Written by: Xu Xiaohui and Liu Fuqi, Mankiw LLP
New opportunities are sometimes accompanied by new problems. With the rapid development of Web3 and blockchain technology, some new models may inadvertently touch upon potential legal issues. For example, Filecoin mining, which was very popular in 2020, although everything seemed normal and the cloud computing company also redeemed FIL later, there are still many companies using the Fil concept that are linked to illegally absorbing public deposits.
So, what are the characteristics of this legal issue? How can Web3 practitioners avoid it? This article will start from actual cases, explore the possible illegal fund-raising situations of Web3 project parties and general investors, and provide compliance advice to help avoid potential legal issues in the early stages.
Inventory of non-absorption cases
Case 1: Mining
Ma Moumou established a "FIL mining" company and attracted investment from unspecified customers through various promotional methods. He signed equipment sales contracts and custody contracts with customers to collect funds, but did not conduct substantive commodity transactions. Subsequently, the company used customer funds to "mine" to obtain virtual currency and shared the profits with customers. In order to attract investment, Ma Moumou claimed to customers that by purchasing his equipment and services, they could obtain "FIL coins" with an annual return rate of 500% to 1000%, which could achieve a quick return on investment. At the same time, he promised to refund the full amount if "FIL coins" could not be mined.
The court found that Ma Moumou committed the crime of illegally absorbing public deposits, and the amount of the crime was extremely huge. He was sentenced to ten years and six months in prison and a fine of 500,000 yuan.
Case 2: Virtual Currency Custody
Feng, Zhang and Jiang jointly operated the ICC platform project, which was affiliated with a foreign company that held currency to earn interest. They lured investors to invest in virtual currency and entrusted it to the platform, and used the platform's built-in arbitrage software to buy low and sell high on various exchanges to generate income and return fixed amounts to investors. During the promotion process, Feng and Zhang promised investment rebate ratios and investment funds that could be withdrawn at will.
The court determined that Feng, Zhang and Jiang committed the crime of illegally absorbing public deposits. Among them, Feng and Zhang, as the main persons in charge of promoting the ICC platform, had corresponding management responsibilities and played a major role in the joint crime. They were identified as the principal offenders and Feng was sentenced to three years and six months in prison and a fine of RMB 200,000. Zhang was sentenced to two years in prison and a fine of RMB 80,000. Jiang was hired to carry out settlement and operations knowing that others illegally absorbed public deposits. He played a minor and auxiliary role in the joint crime and was an accomplice. He was sentenced to one year and seven months in prison and a fine of RMB 50,000.
Case 3: Joint crime
Yan was introduced to invest in virtual currency projects and believed that it was profitable. He followed the introducer's arrangement and actively participated in the promotion of such projects to obtain commissions and remuneration from the introducer. Yan held promotion meetings in many places or used mobile phone information promotion to attract people to invest, absorbing a total of more than RMB 4.9 million from 29 investors on the grounds that he could get high returns.
The court determined that Yan's behavior constituted the crime of illegally absorbing public deposits. Yan and his introducer were co-offenders in illegally absorbing public deposits. Although Yan followed the arrangements of the introducer, he played a major role in the financing process. The reason why he only collected part of the public funds during the crime was simply a problem of internal division of labor. His status and role were slightly smaller than those of his introducer, which can be taken into consideration when sentencing, but he was not an accomplice. He was sentenced to two years' imprisonment and a fine of 30,000 yuan in accordance with the law.
It can be seen that Web3's illegal absorption of public deposits is often common in marketing models such as guaranteed principal and interest payments . In such cases, the project party is likely to have compliance issues, and ordinary investors may also be implicated because of their participation or assistance.
So, how can we avoid being involved in such illegal and criminal activities? We can start by analyzing its nature.
How to determine non-absorption?
Illegal absorption of public deposits is illegal fund-raising. According to the State Council's Regulations on Preventing and Dealing with Illegal Fund-raising in 2021, illegal fund-raising refers to the act of absorbing funds from unspecified persons by promising to repay principal and interest or provide other investment returns without the permission of the financial management department of the State Council or in violation of national financial management regulations. If the above characteristics are met, administrative penalties will be imposed.
It should be noted that the Supreme People's Court's "Notice on the Determination of the Nature of Criminal Cases of Illegal Fund-raising" expressed that in the determination of the illegality of illegal fundraising, criminal determination should be distinguished from administrative determination.
According to Article 176 of the Criminal Law of the People's Republic of China and Article 1 of the Interpretation of the Supreme People's Court on Several Issues Concerning the Specific Application of Laws in the Trial of Criminal Cases of Illegal Fund-raising, a crime can only be convicted if the behavior meets the following four core elements at the same time :
Illegality: raising funds without the permission of the relevant departments or in the form of legal operations;
Publicity: publicize to the society through the Internet, media, promotion meetings, leaflets, mobile phone messages, etc.;
Inducement, promise to repay principal and interest or provide returns in the form of money, physical objects, equity, etc. within a certain period of time;
Social nature, raising funds from the general public, that is, non-specific objects in society.
Compared with administrative law, illegality has added a substantive identification path for absorbing funds by borrowing legal business forms; compared with publicity and sociality, it has added a specific description of the method of public publicity; and inducement has added the expression of repayment of principal and interest.
On this basis, if the amount of illegal absorption or disguised absorption of public deposits exceeds one million yuan or the number of objects exceeds one hundred and fifty people or the direct economic losses caused to the participants of the fund-raising exceed five hundred thousand yuan, the person will be convicted and sentenced; if there has been criminal prosecution or administrative punishment for illegal fund-raising or other serious consequences, the standard for conviction will be lowered; the standards for individual crimes and corporate crimes are the same. At the same time, according to the "Opinions on Illegal Fund-raising Cases", providing assistance to others in illegally absorbing funds from the public and collecting agency fees, benefits, rebates, commissions, commissions and other fees from them constitutes a joint crime of illegal fund-raising and should be investigated for criminal responsibility in accordance with the law.
In combination with Case 1 and Case 2, according to the "Announcement on Preventing the Risks of Token Issuance and Financing", "Notice on Conducting Self-Inspection and Rectification of Payment Services for Illegal Virtual Currency Transactions" and "Risk Warning on Preventing Illegal Fundraising in the Name of "Virtual Currency" and "Blockchain"" and other relevant regulations, Ma, Feng and Zhang did not obtain approval from the relevant departments in accordance with the law, and used legal business forms to absorb funds, and their behavior has illegal characteristics; the three people used roadshows, company websites, public accounts, brochures and other channels, which has publicity characteristics; the three people publicly promoted their business to the general public, which has social characteristics; Ma claimed to customers that they could obtain high-yield "FIL coins" and quickly recover their investments by purchasing equipment and services from him, and promised a full refund if they could not mine "FIL coins". Feng and Zhang promised an investment rebate ratio, and their behavior had inducement characteristics; at the same time, the behavior of the fund absorber and the provider has investment attributes. The above characteristics and behavior are sufficient to determine that the above-mentioned people's behavior constitutes illegal absorption of public deposits in illegal fund-raising.
Combined with the identification of Jiang in Case 2 and Case 3, Jiang was hired to carry out settlement and operation, and Yan was hired to promote illegal fund-raising projects. Although they did not directly obtain illegal public deposits, the two knew that others were illegally absorbing funds from the public and still provided assistance and met the standards for conviction, and indirectly profited from it, which is a joint crime of illegal fund-raising.
Attorney Mankiw recommends
Therefore, with a clear understanding of the illegal absorption of public deposits, how can we prevent such risks as much as possible? We can start from the following aspects:
Project Party
Ensure transparent use and management of funds: The use and flow of any raised funds should be transparent and traceable, and the specific fund use plan and risk description should be disclosed to investors.
Avoid public fundraising from the general public: If the project involves fundraising, it should be ensured that it is only open to qualified investors or through legal channels, and should not be open to the general public.
Avoid promises of fixed returns: Whether it is a virtual currency project or a traditional financial product, the model of promising fixed high returns to the public is very likely to be identified as illegal fundraising. Project parties should carefully design the return mechanism to ensure that it complies with market rules and legal regulations.
investor
Participate in crowdfunding investments with caution: When investing in crowdfunding or other projects, investors need to conduct sufficient investigations to confirm whether the projects comply with relevant laws and regulations, especially to verify whether the projects require corresponding financial service qualifications.
Avoid promoting crowdfunding projects on behalf of others: Investors should not promote such high-risk projects on behalf of others to avoid being identified as accomplices in illegal fundraising. If the platform has set up a recommendation rebate mechanism, investors should be highly vigilant and cautious in participating in such activities. The rebate mechanism can easily evolve into a pyramid scheme-style expansion. If the corresponding amount or level is reached, investors may be involved in corresponding criminal liability.
Avoid investing on behalf of others: Investors should not operate funds or place orders for others, unless they have the corresponding qualifications and regulatory permission, otherwise it may be regarded as illegal assistance.
Attorney Mankiw's Summary
Even though there are many tricks, illegal absorption of public deposits cannot escape the four core elements of illegality, publicity, inducement and sociality described above. High returns are often accompanied by high risks. Therefore, project parties need to fully disclose and investors should participate prudently to avoid "picking up sesame seeds and losing watermelons".
Although the Web3 field is full of opportunities, the risks in the investment process cannot be ignored. Therefore, when necessary, it is necessary to seek professional legal advice to ensure that every step of the operation is within the scope permitted by law, which is also an important guarantee for the long-term and healthy development of the business.
