Item
1. Business.
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 solution for under-served SME and individual borrowers
who need access to financing. Since the launch of our marketplace in December 2013 through December 31, 2017 we have facilitated
over $2.87 billion in loans. As of December 31, 2017, we had 367,893 registered investors and 24 institutional partners.
We
generate revenue from our services that facilitate matching lenders, who we refer to as investors, with individual and SME borrowers.
We typically charge borrowers a loan origination service fee between 1.5% and 3% of the loan amount, depending on the duration
of the loan, for each effected loan facilitated by us. Additionally, we charge a separate fee from borrowers for each loan repayment
facilitated by us, which is based on an agreed upon percentage approximately 0.3% on the borrowing times the duration of the loan.
In
addition, in June 2017 we engaged a qualified non-banking financial institution to provide entrusted loans to SMEs. Through this
process we, as the trustor, provide funds to a trustee, who enters into a three-party loan agreement with us and the borrower.
The loans are typically short-term and are guaranteed by a third-party financing guarantor. This is one step forward towards our
long-term strategy of building a financial ecosystem aimed at providing full service to our SME customers. We intend to expand
our business in both online and offline sectors to meet the demands of various customers.
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 to operate our online financial platform in China through Benefactum Beijing, which
is wholly-owned by two Chinese shareholders, but is contractually controlled and managed through our wholly-owned WFOE.
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.
Our
Strategy
Our
mission is to provide SMEs and individual borrowers with easy and effective access to affordable financing and provide investors
with a safe and acceptable investment return. To achieve this goal, we have implemented the following strategies, each of which
we intend to continue to expand:
|
●
|
Expand
the base of borrowers on our platform by entering into cooperation agreements with guarantor
institutions, pawn shops, micro credit companies and asset management companies
|
We
will continue to expand our base of SMEs and individual borrowers by entering into cooperation agreements with various partners,
including without limitation, guarantor institutions, pawn shops, micro-credit companies and asset management companies, who can
provide us with recommendations for new borrowers. Currently, our cooperative partners are located in Shandong, Inner Mongolia
and other areas in China. Since the inception of our online platform, approximately 88.5% of the loans facilitated through our
platform are for SME borrowers. We will continue expanding the number, type and areas of cooperative partners, and seek cooperation
with internet companies, e-commerce companies, telecommunication companies and third-party payment platforms which are located
throughout China.
|
●
|
Develop
new consumer financing products and penetrate niche markets
|
We
are promoting new personal consumer financing products to individual borrowers, such as automobile financing and consumer financing.
In addition, we will continue to design and develop diversified financing products to satisfy market demand.
Our
platform also allows investors to diversify their wealth management strategies by providing easy access to various lending opportunities
that can be designed with flexible terms.
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●
|
Expand
our base of investors to include mutual fund and other institutional investors
|
Currently,
all of our investors are individuals. We are introducing mutual fund or other institutional investors to increase our overall
number and type of investors. In addition, we have implemented plans to attract more individual and institutional investors by
cooperating with institutions so that the cost to the borrowers would be reduced if there are more funds available for loans.
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●
|
Further
enhance our risk management capabilities
|
As
loan volume in our marketplace grows and consumer financing products expand, we have implemented protocols to enhance our risk
management capabilities. As for individual borrowers, we have improved the risk management model for individual credit control
so that risk management testing will be more effective and reasonable. For SME borrowers, besides the due diligence process that
our cooperative partners undertake, we have enhanced the onsite due diligence process and appointed a risk management team.
In
addition, we have enhanced our cooperation with other third-party credit investigators to obtain more accurate information about
the credit history of the borrowers so we can make reasonable and accurate assessments of borrower applications to reduce and
avoid bad debts.
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●
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Continue
to invest in our technology platform
|
We
have made significant investments in our proprietary technologies in the areas of data collection and processing algorithms to
increase the precision, speed and scale at which we match the demand and supply of loans. Enhanced data analytics improves our
conversion of online leads into successful borrowers and investors. With the further application of big data, we can acquire members
of our target borrower and investor groups in a more focused and cost-efficient way. Furthermore, we will continue to leverage
technology to further automate our processes and improve the safety and efficiency of matching the loans with investors. At the
same time, we will also benefit from the operating leverage associated with our scalable platform as our loan volume increases.
We believe these investments will facilitate the long-term growth of our marketplace.
|
●
|
Increase
our merger and acquisition activities to enhance our competitive advantage in the financing
technology ecosystem and to improve the efficiency of our products and services
|
We
will expand strategic relationships with internet financing companies, internet companies, technology companies and financing
companies, by mergers and acquisitions to enhance our competitive advantage in the financing technology ecosystem and to improve
the efficiency of our products and services
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●
|
Various
Product and Service Offerings
|
As
a long-term strategy, we are planning to build a financial ecosystem for SME customers that are under-served in China’s
current financial system. We will seek to expand our intermediary and direct lending services, both online and offline, to meet
the demands of various customers. As part of this initiative, we announced the launch of entrusted loan services on June 30, 2017,
which leverages our improving financial condition and years of experience in providing financing solutions to our customers in
China. We believe the new service allows us not only to generate new revenues but also to expand our scope beyond the existing
service of being an intermediary between investors and borrowers through the online platform. We will continue to devise customized
product and service offerings to meet customer demands and expand the scale and scope of our operations.
Our
Business
We
operate our business through 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 calendar years 2017 and 2016, we facilitated over RMB4.12 billion (approximately $609.22 million) and RMB1.28
billion (approximately $188.14 million) in loans through our mobile apps, respectively, representing 46.58% and 22.54 % of the
total amount of loans facilitated through our marketplace in the respective periods.
Our
platform is also accessible to those who guarantee the loans for our borrowers (“third-party cooperative partners”).
Apart from acting as guarantors, 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 loan origination service fees and repayment management fees.
We
had 24 third-party cooperative partners as of December 31, 2017, consisting of five pawn shops, four guaranty companies, a micro-loan
company, an asset management companies, three information technology companies, three financial consulting companies, four technology
companies, and three financial services companies, which frequently serve as guarantors of loans on our platform.
The
following diagram illustrates our current business model:
Our
Online Marketplace
Our
platform embraces significant opportunities presented by a financial system that leaves many creditworthy individuals and SMEs
underserved. We match qualified borrowers who have completed profiles that are available on the platform with investors. Once
an investor decides to proceed with a specific loan, and the borrower accepts the terms of the loan, our system automatically
generates electronic loan contracts for execution. When 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 investors on our platform. The loans we facilitate are usually short-term loans
that range from one month to twelve months with interest rates ranging from 4.5% to 12%.
Online
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, takes no longer than 19 days but,
more typically, only three to five days. At any given time, a borrower may have only one outstanding loan on our platform, and
only after the outstanding loan is paid off, can the borrower enter into a new loan. At such time the borrower submits a new application,
we undertake a new review of the borrower’s loan profile prior to making any determination as to whether to facilitate a
new loan transaction. This restriction on lending prevents a borrower from borrowing a new loan to pay off the old loan resulting
in an increase in the borrower’s total debt. The platform monitors and reviews borrowers, therefore preventing a “roll
over” of loans.
We
post borrower profiles and their loan information on our online platform, including loan amount, duration, interest rate or rate
range they are willing to pay, borrower’s basic information, its total assets and credit score etc. Investors can browse
the loan information on our platform and select loan products appropriate for them to invest in, based on their own availability
of funds and their risk preferences. Set forth 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 open an account with us and complete
an online loan application form.
Our
risk control department determines 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, the application is forwarded to our third-party cooperative partners
who guarantee the borrower’s loan after reviewing the borrower’s 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 the borrower’s
debt.
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 reviews all 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. After verifying the authenticity of the borrower’s
submitted documents, we will assign a credit rating to the borrower based on its credit history, business activities being undertaken,
assets and other criteria.
We
have established a risk management model for SME borrowers. We use over 120 factors to evaluate SME borrowers, with a weighted
total score of 400 and a minimum score of 60. Our risk assessment matrix can be classified into the following categories: enterprise
quality assessment, operation and management assessment, repayment funding source assessment, and risk management assessment,
and we use these four categories to evaluate SME borrowers. At the same time, we use a third-party system and publicly available
credit reporting system to make necessary inquiries on SME borrowers, thereby establishing a risk management model suitable for
China’s SME borrowers. Based on a borrower’s credit history, business activities, assets and other criteria, we classify
the borrower’s credit rating into the following categories according to its weighted average score: AAA (> 90), AA+ (80-90),
AA (70-80), AA- (60-70), and A (< 60). In the order of AAA to A, the expected quality of borrowers decreases, and the expected
default rates ascends, even though there have been no defaults of borrowers since the inception of the platform. Explanations
of each credit rating are as follows:
AAA: The
SME borrower operates its business normally without the presence of any operational issues; it has abundant repayment funding
sources, good financial standing, and no bad credit records. Borrowers with credit rating of AAA are expected to have a default
rate of approximately 0%.
AA+: The
SME borrower operates its business normally without the presence of any operational issues; it has multiple repayment funding
sources, good financial standing, and no bad credit records or resolved bad records only.
AA: The
SME borrower operates its business normally; it has multiple repayment funding sources, moderate to good financial standing, and
resolved bad credit records or minor bad credit records, for which reasonable explanations are required by the Company.
AA-: The
SME borrower operates its business normally; it has some repayment funding sources, moderate financial standing, and resolved
bad credit records or minor bad credit records, for which reasonable explanations are required by the Company. For these borrowers,
the Company facilitates loans under the condition that the borrower meets stricter collateral requirements asked by the guarantors.
A: Any
SME borrowers that fail to meet the qualifications mentioned in AA- and above are unqualified to receive loans on our platform.
The
following table sets forth the outstanding loan amounts for SME borrowers by credit rating at end of each period as indicated:
(in US$ millions)
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|
December 31,
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December 31,
|
|
|
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December 31,
|
|
|
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Credit Rating
|
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2017
|
|
|
% Total
|
|
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2016
|
|
|
% Total
|
|
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2015
|
|
|
%Total
|
|
AAA
|
|
$
|
—
|
|
|
|
—
|
|
|
$
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10.1
|
|
|
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4.7
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%
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|
$
|
3.2
|
|
|
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2.1
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%
|
AA+
|
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15.4
|
|
|
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3.6
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%
|
|
|
24.4
|
|
|
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11.3
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%
|
|
|
12.7
|
|
|
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8.2
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%
|
AA
|
|
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415.1
|
|
|
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96.3
|
%
|
|
|
170.5
|
|
|
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79.2
|
%
|
|
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132.6
|
|
|
|
85.3
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%
|
AA-
|
|
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0.8
|
|
|
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0.2
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%
|
|
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10.3
|
|
|
|
4.8
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%
|
|
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6.8
|
|
|
|
4.4
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%
|
A
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
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Total
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$
|
431.2
|
|
|
|
100
|
%
|
|
$
|
215.3
|
|
|
|
100
|
%
|
|
$
|
155.4
|
|
|
|
100
|
%
|
As percentage of total loans outstanding
|
|
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98.8
|
%
|
|
|
|
|
|
|
87.5
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%
|
|
|
|
|
|
|
83.5
|
%
|
|
|
|
|
We
are also working on establishing a risk management model for individual borrowers. The model for individual borrowers will have
over 440 factors, with a weighted total score of 1,085 and a minimum score of 550. The risk assessment matrix can be classified
into the following six controlling categories: borrower’s basic information, existing assets, repayment ability, credit
status, indebtedness status and behavioral analysis. At the same time, we obtain from the third-party the borrower’s relevant
social activities, telephonic records, creditworthiness, indebtedness status, and these four factors form an all-dimensional holistic
assessment mechanism, thereby establishing an objective and realistic risk management model for individual borrowers. Once the
model is completely established, we will rely on this model for risk management of individual borrowers.
We
have stringent requirements for the collateral in order to protect the investors’ interests. Generally, we only accept collateral
that is highly liquid and adequate to repay the loan amount. Borrowers 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. The collateral provided by borrowers is provided only to third-party guarantors, not to the investors.
Although
we typically do not accept personal property as collateral, we may do so under exceptional circumstances when the personal property
will be pledged and 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 categorize the borrower’s credit facility into one or more of the following loan products and
post it on our platform. We 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.
Product
|
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Target
Investors
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Term
of
Loan
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Expected
Return
|
|
Minimum
investment
amount
(RMB)
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|
Maximum
investment
amount
(RMB)
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|
Fund-raising
period
|
|
Repayment
of
Loan
(for borrowers)
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|
Assignability
(Yes/No)
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|
|
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|
|
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|
|
|
|
|
|
|
|
|
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Xin Shou Zhuan Qu
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|
For investors who have made no investments in
anyproducts on our platform
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30 days
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Generally 8.5%
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|
100
|
|
10,000
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No more than 19 days
|
|
Repay capital with interest when the loan is
due
|
|
No
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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Cai Fu Hui
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For all registered platform users
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1 – 24 months
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4.5% - 12%
|
|
100
|
|
—
|
|
No more than 19 days
|
|
Repay capital with interest when the loan is
due
|
|
Yes, but only after holding this product for
at least 30 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Zun Xiang
|
|
Premium customers and private business customers
|
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6 - 12 months
|
|
11% - 12%
|
|
100,000
|
|
—
|
|
No more than 19 days
|
|
Repay capital with interest when the loan is
due
|
|
Yes, but only after holding this product for
at least 30 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hui Ji Hua
|
|
For all registered platform users
|
|
7 days – 12 months
|
|
4.5% - 11%
|
|
1,000
|
|
—
|
|
No more than 19 days
|
|
Repay capital with interest when the loan is
due
|
|
Yes, but only after holding this product for
at least 30 days
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
You Xuan Zhai Quan
|
|
For all registered platform users
|
|
30 days – 12 months
|
|
6.5% - 11%
|
|
10,000
|
|
—
|
|
No more than 19 days
|
|
Repay capital with interest when the loan is
due
|
|
Yes, but only after holding this product for
at least 30 days
|
Zhai
Quan Zhuan Rang*
|
|
For
all registered platform users
|
|
Depending
on the investment products
|
|
N/A
|
|
100
|
|
—
|
|
N/A
|
|
Repay
capital with interest when the loan is due
|
|
Yes,
but only after holding this product for at least 30 days and there will be a 0.5% assigning fee
|
Hui Xiao Fei
|
|
For all registered platform users
|
|
12 months
|
|
N/A
|
|
100
|
|
—
|
|
No more than 19 days
|
|
12 equal monthly payments
|
|
Yes
|
*
Zhai Quan 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. The service was
launched in October 2015. For the years ended December 31, 2017 and 2016, service revenues from Zhai Quan Zhuan Rang product amounted
to $158,227 and $55,342, respectively. Revenue is recognized when the service is rendered and service fee is collected from transferor
upon the completion of the transfer, which is classified under Revenues on the Income Statement, the same as loan origination
service fee collected for other loan products.
Once
we successfully match investors and borrowers through our online platform, we provide following services during the loan origination
process:
a)
Assisting in registering of liens or collaterals with relevant government agencies;
b)
Verifying accuracy of documents and loan information and assisting in loan offering transactions. There are often times multiple
investors involved in a single loan offering;
c)
Facilitating communications with borrowers and guarantors through various means to ensure smooth closings of transactions; and
d)
Coordinating with third-party online payment depository institutions to transfer funds upon closing.
Step
4: Funding
Since
the inception of our online platform in December 2013 through July 2017, we had 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.
Individual borrowers were 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 was deposited in their ChinaPnR account. For SME borrowers, they paid RMB 10 per deposit.
When borrowers withdrew 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 was repaid to
ChinaPnR, ChinaPnR would disburse the loan and interest back to the investors, who were not charged for the service provided by
ChinaPnR.
However,
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. In compliance with the regulatory
requirement, we engaged Jiangxi Bank, a qualified banking financial institution, in March 2017 as our funding depository service
provider. Upon successful system transition from China PnR to Jiangxi Bank in July 2017, Jiangxi Bank started to assist in the
disbursement and repayment of loans. Both the investor and the borrower open accounts with Jiangxi Bank and authorize Jiangxi
Bank to manage their accounts. The investor funds the loan amount in his/her account with Jiangxi Bank, which disburses loan amount
to the borrower net of our service fees, which is remitted to us.
Currently,
investors are not charged for deposits made to their accounts in Jiangxi Bank. However, borrowers are charged a processing fee
by Jiangxi Bank in the amount of 0.10% (with a minimum of RMB2) of the loan amount when the funds are deposited into the borrower’s
Jiangxi Bank account. When borrowers and investors withdraw money from their Jiangxi Bank accounts, they pay a processing fee
of RMB1 per transaction.
Our
dedicated team closely monitors the whole process and solves any issues promptly to ensure closing of loan transactions are handled
in a timely and accurate manner. Once loans are closed and funds are transferred, we consider our loan origination service being
rendered. We then recognize revenue from fees collected from loan origination services. The fees are simultaneously deducted from
loan proceeds upon transfer of funds from lenders and remitted to our account on the same day. In most cases, the fees will be
in our account on the same day or next business day but occasionally may take up to three business days due to bank or internal
processing delay. The fees are not refundable. We retain borrowers’ loan records in our system as a part of their credit
profile and for reference in their future financing applications.
Step
5: Post-Funding Supervisory
After
the debt financing is provided to the borrower, the guarantor monitors the borrower’s performance and provides the platform
with the feedback on the borrower’s credit condition, contract performance and debt repayment capabilities. The guarantor
initially monitors and examines the borrower’s performance within one month after the loan is provided to the borrower.
For longer-term loans, the guarantor conducts additional rounds of examination every two months after the first round. For every
round of examinations, the guarantors examine borrowers’ performance from multiple aspects, including reviewing their most
recent credit histories, monthly cash flows, operational activities, debt repayment capabilities, and occurrence of any contract
breaches. If no material changes are found, a Post-Funding Supervisory Report is provided to the company within five business
days after the examination. Examinations are conducted for two primary reasons. First, we create a separate credit file for each
borrower on our platform. The Post-Funding Supervisory Reports allow us to update the borrower profiles in a timely manner with
additional information and recent business developments. Post-Funding Supervisory Reports ensure the completeness of the borrower
profiles. Moreover, additional rounds of examinations give us timely access to the borrower’s financial and operational
issues that could potentially result in credit events. In this case, the additional examinations enable the Company to recognize
any risks earlier and take actions to avoid losses more promptly than we would have been without the examinations. As noted previously,
after the initial examination, the guarantor conducts additional rounds of examination every two months. The two-month period
is a minimum requirement that we set and is determined based upon our risk management experience and estimation of the average
cash cycle among our borrowers. In practice, we may recommend our guarantors, or the guarantors themselves may choose, to conduct
examinations more frequently as needed to better protect their interests. For example, if the default rate of a particular industry
or a geographical area surges during a period of time, we would recommend the guarantors to conduct more frequent and detailed
examinations.
Since
the inception of the platform there have been no credit events giving rise to the possibility of a borrower default. However,
we expect that if a guarantor recognizes a credit event with any material changes that could potentially result in a negative
turn in a borrower’s financial standing and ability to repay its loan, the guarantor will notify us immediately, or at least
within the same day, so that our management can take prompt action to minimize the risk of non-payment. Although we have instituted
a minimum two-month period for rounds of examinations, each guarantor has its own terms of disclosure requirements and/or additional
examinations included in their guarantee contracts signed with the borrowers and may determine to put in place additional controls
to detect a possible credit default prior to an examination. For example, most of our guarantors require borrowers to report monthly
on the usage of loans guaranteed by them, the occurrence of any new borrowings and updated financial statements etc. Guarantors
may also monitor the borrowers’ credit status through reviewing their monthly credit reports on the People’s Bank
of China’s Credit Record Center website. Besides these standard checks, guarantors may also require borrowers to report
any significant events, such as equity restructuring and merger & acquisition etc., at least thirty days in advance. With
the additional reporting and examinations, the guarantors have comprehensive knowledge on the borrowers’ operational condition
and credit status. If any potential default risk is recognized, the guarantors will notify our platform immediately to discuss
the severity of the situation and the necessity to take actions to prevent a default.
We
do not expect any significant impact on the risk reserve fund since we have a process in place for payment from the fund and reimbursement
to the risk reserve fund. In the event of any negative credit event, our management will determine the proper action to take to
avert or minimize the risk of non-payment. One week before the loan is due, the risk control department informs Jiangxi Bank (China
PnR prior to July 2017), our third-party cooperative partners and the borrower and supervises the repayment of the loan.
Step
6: Collections
Towards
the end of each loan term, we provide repayment service to ensure the loan repayment process is handled smoothly through our online
platform. All loans originated through our online platform are repaid through our online platform and the terms are agreed upon
at the time of the original loan agreement. When loans approach its maturity, our team will typically send our notices to borrowers
via several means to remind them of the repayment deadlines. We will then calculate the amounts to be repaid by borrowers, including
the principals, accrued interests and service charges, and provide repayment notices to borrowers 7 days before the maturity day.
On the maturity day, borrowers log onto their accounts opened with our online platform, transfer funds into their depository accounts
in Jiangxi Bank’s depositary system, and process the repayment through our online system. When the borrower repays the loan
to Jiangxi Bank, they deposit the loan repayment management fee along with the principal loan amount and interest. Jiangxi Bank
then disburses the principal loan amount and interest back to the investor and remits the repayment management fee to us.
The
use of our online system is a part of our service provided in connection with the repayment process. Borrowers authorize our platform
to send instructions to Jiangxi Bank’s fund depositary system, which, following pre-established rules, deduct calculated
repayment amounts from borrower’s depositary accounts and transfer the funds to lender’s depositary accounts. We also
help with making arrangement with release of liens or collateral if applicable. Our system closely monitors the whole repayment
process and solves any issues promptly to ensure the repayment proceeds arrive at lender accounts in a timely and accurate manner.
It’s only up to this point that we consider our loan repayment service has been rendered, we then recognize revenue for
repayment services upon the completion of the repayment services. Once loans are successfully repaid, we also retain borrowers’
repayment records through our online platform for a minimum of 3 to 5 years per regulatory requirement, as part of their credit
profile and for reference in their future financing applications such as loan amount to be granted or interest rate charged.
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 Risk Reserve Fund below) and then commence our collection proceedings. 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.
Though
there have been few cases since our platform’s inception where borrowers prepaid their loans, there are prepayment terms
available in our agreement with borrowers and investors. If the borrowers prepay within 8 days before loan maturity, they still
need to pay the full interests accrued as if the loans were repaid at the end of the loan term, which amounts are specified in
the agreement when entered. If the borrowers prepay more than 8 days (inclusive) before loan maturity, they need to pay interests
accrued up to the date of prepayment plus extra three days’ interests to the investors. In either case, however, according
to our agreement, the borrowers would still be obligated to pay our platform the full amount of the loan repayment management
fee as if the loans were repaid at the end of the loan term.
Third-Party
Cooperative Partners Guarantees
Our
cooperative partners are party to cooperation agreements. The performance by the cooperative partner is unconditional pursuant
to the terms and conditions of the cooperation agreement.
Our
management has been in the lending business for more than a decade and has established a network of industry resources including
access to many financing guarantors who know many potential borrowers. Since inception in 2013, our online platform has established
good brand awareness in the industry and some guarantors come to us proactively. We typically select qualified and sizable guarantors
as our platform’s cooperative partners. They refer borrowers to us and assume financing guarantee responsibility. Factors
we consider when selecting a cooperative guarantor include its license and qualification, total assets, business process, risk
control capability and credit status etc. We conduct an Offline Anti-Fraud Investigation of guarantors by reviewing their credit
history, legal disputes, and/or using third-party verifications. However, we do not perform a credit assessment of the guarantors
like we perform for borrowers, therefore there are no underlying credit ratings for third-party guarantors. We will also conduct
on-site due diligence and sign a cooperative agreement with the guarantor including acceptable methods of liens and collaterals.
After that, the guarantor can start referring borrowers to our platform and provide loan guarantee. Guarantors usually charge
a separate fee for their loan guarantee service. Guarantors will sign a separate loan guarantee agreement with borrowers and upon
receipt of loan proceeds, borrowers will pay guarantors a separate guaranty fee, which is usually around 2% of the loan principal.
This arrangement is made offline between the guarantors and borrowers.
Cooperative
partners provide investigative reports on the veracity and credit condition of the borrower for every financing project being
recommended. After the debt financing is provided to the borrower, the cooperative partner will monitor the borrower’s performance
and will provide the platform with the feedback on the borrower’s credit condition, contract performance and debt repayment
capabilities. For the financing project, which the cooperative partner has recommended, and has provided the guaranty, the cooperative
partner will deposit a certain proportion of the loan into risk reserve fund, thereby fulfilling its duty with a cash deposit.
The cooperative partner provides a guaranty letter/guaranty agreement for the financing project it has recommended, providing
guaranty for the timely repayment of loans. The terms provided by the cooperation partner are the same terms offered by third-party
guarantors who the borrower may propose to guarantee its loan.
Third-Party
Creditor Loan Assignment Process
The
process described above also applies to third-party creditors (“Creditor Partner(s)”) that seek to sell their rights
as creditors on third-party loans with borrowers who are not borrowers on our platform (“Original Borrowers”). This
service generated revenues in the amount of $1,740,693 and $493,975 in 2017 and 2016, respectively. Since the inception of the
platform, no Original Borrower or Creditor Partner has defaulted on any loan payments, which would have required disbursement
of funds from the risk reserve fund. In the loan assignment process, Creditor Partners assume the role of borrowers on our platform
and revenues are recognized following the same revenue recognition policy as to other borrowers, which are classified under Revenues
on our Income Statement. 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 application materials
before a third-party loan may be listed and sold on our platform. These Creditor Partners are usually the third-party cooperative
partners discussed above, who refer borrowers to our platform and provide loan guarantee. 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 into the Original Borrower’s credit-worthiness.
Nonetheless, our risk control department conducts 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 reviews 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 contact the Original Borrower directly to ensure that
they have received notice of proposed sale from the Creditor Partner.
Step
3: Approval
Once
the Creditor Partner is approved, we 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, if any, 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 guarantee the loans and require them deposit 2% to 5% of the loan amount into the risk reserve fund as
usual.
Once
a credit facility is accepted by an investor, our platform automatically prepares the necessary assignment documents for online
execution by the parties.
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 due to their pre-established cooperative relationship
with us, 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 Original Borrower defaults and the Creditor Partner also defaults on the payment, we will pay the
investor the sum owed from the reserve fund (See description of Risk Reserve Fund below).
Fees
For
our services that match investors and borrowers through our online platform, we typically charge borrowers and Creditor Partners
a loan origination service fee between 1.5% to 3% of the loan amount facilitated by us (or proceeds of sale of the creditors’
rights, as the case may be) depending on, among other things, the duration of the loan. The loan origination 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 Jiangxi Bank (or China PnR prior to July 2017), which will separate the loan origination
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 separate fee from borrowers for each loan repayment facilitated by us, which is based on an agreed upon percentage around 0.3%
on the borrowing times the duration of the loan. The loan repayment management fee is payable when the borrower or Creditor Partner
repays its loan. In a transaction involving the sale of a Credit Partner’s creditor’s rights, the amount of fees charged
to the Credit Partner is the same as that charged to a borrower. In addition to the loan amount, they would have to deposit the
repayment management fee to their accounts with Jiangxi Bank, who will allocate the loan repayment to the investors’ accounts
and repayment management 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 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
primarily manage credit risk on behalf of the investors by doing the following:
i.
We evaluate the borrower’s repayment ability utilizing our pre-transaction credit and fraud detection assessment 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.
ii.
We offer a risk reserve fund which is 2-5% of all the credit extended to the borrowers (in December 2017, we have started to stop
requiring new contributions from most of the borrowers and guarantors to the risk reserve fund. Existing reserve funds are being
returned to borrowers and /or guarantors as loans mature and are repaid. See description of Risk Reserve Fund below).
iii.
Each loan transaction facilitated on our platform is guaranteed by a third-party guarantor who is jointly and severally liable
for the loan, except for the third-party loan assignment, in which case Creditor Partners seek to sell their rights as creditors
on third-party loans with borrowers who are not borrowers on our platform. Since these Creditor Partners are usually our third-party
cooperative partners with pre-established cooperative relationship with us, we do not require them to provide a third-party guarantor
when they seek to sell their creditor rights on our platform. They will provide a “letter of promise,” which promises
that they will guarantee the loan if the Original Borrower defaults and we require them to deposit 2% to 5% of the loan amount
into the risk reserve fund as usual.
Risk
management is the core task in the financial activities in which we engage. Our risk management department functions independently,
creates detailed risk management policies, loan management rules, and operation manuals. The risk management department provides
an independent expert assessment on the borrowers’ credentials in accordance with our loan policy and resolutely denies
the applications of unqualified borrowers.
Credit
review is a key part of risk management. The risk management department evaluates every application carefully without being affected
by any subjective considerations. Determining the borrower’s credentials is a key principle in the credit review. With respect
to an individual borrower’s loan application, the risk management department utilizes the risk management model for individual
credit loans, and this model both realistically and effectively establishes 440 assessment points for comprehensive evaluations.
Weighing different factors, this model requires the individual borrower to reach a threshold of 550 points in order to qualify
for personal loans.
For
business loans, the risk management department is required to perform on-site visits, inspect the business’ operating conditions,
financial condition, use of loan proceeds, and the business owner’s individual reputations, among other factors. The risk
management department first provides a risk assessment report and then approves a loan with respect to the underlying project.
In
the internet era, our platform utilizes a third-party credit assessment system for our personal loan business. The borrower’s
true financial condition and credit history provided by third-party credit assessment agencies greatly assist our evaluation of
the borrower’s loan application. An important role of the risk management in the financial business is to minimize the risk
of investor’s investment and to protect the safety of the platform.
A
key aspect of the Company’s risk management is the full-tracking risk management. As a basic requirement of loan management,
the risk management department sets up three management modules: pre-lending, during-lending, and post-lending. “Pre-lending
management” emphasizes due diligence, including on-site inspections in order to obtain first-hand materials. “During-lending
management” emphasizes standardized operations and execution of operating procedures according to the contract in order
to avoid omissions or mistakes. “Post-lending management” emphasizes pre-warning mechanism and implements all-around
debt collection mechanism for post-due debt, including on-site inspection, account review, control of material assets, exposure
of delinquent activities, and legal recourse of litigation in order to protect the investor’s rights.
After
the debt financing is provided to the borrower, the guarantor will monitor the borrower’s performance and will provide the
platform with the feedback on the borrower’s credit condition, contract performance and debt repayment capabilities. 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 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.
Risk
Reserve Fund
In
order to better protect our investors’ interests, we have voluntarily established a risk reserve fund which is generally
equivalent to 2% to 5% of all credit extended to borrowers. The determination of the reserve fund ratio is made by referencing
the overdue default loan data for the industry in which the borrower operates its business. Our risk control department starts
with the industry default loan data and credit trend then adjusts it appropriately with information collected from current and
past borrower profiles in the same industry on our platform, also taking into consideration communications with and updates from
guarantors including changes in guarantee fees they charge borrowers and other measures they would take in providing guarantees.
Based on the research results, the risk control department then sets the reserve fund ratio for the industry and reviews and adjusts
it regularly if necessary, usually every quarter to six months. The risk reserve account is currently maintained with Jiangxi
Bank and China Construction Bank. Under our risk reserve fund arrangement, if a loan is delinquent for a certain period of time,
usually within three 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, the borrower (or if a guarantor is needed for the borrower, the guarantor)
is required to provide an amount equal to 2% to 5% of the aggregate amount of the loan, which is deposited directly into the risk
reserve fund. If the borrower cannot be matched with an investor within the fundraising period (no more than 19 days), all amounts
deposited by the borrower or guarantor in the risk reserve fund, as the case may be, will be returned. If the borrower is successfully
matched with an investor, the risk reserve fund will be refunded to the borrower if the loan is paid in full at maturity.
In
the event that a borrower defaults in repaying the loan when it is due, we advise the guarantor of such default. If the guarantor
cannot make the repayment within the period as stipulated (usually three days), we withdraw a sum equivalent to the outstanding
loan amount with interest and penalty at a rate of 0.06% per day 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. When deciding to draw upon the reserve fund to pay back an investor,
we calculate the reserve fund to determine whether there are sufficient funds to repay. If the reserve fund is insufficient to
repay investors, the fund shall be allocated on a pro rata basis. We notify investors and the third-party guarantors, or Creditor
Partner, as the case may be, via website, text messages, email and then we implement a pre-set payment plan with the investors
for each overdue loan transaction in which they receive their corresponding pro rata distribution of the reserve fund. In case
of a default by a borrower, the investor bears the risk of not receiving a timely repayment or an investment failure, and the
cooperative partners, through a series of protective measures, protect the investors’ interest to the maximum possible degree.
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, which will be recorded as part
of the balance of the risk reserve fund liability on our balance sheet. According to our Intermediary Service Agreement signed
for each loan between the borrower, investors, and the platform, the interest and penalty are paid to investors for the period
between the time of a borrower default and the time of a risk-reserve-fund repayment. After the repayment is withdrawn from the
risk reserve fund, the guarantor is responsible for collecting loan repayments from the borrower and re-contributing funds to
the risk reserve fund. Thus, the guarantor is entitled to the interest and penalty for this period of time.
Since
the inception of the platform, no borrower has defaulted on any loan payments. All investors through the platform have timely
received repayment of their investment funds. Our platform has not used the reserve fund to advance the repayment to investors,
and our cooperative partners have not had to advance any payments as part of their obligation as guarantors.
As
a transaction intermediary, we do not assume credit risk for the loans facilitated through our online platform and our risk reserve
liability is limited to the balance of risk reserve fund that the borrowers or guarantors deposit with us. When loans that are
facilitated through our online platform default, we do not record allowance for loan losses on our consolidated financial statements
and if we use risk reserve fund to repay investors, we will make a footnote disclosure to risk reserve fund on withdraws for delinquent
loans and subsequent reimbursements by borrowers or guarantors if any.
In
March 2017, the Office of Task Force Responsible for Special Rectification of Risks in Internet Finance in Beijing issued Notice
for Factual Acknowledge by and Rectification of Online Lending Information Intermediaries in Beijing (the “Notice”),
pursuant to which, P2P platforms in Beijing are prohibited from setting up risk reserve fund or security fund for the purpose
of providing guarantees to loans or promoting to investors regarding such types of funds. P2P platforms in Beijing have the same
transition period to be compliant with the Notice as set forth in the Interim Measures.
Our
PRC legal counsel has advised us that the Notice is still subject to further clarification and implementation measures for its
enforcement, such as a clear definition of the risk reserve fund, and we believe P2P platforms in Beijing are prohibited from
setting up and promoting risk reserve funds by committing their own capital. Our platform, however, sets up the risk reserve fund
by requiring borrowers and/or guarantors to contribute their capital equal to 2% to 5% of the loan amount. Nevertheless, starting
in December 2017, we have started to stop requiring new contributions from most of the borrowers and guarantors to the risk reserve
fund, and stopped advertising the establishment of risk reserve funds on the platform. Existing reserve funds are being returned
to borrowers and /or guarantors as loans mature and are repaid. As a result, we do not believe we are in violation of the Notice
and there is currently no communication from regulatory agencies regarding such violation. We have not distributed a formal notice
to our existing borrowers and/or guarantors about the regulations as the Notice is widely known, and it is expected that participants
in this industry are aware of the Notice. If it is determined that we are in violation of the Notice, we would return the existing
risk reserve contributions within the time frame provided by the regulatory agency. If there is no such time frame provided or
required, we expect we would return the contributions in cash to our borrowers and guarantors within 3 to 5 business days or as
soon thereafter as practicable.
As
of December 31, 2017, balance of our risk reserve fund was approximately $ 12.1 million.
Information
Technology & Cyber Security
Information
technology is an important component of an internet company. We have an expert team possessing a depth of technical know-how and
expertise, and we have carefully assembled a team of experts to operate the platform, communicate via the network, and for system
maintenance.
Our
technology team consists of three major working groups, responsible for different technical areas but at the same time mutually
supportive of one another’s tasks. The structure working group is responsible for developing the system’s source code
and constituting the system’s structure to meet the business needs. The testing working group is responsible for the necessary
testing of the already developed operable system in order to examine its reliability and user’s experiences, thereby providing
testing data and implementing needed modifications to the operating system. The operation maintenance working group is responsible
for the necessary maintenance and inspection of the website’s technical system, including building fire wall, placing patches,
preventing hackers’ attacks, thereby ensuring the normal operation of the system.
Our
technology department has established a comprehensive system for managing web technology. To prevent external infiltration and
theft of data and other illegal activities, we have established three levels of prevention mechanisms, thereby effectively implementing
preventions from physical, technical, and authorization aspects.
Our
system security protection is implemented from protective archiving and evaluation based on levels of information system security,
disaster recovery, and information security. First, we have already entered into a cooperation agreement with Alibaba Cloud Computing,
ensuring that the servers used on our platform are well protected and maintained. With respect to the data security on the platform’s
computers, besides backing up all data with Alibaba Cloud Computing, our platform also backs up all operation data in order to
prevent any data loss and ensure the reliable and prompt reading and retrieving data, therefore guaranteeing the normal operation
of the platform.
As
a platform used by both investors and borrowers, we have established an emergency response mechanism in the event of an emergency
and built a back-up database in order to restore the platform’s operations and minimize downtime of the platform.
Our
Products
As
discussed above, we categorize the borrower credit facility into one or more loan products and post it on our platform. Those
products include Xin Shou Zhuan Qu, Cai Fu Hui, Zun Xiang, Hui Ji Hua, You Xuan Zhai Quan, Zhai Quan Zhuan Rang and Hui Xiao Fei.
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 Chinese individuals and SMEs. All of 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, 2017, SME borrowers and individual borrowers accounted for approximately 84.1% and 15.9% of the loan amounts facilitated through
our platform, respectively.
Currently,
most of our investors are in Shanghai, Shandong, Heilongjiang, Jiangsu, Henan and Jiangxi etc. provinces, and most of our borrowers
are currently in Shandong province. All of our current borrowers are referred to us by our guarantors, whose businesses operate
only in Mainland China. US-based investors and borrowers are prohibited from borrowing funds or being investors. Prospective borrowers
and investors must be Chinese citizens or enterprises located in the PRC in order to register for an account and submit borrowing
or investing applications through our platform. Our “Registration Agreement” and “Intermediary Service Agreement”
also requires that the borrowers and investors represent and confirm that they are Chinese citizens or enterprises located in
the PRC at the time of registration and submission of borrowing or investing applications, respectively, or they won’t be
able to proceed. In addition, when submitting an application, a confirmation window will pop up, requesting borrowers or investors
to confirm that they are located in the PRC before they can proceed with the submission. In the event that a non-PRC based citizen
or enterprise is able to register and submit an application, upon our review of such application, including the implementation
of our Step 1 and Step 2 protocols, such an application would be rejected and such registration would be terminated.
Marketing
The
borrowers are made known to us 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 obtain borrowers through referrals from financial
institutions we partner with. As of December 31, 2017, we have entered into cooperation agreements with 24 cooperative partners,
including five pawn shops, four guaranty companies, a micro-loan company, an asset management company, three information technology
companies, three financial consulting company, four technology companies, and three financial services companies. Besides online
investors, we also attract investors through cooperative relationships with institutions. To obtain investors more efficiently,
Benefactum Beijing has entered into co-operative agreements with third-party referral service providers, pursuant to which those
service providers will refer potential investors to Benefactum Beijing while Benefactum Beijing will pay those service providers
service fees based on the value of loans those referred investors actually lend through 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 December 31, 2017, we have 160 employees, located in Shanghai, Beijing and in 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
|
|
|
|
2.50
|
%
|
Product and service
|
|
|
17
|
|
|
|
10.63
|
%
|
Marketing
|
|
|
15
|
|
|
|
9.38
|
%
|
Human resources and administrative
|
|
|
11
|
|
|
|
6.88
|
%
|
IT
|
|
|
49
|
|
|
|
30.63
|
%
|
Accounting
|
|
|
7
|
|
|
|
4.38
|
%
|
Legal
|
|
|
2
|
|
|
|
1.25
|
%
|
Risk management
|
|
|
24
|
|
|
|
15.00
|
%
|
Operations
|
|
|
31
|
|
|
|
19.38
|
%
|
Total
|
|
|
160
|
|
|
|
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. In light of the low barriers of entry in this industry,
more players may enter this market which would result in increased 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
(www.wdzj.com), a third-party information platform that specializes in providing information in China’s 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. (“Lujinsuo”)- Lujinsuo is the only financial assets trading
information service platform that runs its business through the trading platform of the State Counsel of China. It provides investment
and financing services to SMEs and individuals. As of December 31, 2017, it had approximately 32.9 million registered users. Lujinsuo
offers what is known as “financial instruments beneficial rights transfer” information services to financial and non-financial
companies. This is a process in which the borrowers (usually companies) pledge their bank acceptance bills, and then transfer
the beneficial interests to investors. Lujinsuo’s role is an informational intermediary between the holders of bank acceptance
bills and the investors.
Yirendai
Ltd. (“Yirendai”) – Yirendai is a leading online consumer financial platform in China connecting investors and
individual borrowers. According to Yirendai reports, they facilitated RMB 47.41 billion ($7.29 billion) in loans from their inception
in March 2012 through June 30, 2017. According to the database of Wang Dai Zhi Jia, Yirendai facilitated RMB 4.92 billion (approximately
$755.94 million) in loans in December 2017 and was ranked the 7th in the industry. Leveraging the extensive experience of their
parent company CreditEase, they have large client bases consisting of underserved investors and individual borrowers in China
Kaixindai
Financing Service Jiangsu Co., Ltd. (“Kaixindai”) – Co-founded by China Development Bank, Kaixindai is a state-owned
internet finance platform that aims at providing safe, stable and convenient internet lending intermediary services to SMEs and
individuals. It facilitated RMB 41.88 billion (approximately $6.16 billion) in loans from December 2012 through June 2017. According
to Wang Dai Zhi Jia, Kaixindai facilitated RMB 33.85 million (approximately $5.20 million) in loans in December 2017 and was ranked
the 313th in the industry.
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 platforms and traditional financial institutions, such as financing business units in commercial
banks, credit card issuers and other financing 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.
Country
|
|
Trademark
|
|
Application
Number
|
|
Classes*
|
|
Status
|
Mainland China
|
|
|
|
19915412
|
|
9
|
|
Approved
|
Mainland China
|
|
|
|
19915413
|
|
35
|
|
Approved
|
Mainland China
|
|
|
|
19915414
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
19915415
|
|
38
|
|
Approved
|
Mainland China
|
|
|
|
19915411
|
|
42
|
|
Approved
|
Mainland China
|
|
|
|
16773973
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
16774073
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
17945485
|
|
36
|
|
Approved
|
Mainland China
|
|
|
|
19915410
|
|
38
|
|
Approved
|
Country
|
|
Trademark
|
|
Application
Number
|
|
Classes*
|
|
Status
|
Mainland China
|
|
|
|
22745837
|
|
9
|
|
In process
|
Mainland China
|
|
|
|
22746011
|
|
35
|
|
In process
|
Mainland China
|
|
|
|
22745940
|
|
42
|
|
In process
|
Mainland China
|
|
|
|
22746083
|
|
45
|
|
In process
|
Mainland China
|
|
|
|
23328481
|
|
36
|
|
Partially rejected
|
Mainland China
|
|
|
|
25706455
|
|
36
|
|
In process
|
Mainland China
|
|
|
|
27772660
|
|
36
|
|
In process
|
Mainland China
|
|
|
|
29345199
|
|
36
|
|
In process
|
Mainland China
|
|
|
|
29341176
|
|
38
|
|
In process
|
Mainland China
|
|
|
|
29345129
|
|
42
|
|
In process
|
*
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
Installment
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 prospectus, 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 – 00288617
|
|
Artwork
|
Mainland China
|
|
Jin Ding Hui Ju
|
|
|
|
2016 – F – 00337813
|
|
Artwork
|
Country
|
|
Name
of Work
|
|
Work
|
|
Registration
Number
|
|
Type
|
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 Jin Fu Financial Investment Platform
|
|
January
19, 2016;
August
4, 2016
|
|
2016SR205944
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Investment Management System
(WeChat version)
|
|
June
28, 2016;
August
18, 2016
|
|
2016SR224313
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Mobile Client Access Software
(Android)
|
|
March
20, 2016;
August
18, 2016
|
|
2016SR224323
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Mobile Client Access Software
(ios)
|
|
March
20, 2016;
August
1, 2016
|
|
2016SR199404
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jing Fu Internet Lending Information
Intermediary Platform
|
|
January
19, 2016
May
4, 2017
|
|
2017SR156792
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Internet Lending Information
Intermediary Platform(Android)
|
|
March
20, 2016
May
4, 2017
|
|
2017SR156783
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Internet Lending Information
Intermediary Platform (IOS)
|
|
March
20, 2017
May
4, 2017
|
|
2017SR156674
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Internet Lending Information
Intermediary Platform (WeChat version)
|
|
June
28, 2016
May
5, 2017
|
|
2017SR160200
|
|
Computer software
|
Mainland China
|
|
Hui Ying Jin Fu Information Data Management
System
|
|
August
10, 2016
April
20, 2017
|
|
2017SR126893
|
|
Computer Software
|
Mainland China
|
|
Jin Rong Zhi Nan Intelligent Information Consulting
Services Platform
|
|
December
28, 2016
April
20, 2017
|
|
2017SR126888
|
|
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.
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
were given up to 12 months to adjust their practices to comply with them. Further in June 2017, the PBOC together with sixteen
other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement of Internet Finance Risk Rectification
and Clearance Task, which, among other things, gave peer-to-peer platforms till end of June 2018 to adjust their practices to
be compliant with the Interim Measures and in some complicated cases, up to two years for compliance upon approval by provincial
government. For more details, please see “Regulations - Regulations on Value-Added Telecommunication Services” and “Regulations on Peer-to-Peer Lending Service Provider”.
Regulations
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 borrowers, we are regulated by various government authorities, including,
among others:
|
o
|
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;
|
|
o
|
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;
|
|
o
|
China
Banking Regulatory Commission, or the CBRC, regulating financial institutions and promulgating
the regulations related to the administration of financial institutions.
|
|
o
|
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.
|
|
o
|
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 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.
In
October 2016, the Interim Measures for the Filing Administration for the Establishment and Change of Foreign Invested Enterprises
were approved by the Ministry of Commerce’s Office Meeting upon consideration and are being implemented.
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
4.5% to 12%. 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.
In addition, Private Lending Judicial Interpretations also provide that when a private lending contract is necessary for the purposes
of production and business operations between legal persons, other organizations or between a legal person and other organization,
unless circumstances under Article 52 of the Contract Law of the People’s Republic of China and Article 14 of Private Lending
Judicial Interpretations exist, if the party claims that the private lending contract is valid, the People’s Court shall
uphold such claim.
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
(approximately $153,671), (ii) with over 150 fund-raising targets involved, or (iii) with the direct economic loss caused to fund-raising
targets exceeding RMB500,000 (approximately $76,836), 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
(approximately $30,734) for one online lending intermediary and not more than RMB1 million (approximately $153,671) in total from
all platforms, while the limit for a legal person or organization shall not be more than RMB1 million (approximately $153,671)
for one online lending intermediary and not more than RMB5 million (approximately $768,356) 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 (the “Filling Guideline”),
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 a 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 “Depositories
Guideline”). 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.
In
March 2017, the Office of Task Force Responsible for Special Rectification of Risks in Internet Finance in Beijing issued Notice
for Factual Acknowledge by and Rectification of Online Lending Information Intermediaries in Beijing (the “Notice”),
pursuant to which, P2P platforms in Beijing are prohibited from setting up risk reserve fund or security fund for the purpose
of providing guarantees to loans or promoting to investors regarding such types of funds. P2P platforms in Beijing have the same
transition period to be compliant with the Notice as set forth in the Interim Measures.
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.
In
addition, pursuant to the Guideline of CBRC on Risk Prevention and Control in Banking Industry promulgated by CBRC on April 7,
2017, the promotion for the special risk rectification for internet lending platform (P2P) shall be continued. Internet lending
intermediaries shall not market the borrowers who do not have the repayment ability; and they are also prohibited to provide Internet
loan services to university students who are under the age of 18. It is also emphasized that the advertisement and sales which
are fraud or false shall be prohibited.
In
June 2017, the PBOC together with sixteen other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement
of Internet Finance Risk Rectification and Clearance Task, or the Task Notice. The Task Notice, among other things, gave peer-to-peer
platforms till end of June 2018 to adjust their practices to be compliant with the Interim Measures and in some complicated cases,
up to two years for compliance upon approval by provincial government. During such compliance period, no new non-compliant activities
shall be practiced and existing non-compliant practices shall gradually drop down to nil.
On
August 23, 2017, CBRC issued Disclosure Guideline for Information Regarding Business Activities of Online Lending Information
Intermediaries (the “Disclosure Guideline”) which clarifies, among other things, the items, timing, frequency and
objects of disclosure and gives online lending Intermediaries 6 months to rectify its existing non-compliance business. If online
lending Intermediaries fail to make rectification, then the related rule set forth in Interim Measures and Guidance of Administration
shall be governed.
In
December 2017, the Office of Task Force Responsible for Special Rectification of Risks in P2P Online Lending issued the Notice
on Inspection Acceptance of Special Rectification of Risks in P2P Online Lending Intermediaries, or the Circular 57, which requires
the Office together with local financial regulatory authorities, local branches of the CBRC and the People’s Bank of China, public
security bureaus, telecommunication administrative agencies and local administration of industry and commerce (“AIC”)
to jointly inspect and determine whether a P2P platform complies with the Interim Measures. Circular 57 further clarifies several
matters including, among other things, the assignment of creditor’s right, the risk reserve fund, the fund depository, the
comprehensive return rate of lending amount and cash loan, the registration requirements for P2P company and its branches, offline
operation and the scale of businesses for P2P platforms, co-operations between P2P platforms and local financial exchanges, the
outsourcing of the business and establishment of branches and disclosure of the information of P2P platforms and its infrastructure
etc. Additionally, Circular 57 promulgates that a P2P platform can be registered with the local financial regulatory authority
only after passing inspection and receiving acceptance certificate or document issued jointly by local financial regulatory authority
and local counterparts of CBRC. Circular 57 requires that the registration of major P2P platforms shall be completed before April
2018 and no later than end of June 2018 for highly complicated cases.
Regulations
on Financing Guarantee Company
On
August 2, 2017, the State Council issued Administrative Regulations on Supervision of Financing Guarantee Companies (“Financing
Guarantee Company Regulation”), which will be effective on October 1, 2017. The Financing Guarantee Company Regulation increases
the minimum requirement of registered capital from RMB 5,000,000 to RMB 20,000,000. Financing Guarantee Company Regulation also
provides that the balance amount of guarantee liability of a financing guarantee company shall not exceed 10 times the amount
of its net assets. Where a financing guarantee company mainly provides services to small and micro enterprises, agriculture sector,
rural villages and farmers, the balance amount of guarantee liability may be up to 15 times the amount of its net assets.
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. 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 now explicitly 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. Further in June 2017, the PBOC
together with sixteen other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement of Internet
Finance Risk Rectification and Clearance Task, which, among other things, gave peer-to-peer platforms till end of June 2018 to
adjust their practices to be compliant with the Interim Measures and in some complicated cases, up to two years for compliance
upon approval by provincial government. 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 clarifies which sub-set of telecommunication business certificates need to be obtained by
online 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 were given a year to adjust their practices to comply with them. Further in June 2017,
the PBOC together with sixteen other PRC regulatory agencies jointly issued a notice titled the Notice on Further Improvement
of Internet Finance Risk Rectification and Clearance Task, which, among other things, gave peer-to-peer platforms till end of
June 2018 to adjust their practices to be compliant with the Interim Measures and in some complicated cases, up to two years for
compliance upon approval by provincial government.
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 (approximately $15,367) may be
imposed in accordance with Advertising Law. A fine ranging from RMB5,000 (approximately $768) to RMB30,000 (approximately $4,610)
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 (approximately $1,537) to RMB30,000 (approximately
$4,610). 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, we are not required
to submit an application to the CSRC for the approval of our listing on a national securities exchange because (i) the CSRC currently
has not issued any definitive rule or interpretation concerning whether the initial public offering we are contemplating is subject
to this regulation, and (ii) we did not acquire any equity interest or assets of a “PRC domestic company” as such
term is defined under the M&A Rules, and (iii) there is no statutory provision that clearly classifies the contractual arrangement
among our WFOE, and our PRC varies interest entity, Benefactum Beijing and its shareholders as transactions regulated by 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.”
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 were not successful in implementing our business plan and only
recognized $1,180 in revenue for the year ended December 31, 2015. 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 “Amendment”) 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
Sino was incorporated in Hong Kong SAR which is currently 100% owned by Benefactum Alliance. 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.
Benefactum
Beijing incorporated Puhui Equity Investment Co., Ltd (“Puhui”) on February 24, 2017 and incorporated Qianhai Zhonghui
Business Information Consulting Co., Ltd (“Qianhai”) on May 9, 2017. Both Puhui and Qianhai are located in Xinjiang
Khorgos Economic Development Zone in China, where a favorable income tax holiday is offered for service-oriented entities.
On
September 1, 2017, Puhui acquired 4.4538% of equity interests in Shenzhen TouZhiJia Financial Information Service Co., Ltd. (“Shenzhen
TouZhiJia Financial”), a company incorporated in the People’s Republic of China. The equity interest Puhui acquired
is held through three limited partnerships wherein each partnership’s sole purpose is to hold the equity interest of Shenzhen
TouZhiJia Financial.
On
September 29, 2017, we amended our Articles of Incorporation to change our name from “Sino Fortune Holding Corporation”
to “Hui Ying Financial Holdings Corporation”. 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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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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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 would transfer 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.
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.
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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.