Defense Strategies for Illegal Fundraising Cases Related to Private Offering Fund- Zhiheng Law Firm

Author | Zhang Nannan Attorney Team

Crimes involving private equity funds that constitute illegal fundraising generally share the same criteria for establishing liability as those under Article 176 of the Criminal Law, which criminalizes the unlawful acceptance of public deposits. Specifically, in terms of behavioral characteristics, such acts must satisfy the elements of illegality, publicity, inducement through profit, and a social scope.

The “illegality” issue of private equity funds

Public funds and private funds are entirely different. For a public fund management company to launch a public fund, it must obtain approval from and be issued a fund manager license by the China Securities Regulatory Commission in order to qualify as a legally recognized fund entity; private fund management companies, however, are different—my view is that they only need to register with the Asset Management Association of China.The failure of a fund manager to register or a fund product to be filed does not, in fact, constitute the “illegality” element of the crime of illegally absorbing public deposits.

Since private equity funds are not subject to administrative approval, they lack the “illegality” element that is a prerequisite in cases of illegal fundraising. From this perspective, the registration of fund managers is not a prerequisite for their lawful establishment and, therefore, cannot serve as a basis for establishing the “illegality” element either. According to Article 9 of the Provisional Measures for the Administration of Private Equity Investment Funds, the registration and filing of private fund managers and private equity funds with the Asset Management Association of China does not constitute an endorsement of the investment capabilities or ongoing compliance of the private fund manager, nor does it serve as a guarantee of the safety of fund assets.

In simple terms, even if you have filed the required registration, the Asset Management Association of China does not vouch for your investment capabilities or ongoing compliance. Given this, on what basis should private equity funds be required to file with the Asset Management Association of China? This also indirectly underscores that such filing does not confer any corresponding legal effect; even in the absence of filing, it cannot serve as grounds for determining “illegality” under administrative law or, at a higher level, under criminal law.

Social aspects

Private equity funds are required to market exclusively to “qualified investors.” How is a qualified investor determined? What obligations does the fund manager have to conduct due diligence through an “look-through” assessment? If an investor deliberately falsifies documents—such as forging proof of financial assets or pooling investments from multiple individuals—how can the private equity firm detect such misconduct? Furthermore, even if the fund manager has fulfilled its duty of care, if a few unqualified investors still slip through the screening process, would the offering still be considered to the general public rather than to a specific, defined group?

In my view, firstly, even if the target investors are specific, a private fund manager must still engage in marketing activities when selling private funds, including roadshows, presentation meetings, and seminars. However, private equity firmsAs long as the aforementioned promotional methods do not directly feature private equity funds in the promotional content, but merely use these methods to identify clients who meet the criteria for investing in private equity funds, such practices are lawful and compliant.Secondly, with regard to the review of both qualified investors and eligible investors,As a fund manager or a fund-raising institution, it is sufficient to fulfill the duty of due diligence.The review corresponding to this duty of prudent care should be understood as a formal review.

Since private fund managers are not judicial authorities and do not possess statutory powers such as investigative or inquiry authority, they are unable to conduct a substantive review of investors’ actual financial circumstances. To require such “look-through” verification would be unduly stringent; therefore, the so‑called “unspecified investors,” both in terms of their sales method and the identity of the investors targeted, may entirely be determined in accordance with the aforementioned view.

On the Determination of Publicity

The publicity hereIt should be interpreted restrictively.In the crime of illegally absorbing public deposits, “publicity” refers to publicity directed at the general public. If such activities are conducted through mass media or lectures, does this constitute public dissemination? Even if dissemination is carried out via mass media or lectures, if the audience consists of pre-screened qualified investors, does this still qualify as public dissemination?

Therefore, the criterion of publicity must be assessed in conjunction with the aforementioned characteristic of indeterminacy; it is not sufficient to conclude that a message possesses the attribute of public dissemination merely because it has been publicly advertised.

Judgment of inducement

The China Securities Regulatory Commission and judicial authorities often, during administrative investigations and the collection of criminal evidence, obtain statements from investors and even fund sales personnel at fund distribution agencies, as well as relevant chat records, in order to demonstrate that guarantees of principal protection and fixed returns were made during the sale of private equity funds. As a defense attorney, at this point, it is necessary to review two aspects.

First, review whether the fund manager’s internal systems include requirements for compliant sales practices, whether training, assessment, and even disciplinary mechanisms have been established, and whether it has been clearly stipulated that guarantees of principal protection and fixed returns are prohibited when selling private equity products.If individual sales personnel, in pursuit of their personal performance targets, have made guarantees to investors regarding the principal and interest, such actions constitute the personal conduct of those salespersons, and the fund manager bears no responsibility.

Second, review the Fund Contract to determine whether it includes appropriate disclosures regarding qualified investors and whether a Risk Disclosure Statement has been signed.If the investors themselves have personally signed the documents, but subsequently, in order to comply with the criminal investigation—either at the request of investigators or with the aim of recovering their investment—they make statements such as “I did not carefully read the fund agreement,” such statements are, in the author’s view, of questionable objectivity and should not be accepted as credible.

Therefore, in handling such cases, the probative force of objective evidence is of paramount importance.

Author

Introduction

Zhang Nannan

Member of the Management Committee of

Director of the All-China Criminal Law Committee of Zhiheng

Deputy Director of the Commercial Crime Defense Legal Professional Committee of the Shenzhen Lawyers Association

Member of the Committee on Defense of Official Crime, Guangdong Lawyers Association

Outstanding Female Lawyer of Shenzhen City

Attorney Zhang Nannan specializes in criminal defense, criminal compliance, and criminal risk prevention and control. She has led numerous cases resulting in decisions not to prosecute, withdrawal of cases at the public security stage, release on bail pending trial, and suspended sentences.

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Zhiheng · Introduction