our ability to enforce the contracts we have entered
into and could materially and adversely affect our business, financial condition and results of operations.
We may be
required to obtain a value-added telecommunication business certificate and be subject to foreign investment restrictions.
PRC
regulations impose sanctions for engaging in Internet information services of a commercial nature without having obtained an Internet
content provider, or ICP, certificate. PRC regulations also impose sanctions for engaging in the operation of online data processing
and transaction processing without having obtained an online data processing and transaction processing, or ODPTP, certificate
(ICP and ODPTP are both sub-sets of value-added telecommunication business certificates). These sanctions include corrective orders
and warnings from the PRC communication administration authority, fines and confiscation of illegal gains and, in the case of significant
infringements, the websites may be ordered to cease operation. Nevertheless, the PRC regulatory authorities’ enforcement
of such regulations in the context of marketplace lending platforms remains unclear. The Interim Measures provide that online lending
information intermediaries must apply for value-added telecommunications business licenses in accordance with the relevant provisions
of telecommunications authorities after filing with a local financial regulator. However, PRC regulatory authorities to date have
not explicitly stipulated whether the operator of a marketplace lending platform (including in the form of a website or mobile
Internet application) is engaging in Internet information services requiring an ICP certificate or an ODPTP certificate. If we
could not obtain such value-added telecommunication certificates pursuant to the relevant regulations, we may not be able to conduct
online lending intermediaries’ services, but it is unclear whether online lending intermediaries would be deemed to be engaged
in a commercial information provider business or online data processing and transaction processing business or whether an ICP certificate
or an ODPTP certificate is required. To the extent that the PRC regulatory authorities require such value-added telecommunication
certificate to be obtained or set forth rules that impose additional requirements, and we do not obtain such certificate, we may
be subject to the sanctions described above. We plan to apply for filing immediately after the filing procedures are clarified
by the relevant authorities, and apply for the corresponding value-added telecommunication business certificates after completing
the filing, provided that the relevant telecommunication authority clarify which sub-set of telecommunication business certificates
need to be obtained by market lending platforms and how to apply for such certificate.
If
we are unable to obtain the telecommunication business certificate in a timely fashion, our business may be materially and adversely
affected.
PRC regulations
regarding acquisitions impose significant regulatory approval and review requirements, which could make it more difficult for us
to pursue growth through acquisitions.
Under the PRC Anti-Monopoly
Law, companies undertaking acquisitions relating to businesses in China must notify MOFCOM, in advance of any transaction where
the parties’ revenues in the China market exceed certain thresholds and the buyer would obtain control of, or decisive influence
over, the target. In addition, on August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets
Supervision and Administration Commission, the State Administration of Taxation, the SAIC, the China Securities Regulatory Commission,
or the CSRC, and the State Administration of Foreign Exchange, or SAFE, jointly adopted the Regulations on Mergers and Acquisitions
of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and was amended
on June 22, 2009. Under the M&A Rules, the approval of MOFCOM must be obtained in circumstances where overseas companies
established or controlled by PRC enterprises or residents acquire domestic companies affiliated with such PRC enterprises or residents.
Applicable PRC laws, rules and regulations also require certain merger and acquisition transactions to be subject to security review.
Our proposed acquisition of control of, or decisive influence over, any company with revenues within China of more than RMB400 million
in the year prior to any proposed acquisition would be subject to MOFCOM merger control review. Certain transactions we may undertake
could be subject to MOFCOM merger review. Complying with the requirements of the relevant regulations to complete such transactions
could be time-consuming, and any required approval processes, including approval from MOFCOM, may delay or inhibit our ability
to complete such transactions, which could affect our ability to expand our business or maintain our market share. In addition,
MOFCOM has not accepted antitrust filings for any transaction involving parties that adopt a variable interest entity structure.
If MOFCOM’s practice remains unchanged, our ability to carry out our investment and acquisition strategy may be materially
and adversely affected and there may be significant uncertainty as to whether transactions that we may undertake would subject
us to fines or other administrative penalties and negative publicity and whether we will be able to complete large acquisitions
in the future in a timely manner or at all.
We may be
treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may therefore be subject
to PRC income tax on our global income.
Under the PRC Enterprise
Income Tax Law and its implementing rules, both of which came into effect on January 1, 2008, enterprises established under
the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC
tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global
income. “De facto management body” refers to a managing body that exercises substantive and overall management and
control over the production and business, personnel, accounting books and assets of an enterprise. The State Administration of
Taxation issued the Notice Regarding the Determination of Chinese-Controlled Offshore-Incorporated Enterprises as PRC Tax Resident
Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific
criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise
is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled
by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of
Taxation’s general position on how the “de facto management body” test should be applied in determining the tax
resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. Currently, we generate no
revenues offshore. However, if we generate revenues offshores in the future and if we were to be considered a PRC resident enterprise,
we would be subject to PRC enterprise income tax at the rate of 25% on our global income. In such case, our profitability and cash
flow may be materially reduced as a result of our global income being taxed under the Enterprise Income Tax Law. We believe that
none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an
enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of
the term “de facto management body.”
Restrictions
on currency exchange may limit our ability to utilize our revenue effectively.
Presently all of our
revenue is denominated in RMB. The RMB is currently convertible under the “current account,” which includes dividends,
trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign
direct investment and loans. Currently, our PRC subsidiary, which is a wholly-foreign owned enterprise, may purchase foreign currency
for settlement of “current account transactions,” including payment of dividends to us, without the approval of SAFE
by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate our
ability to purchase foreign currencies in the future for current account transactions. Since a significant amount of our future
revenue will be denominated in RMB, any existing and future restrictions on currency exchange may limit our ability to utilize
revenue generated in RMB to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders,
including holders of our common stock, or pay principal and interest in foreign currencies to the holders of the notes. Foreign
exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with,
SAFE and other relevant PRC governmental authorities. This could affect our ability to obtain foreign currency through debt or
equity financing for our subsidiaries and the variable interest entities.
Fluctuations
in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the RMB
against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic
conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its
policy of pegging the value of the RMB to the U.S. dollar. Following the removal of the U.S. dollar peg, the RMB appreciated more
than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and
the exchange rate between the RMB and the U.S. dollar remained within a narrow band. Since June 2010, the PRC government has allowed
the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. In April 2012,
the PRC government announced that it would allow more RMB exchange rate fluctuation. On August 11, 2015, the PRC government
set the central parity rate for the RMB nearly 2% lower than that of the previous day and announced that it will begin taking into
account previous day’s trading in setting the central parity rate. It is difficult to predict how market forces or PRC or
U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. There remains significant
international pressure on the PRC government to adopt a more flexible currency policy, which could result in greater fluctuation
of the RMB against the U.S. dollar. Substantially all of our revenues and costs are denominated in RMB, and a significant portion
of our financial assets and debt are also denominated in RMB. We are a holding company and we rely on dividends paid by our operating
subsidiaries in China for our cash needs. Any significant revaluation of the RMB may materially and adversely affect our liquidity
and cash flows. To the extent that we need to convert U.S. dollars into RMB for our operations, appreciation of the RMB against
the U.S. dollar would have an adverse effect on the RMB amount we would receive. Conversely, if we decide to convert our RMB into
U.S. dollars for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S.
dollar amount we would receive.
We may be
adversely affected by the complexity, uncertainties and changes in PRC regulation of internet-related businesses and companies,
and any lack of requisite approvals, licenses or permits applicable to our business may have a material adverse effect on our business
and results of operations.
The
PRC government extensively regulates the internet industry, including foreign ownership of, and the licensing and permit requirements
pertaining to, companies in the internet industry. These internet-related laws and regulations are relatively new and evolving,
and their interpretation and enforcement involve significant uncertainties. As a result, in certain circumstances it may be difficult
to determine what actions or omissions may be deemed to be in violation of applicable laws and regulations.
We
only have contractual control over our website. We do not directly own the website due to the restriction of foreign investment
in businesses providing value-added telecommunication services in China, including internet information provision services. This
may significantly disrupt our business, subject us to sanctions, compromise enforceability of related contractual arrangements,
or have other harmful effects on us.
The
evolving PRC regulatory system for the internet industry may lead to the establishment of new regulatory agencies. For example,
in May 2011, the State Council announced the establishment of a new department, the State Internet Information Office (with the
involvement of the State Council Information Office, the MITT, and the Ministry of Public Security). The primary role of this new
agency is to facilitate the policy-making and legislative development in this field, to direct and coordinate with the relevant
departments in connection with online content administration and to deal with cross-ministry regulatory matters in relation to
the internet industry.
The
interpretation and application of existing PRC laws, regulations and policies and possible new laws, regulations or policies relating
to the internet industry have created substantial uncertainties regarding the legality of existing and future foreign investments
in, and the businesses and activities of, internet businesses in China, including our business. We cannot assure you that we have
obtained all the permits or licenses required for conducting our business in China or will be able to maintain our existing licenses
or obtain new ones. If the PRC government considers that we were operating without the proper approvals, licenses or permits or
promulgates new laws and regulations that require additional approvals or licenses or imposes additional restrictions on the operation
of any part of our business, it has the power, among other things, to levy fines, confiscate our income, revoke our business licenses,
and require us to discontinue our relevant business or impose restrictions on the affected portion of our business. Any of these
actions by the PRC government may have a material adverse effect on our business and results of operations.
We rely
on dividends and other distributions on equity paid by our PRC subsidiary to fund any cash and financing requirements we may have,
and any limitation on the ability of our PRC subsidiary to make payments to us could have a material adverse effect on our ability
to conduct our business.
We
are a holding company, and we rely on dividends and other distributions on equity paid by our PRC subsidiary for our cash and financing
requirements, including the funds necessary to pay dividends and other cash distributions to our shareholders and service any debt
we may incur. If our PRC subsidiaries incur debt on their own behalf in the future, the instruments governing the debt may restrict
their ability to pay dividends or make other distributions to us. In addition, the PRC tax authorities may require Benefactum Shenzhen
to adjust its taxable income under the contractual arrangements it currently has in place with our consolidated variable interest
entity in a manner that would materially and adversely affect its ability to pay dividends and other distributions to us. See “—Risks
Related to Our Corporate Structure—Contractual arrangements in relation to our consolidated variable interest entity may
be subject to scrutiny by the PRC tax authorities and they may determine that we or our PRC consolidated variable interest entity
owe additional taxes, which could negatively affect our financial condition and the value of your investment.”
Under
PRC laws and regulations, our PRC subsidiary, as a wholly foreign-owned enterprise in China, may pay dividends only out of their
respective accumulated after-tax profits as determined in accordance with PRC accounting standards and regulations. In addition,
a wholly foreign-owned enterprise is required to set aside at least 10% of its accumulated after-tax profits each year, if any,
to fund certain statutory reserve funds, until the aggregate amount of such funds reaches 50% of its registered capital. At its
discretion, a wholly foreign-owned enterprise may allocate a portion of its after-tax profits based on PRC accounting standards
to staff welfare and bonus funds. These reserve funds and staff welfare and bonus funds are not distributable as cash dividends.
Any
limitation on the ability of our PRC subsidiary to pay dividends or make other distributions to us could materially and adversely
limit our ability to grow, make investments or acquisitions that could be beneficial to our business, pay dividends, or otherwise
fund and conduct our business. See also “—If we are classified as a PRC resident enterprise for PRC income tax purposes,
such classification could result in unfavorable tax consequences to us and our non-PRC shareholders or common stock holders.”
Governmental
control of currency conversion may limit our ability to utilize our net revenues effectively and affect the value of your investment.
The
PRC government imposes controls on the convertibility of the RMB into foreign currencies and, in certain cases, the remittance
of currency out of China. We receive substantially all of our net revenues in RMB. Under our current corporate structure, our company
in the United States relies on dividend payments from our PRC subsidiary to fund any cash and financing requirements we may have.
Under existing PRC foreign exchange regulations, payments of current account items, such as profit distributions and trade and
service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying
with certain procedural requirements. Therefore, our PRC subsidiary is able to pay dividends in foreign currencies to us without
prior approval from SAFE, subject to the condition that the remittance of such dividends outside of the PRC complies with certain
procedures under PRC foreign exchange regulation, such as the overseas investment registrations by the beneficial owners of our
company who are PRC residents. But approval from or registration with appropriate government authorities is required where RMB
is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated
in foreign currencies. The PRC government may also at its discretion restrict access in the future to foreign currencies for current
account transactions. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy
our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including holders
of our common stock.
Failure
to make adequate contributions to various employee benefit plans as required by PRC regulations may subject us to penalties.
We
are required under PRC laws and regulations to participate in various government sponsored employee benefit plans, including certain
social insurance, housing funds and other welfare-oriented payment obligations, and contribute to the plans in amounts equal to
certain percentages of salaries, including bonuses and allowances, of our employees up to a maximum amount specified by the local
government from time to time at locations where we operate our businesses. The requirement of employee benefit plans has not been
implemented consistently by the local governments in China given the different levels of economic development in different locations.
Although we have made contributions to some employee benefit plans, such as social security plans, we may have not made adequate
employee benefit payments required by PRC regulations. We may be required to make up the contributions for these plans as well
as pay late fees and fines. If we are subject to late fees or fines in relation to the underpaid employee benefits, our financial
condition and results of operations may be adversely affected.
The M&A
Rules and certain other PRC regulations establish complex procedures for some acquisitions of Chinese companies by foreign investors,
which could make it more difficult for us to pursue growth through acquisitions in China.
The
M&A Rules and some other regulations and rules concerning mergers and acquisitions established additional procedures and requirements
that could make merger and acquisition activities by foreign investors more time consuming and complex, including requirements
in some instances that the MOC be notified in advance of any change-of-control transaction in which a foreign investor takes control
of a PRC domestic enterprise. Moreover, the Anti-Monopoly Law requires that the MOC shall be notified in advance of any concentration
of undertaking if certain thresholds are triggered. In addition, the security review rules issued by the MOC that became effective
in September 2011 specify that mergers and acquisitions by foreign investors that raise “national defense and security”
concerns and mergers and acquisitions through which foreign investors may acquire de facto control over domestic enterprises that
raise “national security” concerns are subject to strict review by the MOC, and the rules prohibit any activities attempting
to bypass a security review, including by structuring the transaction through a proxy or contractual control arrangement. In the
future, we may grow our business by acquiring complementary businesses. Complying with the requirements of the above-mentioned
regulations and other relevant rules to complete such transactions could be time consuming, and any required approval processes,
including obtaining approval from the MOC or its local counterparts may delay or inhibit our ability to complete such transactions,
which could affect our ability to expand our business or maintain our market share.
PRC regulations
relating to offshore investment activities by PRC residents may limit our PRC subsidiary’ ability to increase their registered
capital or distribute profits to us or otherwise expose us or our PRC resident beneficial owners to liability and penalties under
PRC law.
SAFE
promulgated the Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment
through Special Purpose Vehicles, or SAFE Circular 37, in July 2014 that requires PRC residents or entities to register with SAFE
or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas
investment or financing. In addition, such PRC residents or entities must update their SAFE registrations when the offshore special
purpose vehicle undergoes material events relating to any change of basic information (including change of such PRC citizens or
residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, or mergers
or divisions. SAFE Circular 37 is issued to replace the Notice on Relevant Issues Concerning Foreign Exchange Administration for
PRC Residents Engaging in Financing and Roundtrip Investments via Overseas Special Purpose Vehicles, or SAFE Circular 75. SAFE
promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment
in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities
to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore
entity established for the purpose of overseas investment or financing.
If
our shareholders who are PRC residents or entities do not complete their registration as required, our PRC subsidiary may be prohibited
from distributing their profits and proceeds from any reduction in capital, share transfer or liquidation to us, and we may be
restricted in our ability to contribute additional capital to our PRC subsidiary. Moreover, failure to comply with the SAFE registration
described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
However,
we may not be informed of the identities of all the PRC residents or entities holding direct or indirect interest in our company,
nor can we compel our beneficial owners to comply with SAFE registration requirements. As a result, we cannot assure you that all
of our shareholders or beneficial owners who are PRC residents or entities have complied with, and will in the future make or obtain
any applicable registrations or approvals required by, SAFE regulations. Failure by such shareholders or beneficial owners to comply
with SAFE regulations, or failure by us to amend the foreign exchange registrations of our PRC subsidiary, could subject us to
fines or legal sanctions, restrict our overseas or cross-border investment activities, limit our PRC subsidiary’ ability
to make distributions or pay dividends to us or affect our ownership structure, which could adversely affect our business and prospects.
Enhanced
scrutiny over acquisition transactions by the PRC tax authorities may have a negative impact on potential acquisitions we may pursue
in the future.
The
PRC tax authorities have enhanced their scrutiny over the direct or indirect transfer of certain taxable assets, including, in
particular, equity interests in a PRC resident enterprise, by a non-resident enterprise by promulgating and implementing SAT Circular
59 and Circular 698, which became effective in January 2008, and a Circular 7 in replacement of some of the existing rules in Circular
698, which became effective in February 2015.
Under
Circular 698, where a non-resident enterprise conducts an “indirect transfer” by transferring the equity interests
of a PRC “resident enterprise” indirectly by disposing of the equity interests of an overseas holding company, the
non-resident enterprise, being the transferor, may be subject to PRC enterprise income tax, if the indirect transfer is considered
to be an abusive use of company structure without reasonable commercial purposes. As a result, gains derived from such indirect
transfer may be subject to PRC tax at a rate of up to 10%. Circular 698 also provides that, where a non-PRC resident enterprise
transfers its equity interests in a PRC resident enterprise to its related parties at a price lower than the fair market value,
the relevant tax authority has the power to make a reasonable adjustment to the taxable income of the transaction.
In
February 2015, the SAT issued Circular 7 to replace the rules relating to indirect transfers in Circular 698. Circular 7 has introduced
a new tax regime that is significantly different from that under Circular 698. Circular 7 extends its tax jurisdiction to not only
indirect transfers set forth under Circular 698 but also transactions involving transfer of other taxable assets, through the offshore
transfer of a foreign intermediate holding company. In addition, Circular 7 provides clearer criteria than Circular 698 on how
to assess reasonable commercial purposes and has introduced safe harbors for internal group restructurings and the purchase and
sale of equity through a public securities market. Circular 7 also brings challenges to both the foreign transferor and transferee
(or other person who is obligated to pay for the transfer) of the taxable assets. Where a non-resident enterprise conducts
an “indirect transfer” by transferring the taxable assets indirectly by disposing of the equity interests of an overseas
holding company, the non-resident enterprise being the transferor, or the transferee, or the PRC entity which directly owned the
taxable assets may report to the relevant tax authority such indirect transfer. Using a “substance over form” principle,
the PRC tax authority may disregard the existence of the overseas holding company if it lacks a reasonable commercial purpose and
was established for the purpose of reducing, avoiding or deferring PRC tax. As a result, gains derived from such indirect transfer
may be subject to PRC enterprise income tax, and the transferee or other person who is obligated to pay for the transfer is obligated
to withhold the applicable taxes, currently at a rate of 10% for the transfer of equity interests in a PRC resident enterprise.
We
face uncertainties on the reporting and consequences on future private equity financing transactions, share exchange or other transactions
involving the transfer of shares in our company by investors that are non-PRC resident enterprises. The PRC tax authorities
may pursue such non-resident enterprises with respect to a filing or the transferees with respect to withholding obligation, and
request our PRC subsidiaries to assist in the filing. As a result, we and non-resident enterprises in such transactions may become
at risk of being subject to filing obligations or being taxed, under Circular 59 or Circular 698 and Circular 7, and may be required
to expend valuable resources to comply with Circular 59, Circular 698 and Circular 7 or to establish that we and our non-resident
enterprises should not be taxed under these circulars, which may have a material adverse effect on our financial condition and
results of operations.
The
PRC tax authorities have the discretion under SAT Circular 59, Circular 698 and Circular 7 to make adjustments to the taxable capital
gains based on the difference between the fair value of the taxable assets transferred and the cost of investment. We may pursue
acquisitions in the future that may involve complex corporate structures. If we are considered a non-resident enterprise under
the PRC Enterprise Income Tax Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under
SAT Circular 59 or Circular 698 and Circular 7, our income tax costs associated with such potential acquisitions will be increased,
which may have an adverse effect on our financial condition and results of operations.
PRC regulations
regarding peer-to-peer lending impose significant regulatory restrictions on business scope, lending amount, and registration requirements,
which may materially and adversely affect our business, financial condition and results of operations and may result in our inability
to sustain our growth. In addition, the implementing regulations have yet to be announced and there is substantial uncertainty
over it. The costs and burden of compliance with such regulations may be sufficiently inhibitory to negatively affect our profitability
and growth.
Under the Interim Measures,
peer-to-peer platforms will not be able to accept deposits from the public, nor create asset pools, or provide any form of guarantee
for lenders. In addition, according to the Interim Measures, an individual may borrow a maximum of RMB 200,000 from a single peer-to-peer
platform and a maximum of RMB 1 million from all peer-to-peer platforms. A company can borrow no more than RMB 1 million from a
single peer-to-peer platform, and no more than RMB 5 million from all peer-to-peer platforms. The Interim Measures require a peer-to-peer
lending platform to register with the local financial supervisory department, and to apply for related licenses for providing telecommunication
services.
Based on the review
of Beijing Finance Bureau, we are required to rectify our incompliance with certain requirements of the Interim Measures, including
that a majority of the loans facilitated through our platform have exceeded the maxim amounts allowed under the Interim Measures.
In order to meet the requirements of the Interim Measures as well as other applicable rules and regulations, the Company has
taken a series of measures, including: (i) execution of a fund depository agreement with Jiangxi Bank as custodian of investor
funds, (ii) strict qualification review of borrowers, investors and financing projects, (ii) strengthening protection of lenders
and borrowers; (iii) full information disclosure; (iv) expanding and restructuring loan product offerings and (v) adjustment of
loan balances. However, if we fail to comply with the requirements within the transition period, we may not be able to obtain the
value-added telecommunication business licenses to continue to operate our current business.
Although the Interim
Measures took effect immediately on August 17, 2016, peer-to-peer platforms are given a year to adjust their practices to comply
with them. We have been advised by our Chinese counsel that regulations and rules regarding registration as an online lending intermediary
information agency, apart from the value-added telecommunication business licenses, remain unclear at this moment. There is significant
uncertainty as to whether practices that we may undertake would subject us to fines or other administrative penalties.
The future development and implementation
of anti-money laundering laws in China may increase our obligation to supervise and report transactions with our customers, thereby
increasing our compliance efforts and costs and exposing us to criminal measures or administrative sanctions for non-compliance.
The Interim Measures
provide that an internet lending intermediary information agency is obligated to “fulfill its anti-money laundering and anti-terrorist
financing obligations according to relevant laws, such as examining client identification, reporting suspicious transactions and
maintaining client identity documents and transaction records”. PRC laws and regulations relating to anti-money laundering
have evolved significantly in recent years and may continue to develop. In the future, we may be required to supervise and report
transactions with our customers for anti-money laundering or other purposes, which may increase our compliance efforts and costs
and may expose us to potential criminal measures or administrative sanctions if we fail to establish and implement the required
procedures or otherwise fail to comply with the relevant laws and regulations.
Increases in labor costs in the PRC
may adversely affect our business and results of operations.
The economy in China
has experienced increases in inflation and labor costs in recent years. As a result, average wages in the PRC are expected to continue
to increase. In addition, we are required by PRC laws and regulations to pay various statutory employee benefits, including pension,
housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government
agencies for the benefit of our employees. The relevant government agencies may examine whether an employer has made adequate payments
to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees,
fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase.
Unless we are able to control our labor costs or pass on these increased labor costs to our users by increasing the fees of our
services, our financial condition and results of operations may be adversely affected.
Risks Relating to Investment in Our
Securities
An active public market for our common
stock may not develop or be sustained, which would adversely affect the ability of our investors to sell their securities in the
public market.
We cannot predict the
extent to which an active public market for our common stock will develop or be sustained.
Shares eligible for future sale may
adversely affect the market price of our common stock, as the future sale of a substantial amount of outstanding stock in the public
marketplace could reduce the price of our common stock.
Holders of a significant
number of our shares and/or their designees may be eligible to sell our shares of common stock by means of ordinary brokerage transactions
in the open market pursuant to Rule 144, promulgated under the Securities Act (“
Rule 144
”), subject to certain
limitations. In general, pursuant to Rule 144, a non-affiliate stockholder (or stockholders whose shares are aggregated) who has
satisfied a six-month holding period, and provided that there is current public information available, may sell all of its securities.
Rule 144 also permits the sale of securities, without any limitations, by a non-affiliate that has satisfied a one-year holding
period. Any substantial sale of common stock pursuant to any resale prospectus or Rule 144 may have an adverse effect on the market
price of our common stock by creating an excessive supply.
Compliance with changing regulation
of corporate governance and public disclosure will result in additional expenses.
Changing laws, regulations
and standards relating to corporate governance and public disclosure, including SOX and related SEC regulations, have created uncertainty
for public companies and significantly increased the costs and risks associated with accessing the public markets and public reporting.
Our management team will need to invest significant management time and financial resources to comply with both existing and evolving
standards for public companies, which will lead to increased general and administrative expenses and a diversion of management
time and attention from revenue generating activities to compliance activities.