LYL Dragon Victory International Ltd

Item 4. INFORMATION ON THE COMPANY

A. History and Development of the Company

We were incorporated in the Cayman Islands on June 19, 2015. Our wholly-owned subsidiary, Sweet Lollipop Co., Ltd. (“Sweet Lollipop”) was incorporated in the British Virgin Islands on May 8, 2014, with Lili Xiang as the sole shareholder, a non-related third party to us. From its inception until June 25, 2015, Sweet Lollipop had no business activities. On June 25, 2015, Lili Xiang transferred her 100% equity interest in Sweet Lollipop to us. After June 25, 2015 and until now, Sweet Lollipop has no business operation other than being a pass-through entity and holding the 100% equity interest in Long Yun International Holdings Limited (“Long Yun HK”). Long Yun HK, which is a wholly-owned subsidiary of Sweet Lollipop, was incorporated in Hong Kong on May 2, 2015. WFOE II, Sweet Lollipop’s wholly owned subsidiary, was organized pursuant to PRC laws on February 27, 2017. Our variable interest entity, Hangzhou Long Yun Network Technology Co., Ltd., which we refer to as Long Yun, was established on October 9, 2014 in City of Hangzhou, PRC pursuant to PRC laws. Long Yun’s shareholders include certain PRC residents and corporate entities controlled by PRC residents.

On November 3, 2017, we entered into a strategic cooperation agreement with Mr. Jiawei Cao, pursuant to which we and Mr. Jiawei Cao are expected to establish a joint venture, namely, Hangzhou Dacheng, in which we would hold approximately 60% of the equity interest in Hangzhou Dacheng. Hangzhou Dacheng, Sweet Lollipop’s subsidiary where through WFOE II, we hold 60% equity interest, was organized pursuant to PRC laws on October 31, 2017. Mr. Jiawei Cao subsequently transferred the approximately 40% of equity interest in Hangzhou Dacheng to Mr. Mangyue Sun in January 2018 pursuant to a share transfer agreement. Mr. Mangyue Sun subsequently transferred approximately 2% of the equity interest in Hangzhou Dacheng to Wenbin Liu in March 2018 pursuant to a share transfer agreement.

Pursuant to PRC laws, each entity formed under PRC law shall have certain business scope approved by the Administration of Industry and Commerce or its local counterpart. As such, WFOE II’s business scope is to primarily engage in technology development, provision of technology service, technology consulting; development of computer software and hardware, computer network technology, game software; provision of enterprise management and related consulting service, human resource consulting service and intellectual property consulting service. Since the sole business of WFOE II is to provide Long Yun with technical support, consulting services and other management services relating to its day-to-day business operations and management in exchange for a service fee approximately equal to the net income of Long Yun, such business scope is necessary and appropriate under the PRC laws. Long Yun, on the other hand, has been granted a business scope different from WFOE II to enable it to provide internet crowdfunding, and incubation management service and function as a financing channel for small and micro businesses.

We control Long Yun through contractual agreements, which are described under “— Contractual Arrangements between WFOE II and Long Yu.” Dragon Victory is a holding company with no business operation other than holding the shares in Sweet Lollipop, Long Yun and Long Yun HK are both pass-through entities with no business operation. WFOE II is exclusively engaged in the business of managing the operation of Long Yun.

Our principal executive offices are located at 2101 Phoenix Center,28 Qiutao Road, Shangcheng District, Hangzhou, PRC, and our phone number is + 86-571-82213772. We maintain a corporate website at http://www.dvintinc.com/ . The information contained in, or accessible from, our website or any other website does not constitute a part of this report.

Our corporate structure as of the date of this report is as follows:

Previously, we controlled Long Yun through WFOE I, a then wholly owned subsidiary of the Company. On August 19, 2016, WFOE I entered into a series of contractual arrangements, also known as the VIE Agreements, with Long Yun, Long Yun Shareholders. The VIE Agreements were designed to provide WFOE I with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Long Yun, including absolute control rights and the rights to the assets, property and revenue of Long Yun.

Effective March 20, 2018, WFOE I, Long Yun and Long Yun’s shareholders executed a Termination Agreement to the Exclusive Business Cooperation Agreement, Termination Agreement to the Share Pledge Agreement, Termination Agreement to the Exclusive Option Agreement and Termination Agreement to the Powers of Attorney that terminated each a of the VIE Agreements, including the Exclusive Business Cooperation Agreement, Exclusive Option Agreement, Share Pledge Agreement and the Powers of Attorney.

As a result of entering into such Termination Agreements, WFOE I is no longer the sole equity holder of Long Yun and has no control rights and no rights to the assets, property and revenue of Long Yun. The Company is in the process of dissolving WFOE I.

On March 20, 2018, WFOE II, a newly formed wholly owned subsidiary of the Company, entered into a series of contractual arrangements (the “New VIE Agreements”) with Long Yun and its shareholders. The New VIE agreements are designed to provide WFOE II (which replaced WFOE I) with the power, rights and obligations equivalent in all respects to those it would possess as the sole equity holder of Long Yun, including absolute control rights and the rights to the assets, property and revenue of Long Yun. There is no change to Long Yun’s capital structure.

The Company decided to replace WFOE I with WFOE II in order to take full advantage of certain preferential tax treatments and subsidies granted by the local government of Shangcheng District of Hangzhou, Zhejiang province, where WFOE II was incorporated. Based on the amount of income tax and value-added tax payment that is attributable to the District, the Company will receive comparable tax refund in the form of projects subsidies, 100% for the first three years and 50% for the latter two years. Executives of the Company will receive refund of their personal income tax that is attributable to the District in the form of living subsidies, 100% for the first three years and 50% for the latter two years.

Contractual Arrangements between WFOE II and Long Yun

Due to PRC legal restrictions on foreign ownership in the telecommunications sector, see “Regulations — Foreign Ownership Restrictions”, neither we nor our subsidiaries own any equity interest in Long Yun. Instead, we control and receive the economic benefits of Long Yun’s business operation through a series of contractual arrangements. WFOE II, Long Yun and its shareholders entered into a series of contractual arrangements, also known as the New VIE Agreements, on March 20, 2018. The VIE agreements are designed to provide WFOE II with the power, rights and obligations equivalent in all material respects to those it would possess as the sole equity holder of Long Yun, including absolute control rights and the rights to the assets, property and revenue of Long Yun.

According to the Exclusive Business Cooperation Agreement, Long Yun is obligated to pay service fees to WFOE II approximately equal to the net income of Long Yun.

Each of the New VIE Agreements is described in detail below:

Exclusive Business Cooperation Agreement

Pursuant to the Exclusive Business Cooperation Agreement between Long Yun and WFOE II, WFOE II provides Long Yun with technical support, consulting services and other management services relating to its day-to-day business operations and management, on an exclusive basis, utilizing its advantages in technology, human resources, and information. Additionally, Long Yun granted an irrevocable and exclusive option to WFOE II to purchase from Long Yun, any or all of Long Yun’s assets at the lowest purchase price permitted under PRC law. Should WFOE II exercise such option, WFOE II, Long Yun and its shareholders shall enter into a separate asset transfer or similar agreement. For services rendered to Long Yun by WFOE II under the Exclusive Business Cooperation Agreement, WFOE II is entitled to collect a service fee calculated based on the amount time spent by WFOE II to render such services, multiplied by the corresponding billing rate of WFOE II, plus a services fee determined by the board of directors of WFOE II based on the value of the services rendered by WFOE II and taking into account the actual net income of Long Yun.

The Exclusive Business Cooperation Agreement shall remain in effect for ten years unless it is terminated by WFOE II with 30-day prior notice. Long Yun does not have the right to terminate the agreement unilaterally. WFOE II may unilaterally extend the term of the Exclusive Business Cooperation Agreement with prior written notice.

The CEO and president of WFOE II, Mr. Jianjun Sun, will effectively be managing Long Yun pursuant to the terms of the Exclusive Business Cooperation Agreement. WFOE II has absolute authority relating to the management of Long Yun, including but not limited to decisions with regard to expenses, salary raises and bonuses, hiring, firing and other operational functions. The Exclusive Business Cooperation Agreement does not prohibit related party transactions, provided, however, that the audit committee of the Company is required to review and approve in advance any related party transactions, including transactions involving WFOE II or Long Yun.

Share Pledge Agreement

Under the Share Pledge Agreement between Mr. Yu Han, and Ms. Koulin Han, together holding 100% of the shares of Long Yun (“Long Yun Shareholders”) and WFOE II, the Long Yun Shareholders pledged all of their equity interests in Long Yun to WFOE II to guarantee the performance of Long Yun’s obligations under the Exclusive Business Cooperation Agreement. Under the terms of the Share Pledge Agreement, should Long Yun or the Long Yun Shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE II, as pledgee, will be entitled to certain rights, including, but not limited to, the right to collect dividends generated by the pledged equity interests. The Long Yun Shareholders also agreed that upon the occurrence of any event of default, as set forth in the Share Pledge Agreement, WFOE II is entitled to dispose of the pledged equity interest in accordance with applicable PRC law. The Long Yun Shareholders further agreed not to dispose of the pledged equity interests or take any actions that would prejudice WFOE II’s interest.

The Share Pledge Agreement shall be effective until all payments due under the Exclusive Business Cooperation Agreement have been paid by Long Yun. WFOE II shall cancel or terminate the Share Pledge Agreement upon Long Yun’s full payment of all fees payable under the Exclusive Business Cooperation Agreement.

The Share Pledge Agreement serves several functions: (1) guarantee the performance of Long Yung’s obligations under the Exclusive Business Cooperation Agreement, (2) ensure the Long Yung Shareholders do not transfer or assign the pledged equity interests, or create or allow any encumbrance that would prejudice WFOE II’s interests without WFOE II’s prior written consent, and (3) provide WFOE II control over Long Yun. In the event Long Yun or the Long Yun Shareholders breach their respective contractual obligations under the Exclusive Business Cooperation Agreement, WFOE II will be entitled to foreclose on the Long Yun Shareholders’ equity interests in Long Yun and may (1) exercise its option to purchase or designate third parties to purchase part or all of their equity interests in Long Yun and in this situation, WFOE II may terminate the VIE agreements after acquisition of all equity interests in Long Yun or form new VIE structure with the third parties designated by WFOE II; or (2) dispose of the pledged equity interests retain the proceeds from such sale. In the event of such a sale of the pledged equity interests, the VIE structure evidenced by the New VIE Agreements will be terminated.

Exclusive Option Agreement

Under the Exclusive Option Agreement, the Long Yun Shareholders irrevocably granted WFOE II (or its designee) an exclusive option to purchase, to the extent permitted under PRC law, once or at multiple times, at any time, part or all of their equity interests in Long Yun. The option price is equal to the capital paid in by the Long Yun Shareholders subject to any appraisal or restrictions required by applicable PRC laws and regulations. As of the date of this report, if WFOE II exercised such option, the aggregate option exercise price that would be paid to the Long Yun Shareholders would be approximately $1.5 million, which is the aggregate registered capital of Long Yun. The option exercise price may increase in in the event the Long Yun Shareholders make additional capital contributions to Long Yun.

The Exclusive Option Agreement, together with the Share Pledge Agreement and the Power of Attorney, enable WFOE II to exercise effective control over Long Yun.

The Exclusive Option Agreement remains effective for a term of ten years and may be renewed at WFOE II’s election.

Powers of Attorney

Under the Powers of Attorney, each of the Long Yun Shareholders authorizes WFOE II to act on their behalf as their exclusive agent and attorney with respect to all rights as shareholders, including but not limited to: (a) attending shareholders’ meetings; (b) exercising all the shareholder’s rights, including voting, that shareholders are entitled to under the laws of China and the Articles of Association, including but not limited to the sale or transfer or pledge or disposition of shares in part or in whole; and (c) designating and appointing on behalf of shareholders the legal representative, the executive director, supervisor, the chief executive officer and other senior management members of Long Yun.

Although it is not explicitly stipulated in the Powers of Attorney, the term of the Powers of Attorney shall be the same as the term of that of the Exclusive Option Agreement.

Each Power of Attorney is coupled with an interest and shall be irrevocable and continuously valid from the date of execution, so long as the applicable Long Yun Shareholder is a shareholder of Long Yun.

Emerging Growth Company Status

We are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act (the “JOBS Act”), and we are eligible to take advantage of certain exemptions from various reporting and financial disclosure requirements that are applicable to other public companies, that are not emerging growth companies, including, but not limited to, (1) not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), (2) reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and (3) exemptions from the requirements of holding a non-binding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. We intend to take advantage of these exemptions. As a result, investors may find investing in our Class A ordinary shares less attractive.

In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933, as amended (the “Securities Act”), for complying with new or revised accounting standards. As a result, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

We could remain an emerging growth company for up to five years, or until the earliest of (1) the last day of the first fiscal year in which our annual gross revenues exceed $1.07 billion, (2) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our Class A ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter and we have been publicly reporting for at least 12 months, or (3) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three-year period.

We report under the Exchange Act as a non-U.S. company with foreign private issuer status. Even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act we will be exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies.

Foreign Private Issuer Status

We are a foreign private issuer within the meaning of the rules under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As such, even after we no longer qualify as an emerging growth company, as long as we qualify as a foreign private issuer under the Exchange Act we are exempt from certain provisions of the Exchange Act that are applicable to U.S. domestic public companies. For example:

Our Competitive Advantages

Integration Synergy by Combining Business Incubation Services With Crowdfunding Platform

Our business incubation services include providing additional business insight, operation advisory and product management assistance in a project’s product development, sales growing, operation efficiency as well as building more significant online presence and brand recognition. Our business incubation services also provide guidance and resources in ancillary services such as accounting and human resources to minimize corporate demands which are usually distractions faced by projects and their entrepreneurs. We believe this will translate to more successful projects as projects may now focus on their core business and driving sales, and in the long run, establish a strong brand reputation and attract a much larger number of backers. Projects enrolled in this service have a higher chance of success in both product development and completing a fundraising campaign. In turn, participants are more likely to see their rewards materialize. To the extent that our services can assist a project’s product development, sales and marketing and operating efficiencies, the project could become a more attractive project for participants. However, our services are consulting services, and we have no control over the operations of the company. We are hopeful that combining our business incubation services with our platform will translate to more successful projects.

Strategic Partnership with Prominent Funding Sources Such as Venture Capital Funds and Institutional Investors

Projects on our reward-based crowdfunding platform have access to additional perks that include meaningful introduction to relevant venture capital funds and institutional investors, for follow-on equity or debt-based financing. We believe that this aspect of our services allows our platform to attract the higher quality projects. In turn, access to additional and follow-on capital increases the success rate of projects in the long run. As such, we will cultivate a strong business reputation through a virtuous cycle of attracting higher quality projects that undergo higher success rates.

Strategic Partnership with Provincial and Regional Exchanges to Better and More Broadly Market our Platform to Interested Parties

Our strategic partnership with provincial and regional exchanges allow us to market our platform via exchange-sponsored public events targeting a broader group of individuals and entities who would potentially be interested in in participating in projects via our platform. We believe marketing our platform via exchange-sponsored public events is an effective way to increase the public exposure and brand recognition of our platform, since exchange-sponsored public events typically target a broader group of individuals and entities.

Our Innovative Auto-parts Procurement Service Bridges the Supply Chain Gap and Is an Industry Pioneer in Zhejiang

Through our innovative auto-parts procurement service operation, we are an industry pioneer in Zhejiang province where we currently operate and where we believe the procurement needs of auto-repair and auto-service shops are largely unmet. Our experience and expertise in the auto-parts industry, as well as our working relationships with a large number of auto-parts suppliers allow us to expeditiously procure and ship most types of auto-parts and specialty auto-parts within no more than two business days.

Higher Quality Projects From Incubators and HiTech Parks Operated by Higher-Education Institutes and Governments

We have working relationships with various provincial and municipal government sponsored hi-tech incubation parks in Hangzhou, Guangzhou, Hong Kong, Macau and Taiwan, to share resources to achieve mutual growth. We do not have any compensation arrangement with them. University-sponsored incubators and hi-tech incubation parks sponsored by provincial or municipal governments have access to higher quality projects stemming from university research and/or attract better projects due to the government-backed incubation park infrastructure. Additionally, because they provide infrastructure and mentorship services to projects and entrepreneurs, these projects have more resources to succeed than those that are not part of a university incubator or government sponsored incubation park. These incubators and incubation parks, in turn, allow us and our users access to a pool of higher quality projects, via our working relationship with various university incubators and provincial-and-municipal-sponsored hi-tech incubation parks in Hangzhou, Guangzhou, Hong Kong, Macau, Taiwan, etc. We have collaborated with various quality projects from government-sponsored or university-sponsored incubators.

Experienced and Highly Qualified Team

Our team members have an average of at least eight years of experience in their respective fields of e-commerce, Internet finance, media, entertainment, auto-parts procurement service, design and technology and online marketing. Some members of our team previously work at other online giants such as Alibaba and Baidu, while others have ample experience in product development and marketing. Our CEO Mr. Jianjun Sun, Mr. Sun was a director responsible for administrative affairs, human resources, accounting and asset management, for Hangzhou Qinghefang Asset Management Co. Ltd., a state-owned enterprise from June 2015 to September 2017. Mr. Sun was a director of Hangzhou Qinghefang District Joint Committee, responsible for managing Hangzhou Qinghefang Historical District Management Committee, a governmental agency from June 2015 to September 2017. Mr. Sun was the Division Chief of Administrative and Management Affairs Division, Hangzhou Qinghefang Historical District Management Committee, and was responsible for administrative affairs, human resources, accounting and asset management from July 2012 to May 2015. Mr. Sun holds a bachelor’s degree in Economics and Administration from Nanjing University of Political Science.

B. Business Overview

Overview

We operate a fast growing reward-based crowdfunding platform in the PRC and provide quality incubation services and financial services to entrepreneurs and business entities with funding needs utilizing our crowdfunding platform. In addition, we have commenced our auto-parts service operation to provide one-stop services serving auto-repair shops seeking and transacting with auto-parts suppliers,

Since the inception of Long Yun, we have generated our revenue from four sources:

Currently, we generate revenues from three sources, platform service fee, incubation service fee and procurement fee.

Crowdfunding is a process by which a project or project is funded by raising money from a large number of people, primarily through an internet-based platform. The participants in crowdfunding are the crowdfunding platforms, such as our platform, the entrepreneurs or project sponsors, and the participants or other funding sources who make a payment for the reward. There are five basic types of crowdfunding programs — equity crowdfunding, reward-based crowdfunding, debt-based crowdfunding, by which loans are made to an individual or business, royalty-based crowdfunding, which the participant receives payments based on revenue generated by the project, to the extent that the project generates revenue, and donation-based crowdfunding. Currently, we are only engaged in reward-based crowdfunding in China, and we may offer other types of crowdfunding in compliant with PRC laws and regulations in the future.

We launched our online crowdfunding platform, 5etou (“ ”), at www.5etou.cn in March 2015. Our 5etou platform is designed to enable projects searching for funding to connect with participants, who are the funding sources looking for projects. Our platform enables projects to seek to raise initial seed money and to try to establish a credible track-record in product/service development and cash flow, and participants become involved in opportunities for rewards, often the product for which the business is seeking funding, as well as being involved in a project that the participant believes has the possibility of offering products, services and technology of interest to him.

For a reward-based crowdfunding project, the participant uses our platform to review opportunities that are available on our platform and to consider whether he or she wants to make a payment to one or more of the projects that are then raising funds through our platform. In exchange for the payment, the participant receives a reward. If the project is developing a product, the project can offer to deliver the product when it is completed, which is, in effect, a pre-order of the product, with the project using the proceeds of the pre-sale to develop or manufacture the product. The project may require payment of a certain amount in order to receive the product, and participants who pay a lesser amount may receive a lesser benefit, such as a project company t-shirt or recognition on the project company’s website. If the delivery of a product does not apply to the project, the project can offer a service or other benefit.

In addition to the operation of our funding platforms, we offer business incubation services to the projects utilizing our platform for their projects, at the election of the projects. We provide our consulting services pursuant to agreements with the projects on an ongoing and as-needed basis, until the projects no long need or desire the consulting services. We offer these services, commencing from the time when a project first initiates a contribution campaign using our platform to the completion of project prototypes and/or product/service, and continuing until the project becomes profitable or no longer requires or desires our services. These services include business and operation advisory services relating to marketing, sales and strategic planning, and guidance and general resources in ancillary services such as human resources, legal, accounting, assisting with feasibility studies and other types of services that projects need. We are not intended to substitute for professional services providers such as business operation professionals, accountants, or lawyers and will make referrals to third-party providers when needed. For the fiscal year ended March 31, 2017, we generated revenue of $2,707,008, or approximately 75%, through our incubation services. For the fiscal year ended March 31, 2018, we generated revenue of $3,197,865, or approximately 74.73%, through our incubation services.

We also offer to act as a finder to assist these companies to obtain loans or additional equity financing, and introduce them to potential business partners, find merger candidates or other strategic relationships, or assist with feasibility studies, for which we charge a finders’ fee in the form of cash only. We generally seek financing only from funds or groups that are financially sophisticated in making risky investment. We do not engage in investment activities such as providing capital in the form of equity or debt, in projects that seek funding through our platform. We do not engage in similar investment activities in entities that provide equity or debt financings separate from our platform. Unlike in the United States, where an issuer is not allowed to pay to an individual or entity without the relevant registration or license a finder’s fee or broker’s fee for raising capital in either a public or private offering, in the PRC, as long as the issuer is (a) not a public company, and (2) the fundraising transaction does not involve any public offering or sale of equity or debt securities pursuant to PRC securities laws, a finder is not required to obtain any special administrative approval for receiving finders fee or brokers fee for making business introductions or referrals, and assisting fundraising in private financing transactions. Occasionally, as part of the perks for fundraising via our platform and aimed at attracting high quality projects with additional conduits of follow-on financing, we also introduce projects that are ready to raise funding publicly, to relevant primary exchanges for which we do not take a finder’s fee. Such primary exchanges are provincial or regional primary exchanges, aka stock exchanges or financial assets exchanges licensed by regional governments in the PRC and hold business license and permits to engage in activities involving the primary market of share issuance, primary trading of stocks and financial assets and the like.

The PRC government takes the position that start-up related business activities are an important source that drives economic development and lowers unemployment rate, and thus encourages start-up related business activities, as stated in an opinion issued by the PRC State Council on April 27, 2015, on “Further Efforts Relating to Employment and Business Startup Under the New Conditions”. Partly in response to a belief that the government is encouraging start-up projects, recent college graduates, college students, as well as young professional are entering the start-up business world. Our goal is to enable quality start-up projects to first test the market with either prototypes of their products or services, or their business propositions and then cultivate initial financial and business resources for the underlying businesses to grow and thrive.

The first project was launched on our platform on April 12, 2015. Since then, through March 31, 2018, 209 projects have initiated and completed fundraising campaigns using our platform, for which they raised approximately $120,371,343. All of the 209 projects successfully met their target amounts on our platform. The majority of the 209 projects successfully completed their fundraising between one month and three months from the date they launched their fundraising campaign on our platform.

We do not possess an internal payment capability and as such, transaction payments through our platform are processed by Union Mobile Pay, who is an independent third-party payment processor. Union Mobile Pay retains a percentage of the proceeds from successfully completed offerings as cost for the transaction. Union Mobile Pay advised us that it is in compliance with all applicable PRC’s regulations, including those related to privacy, online payments and money laundering.

We were incorporated in October 9, 2014, and with respect to our crowdfunding platform operation, only started generating revenue in the year ended March 31, 2016. For the fiscal year ended March 31, 2017, we generated revenue of $3,590,217, of which $2,707,008, or approximately 75.40%, was from our incubation services, $883,209, or approximately24.6% was from crowdfunding platform service, $0, or 0%, was from finder’s fees for raising capital.

Since January 2018, we commenced providing auto-parts related services through Hanghzou Dacheng, Currently, we provide procurement services, in the form of sourcing, accounts receivables financing, and logistics services to auto-repair shops that have demands for auto-parts from auto-parts suppliers, and auto-parts suppliers transacting with auto-repair shops. We receive a 0.8% procurement fee based upon the total transaction amount of auto-parts that we procure or source for the auto-parts suppliers and the auto-repair shops, in addition to any logistics fees applicable.

For the fiscal year ended March 31, 2018, we generated revenue of $4,278,729, of which $3,197,865, or approximately 74.74%, was from our incubation services, $1,074,101, or approximately 25.10% was from crowdfunding platform service, $6,763, or 0.16%, was from procurement services related to the Dacheng auto-platform operation commenced in the fiscal year ended March 31, 2018. In the fiscal year ended March 31, 2018, we did not generate any revenues from finder’s fee services. None of the three sources related to our crowdfunding operation experience any seasonality. Our procurement services experience some seasonality because the post-sales automobile market and auto parts markets are more active in the last three months and first three months of each calendar year.

Marketing

With respect to our crowdfunding operation, locating and identifying viable projects for reward-based crowdfunding and continuing to support their growth, is integral to our business. We have working relationships with various provincial and municipal government sponsored hi-tech incubation parks in Hangzhou, Guangzhou, Hong Kong, Macau and Taiwan, to share resources to achieve mutual growth. We do not have any compensation arrangement with them. The nature of the working relationship is through mutual effort, increase the success of incubating viable startup projects or companies into successful businesses that would benefit all parties. The infrastructure of such parks, and the crowdfunding expertise and the platform of our company allow us to provide synergy in supporting startup projects and companies. Incubation parks usually have a campus providing for office and/or product development space for startups, and IT infrastructure and support provided by reliable IT service companies; additionally, these incubation parks are either certified by local or provincial PRC government, or established according to the policy guidance of and/or operated by state-owner-enterprises of local or regional PRC government. Specifically, such sponsored parks allow us and our sponsors to access projects in such incubation parks and bring them to fundraise on our platform, and/or allow us to recommend projects for membership in such incubation parks, after projects have successfully completed the Fast Track program on our platform. For the former, our sponsors or us then screen and select viable projects in need of funding and/or business incubation services from us. For the latter, the incubation parks then provide the infrastructure and support (IT support, continued operation of the infrastructure, etc.) for Fast Track projects to complete product or service development as promised in their campaigns. Additionally, we collaborate with these incubation parks in organizing public events geared towards either attracting contributors, or viable projects, or both, or raising general awareness in crowdfunding. Such incubators and incubation parks provide facility and space, and favorable business environment to determined entrepreneurs and business startups that qualify for access to such incubators and incubation parks. We believe that startups and projects that qualify for membership in such incubators and incubation parks have a higher success rate, and in turn, startups and projects benefit from the infrastructure, support and operation and are also more likely to deliver promised service or product development and eventually grow into successful businesses. We do not have any compensation arrangements with incubation parks.

Currently, as a crowdfunding platform company still in our initial growth period, we believe a steady growth of our registered user base is also integral to our operation and the recognition of our brand name. As such, we have been focusing our marketing resources on our Fast Track program since April 2016, because Fast Track projects typically see a large number of participants and usually sees significant increases in new registered users, as explained herein. Our marketing expenses on our Fast Track program as part of our marketing expenses for all three levels of our programs, have increased from 18.4% in the year ended March 31, 2016, to 64.95% for the fiscal year ended March 31, 2017 as we increased spending on Fast Track program to as a focus of our marketing efforts on the Fast Track program, and have decreased to 48.6% for the fiscal year ended March 31, 2018, because we have launched a Fast Track WeChat marketing channel and moved part of the marketing in-house, resulting in decreased marketing expenses.

We have also entered into cooperative agreements with regional stock and/or financial exchanges that hold the requisite regulatory permits to facilitate equity or debt-based financing and secondary transactions, such as Wenzhou Financial Assets Exchange Center, Jiangsu Culture Exchange, Tianjin Financial Assets Exchange, and other various non-affiliated project capital funds and private equity funds. These exchanges do not receive compensation unless a project fundraises through these exchanges.

Several well-known companies have launched or intend to launch projects for crowdfunding campaigns via our platform, such as 163.com Games, Ping An Games, and Global Gaming. As part of our working relationship, they feature such projects on their webpage with a url link to our platform. These companies usually have large registered user bases and/or busy online traffic and thus such exposure potentially lead to increasing traffic to our platform and increasing our online exposure. We conduct targeted sales and marketing efforts to the customers and users of such collaborators in order to expand our own registered user base. Our collaboration with these well-known companies includes (1) crowdfunding campaigns on our platform for the projects they launched, and (2) promoting our projects through their websites when we believe that the themes of these companies are relevant to our projects, such as technology, game design, entertainment and business. We believe featuring our projects on partner platforms allow additional exposure of both our platform and the projects and will positively influence our platform’s online traffic.

In addition to our marketing efforts described above, we also market our platform, through:

With respect to our auto-parts service operation, we establish working relationships with auto-parts suppliers primarily by visiting and meeting with the suppliers at auto-parts malls, which are congregations of auto-parts suppliers in the PRC market. We also establish working relationship with auto-repair shops by having our marketing and sales staff visit local auto-repair shops and signing them up to our official Wechat group. Typically, when we are approached by auto-parts suppliers to provide auto-parts procurement services to both the auto-parts suppliers and auto-repair shops, the auto-repair shops that we serve become our clients upon completion of the transaction. As of the date of this annual report, we have served over 500 auto-parts suppliers, and over 3,000 auto-repair shops located in Jiaxing, Suzhou City, Zhoushan Island, Dongyang and Yiwu. We plan to expand our operation presence to the entire Zhejiang Province in the rest of 2018.

Competition

We face competition from a number of reward-based crowdfunding platforms such as z.dj.com, and izhongchou.taobao.com. Many of these platforms are well established in the e-commerce market in China, and have more resources and are better funded and better known than we are, and also have a significant proprietary user base. The top five largest rewards-platforms in China, z.jd.com (operated and owned by JD.com), Zhongchou.cn, Hi.taobao.com, Demohour.com and Dreamore.com, are reported to have raised an aggregate of RMB 270 million (approximately $40.5 million), which accounted for 60.8% of the total money raised in the reward-based crowdfunding market in China in 2016.

We also face competition from other crowdfunding platforms that specialize in either loan-based, equity-based or royalty-based crowdfunding offerings, such as AngelCruch, AngelClub and Dajiaotou. Market leaders such as z.jd.com, an equity crowdfunding platform operated by JD.com, utilizes a lead-and-follow mechanism, where institutional VC firms and angel funds will lead and manage the investment deals and allowing individual investors to participate on the same terms.

We believe that, by offering business incubation services, we attract high quality prospective projects with valuable services in addition to the funds that could be raised using our platform. We market these services, as well as the possibility that we may be able to introduce them to offline funding sources and potential business relationship through our formal and informal relationships. We believe that, because these additional services could assist the projects is developing their business, we will be able to attract more quality projects. We believe that we are one of the few platforms in the PRC market that provides high-quality business incubation services to entrepreneurs, although we are aware that there are a number of incubation facilities, including those with which we have a formal or informal relationship. By providing these value-added services, we believe that projects on our platform could have a better chance of success in both product development and completing a fundraising campaign.

For our auto-parts service operation, the competition in the PRC market is intense, and the market is fragmented. Online-only companies such as Alibaba and JD.com have not succeeded in establishing a market dominance in this industry. We believe we currently do not face direct competition from similar service providers in the PRC, other than auto-parts suppliers who market and sell their auto-parts products directly.

Our Strategy

Our goal is to establish our 5etou platform as a well-known reward-based crowdfunding platform recognized both for quality projects in the PRC market and as a business services provider to crowdfunding projects. To reach our goal, our general strategy is the following: (1) attract an ongoing supply of high quality projects and companies to fundraise for capital on our platform, and (2) grow and maintain a loyal user base.

(1) Attract an ongoing supply of high quality projects and companies through deepening collaboration with sources of projects such as university incubators and government-sponsored incubation parks. We attract high quality, viable projects through various incubation campuses of higher education institutions and high-tech incubation parks of municipal and provincial governments. Currently, we have access to various university incubators and provincial-and-municipal-sponsored hi-tech incubation parks in Hangzhou, Guangzhou, Hong Kong, Macau, Taiwan, etc. where our sponsors have identified viable and promising projects that have utilized our platform. We plan to collaborate with more incubators and hitech parks sponsored by higher educational institution, municipal and provincial governments, to attract projects from these institutes to fundraise via our platform.

(2) Grow and maintain our user base via growing contributions in registered users to multiple projects on our platform, and targeted sales and marketing efforts to customers and users of some of our established crowdfunding customers . We believe we have been successful in growing our user base by conducting more targeted sales and marketing efforts to the customers and users of our customers such as 163.com Games, Ping An Games, Global Gaming, etc. pursuant to relevant strategic or cooperative agreements, as well as targeting our Fast Track registered users to participate in Type A and Type B projects to boost our platform service revenues in the long run. These customers are usually well established, well-known companies with a larger and geographically broader, registered user base and casual online visitor volume, and are generally interested in developing high quality products in each of their product realms via crowdfunding. They have initiated projects to fundraise and have successfully completed fundraising via our platform; they feature these projects on their webpages with links to the project’s fundraising page on our 5etou platform, and thereby increasing online traffic to our platform and creating greater brand exposure.

With respect to Dacheng auto-parts service platform, our goal is to establish the platform as a national, one-stop service platform for automobile repair. To reach our goal, our general strategy is to replicate our current business model through cooperative and franchising models first in other cities in the southeastern seaboard of the PRC, and next nationally.

With respect to both our crowdfunding platform and our auto-parts service operation, we have no current plans to acquire any businesses or to engage in any businesses other than our current business as described in this report.

Our Operation

Our operation consists of our Dacheng auto-parts service operation and our integrated crowdfunding platform and our Dacheng auto-parts procurement service operation.

Our Crowdfunding Platform

Our integrated crowdfunding platform, “5etou” (“ ”) began its operations in China in March 2015. Our platform enables small and medium sized companies, start-up companies and idea generators to raise funding from participants through the Internet. Currently, we only facilitate reward-based crowdfunding. Reward-based crowdfunding refers to payments through the Internet by a large number of participants to a specific project with the prospect of a return in the form of goods, perks, a product or service, when the project is successful. We do not presently intend to offer equity-based crowdfunding, debt crowdfunding or donation-based crowdfunding.

Our operation consists of our Dacheng auto-parts service operation and our integrated crowdfunding platform and our Dacheng auto-parts procurement service operation.

Projects on our platform

Our platform is based in China, and our contributors, entrepreneurs and projects are all located in China. We do not market our platform or our projects to backers located in the U.S. We employ technological measures designed to ensure that our online contribution system is only accessible by Internet users located in China. All contributors are required to complete an online certification confirming they are not U.S. Persons, as defined in Rule 902 of Regulation S under the Securities Act of 1933, as amended, prior to making contributions and are using their legal name consistent with their government-issued identification card. Projects and individuals can submit business propositions to be funded by individual and entity contributors, via our platform. After projects and individuals make online submissions, our platform staff will review and then determine whether and under which category to upload the projects on our platform. Our staff has full control over the access to the platform. Alternatively, potential projects are identified, screened and referred to us by non-related, third party sponsors who are typically experienced personnel with technical or skilled knowledge in their respective fields. We do not pay the sponsors any compensation, nor do we enter into any compensation arrangements with the sponsors. Projects referred by sponsors and self-submitted projects are subject to the same review process.

The primary focus of our crowdfunding platform is reward-based projects for all industries, with an emphasis on design, business, technology, media and entertainment. Projects and/or entrepreneurs involved in product development, service provision, films and entertainment projects in production, and other projects in exchange for rewards, such as the products, services, and film tickets when such films are in public distribution.

Our proprietary platform also displays the business and financial information of companies and/or projects database that have completed campaigns or sought contributions on our crowdfunding platform. We require projects that successfully completed their campaigns using our platform to post on our platform the financial reports and business and product updates from time to time but we do not independently verify any information provided by the project and its sponsors. If the projects provide information on our platform as to both the success of the previous crowdfunding campaigns and the development of the project’s product or service, potential participants have access to this information on our platform, and can use this information in determining whether to participate. Our platform as well as our agreements with the registered users provide that the information as to any project or project on our website is provided by the sponsor or the project and we have no responsibility for the accuracy or adequacy of any information relating to any project, sponsor or project that is accessible on our website. We do not require projects seeking to raise funds through our platform to meet minimum income or asset requirements since all of our projects are reward-based. We require all participants to become registered users of our platform and make contributions under their legal names. Our platform does not require participants to Fast Track, Type A and Type B campaigns to make a minimum investment commitment. Projects set their own minimum contribution required of each backer, and Type A and Type B projects typically set a higher minimum investment commitment than the Fast Track projects, in order to attract high-net-worth individuals and larger entities. We are not involved in determining the campaign target or the rewards. In each offering, the amount of money being raised, the nature of the offering, including amount to be paid for a specified reward or benefit and the period during which payments will be accepted by the project, is determined by the project.

Three levels of programs on our platform

Our platform supports three levels of programs that are available to businesses or entrepreneurs, which we call our Fast Track program, Type A program and Type B program.

Our Fast Track program is designed to enable a start-up project to raise up to RMB 100,000, which is approximately $15,000, for which the participant will receive a reward or benefit. Participants in this program can contribute as little at RMB 1.00 (approximately $0.15), thus as a result, to meet funding target, each project that use our Fast Track program typically receives contribution from a large number of participants (who also become registered users if they are not already registered users) than those using our Type A or Type B programs (as explained below, typically have higher minimum contribution per participant). Our Fast Track program is designed to enable start-up projects to test the market by offering a non-equity participation in the project in order to give the project resources to develop its product and service and provide participants with a product or service or other benefit, generated by the project, even if the reward is not developed until a considerable time after the completion of the Fast Track financing. Participants in Fast Track offerings may make contributions either because they want to receive the product, for which they are pre-paying, or receive another benefit. Startup companies without a track record and companies needing a small amount of contribution are eligible for Fast Track crowdfunding campaign. As of March 31, 2018, the Fast Track program had the largest number of projects either under way or completed on our platform. Due to their small fundraising size and quick turnaround, Fast Track projects could be accessed by a larger number of participants and provide valuable market intelligence on the projects.

Type A and Type B campaigns are designed for projects that either have completed a Fast Track campaign and received a positive response from the market, or are projects that are more established or whose product development are further along the way than a Fast Track project, or require more funds than can be raised through Fast Track. Projects using Type A and Type B campaign tracks may raise a larger amount of money without any limitation on the target amount, for which they issue rewards that may, but need not, be different from the rewards available through Fast Track. Typically, projects that have successfully raised via the Type A or Type B campaign tracks have had target amounts in the range from approximately $149,253 (RMB 1,000,000) to approximately $8,628,748 (RMB 60,000,000), which are many times the ceiling of a Fast Track campaign which is approximately $15,000 (RMB 100,000).

Projects may raise funds through our Type A program if a project has completed a Fast Track program or if the project is submitted by a business entity registered with the relevant branches of Bureau of Industry and Commerce and holds a requisite business license, which is the main parameter we consider in reviewing a project’s eligibility for Type A campaigns, and the project agrees to disclose certain financial information during the period from the date when the project is first funded until all promised rewards are delivered. For Type A projects only, we verify with the relevant branches of Bureau of Industry and Commerce regarding a project’s requisite business license and conduct a background search of the principals for our file, and do not otherwise perform any additional independent verification or due diligence beyond what is described herein. The due diligence that is performed for Type A campaigns is significantly less than the due diligence a broker-dealer in the United States is required to conduct in connection with a financing arranged by the broker-dealer. Since we do not independently verify the application material provided by the projects, we cannot assure participants that the information in the application material provides either accurate or adequate information.

Our Type B platform enables projects that are either relatively established or have completed a Fast Track program. Unlike projects using the Type A platform, Type B projects are not subject to any due diligence review by us.

FastTrack and Type B projects are permitted to commence their campaigns on the platform after our staff completes a review ensuring all information in the application is provided in full. As part of the application material, Fast Track and Type B projects are also required to certify to us that the project founders are disclosing their legal names as evidenced by their State-issued identification card, and are abiding by the terms and conditions of utilizing our 5etou platform for raising funding. We do not independently verify the completeness or accuracy of the information in the application of Type B and Fast Track projects. We review Type A projects based upon the aforementioned verification standard and some are occasionally rejected for failure to meet our verification standard. For Type A projects, we do not perform any additional independent due diligence on the projects other than the aforementioned, the principals and officers of the project or the material which the projects provide to us. Project Profile information and fundraising information are otherwise published in the form that they are submitted, without input from or revision by our platform. We do not require companies using our platform to provide audited financial statements. The disclosure provided by the project is included with the information about the company on our platform, without edit or comment by us. Alternatively, potential projects are identified, screened and referred to us by third party “sponsors” who represent that they have knowledge in fields in which their projects are engaged.

The first project was launched on our platform on April 12, 2015. Since then and through March 31, 2018, 209 projects have initiated and completed fundraising campaigns using our platform, for which they raised approximately $120,371,343 (RMB 787,810,037) in funding, including approximately $75,256,228 (RMB491,600,000) for Type A projects, approximately $44,866,769 (RMB 294,578,037) for Type B projects, and approximately $248,346 (RMB 1,632,000) for Fast Track projects. As of March 31, 2018, out of the 209 projects that initiated and completed fundraising campaigns using our platform, 42 projects successfully met their target amounts for the year ended March 31, 2016, an additional 66 projects for the year ended March 31, 2017, and an additional 101 projects for the year ended March 31, 2018.

For the year ended March 31, 2016, the revenue for crowdfunding platform service fees generated by Type A projects was approximately $581,925 (RMB3,805,501), by Type B projects was approximately $145,362 (RMB950,597), and by Fast Track projects was approximately $15,619 (RMB102,142). For the year ended March 31, 2017, of the 66 projects that successfully met their fundraising target, 35 are Fast Track, 6 are Type A, and 25 are Type B. For the year ended March 31, 2017, the revenue for crowdfunding platform service fees generated by Type A projects was approximately $420,586 (RMB2,830,189), by Type B projects was approximately $458,391 (RMB3,084,579), and by Fast Track projects was approximately $4,232 (RMB28,475). For the year ended March 31, 2018, the revenue for crowdfunding platform service fees generated by Type A projects was approximately $578,966 (RMB3,767,227), by Type B projects was approximately $494,505 (RMB3,217,654), and by Fast Track projects was approximately $631 (RMB4,104). For the year ended March 31, 2018, of the 101 projects that successfully met their fundraising target, 8 are Type A, 41 are Type B and 52 are Fast Track. As such, we believe that in the foreseeable future, platform service revenues generated by Type A and Type B projects will continue to take a more significant portion of our platform service revenues generated by all three levels of our programs, mainly due to the much larger target offering amounts of Type A and Type B projects than those of Fast Track projects. However, despite the smaller fundraising size associated with Fast Track projects which may not contribute to significant growth in our revenue in the immediate future, we believe that our focus on marketing our Fast Track program will continue to boost overall revenue generated by our platform service, as illustrated by our past operation and business performance (as further discussed below).

Since April 2016 till now, the main focus of our marketing efforts has been our Fast Track aspect of the platform operation. We believe that marketing the Fast Track program and attracting first-time registered users with our Fast Track projects could ultimately allow us to build a stronger brand name and generate steady revenue in the long run. First-time registered users who registered in order to participate or view our Fast Track projects have consistently had a high conversion rate where they later on participated in Type A and Type B projects.

In the long run, we believe that attracting first-time registered users by focusing on marketing Fast Track program is key to growing our revenue, due to the following reasons. First, as discussed previously, increasing first-time registered users who first participated in Fast Track projects ultimately contribute to more participation in all three levels of programs. Second, Fast Track projects act as a useful marketing tool for our platform, since due to their lower fundraising amount per participant, they typically introduce more participants who are first-time registered users.

The majority of the 209 projects successfully completed their fundraising between one month and three months from the date they launched their fundraising campaign on our platform. Specially, the average timeframe of a campaign from initiation to completion of a typical project is approximately 30 – 60 days for Fast Track projects, and 30 – 90 days for both Type B and Type A projects.

The projects raising funds through our platform come from different industries including but not limited to, technology, media entertainment, social media, healthcare product, and manufacturing. The nature of products and services developed through funds raised via our crowdfunding platform is diverse, ranging from integrated smart healthcare mobile application, to social media network applications, personalized service providers for jewelry design and trip planning, online applications for cooking and recipes, and online games platforms and internet finance platforms. Due to our limited operating history, we have not identified any trends in terms of average funding amount/per participant in a given project and the percentage of participants who so far have qualified for the full amount of benefits.

Participants on our platform

Although it is not necessary for a participant to become a registered user in order to view available projects on our platform, the participant must register before making any payment using our platform. All of the registered users and projects are located in China, and our platform used technological measures designed to make it accessible only by Internet users in the PRC. Each registered user must self-certify that, among other requirements, he or she is not a U.S. Person, as that term is defined in Rule 902 of Regulation S under the Securities Act, that he or she is a resident of the PRC and that he or she is using his legal name consistent with governmental-issued identifications when making contribution payments. Our 5etou platform includes software protections designed to ensure that the online contribution system is only accessible to Internet users located in the PRC. In registering on our platform, a participant acknowledges that he or she understands that our platform is designed to enable participants to make payments to projects using our platform, but that we have not performed any independent due diligence review concerning the projects raising money on our platform, other than whether Type A projects have the required business licenses and required permits and government approvals and a background search of the principals, that the participant is making his or her own determination as to whether to make any payment for any projects on our platform.

Transaction Processing on our Platform

We do not possess internal payment capabilities and payments through our platform are processed by Union Mobile Pay, who is an independent vendor providing third-party payment processing service to us. Union Mobile Pay retains a percentage of the proceeds from successfully completed offerings as cost for the transaction. Pursuant to our agreement with Union Mobile Pay, once the funding target is reached and the campaign closes, our platform fees will be paid to us out of the raised proceeds held in an escrow account administered by Union Mobile Pay, as further described below.

Transaction payments will be held in a third-party escrow account administered by our payment processor, Union Mobile Payment, during crowdfunding campaign and 90% of the gross proceeds is paid to the project if and when the target is reached by the last day of the campaign. Projects set their own target amount and/or minimum amount and how long they want to keep their campaigns open (the “Campaign Period”). Successfully reaching the target and/or minimum amount prior to or at the end of the Campaign Period means the funding target is reached and funds are eligible for disbursement; these are the only circumstances where funding target is deemed to be reached. Once the funding target is reached, as determined by the system of Union Mobile Payment that tracks the funding process and amounts, Union Mobile Pay distributes 90% of the proceeds to the project net of our platform service fees (which Union Mobile Pay will pay to us simultaneously) and Union Mobile Payment’s transaction cost, and the remaining 10% is held in escrow until the project delivers the reward. If the project fails or does not deliver the promised reward, the 10% held in escrow is then paid to the participants on a pro rata basis. If the funding target is not reached by the end of the Campaign Period, all funds will be repaid to the participants. We understand that this practice is customary in the PRC crowdfunding market.

At inception, we also offered donation-based projects, to either charities seeking funds for their charitable purposes or individuals or organizations seeking funding for a specific project, such as fulfilling a personal dream of a disabled person to receive piano training. The donation-based programs did not provide goods, services or other benefits. We required the donation-based program sponsors to provide status updates to us and contributors. However, we did not pass upon or evaluate the sponsors or the projects, and we did not take any steps to determine whether the charity is a bona fide charity under PRC law or whether the project or the sponsor is legitimate, and we did not audit or otherwise evaluate the project or take any steps to independently determine how the proceeds were used. We exited the donation-based crowdfunding program and currently do not offer donation-based crowdfunding programs. Our exit was due to our plan to focus our business and operation resources on growing our reward-based projects. But we may offer such a program in the future, when we have more resources to grow the donation-based program into a significant aspect of our platform.

For the fiscal year ended March 31, 2017, we generated approximately 24.6% of our total revenue from our crowdfunding platform service operation. For the fiscal year ended March 31, 2018, we generated approximately 25.10% of our revenue from our crowdfunding platform service operation.

Business Incubation and Consulting Services

We offer business incubation services to projects utilizing our platform for fundraising. We provide consulting services pursuant to agreements with the projects on an ongoing and/or as-needed basis.

These services include business and operation advisory services relating to marketing, sales, and strategic planning, and guidance and general resources in ancillary services such as human resources, legal, accounting, assisting with feasibility studies and other types of services that projects need. We do not intend to be a substitute for professional services providers such as business operation professionals, accountants, or lawyers and will make referrals to third-party providers when needed.

Our relevant fees are in the form of cash only. We negotiate our fees for providing incubation services on a case-by-case basis, taking into consideration the specific services that our team provides, the nature of the projects, our business relationships with the project owners, and whether the services are ongoing or as-needed. Clients utilizing our business incubation services are typically business and technology startups in the information technology, media, entertainment, and tourism industries. Projects fundraising through our platform typically involve the development and/or sales of products or services, based upon a viable business proposition or prototypes still in development. We provide quality business consulting and advisory services to our projects in each of their development stages from initiation to implementation, and seek to assist those projects to reach profitability. However, we are not involved with the management of these projects and we cannot assure investors in those projects that those projects can or will ever operate profitably.

We focus on business and technology startups including but not limited to information technology, media and entertainment, etc. Projects fundraising through our platform typically involve the development and/or sales of products and/or services, based upon a viable business proposition or prototypes still in development. We provide business incubation services continuously from when a project first initiates a contribution campaign via our platform, to completion of project prototypes and/or product/service, and so on until they reach profitability, on an as-needed basis. Specifically, the growth and development of startup companies and small and medium-sized projects typically overlook the following general stages before they generate sufficient volume to reach profitability and we seek to assist them in these areas:

We provide quality business consulting and general services to our client projects in each of the development stages, and seek to assist the projects that raise funds through our platform to use to reach profitability. However, we are not involved with the management of these projects and we cannot assure either the participants or the projects that the projects can or will ever operate profitably.

For the fiscal year ended March 31, 2017, approximately 75.4% of our revenue was generated from our incubation services. For the fiscal year ended March 31, 2018, approximately 74.74% of our revenue was generated from our incubation services. To date, all of the projects receiving our business incubation services have previously raised capital via our crowdfunding platform. We believe that having a crowdfunding platform with growing number of successful crowdfunding projects has been the key driving factor in the increase of our incubation services revenue. For more detailed discussion, please refer to “Item 3. Key Information – D. Risk Factors — Risks Relating to Our Business and Industry — We have a limited operating history and are subject to the risks encouraged by early-stage companies.” The increase in the number of crowdfunding projects fundraising via our platform has provided us with more potential clients who have needs for our incubation and financial services.

Services For Financing and Strategic Business Opportunities

From time to time, we also assist projects who fund projects through our platform to seek equity or debt financing and introduce them to potential business partners, merger candidates or other strategic relationships, for which we charge a finders’ fee in the form of cash only in connection with the specific services that our team provides. We generally seek financing only from funds or groups that are financially sophisticated in making potentially risky investment. These investments are generally made directly between the investor and the project and not through our platform. These are typically one-off transactions when a client’s need arises.

Unlike in the United States, where an issuer is not allowed to pay to an individual or entity without the relevant registration or license a finder’s fee or broker’s fee for raising capital in either a public or private offering, in the PRC, as long as the issuing company is (a) not a public company, and (2) the fundraising transaction does not involve any “public offering” securities pursuant to PRC securities law, a finder is not required to obtain any special permit or license, or administrative approval, to receive a fee for making business introductions and assisting fundraising in private financing transactions. Under the PRC securities laws, a “public offering” is defined as an offering of securities which is (a) marketed publicly via general solicitation, (b) sold to more than 200 investors, or (c) as otherwise deemed as “public offering” by specific regulations. The financing transactions in connection with which we can receive a finder’s fee are private equity transactions or loan financings for non-public enterprises, which do not fall under the definition of “public offering” under applicable PRC securities laws.

Occasionally, as part of the perks for fundraising via our platform and with the goal of attracting high quality projects with additional conduits of follow-on financing, we also introduce projects that are ready to raise funding publicly, to relevant primary exchanges for which we do not take a finder’s fee. Such primary exchanges are provincial or regional primary exchanges, i.e. stock exchanges or financial assets exchanges licensed by regional governments in the PRC, and hold business license and permits to engage in activities involving the primary market of share issuance, primary trading of stocks and financial assets and the like.

For our finder’s business, we do not have a fixed rate or fee percentage based upon funds raised, and intend to negotiate our fees on a project by project basis. For the year ended March 31, 2018, we did not provide any finder’s service. For more detailed discussions, please refer to “Item 3. Key Information—D. Risk Factors — Risks Relating to Our Business and Industry — We may experience significant fluctuation in revenues to be generated by our financial services, since the fee rates we charged are assessed on a project by project basis and subject to variables.

We do not engage in any offline roadshow activities involving capital raising by projects or entrepreneurs, and we are not involved in value-assessment of the projects or business ideas. Pricing or valuation is primarily determined by the entrepreneurs and the investors.

Our Auto Parts Operation

Following the inception of Hangzhou Dacheng on October 31, 2017, we launched the Dacheng operation in January, 2018 to provide procurement or sourcing services to auto repair and auto-service shops and auto-parts suppliers through our Dacheng Qipei E-House and Dacheng Qipei Supply Chain, by seamlessly connecting our small to medium sized auto repair and auto-service shops to a wide range of auto-parts suppliers. Auto-parts suppliers may engage us to deliver auto-parts to their auto-repair shop customers. Auto-repair and auto-service shop clients may engage us to procure and source, on their behalf, specific types of and specialty auto-parts from auto-parts suppliers for the most efficient and fast order placement, and delivery. Specifically, auto repair and auto-service shops of small to medium sized who typically service all types of automobile vehicles may not have the business resources to identify and locate expeditiously the specific auto-parts supplier for the parts they need for their repair and service work, or put in an order expeditiously. Additionally, some specially auto-parts suppliers may not ship their products to first-time customers unless the auto repair and auto-service shops make full payment in advance. As such, our procurement services seamlessly help auto-repair and auto-service shops order the auto-parts they need in no more than one business day. Additionally, Dacheng Qipei Supply Chain provides expeditious logistics services that uses our in-house delivery services to ensure timely delivery of the goods to our auto repair and auto-service shops. As such, our procurement services include but are not limited to procuring and sourcing auto-parts, collecting advance deposits needed, if applicable, for putting in an order and the remaining balance payments and remitting such payments to auto-parts suppliers on behalf of the auto-repair and auto-service shops in a timely manner, the logistics of shipping and delivery, return and exchange.

We charge 0.8% procurement fee based upon the total transaction amount of auto-parts that we procure or source for the auto-parts suppliers and the auto-repair shops. Our auto repair and auto-service shops clients will pay the entire amount of the order balance to us and also the procurement fee. We currently provide the in-house delivery services as part of the procurement service, and do not currently charge separate shipping services for our logistics service, but we plan to hire third-party shipping and/or delivery agents in the future and expect to charge delivery and shipping costs separately.

From the commencement of the Dacheng operation in January, 2018 to the end of the fiscal year ended March 31, 2018, we have assisted auto repair and auto-service shops and auto-parts suppliers in transactions that amount to an aggregate of RMB2,078,299 (approximately US$319,403). From the commencement of the Dacheng operation in January, 2018 to the end of the fiscal year ended March 31, 2018, we have provided services to approximately 100 auto-repair and auto-service shops, and to approximately 50 auto-parts suppliers. As of the date of this annual report, we have provided services to approximately 3,000 auto-repair and auto-service shops, and to approximately 500 auto-parts suppliers.

From the commencement of the Dacheng operation in January, 2018 to the end of the fiscal year ended March 31, 2018, our Dacheng operation have generated revenue in the amount of RMB44,007 (approximately $6,763) in procurement service fee.

Seasonality

Except for our procurement service operation, none of our other revenue sources experience any seasonality. The procurement services related to auto-parts service operation may experience seasonality due to a higher demand for auto-parts and relevant services in autumn and around the spring festival annually. Such demand is driven by the automobile maintenance need where PRC car purchasers typically purchase automobiles in autumn and around the spring festival annually.

Facilities/Property

Our registered address and principal executive office is currently and located at Room 2101, No.4 Phoenix City, 28 Qiutao Road, Shangcheng District, Hangzhou, Zhejiang Province, China, for premises of 1,177.1 square meters, pursuant to a lease agreement by and between WFOE II and a non-related third-party landlord, for the period of February 15, 2018 to February 14, 2021. The annual rent is approximately $396,176, $419,947, and $445,038 for each of the 12 months beginning on February 15, 2018 to February 14, 2021, respectively. WFOE II may terminate the lease with 2 months' prior notice. WOFE II has preferential right to enter into a new lease with the landlord at the expiration of the term subject to 3-month prior written notice of new lease and other conditions. Our prior location was Rooms 2001 and 2002, No. 4 Phoenix City, Shangcheng District, Hangzhou, Zhejiang Province, China, with an annual rent at approximately $167,435 and $177,482 for each of the 12 months from February 20, 2017 to February 19, 2019, respectively. This lease was terminated on February 19, 2018 due to our operation need for a larger premise. We also previously had premise at Suite B1-901, No.198, Qidi Road, Xiaoshan District, Hangzhou, PRC with an annual rent at approximately $47,000. This lease was cancelled on Feb. 19, 2017 . As of March 31, 2018, as a result of the cancellation of these lease agreements, our Company accrued rent expenses and penalties totaling $111,885 (RMB 770,950).

Long Yun HK entered into a lease agreement with a non-related third-party landlord for the period of January 23, 2017 to January 22, 2019 for an annual rent of $34,035 with the first month rent free.

Employees

As of March 31, 2018, we had an aggregate of 43 employees, of which 28 are Long Yun employees and 25 are Hangzhou Dacheng employees, all of which are full-time employees. None of our employees are represented by a labor union. We have not experienced any work stoppages, and we consider our relations with our employees to be good.

Intellectual Property

We rely on a combination of copyright, trade secret and other rights, as well as confidentiality procedures and contractual provisions to protect our technology, processes and other intellectual property. We own and operate, through Long Yun, the intellectual property underlying our crowdfunding platform. We own and operate, through Hangzhou Dacheng, the intellectual property underlying our auto-parts service operation. Hangzhou Dacheng is in the process of applying for trademark registration for Dacheng Qipei E-House. Even though intellectual property is not one of our competitive advantages compared to other crowdfunding platforms, it is an essential aspect of our platform operation.

Tax

Longyun, as a PRC entity, is subject to state and local enterprise income tax (“EIT”) according to applicable PRC tax rules and regulations. Hangzhou Dacheng, as a PRC entity, is subject to state and local enterprise income tax (“EIT”) according to applicable PRC tax rules and regulations. We are currently subject to the authority of Hangzhou Shangcheng Tax Bureau of Zhejiang Province.

PRC enterprises are required to file provisional EIT returns with the local tax authorities within 15 days of the end of each quarter based on actual quarterly profits. Enterprises that have difficulty in paying quarterly tax based on actual quarterly profits may make payments based on the quarterly average taxable income in the preceding calendar year, or by any other methods approved by the relevant tax authorities. Longyun and Hangzhou Dacheng have filed all quarterly EIT returns based on actual quarterly profits since its inception.

Final settlement of tax liability must be made within five months of the end of each calendar year in China, the EIT tax year end is December 31 and all enterprises are required to file their income tax return within 5 months after December 31. All EIT returns shall be based on Chinese GAAP. Since Longyun and Hangzhou Dacheng’s financial statements are prepared on U.S. GAAP and used March 31 as fiscal year end, the annual EIT return for tax year ended December 31, 2017 and December 31, 2018 were filed timely based on China GAAP. As such, the accrued tax payables in the EIT return may be different from the annual audited financial statement.

REGULATIONS

We operate our business in China under a legal regime consisting of the National People’s Congress, which is the country’s highest legislative body, the State Council, which is the highest authority of the executive branch of the PRC central government, and several ministries and agencies under its authority, including the Ministry of Industry and Information Technology, SAIC and their respective local offices. This section summarizes the principal PRC regulations related to our business.

Regulations on Crowdfunding Related Activities

Regulations on Operation of Online Crowdfunding Platform

The operation of an online crowdfunding platform includes provision of commercial internet information services via the Internet. Certain areas related to the Internet, such as telecommunications, Internet information services, international connections to computer information networks, information security and censorship, are covered extensively by a number of existing laws and regulations issued by various PRC governmental authorities, including:

The State Council issued the Administrative Measures on Internet Information Services, effective in September 2000, and amended in January 2011. Pursuant to these measures, “internet information services” refer to provision of internet information to online users, and are divided into “commercial internet information services” and “non-commercial internet information services.” A commercial internet information services operator must register for an ICP License, from the relevant government authorities before engaging in any commercial internet information services operations in China. The ICP License has a term of five years and can be renewed within 90 days before expiration.

Additionally, 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, or VATS License, from the MIIT or its provincial level counterparts.

Online payment processing is an integral part of our platform business process. We use Union Mobile Pay, which is compliant with PRC laws regarding accepting payments and transmit the payments to a project, handling payments made to the projects raising money through our platform. Union Mobile Pay is subject to numerous regulations relating to such matters as privacy, receipt and transmission of payments and money laundering.

As the operation of an online crowdfunding platform includes provision of commercial internet information services and provision of Telecommunication Value Added Services Permit License, we believe that with respect to the operation of our 5etou platform, we have obtained from PRC authorities all required approval and license to operate the platform, including but not limited to, (1) the Internet Content Provider (ICP) record filing for our platform URL; and (2) the required VATS License obtained from the requisite regulatory branch in Zhejiang Province, effective until December 24, 2020. The VATS License may be renewed and the ICP record filing is effective for as long as the platform URL operator fulfills the annual examination procedures online.

Regulations on Crowdfunding Activities

The PRC Crowdfunding Regulatory Realm

On March 5, 2016, the PRC government laid out its priorities for the year 2016, when Prime Minister Li Keqiang gave his annual state-of-the-nation report to the legislature, the National People’s Congress. Major areas of work for the PRC government in 2016 include encouraging more business startups, technological innovation and crowdfunding as some of its prerogatives emphasized that favorable government policies including employment-related and possible tax incentives will be promulgated to support business startups, technological innovation and crowdfunding, both on the national level and provincial and local level. According to Mr. Li, “platforms will be created for crowd innovation, crowd support, crowdsourcing, and crowdfunding, and mechanisms will be built to encourage new types of business startups and innovation-making through cooperation between enterprises, institutions of higher learning, research institutes, and makers…” As such, we believe that (even though the) regulatory framework of internet-based fundraising, etc. has not been completely established, the PRC government is planning to promulgate a variety of industrial/incentive policies, to encourage innovation, business start-ups and crowdfunding economy.

Previously on July 18, 2015, People’s Bank of China and other nine ministries issued the Guiding Opinions on Promoting the Healthy Development of Internet Finance (No. 221 [2015], PBOC, hereinafter referred to as the “Guiding Opinions”) on promoting the sound development of internet-based financing. The Guiding Opinions attracted extensive attention from all circles of the society. According to the division of regulatory responsibilities for the Internet finance as specified in the Guiding Opinions, the China Securities Regulatory Commission (the “CSRC”) is accelerating the research and development of regulatory rules for the pilot program of equity crowd funding and actively promoting all preparations for the pilot program. In December 2014, proposed private equity-based crowdfunding rules (the “Draft Rules”) were promulgated by the Securities Association of China, an industry self-regulatory association. The Draft Rules are not yet finalized and have not been adopted.

On August 17, 2016, the China Banking Regulatory Commission (“CBRC”), the Ministry of Industry and Information Technology; the Ministry of Public Security and the State Internet Information Office jointly issued the Interim Measures for Administration of the Business Activities of Internet Borrowing Information Intermediary Agencies, or the Interim Measures. The Interim Measures are aimed to promote the healthy development of internet borrowing industry, prevent financial risks and protect investors’ legitimate interests. The Interim Measures emphasize the role of peer-to-peer lending companies as financial information service intermediaries providing assessment and exchange of borrowing information for unrelated borrowers and lenders via internet platforms, and provided a negative list to draw the business boundaries of peer-to-peer lending companies, forbidding them from cash pooling, absorbing public savings or providing any form of guarantee for borrowers. The Interim Measures also set a ceiling for borrowers to control the size of loans on peer-to-peer platforms. To be specific, the borrowing balance of an individual borrower shall not exceed RMB 200,000 on a single peer-to-peer lending platform and RMB 1 million on different platforms. Similarly, the borrowing balance of a legal entity shall not exceed RMB 1 million on a single platform and RMB 5 million on different platforms. To better ensure the investors’ money safety, peer-to-peer lending platforms are also required to have their investors’ money deposited and managed by qualified banking institutions and to disclose information on the borrowers, financing projects and platform operation accurately on a timely basis. The Interim Measures took effect once promulgated, however, which provided a period of 12 months for any peer-to-peer lending companies established prior to the implementation of the Interim Measures to make rectification.

As such, the proposed Draft Rules and the Interim Measures referenced above only apply to private equity-based and debt-based crowdfunding, respectively. Our crowdfunding platform currently only provides reward-based crowdfunding in the PRC market, and do not provide equity-based or debt-based crowdfunding in the PRC market. Therefore, Guantao, our PRC Counsel, believes that we are is not subject to the proposed Draft rules or the Interim Measures.

Regulations Prohibiting “Illegal Fundraising.”

PRC general securities regulations prohibit “illegal fundraising.” Under PRC securities laws, any individual or entity is prohibited from publicly selling securities without meeting statuary requirements and being approved by the securities regulatory authority under the State Council or any department as authorized by the State Council. Any activity meeting the following criteria constitutes “publicly selling”, 1) selling securities to the general public, 2) selling securities to more than 200 specific persons accumulatively; 3) other activity as prescribed by any law or administrative regulation. “Illegal fundraising” also has consequences under general PRC criminal laws, which defines any fundraising activity meeting the following criteria as “illegal fund raising”, 1) raising funds from general public or without the legal approval from relevant governmental authorities or under the disguise of lawful business operations, 2) publicizing by means of media, recommendation fairs, leaflets or mobile phone text messages, etc.; and 3) promising to repay the principal and interests or make payments in the form of currency, real objects, equities, etc. within a certain time limit. Further, 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, effective January 2011, which provides that a public fundraising 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.

Regulations on Our Reward-Based Crowdfunding Activities in the PRC

As discussed above, the existing PRC crowdfunding rules and regulations are primarily focused on equity-based or debt-based crowdfunding. Our crowdfunding platform currently only provides reward-based crowdfunding in the PRC market, and do not provide equity-based or debt-based crowdfunding in the PRC market. We may provide donation-based crowdfunding in the future. There is no Chinese regulation currently in effect which specifically applies to reward-based or donation-based crowdfunding or requires special license or regulatory approval prior to conducting reward-based or donation-based crowdfunding activities in the PRC.

In addition, our contributors and entrepreneurs are limited to PRC residents and projects located in the PRC. We do not presently engage in crowdfunding offerings in the U.S. or to U.S. investors, and we have no plans to enter the crowdfunding market in the U.S., and therefore are not subject to any U.S. regulations governing securities-based crowdfunding such as Title III of the JOBS Act adopted formally and finally on October 30, 2015 in the U.S.

Since the crowdfunding industry is still at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits to those we currently have and to address new issues that arise from time to time. As a result, there are substantial uncertainties with respect to the interpretation and implementation of current and any future Chinese laws and regulations applicable to the crowdfunding industry. See “Item 3. Key Information – D. Risk Factors — General Risks Relating to our Business and Industry — If our activities are found to be treated by PRC regulatory authorities as unapproved and not exempt from securities regulations, we may be required to suspend our crowdfunding platform business and we may be subject to fines and administrative penalties.”

Regulations on Incubation Services and Finder’s Services

With respect to our business incubation and finder’s services, which is within the business scope set forth in Long Yun’s business license, we believe we have obtained all required licenses and governmental approvals. Unlike in the United States, where an issuer is not allowed to pay to an individual or entity without the relevant registration or license a finder’s fee or broker’s fee for raising capital in either a public or private offering, in the PRC, as long as the issuer is (a) not a public company, and (b) the fundraising transaction does not involve any “public offering” of equity or debt securities pursuant to PRC securities laws, a finder is not required to obtain any special administrative approval for receiving finder’s fee or broker’s fee for making business introductions or referrals, and assisting fundraising in private financing transactions. Under PRC securities laws, “securities” refers to publicly-issued stock, privately-issued stock by a public company, company bonds, listed government bonds, listed securities investment fund units, securities derivatives and other securities identified by the State Council of the PRC. Pursuant to PRC securities laws, a non-public issuer conducting private financings of either equity or loan, is a financing transaction that does not involve “an offer or sale of securities,” and thus such a non-public issuer may pay a finder’s fee to us, and we may receive a finder’s fee without any special administrative approval.

Regulations on Procurement Services

With respect to our auto-parts procurement services, which is within the business scope set forth in Hangzhou Dacheng’s business license, we believe we have obtained all required licenses and governmental approvals.

Provisions on Foreign Investment

All limited liability companies and joint stock limited companies incorporated and operating in the PRC are governed by the Company Law of the People’s Republic of China , or the Company Law, which was amended and promulgated by the Standing Committee of the National People’s Congress on December 28, 2013 and came into effect on March 1, 2014. In the latest amendment, paid-in capital registration, minimum requirement of registered capital and timing requirement of capital contribution were abolished. Foreign invested projects must also comply with the Company Law, with exceptions as specified in foreign investment laws.

With respect to the establishment and operation of wholly foreign-owned projects, the MOFCOM, and the National Development and Reform Commission, or NDRC, promulgated the Catalogue of Industries for Guiding Foreign Investment , or the Catalogue, as amended on June 28, 2017, which came into effect on July 28, 2017. The Catalogue serves as the main basis for management and guidance for the MOFCOM to manage and supervise foreign investments. The Catalogue divides industries for foreign investment into three categories: encouraged, restricted and prohibited. Those industries not set out in the Catalogue shall be classified as industries permitted for foreign investment. According to the Catalogue, rewards based crowd funding, charity based crowdfunding, business incubation services, and business advisory services sectors are neither restricted nor prohibited.

On September 3, 2016, the Standing Committee of the National People’s Congress promulgated the Decision of the Standing Committee of the National People’s Congress on Amending Four Laws Including the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises (the “Decision”), which provides record-filing in lieu of administrative approval for the establishments and alterations of foreign invested enterprises (the “FIEs”) not subject to special administrative measures. On October 8, 2016, the MOFCOM issued the Interim Measures for Record-filing for the Establishment and Alteration of Foreign-invested Enterprises (the “Interim Measure”), and the MOFCOM and the NDRC jointly issued a statement (the “Joint Statement”), clarifying that the special administrative measures in this case are implemented by referencing the Catalogue. To be specific, the special administrative measures to be implemented are the restricted and prohibited industry categories as well as encouraged industry categories having shareholding and executive management requirements prescribed in the Catalogue. Since then, FIE establishments and alterations that are not subject to special administrative measures have been changed from a pre-approval system to a more standardized and convenient filing process.

Foreign Ownership Restrictions

Foreign direct investment in telecommunications companies in China is regulated by the Regulations for the Administration of Foreign-Invested Telecommunications Enterprises, or the FITE Regulations, which limit foreign ownership of companies that provide value-added telecommunications services, including Internet content provision, to 50% of the outstanding equity.

On July 13, 2006, the MIIT issued the Circular on Strengthening the Administration of Foreign Investment in Value-added Telecommunication Services, or the MIIT Circular 2006. The MIIT Circular 2006 requires that (i) foreign investors can only operate a telecommunications business in China by establishing a telecommunications enterprise with a valid telecommunications business operation license; (ii) domestic ICP license holders are prohibited from leasing, transferring or selling telecommunications business operation licenses to foreign investors in any form, or providing any resource, sites or facilities to foreign investors to facilitate the illegal operation of telecommunications business in China; (iii) ICP license holders (including their shareholders) must directly own the domain names and registered trademarks they use in their daily operations; (iv) each ICP license holder must have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license and (v) all value-added telecommunication service providers must improve the network and information security, draft relevant information safety administration regulations and set up networks and information safety emergency plans. The provincial communications administration bureaus in charge of telecommunications services are required to ensure that existing ICP license holders would conduct a self-assessment of their compliance with the Notice and to submit status reports to the MIIT before November 1, 2006, and may revoke the operating licenses of those who fail to comply with the above requirements and fail to rectify such non-compliance within the limited period set by provincial communications administration bureaus. Due to the lack of further necessary interpretation from the regulator, it remains unclear what impact the Notice will have on us or the other Chinese Internet companies that have adopted the same or similar corporate and contractual structures.

In order to comply with such foreign ownership restrictions, we operate a part of our business in China through Long Yun, which is owned 85% by Mr. Yu Han, and 15% by Ms. Koulin Han, and controlled by WFOE II through a series of contractual arrangements. Another part of our business in China, we operate through Hangzhou Dacheng, in which our wholly owned subsidiary WFOE II owns 60% of equity interest. In the opinion of our PRC legal counsel, Guantao Law Firm, except as otherwise disclosed in this report, our ownership structure complies with existing PRC laws and regulations.

Information Security

Internet content in China is regulated and restricted from a state security standpoint. The National People’s Congress, China’s national legislative body, has enacted a law that may subject to criminal punishment in China 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 using the Internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.

PRC Regulation of Intellectual Property Rights

The State Council and the NCAC have promulgated various rules and regulations and rules relating to protection of software in China. Under these rules and regulations, software owners, licensees and transferees may register their rights in software with Copy Protection Center of China or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered software rights may be entitled to better protections.

The PRC Trademark Law, adopted in 1982 and revised in 2001 and 2013, respectively, with its implementation rules adopted in 2002 and revised in 2014, protects registered trademarks. The Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks.

Privacy Protection

In recent years, PRC government authorities have enacted laws and regulations on the use of Internet to protect personal information from any unauthorized disclosure. The Administrative Measures on Internet Information Services prohibit ICP service operators, like our platform, from insulting or slandering a third party or infringing upon the lawful rights and interests of a third party. Additionally, under the Several Provisions on Regulating the Market Order of Internet Information Services, issued by the MIIT in 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 such information necessary for the provision of its services. An ICP service operator is also required to properly store users’ personal information, and in case of any leak or potential leak of users’ personal information, the ICP service operator must take immediate remedial measures and, in extraordinary circumstances, report immediately 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 users’ personal information are subject to the consent of the users, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also maintain such information strictly confidential, and is further prohibited from divulging, tampering or destroying of any such information, or selling or proving such information to other parties. Any violation of the above decision or order 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. We require our users to accept a user agreement whereby they agree to provide certain personal information to us, and have established information security systems to protect users’ privacy.

C. Organizational Structure

The following diagram illustrates our corporate structure as of the date of this annual report: