|Item 1. Identity of Directors, Senior Management and Advisers|
|Item 2. Offer Statistics and Expected Timetable|
|Item 3. Key Information|
|Item 4. Information on The Company|
|Item 4A. Unresolved Staff Comments|
|Item 5. Operating and Financial Review and Prospects|
|Item 6. Directors, Senior Management and Employees|
|Item 7. Major Shareholders and Related Party Transactions|
|Item 8. Financial Information|
|Item 9. The Offer and Listing|
|Item 10. Additional Information|
|Item 11. Quantitative and Qualitative Disclosures About Market Risk|
|Item 12. Description of Securities Other Than Equity Securities|
|Item 13. Defaults, Dividend Arrearages and Delinquencies|
|Item 14. Material Modifications To The Rights of Security Holders and Use of Proceeds|
|Item 15. Controls and Procedures|
|Item 16A. Audit Committee Financial Expert|
|Item 16B. Code of Ethics|
|Item 16C. Principal Accountant Fees and Services|
|Item 16D. Exemptions From The Listing Standards for Audit Committees|
|Item 16E. Purchases of Equity Securities By The Issuer and Affiliated Purchasers|
|Item 16F. Change in Registrant's Certifying Accountant.|
|Item 16G. Corporate Governance|
|Item 16H. Mine Safety Disclosure|
|Item 17. Financial Statements|
|Item 18. Financial Statements|
|Item 19. Exhibits|
|Note 1 - Organization and Principal Activities|
|Note 2 - Summary of Significant Accounting Policies|
|Note 3 - Acquisitions and Disposition|
|Note 4 - Accounts Receivable|
|Note 5 - Advances To Suppliers|
|Note 6 - Other Receivables, Net|
|Note 7 - Other Current Assets|
|Note 8 - Short-Term Investment|
|Note 9 - Fixed Assets, Net|
|Note 10 - Other Non-Current Assets|
|Note 11 - Equity Method Investments|
|Note 12 - Taxation|
|Note 13 - Share-Based Compensation|
|Note 14 - Accruals and Other Liabilities|
|Note 15 - Bank Loan|
|Note 16 - Equity|
|Note 17 - Earnings (Loss) per Share|
|Note 18 - Commitments and Contingencies|
|Note 19 - Related Party Transactions and Balances|
|Note 20 - Subsequent Events|
|Balance Sheet||Income Statement||Cash Flow|
|Comparables ($MM TTM)|
|Ticker||M Cap||Assets||Liab||Rev||G Profit||Net Inc||EBITDA||EV||G Margin||EV/EBITDA||ROA|
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018.
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
for the transition period from __________ to ___________
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report:
Commission file number: 000-37947
Hunter Maritime Acquisition Corp.
(Exact name of the Registrant as specified in its charter)
Republic of the Marshall Islands
(Jurisdiction of incorporation or organization)
Tower A, WangXin Building
28 Xiaoyun Rd
Chaoyang District, Beijing, 100027
(Address of principal executive offices)
Chief Executive Officer
Tower A, WangXin Building
28 Xiaoyun Rd
Chaoyang District, Beijing, 100027
(Name, Telephone, E-mail and/or Facsimile Number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
|Title of Each Class||Name of each exchange on which registered|
|Class A Common Stock, par value $0.0001 per share||The Nasdaq Stock Market LLC|
|Warrants to purchase one share of Class A Common Stock||The Nasdaq Stock Market LLC|
|Units, each consisting of one share of Class A Common Stock and one half of one Warrant||The Nasdaq Stock Market LLC|
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
On March 31, 2019, the registrant had 204,041,004 Class A Common Shares outstanding.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
☐ Yes ☒ No
If this report is an annual or transition report, indicate by check mark if the registrant is required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
☒ Yes ☐ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of “large accelerated filer, “accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
|☐ Large Accelerated filer||☒ Accelerated filer||☐ Non-accelerated filer|
|☒ Emerging Growth Company|
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
|☒ US GAAP||☐ International Financial Reporting Standards as issued by the International Accounting Standards Board||☐ Other|
If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐ Yes ☒ No
|Item 1.||Identity of Directors, Senior Management and Advisers||1|
|Item 2.||Offer Statistics and Expected Timetable||1|
|Item 3.||Key Information||1|
|A.||Selected Financial Data||1|
|B.||Capitalization and Indebtedness||3|
|C.||Reasons for the Offer and Use of Proceeds||3|
|Item 4.||Information On The Company||29|
|A.||History and Development of the Company||29|
|D.||Property, Plants and Equipment||55|
|Item 4A.||Unresolved Staff Comments||55|
|Item 5.||Operating and Financial Review and Prospects||55|
|Item 6.||Directors, Senior Management and Employees||80|
|A.||Directors and Senior Management||80|
|Item 7.||Major Shareholders and Related Transactions||84|
|B.||Related Party Transactions||84|
|C.||Interests of Experts and Counsel||86|
|Item 8.||Financial Information||86|
|A.||Consolidated Statements and Other Financial Information||86|
|Item 9.||The Offer and Listing||86|
|Item 10.||Additional Information||88|
|B.||Memorandum and Articles of Association||88|
|F.||Dividends and Paying Agents||102|
|G.||Statement by Experts||102|
|H.||Documents on Display||103|
|Item 11.||Quantitative and Qualitative Disclosure About Market Risk||103|
|Item 12.||Description of Securities Other Than Equity Securities||104|
|Item 13||Defaults, Dividend Arrearages and Delinquencies.||105|
|Item 14.||Material Modifications to the Rights of Security Holders and Use of Proceeds.||105|
|Item 15||Controls and Procedure||105|
|Item 16A||Audit committee financial expert.||106|
|Item 16B||Code of Ethics||106|
|Item 16C||Principal Accountant Fees and Services||106|
|Item 16D||Exemptions from the Listing Standards for Audit Committees||107|
|Item 16E||Purchases of Equity Securities by the Issuer and Affiliated Purchasers.||107|
|Item 16F||Change in Registrant’s Certifying Accountant||107|
|Item 16G||Corporate Governance||107|
|Item 16H||Mine Safety Disclosure||108|
|Item 17||Financial Statements||109|
|Item 18.||Financial Statements||109|
In this Annual Report on Form 20-F (the “Report”), unless otherwise indicated, “Hunter Maritime,” “we,” “us,” “our,” or “Company” refers to Hunter Maritime Acquisition Corp., a company incorporated under the laws of the Marshall Islands, and its subsidiaries subsequent to the Business Combination (as defined and described below). The “Business Combination” refers to the merger of Hunter Maritime (BVI) Limited, a British Virgin Islands company (“Merger Sub”) with and into NCF Wealth Holdings Limited (“NCF”) , a British Virgin Islands company, which was consummated on March 21, 2019, which resulted in NCF becoming a wholly owned subsidiary of Hunter Maritime.
References to the “PRC” refers to the People’s Republic of China. All references to “provincial-level regions” or “regions,” include provinces as well as autonomous regions and directly controlled municipalities in China, which have an administrative status equal to provinces, including Beijing.
All references to “Renminbi,” “RMB” or “yuan” are to the legal currency of the People’s Republic of the PRC and all references to “U.S. dollars,” “dollars,” “$” are to the legal currency of the United States. This Report contains translations of Renminbi amounts into U.S. dollars at specified rates solely for the convenience of the reader. We make no representation that the Renminbi or U.S. dollar amounts referred to in this Report could have been or could be converted into U.S. dollars or Renminbi, as the case may be, at any particular rate or at all.
This Report contains “forward-looking statements” that represent our beliefs, projections and predictions about future events. All statements other than statements of historical fact are “forward-looking statements” including any projections of earnings, revenue or other financial items, any statements of the plans, strategies and objectives of management for future operations, any statements concerning proposed new projects or other developments, any statements regarding future economic conditions or performance, any statements of management’s beliefs, goals, strategies, intentions and objectives, and any statements of assumptions underlying any of the foregoing. Words such as “may,” “will,” “should,” “could,” “would,” “predicts,” “potential,” “continue,” “expects,” “anticipates,” “future,” “intends,” “plans,” “believes,” “estimates” and similar expressions, as well as statements in the future tense, identify forward-looking statements.
These statements are necessarily subjective and involve known and unknown risks, uncertainties and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from any future results, performance or achievements described in or implied by such statements. Actual results may differ materially from expected results described in our forward-looking statements, including with respect to correct measurement and identification of factors affecting our business or the extent of their likely impact, the accuracy and completeness of the publicly available information with respect to the factors upon which our business strategy is based or the success of our business.
Forward-looking statements should not be read as a guarantee of future performance or results, and will not necessarily be accurate indications of whether, or the times by which, our performance or results may be achieved. Forward-looking statements are based on information available at the time those statements are made and management’s belief as of that time with respect to future events, and are subject to risks and uncertainties that could cause actual performance or results to differ materially from those expressed in or suggested by the forward-looking statements. Important factors that could cause such differences include, but are not limited to, those factors discussed under the headings “Risk Factors,” “Operating and Financial Review and Prospects,” “Information on our Company” and elsewhere in this Report.
|ITEM 1.||IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS|
|ITEM 2.||OFFER STATISTICS AND EXPECTED TIMETABLE|
|ITEM 3.||KEY INFORMATION|
|A.||Selected Financial Data|
Our Selected Consolidated Financial Data
The following selected consolidated statements of operations data for the years ended December 31, 2016, 2017 and 2018 and the selected consolidated balance sheet data as of December 31, 2017 and 2018 are derived from NCF’s audited consolidated financial statements included elsewhere in this annual report. The selected consolidated financial data should be read in conjunction with, and are qualified in their entirety by reference to, NCF’s audited consolidated financial statements and related notes and “Item 5. Operating and Financial Review and Prospects” included elsewhere in this annual report. NCF’s consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The historical results are not necessarily indicative of results to be expected in any future periods.
|Cash and cash equivalents||25,057,905||35,067,737|
|Total Current liabilities:||36,847,590||29,486,419|
|Total shareholders’ equity||146,037,463||91,278,453|
|For the Years Ended December 31,|
|Transaction and service fee||$||234,972,184||$||208,166,308||$||99,056,931|
|Transaction and service fee - related parties||6,273,413||87,660||1,176,104|
|Commission fee - related parties||1,626,942||3,628,848||1,197,575|
|Other revenue – related parties||7,039||149,701||33,935|
|Total net revenue||265,418,770||221,908,644||114,300,089|
|Operating cost and expenses|
|Sales and marketing expenses||156,329,090||150,411,453||103,619,248|
|Product development expenses||17,198,056||15,323,516||13,656,817|
|Loan facilitation and servicing expenses||3,919,555||3,334,719||2,973,370|
|General and administrative expenses||15,433,707||11,981,156||9,274,374|
|Total operating cost and expenses||192,880,408||181,050,844||129,523,809|
|Operating income (loss)||72,538,362||40,857,800||(15,223,720||)|
|Other income (expenses)|
|Interest income – related parties||7,176,876||4,773,013||1,802,979|
|Interest expense – related parties||-||-||(282,276||)|
|Interest (expense) income||(36,829||)||(157,640||)||126,616|
|Foreign currency transaction (loss) gain||(1,171,933||)||2,246,572||(2,324,618||)|
|Loss in equity method investment||(199,908||)||(22,777||)||(110,494||)|
|Gain on sale of equity method investment||-||-||110,494|
|Gain on sale of equity interest in a subsidiary||94,104||-||-|
|Income from short-term investment||506,590||494,252||-|
|Other miscellaneous income (expense)||361,743||1,473||(159,090||)|
|Total other income (expenses)||6,730,643||7,334,893||(836,389||)|
|Income (loss) before income tax||79,269,005||48,192,693||(16,060,109||)|
|Income tax (expense) benefit||(19,260,548||)||(12,348,395||)||2,806,686|
|Net income (loss)||60,008,457||35,844,298||(13,253,423||)|
|Net loss attributable to non-controlling interest||(276,514||)||(143,333||)||(96,262||)|
|Net income (loss) attributable to NCF Wealth Holdings Limited||$||60,284,971||$||35,987,631||$||(13,157,161||)|
|Less: Net income allocated to participating securities||2,848,612||1,700,503||-|
|Net income (loss) attributable to ordinary shareholders of NCF Wealth Holdings Limited||$||57,436,359||$||34,287,128||$||(13,157,161||)|
|Earnings (loss) per ordinary share|
|Basic earnings (loss) per ordinary share attributable to NCF Wealth Holdings||$||0.05||$||0.03||$||(0.01||)|
|Weighted-average number of ordinary shares used in computing basic net income (loss) per share||1,091,569,209||1,091,569,209||1,088,230,612|
|Diluted earnings (loss) per ordinary share attributable to NCF Wealth Holdings||$||0.05||$||0.03||$||(0.01||)|
|Weighted-average number of ordinary shares used in computing diluted net income (loss) per share||1,145,706,634||1,145,706,634||1,088,230,612|
Exchange Rate Information
|B.||Capitalization and Indebtedness|
|C.||Reasons for the Offer and Use of Proceeds|
Our business, financial condition and results of operations are subject to various changing business, competitive, economic, political and social conditions worldwide. In addition to the factors discussed elsewhere in this annual report, the following are some of the important factors that could adversely affect our operating results, financial condition and business prospects, and cause our actual results to differ materially from those projected in any forward-looking statements.
Risks Relating to our Business and Industry
The regulatory regime governing the online lending platform in China is developing and subject to changes in applicable laws and regulations. If Beijing Oriental Union Investment Management Limited Liability Company (“Beijing Oriental”), one of our consolidated Variable Interest Entities (“VIEs”), which operates the peer-to-peer online lending platform, fails to comply with existing and future applicable laws or regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.
Due to the relatively short history of the online lending industry in China, a comprehensive regulatory framework governing Beijing Oriental’s industry is under development by the People’s Republic of China, or PRC. Before any industry-specific regulations were introduced in mid-2015, the PRC government relied on general and basic laws and regulations for governing the online lending industry, including the PRC Contract Law, the General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. Since mid-2015, the PRC government and relevant regulatory authorities have issued various laws and regulations governing the online lending industry, including, among others, the Guidelines on Promoting the Healthy Development of Online Finance Industry, or the Guidelines, the Interim Measures on Administration of Business Activities of Online Lending Information Intermediaries, or the Interim Measures, the Guidelines on Online Lending Funds Custodian Business, or the Custodian Guidelines, and the Guidelines on Information Disclosure of the Business Activities of Online Lending Information Intermediaries, or the Disclosure Guidelines, the Notice on Rectification of Cash Loan Business, or Circular 141, the Notice on the Special Rectification and Inspection of Risk of Online Lending Intermediaries, or Circular 57, the Notice on Conducting Compliance Inspections of Online Lending Intermediaries, or the Inspection Notice, and the Compliance Checklist of Online Lending Information Intermediaries, or the Compliance Checklist. See “History and Development of the Company—Regulation—Regulations on Consumer Lending Service Provider.”
Pursuant to the Interim Measures, online lending information intermediaries are required to register with their local financial regulatory authority, update their business scope in their business license to include a description of being an online lending information intermediary and obtain a telecommunication business license from the relevant telecommunication regulatory authority after registering with their local financial regulatory authority. Furthermore, according to the Interim Measures, the local financial regulatory authorities may conduct onsite inspections or inquiries from time to time and instruct Beijing Oriental to rectify its business operations that are deemed non-compliant with the Guidelines or the Interim Measures. On February 20, 2017, the Beijing Office of the Leading Group for Special Rectification of Internet Financial Risks (the “Office on Internet Financial Risks”) completed its review of Beijing Oriental’s operations and issued a Notice on the Fact-finding Rectification of Network-based Lending Information Intermediary Agencies (the “Notice of Rectification”), in which it advised Beijing Oriental that there were 34 items that needed to be rectified.
On March 9, 2017, Beijing Oriental submitted its Specification on Submitting ‘NCF Pu Hui Rectification Plan’ to the Office on Internet Financial Risks, with a proposal of the rectification plan and estimated time of completion on the basis of rectification requirements under the Notice of Rectification (Jing Zheng Zhi Ban Tong No. 004) (the “Initial Rectification Plan”). On August 4, 2017, Beijing Oriental further submitted a rectification plan to the Office on Internet Financial Risks, undertaking to: (i) during the rectification period, manage the scale of its platform business to ensure that the entire business adheres to limits imposed by the authorities; and withdraw any overstock business prior to August 24, 2017, (ii) rectify its business one by one according to the Notice of Rectification and Interim Measures, and (iii) submit the required regular and temporary information required by the Beijing CBRC Office and Beijing Municipal Bureau of Financial Work. To Beijing Oriental’s knowledge, the local financial regulatory authority, as of the date of this annual report, has not approved any application for the peer-to-peer (“P2P”) registration.
Beijing Oriental has already met 29 rectification requirements according to the Notice of Rectification. The remaining five rectification requirements have to be completed after the regulatory authorities clarify what they would like us to do. The details of the remaining five rectification requirements are as follows: (i) Beijing Oriental must wait for the Department of Industrial and Commercial Registration to issue specific measures for the modification of business scope before Beijing Oriental can amend its business scope; (ii) Beijing Oriental must apply for the Telecom Business Operation License in a timely manner according to the new requirements issued by the relevant regulatory authorities for the online lending platform; and Beijing Oriental must apply for the corresponding Telecom Business Operation License after it has registered and recorded its online platform; (iii) Beijing Oriental must submit the required regular information, after the Beijing Municipal Bureau of Financial Work and Beijing CBRC Office has specified such specific requirements; (iv) after the Beijing Municipal Bureau of Financial Work and Beijing CBRC Office have specified the specific requirements, Beijing Oriental must submit the required temporary information; and (v) after the foresaid financial regulatory authorities specified reporting channels, Beijing Oriental must submit the required suspicious transactions.
As of the date of this annual report, Beijing Oriental has not received any further notification from its local financial regulatory authority in response to its Initial Rectification Plan. Beijing Oriental cannot assure you whether it will be required to submit any additional application materials and whether it will be recognized by the local and national Internet Finance Associations and local financial regulatory authorities as having fulfilled the requirements under applicable rules and regulations and be registered as an online lending information intermediary. If Beijing Oriental is required to make further rectifications, its business and financial condition could be adversely affected. Also, failure to register as an online lending information intermediary, if deemed a violation of the Interim Measures or any other relevant regulations or rules, may result in, among others, regulatory warning, correction order, condemnation, fines or criminal liability to Beijing Oriental, and its business, financial condition, results of operations and prospects could be materially and adversely affected. Moreover, in accordance with the relevant provisions of the competent communications authorities, Beijing Oriental shall apply for a value-added telecommunications business license, but the regulatory authorities have not made clear provisions on what types of value-added telecom business operation licenses should be applied for by P2P online platforms. If such a specific value-added telecommunications business licensing regime were introduced, we cannot assure you that Beijing Oriental would be able to obtain the newly required license in a timely manner, or at all, which could materially and adversely affect our business and impede our ability to continue operations through Beijing Oriental.
Pursuant to Circular 57, as prerequisites to complete registration with the local financial regulatory authority, an online lending information intermediary is required to, among other things, (i) cease conducting any prohibited actions under the Interim Measures (see “History and Development of the Company —Regulation—Regulations on Consumer Lending Service Provider” for details) after August 24, 2016 and cease offering any loan of which the amount exceeds the upper limit under the Interim Measures after August 24, 2016, and shall have fully eliminated the outstanding balance of such non-compliance products that were offered before August 24, 2016; (ii) suspend offering campus loans, cash loans and down payment loans for purchasing real estate property, and gradually reduce the outstanding balance of the aforementioned loans; (iii) set up custody accounts with qualified banks to hold consumer funds, (iv) cease setting aside funds as risk reserve funds, and gradually reduce the existing scale of risk reserve funds, and (v) cease any illegal transfer of creditor’s rights as specified under Circular 57. The registration is required to be completed by most of the online lending information intermediaries by April 30, 2018, and shall in no case be later than June 30, 2018. In the event that any company conducts online lending information services without completing the registration with the relevant local financial regulatory authority, such company may be required to shut down its websites, cease operation of its entire business, have its operation license for telecommunication service revoked, and be forbidden to obtain financial service from financial institutions.
Notice on Rectification of Cash Loan Business, or Circular 141, promulgated by the Head Office for Special Rectification of Online Finance Risk and Head Office for Special Rectification of Peer-to-Peer Online Lending on December 1, 2017 further specifies that any cash loan which is characterized by a lack of specific scenes, designated purposes, targeted users and mortgage may be subject to inspection and rectification, and the online lending information intermediary shall not facilitate loans without designated purposes. It is stipulated in Circular 57 that an online lending information intermediary shall cease providing cash loans after the issuance of Circular 141 and shall gradually reduce its outstanding balance of cash loan within scheduled timetable in order to complete registration with the local financial regulatory authority. Beijing Oriental does not believe any of the loan products it facilitates is prohibited under Circular 141 and Circular 57, as none of its products has all of the four characteristics of cash loans as defined under Circular 141. However, in the absence of any authoritative interpretation of the key requirements or characteristics of cash loans, especially whether the definition of cash loan requires all of the four characteristics or any of the four characteristics, we cannot assure you that our existing practices would not be deemed to violate any relevant laws, rules and regulations that are applicable to our business practices. Beijing Oriental may be required to cease or modify any such “cash loans” to comply with Circular 141, otherwise, it may be ineligible for registration with the local financial regulatory authority, which may materially and adversely affect our business and prospects. While we are closely monitoring the regulatory development, as of the date of this annual report, we have not been informed by any regulatory authorities to cease or modify any of our current products due to the violation of any rules with respect to cash loans under Circular 141 or Circular 57.
Opinions on Operating Well in Classified Disposition and Risk Prevention of Online Credit Institutions” or Circular 175, was promulgated by the Head Office for Special Rectification of Online Finance Risk and Head Office for Special Rectification of Peer-to-Peer Online Lending on December 19, 2018. Circular 175 is a restatement of the previous various online lending institutions’ regulatory policies, but this document emphasizes that the institutions for different situations should be guided and classified. Wangxin Puhui platform has strictly followed the interim measures for online loan management and various regulatory policies, and compliance inspection work is steadily advancing. The introduction of clearer regulatory policies by government departments is conducive to the completion of archival filings by qualified normal operating agencies and the promotion of legal and compliant online lending platforms in a positive and orderly manner. Wangxin Puhui platform did not receive any new influence due to the release of Circular 175.
The Inspection Notice and the Compliance Checklist promulgated by the Head Office for Special Rectification of Peer-to-Peer Online Lending in August 2018, (“Inspection Notice and Compliance Checklist”) further provides that the online lending information intermediaries shall complete self-inspection, inspection conducted by local and national Internet Finance Associations, and verification conducted by the local online lending rectification office by the end of December 2018. According to the requirements of the Inspection Notice and Compliance Checklist, Beijing Oriental has already submitted its self-inspection report and related materials of “Check List” for self-discipline inspection and administrative inspection to the Office of the Leading Group for Special Rectification on Risks in P2P Lending through the Jin-Guan-Tong System on October 14, 2018. Also, Beijing Oriental has already submitted its self-inspection report, self-correction report and related materials to the National Internet Finance Association of China through the System of National Internet Finance Association of China on October 19, 2018. As of the date of this annual report, the specific requirements and detailed implementation rules of such registration and licensing regime in Beijing are still pending further clarification. Although Beijing Oriental has proceeded to rectify its business model pursuant to Circular 57 and the Compliance Checklist, there may still be an outstanding balance of the non-compliance products as mentioned in Circular 57 and the Compliance Checklist.
Beijing Oriental received the Notice on Further Strict Implementation of ‘Three Reductions’ Goal from the Head Office of Chaoyang District, Beijing City for Special Rectification of Finance and Societal Risk on the date of April 24th, 2019. The Notice stated that business scale of Beijing Oriental continued to grow, according to recent statistic data. The Head Office expected Beijing Oriental to rectify and meet the requirement of ‘three reductions’ on loan balance, borrowers and lenders in accordance with the newest policy. If Beijing Oriental cannot meet the requirement of ‘three reductions’, its rectification shall not be accepted and shall not pass administrative inspection. The Notice required Beijing Oriental to provide comprehensive and feasible action plans via email by April 25. Beijing Oriental provided its detailed plan to the designated email address before the deadline.
To the extent that Beijing Oriental is not able to fully comply with these requirements, our business, financial condition and results of operations may be materially and adversely affected. We are unable to predict with certainty the impact, if any, that future legislation, or regulations relating to the online consumer finance industry will have on our business, financial condition and results of operations.
In addition, the overall regulatory conditions in China could affect our business and financial condition. For example, in 2018, the PRC government authorities issued a series of banking policies to control the leverage ratio of financial institutions, which has adversely affected the liquidity of capital in the market. Under such circumstances, the financial condition and repayment capability of some small and medium-size enterprises, was adversely affected, which may affect our cooperation with financial institutions.
If our operations are deemed to violate any rules, laws or regulations, we may face injunctions, including orders to cease illegal activities, correction orders, condemnation, fines, and criminal liability, and may be exposed to other penalties as determined by the relevant government authorities. If such situations occur, our business, financial condition, and prospects would be materially and adversely affected.
We have a limited operating history in a new and evolving market, which makes it difficult to evaluate our future prospects.
We commenced our online fintech marketplace business in July 2013 and thus have a limited operating history. We have limited experience in most aspects of our business operations, such as loan product offerings, data-driven credit assessment, and the development of long-term relationships with borrowers, investors and institutional funding partners. We seek to expand the base of prospective borrowers that we serves, which may result in higher delinquency rates of transactions we facilitate. As our business develops or in response to competition, we may continue to introduce new products and services, make adjustments to our existing products and our business model. Any significant change to our business model not achieving expected results may have a material adverse impact on our financial condition and results of operations.
You should consider our business and prospects in light of the risks and challenges we encounter or may encounter given the rapidly evolving market in which we operate and our limited operating history. These risks and challenges include, among other things, our ability to:
|●||offer personalized and competitive products and services;|
|●||increase the utilization of its products and services by existing borrowers and investors as well as new borrowers and investors;|
|●||offer attractive service fee rates while driving growth in size and profitability of its business; maintain low delinquency rates of loans facilitated by it;|
|●||develop sufficient, diversified, cost-efficient and reputable funding sources;|
|●||maintain and enhance its relationships with its other business partners;|
|●||broaden its prospective borrower and investor base;|
|●||navigate a complex and evolving regulatory environment;|
|●||improve its operational efficiency;|
|●||attract, retain and motivate talented employees to support its business growth;|
|●||enhance its technology infrastructure to support the growth of its business and maintain the security of its system and the confidentiality of the information provided and utilized across its system;|
|●||navigate economic condition and fluctuation;|
|●||compete profitably within our industry; and|
|●||defend itself against legal and regulatory actions, such as actions involving intellectual property or privacy claims.|
Failure of other online lending platforms or damage to the reputation of the online consumer finance industry may materially and adversely affect our business and results of operations.
We operate in the fintech industry, a new and evolving industry. Any negative development in the online consumer finance industry, such as bankruptcies or failures of other consumer finance service providers, and especially a large number of such bankruptcies or failures, or negative perception of the industry as a whole, such as that which arises from any failure of other consumer finance platforms to detect or prevent money laundering or other illegal activities, even if factually incorrect or based on isolated incidents, could compromise our image, undermine the trust and credibility we have established, and impose a negative impact on our ability to attract new borrowers and investors. If any of the foregoing takes place, our business and results of operations could be materially and adversely affected and potentially for a prolonged period of time. For example, certain troubled online lending platforms in China ceased operations in mid-2018. Although these online platforms are not related to us, their failures adversely affected investors’ confidence in the online consumer finance industry, resulting in a reduction in the availability of funding from individual investors.
Negative developments in our industry, such as widespread borrower defaults, fraudulent behavior and/or the closure of other online consumer finance service providers, may also lead to tightened regulatory scrutiny of the sector and limit the scope of permissible business activities that may be conducted, which may adversely affect our business and results of operations.
The service fees we charge borrowers and investors may decline in the future due to factors beyond our control and any material decrease in such service fees could harm our business, financial condition and results of operations.
We generate a substantial majority of our revenues from the transaction and other service fees we charge borrowers and investors. In 2016, 2017 and 2018, transaction and other service fees accounted for 94%, 87%, and 91% of our net revenues, respectively. In the event that the number and amount of service fees we collect from borrowers for loans we facilitate decreases significantly in the future due to regulatory or competitive factors and we are not able to reduce the funding cost of the loans we facilitate or adopt any cost control initiatives, our business, financial condition and results of operations will be harmed.
In addition, our service fees are sensitive to many macroeconomic factors that are beyond our control, such as inflation, recession, the performance of credit markets, global economic disruptions, unemployment, and fiscal and monetary policies. If the service fees we collect from borrowers decrease significantly due to factors beyond our control, our business, financial condition and results of operations may be materially and adversely affected.
Our service fees charged to the borrowers, to the extent they may be fully or partially deemed as loan interest, may also be subject to the restrictions on interest rates as specified in applicable rules on private lending. Pursuant to the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court on August 6, 2015, or the Private Lending Judicial Interpretations, if the service fees that we charge borrowers are considered as loan interest, and if the sum of the annual interest that lenders charge and our service fees exceed 36%, the portion of the overall annual interest that exceed the 36% limit will be deemed invalid, and even if the borrower has paid the portion of the service fees that exceed the 36% limit, such borrower may request that we refund the portion of the service fees that exceed the 36% limit and the PRC courts will uphold such request. In accordance with Circular 141, the overall cost of loans, including the loan interest and other forms of fees charged by the institutions shall be included in an overall annualized interest rate and conform to the restrictions on interest rates as specified in applicable rules on private lending. The Compliance Checklist further specifies that interest and fees collected by any third party collaborator or charged offline shall form part of an overall annualized interest rate. In addition, the online lending information intermediary is also prohibited to deduct loan interest, service fees, administrative fee and deposit from a loan principal in advance.
In April 2017, the Head Office for Special Rectification of Peer-to-Peer Online Lending issued the Notice on Rectification of Carrying out “Cash Loan” Business, or the Notice, which requires local counterparts of the National Rectification Office to conduct a full-scale and comprehensive inspection of cash loan business conducted by online platforms and require such platforms to conduct necessary rectification measures within a designated period to comply with relevant requirements specified in the Notice. The Notice focuses on preventing malicious fraudulent activities, loans that are offered at extortionate interest rates and violent loan collection practices in the cash loan business operation of online platforms.
The annualized fee rates of all new loans that we facilitated since 2018 are below 36%. As a result, we do not believe that our current service fees and various other fees charged from our borrowers violate these provisions. However, if our current fee level is deemed to be excessive or constitutes usurious loans under any existing or future relevant PRC laws, regulations and rules, parts or all of the fees we collected may be ruled as invalid by the PRC courts, and we may face, among others, regulatory warnings, correction orders, or be required to reduce the fees and annual interest rate it charges our borrowers. In addition, any future changes on the annual percentage rate, or APR, ceiling may affect our profitability. If such situations were to occur, its business, financial condition, results of operations and prospects would be materially and adversely affected.
There is no clear regulatory guidance on APR calculation methodology we calculate the APRs of our loan products based on total borrowing costs and the original amount of loan principal on an annualized basis. If regulatory authorities unify the APR calculation to a method that is different from ours, the APRs of our current loan products might represent a risk of breaching the regulatory APR ceiling. As a result, we may be requested to lower our APRs by the regulators and our profitability might be negatively impacted.
Our asset cooperative institutions and funding cooperative institutions have a large proportion of related parties and a high degree of concentration, which may adversely affect our future business.
Our business relies mainly on asset cooperative institutions (the companies who introduce us to qualified borrowers) and funding cooperative institutions (the companies who introduce us to funding sources or investors) to bring assets and funds. As of December 31, 2018, we worked with 28 asset cooperative institutions and 74 funding cooperative institutions, among which 11 asset cooperative institutions and 14 funding cooperative institutions are related parties. Because a large part of our business and capital comes from our related parties, we are dependent on these important associated asset cooperative institutions and funding cooperative institutions. There were three (one from a related party), four (two from related parties), and two (one from a related party) asset cooperative institutions that accounted for 55% (17% from a related party), 57% (26% from a related party), and 43% (20% from a related party) of the total loan facilitated as of December 31, 2018, 2017 and 2016, respectively. There were two (two from related parties), two (two from related parties), and one (one from a related party) funding cooperative institutions that accounted for 64% (64% from related parties), 39% (39% from related parties) and 39% (39% from related parties), of the total loan facilitated as of December 31, 2018, 2017 and 2016, respectively. The loss of support from related parties will adversely affect our core business.
We face competition in the fintech industry, and, if we do not compete effectively, our results of operations could be harmed.
The fintech industry in China is highly competitive, and we compete with other sizable online marketplaces. We also compete with other financial products and companies that may attract borrowers, investors, and institutional funding partners. Our competitors may operate different business models, have different cost structures or selectively participate in different market segments. They may ultimately be proven more successful or more adaptable to consumer demand and new regulatory, technological and other developments. Some of our current and potential competitors have significantly more financial, technological, marketing and other resources than we do and may be able to devote greater resources to the development, promotion, sale and support of their products and services offerings. Our competitors may also have longer operating histories, more extensive user bases, greater brand recognition and brand loyalty and broader relationships with business partners. Additionally, a current or potential competitor may acquire, or form strategic alliances with, one or more of its competitors. If we are unable to compete with such companies and meet the need for innovation in our industry, the demand for our products or services could stagnate or substantially decline, which could harm our business and results of operations.
With respect to investors, we compete with other online consumer finance marketplaces offering multiple investment products, wealth management centers and traditional banks in China. If a substantial number of our investors switch to other investment alternatives, our business, financial condition and results of operations could be materially and adversely affected.
If we are unable to maintain or increase the amount of loans we facilitate or if we are unable to retain existing borrowers or attract new borrowers, our business and results of operations will be adversely affected.
The amount of loans facilitated through NCF’s platform was approximately RMB 77 billion (USD 11 billion) in 2016, approximately RMB 95 billion (USD 15 billion) in 2017 and approximately RMB 71 billion (USD 10 billion) in 2018. To maintain and increase the amount of loans we facilitate, we must continue to engage our existing borrowers and attract new borrowers.
If we are unable to attract borrowers or if borrowers do not continue to use our products and services, we may be unable to increase the amount of loans we facilitate and corresponding revenues, and our business and results of operations may be materially and adversely affected.
Failure in our proprietary credit analysis and risk management system may materially and adversely affect our products and service.
We offer our products and services based on the risk assessment conducted by our proprietary credit analysis and risk management system. Our system uses machine learning and modeling techniques to analyze transaction and repayment data from loans that we facilitated and data from applicants and other third-party sources. Even though we have accumulated a large amount of applicant data and extensive credit analysis experience to perform risk management analysis in our system, our credit analysis and risk management system may not provide an accurate risk assessment for borrowers. If our credit analysis model contains inaccurate assumptions or inefficiencies through model updates, or if the credit data and analysis we obtain is inaccurate or outdated, our credit analysis could result in us making loans we should not be making. If we are unable to effectively and accurately assess the credit profiles of applicants based on their credit profiles, we may be unable to offer attractive service fee rates and products and services to borrowers, be unable to maintain low delinquency rates for loans we facilitate, or be unable to maintain satisfactory annualized investment returns for investors. If our proprietary credit analysis and risk management system fails to perform effectively, our business, liquidity and results of operations may be materially and adversely affected.
If we are unable to maintain low borrower’s delinquency rates, our business and results of operations may be materially and adversely affected. Further, historical delinquency rates may not be indicative of future results.
Investments in our Wangxin platform and Wangxin Puhui platform involve inherent risks as the return of the principal on an investment made through our platforms is guaranteed by guarantors. If widespread defaults were to occur, regardless of whether such defaults resulted from a failure of our risk management system, our investors may lose confidence in our platforms and our business and results of operations may be materially and adversely affected.
The data that we collect may be inaccurate due to inadvertent error or fraud. If we fail to detect inaccurate and false information, the performance of our credit analysis will be compromised, and our business, results of operations and brand and reputation will likely be negatively impacted.
Our risk management system is dependent on accurate data being provided by applicants or, with their authorization, third parties. The data we receive may not accurately reflect an applicant’s creditworthiness because such data may be based on outdated, incomplete or inaccurate information due to inadvertent error or fraud. In addition, the completeness and reliability of credit history information in the PRC are relatively limited.
In addition, a significant increase in fraudulent activity by our borrowers could negatively impact our brand name and reputation, discourage investors from investing in loans on our platform, reduce the amount of loans facilitated to borrowers and make it necessary to take additional steps to reduce fraud risk, which could increase its costs. High profile fraudulent activities could even lead to regulatory intervention, and may divert its management’s attention and cause us to incur additional expenses and costs.
If the local financial assets exchanges which we cooperate with fail to comply with existing and future applicable laws or regulations or requirements of local regulatory authorities, our business, financial condition and results of operations would be materially and adversely affected.
Since March 2017, we have been working with financial exchanges (comprehensive financial assets trading service platform approved and established by the local governments in the PRC). As the issuer for the products of financial exchanges, the financing party, mainly SMEs, strikes a financing deal with investors of financial exchanges through the intermediary information service of financial exchanges. We provide registration services include advising companies on the selection of local financial assets trading service platforms, review registration application documentation and assists with due diligence conducted by the local financial assets trading service platform. We charge registration holders (usually are borrowers) for the E-APP product registration services.
If the government regulatory authorities impose stricter regulatory requirements for service providers participating in financial exchanges, or financial exchanges cooperating with us are no longer able to work with us due to regulatory violations or otherwise, our business operation, profitability and financial position would be materially and adversely affected.
If we fail to comply with existing and future applicable laws or regulations or requirements relating to our fund sales business, there may be a risk that the fund sales business is terminated.
Our wholly-owned subsidiary, Shenzhen Yingxin Fund Sales Co., Ltd., or Yingxin Fund, is mainly engaged in the fund sales business. If Yingxin Fund violates applicable rules related to fund sales, or the information management platform established by Yingxin Fund does not meet the requirements of relevant laws, Yingxin Fund may face administrative punishments from the China Securities Regulatory Commission, or the CSRC. If the violation is significant enough, Yingxin Fund may even face the risk of suspension or termination of its license and associated business activities.
We may not acquire or maintain the qualifications and permissions for conducting third party wealth management business.
Beijing Yinghua Wealth Investment Management Co., Limited, or Yinghua Wealth, is a subsidiary of oursthat is mainly engaged in third-party wealth management. Currently there is no mandatory regulatory qualification or license required for Yinghua Wealth to conduct third-party wealth management business. The third-party wealth management business conducted by Yinghua Wealth may be restricted by specific regulations and policies issued by regulators in the future, and may need to obtain appropriate qualifications and permissions in accordance with regulatory requirements. We cannot guarantee that Yinghua Wealth will obtain the necessary qualifications or permissions in a timely fashion in the future, which could result in the wealth management business being terminated. If the wealth management business were terminated, our business, financial condition and prospects would be materially and adversely affected.
The laws and regulations governing wealth management, asset management and other financial industries in China are developing and subject to further changes.
As of the date of this annual report, the relevant regulatory authorities and the Asset Management Association of China, or AMAC, have released many laws and regulations governing the wealth management, asset management and other financial industries in China, including regulations over private equity products, private securities investment funds, asset management plans managed by securities companies or mutual fund management companies, trust products, and insurance products. However, these laws and regulations are subject to further changes and the PRC government has not yet adopted a unified regulatory framework. As we develop our business, the products we manage or distribute might be subject to detailed regulations and policies in the future, and we cannot assure you that our asset management or wealth management business will not be materially and adversely affected if any supervisory authority enhances its regulation over asset management plans.
The financial products that we distribute or manage involve various risks and any failure to identify or fully appreciate such risks may negatively affect our reputation, client relationships, operations and prospects.
We distribute and manage a broad variety of financial products, including fixed income products, private equity products, secondary market equity products and insurance products. These products often have complex structures and involve various risks, including default risks, interest risks, liquidity risks, market risks, counterparty risks, fraud risks and other risks.
Our success in distributing, managing and offering our products and services depends, in part, on our ability to successfully identify the risks associated with such products and services, and failure to identify or fully appreciate such risks may negatively affect our reputation, client relationships, operations, and prospects.
In addition, we must accurately describe the products and services to, and evaluate them for, our clients. Although we enforce and implement strict risk management policies and procedures, such risk management policies and procedures may not be fully effective in mitigating the risk exposure of all of our clients in all market environments or against all types of risks.
If we fail to identify and fully appreciate the risks associated with the products and services we distribute, manage and offer, or fail to disclose such risks to our clients, and our clients suffer financial loss or other damages resulting from their purchase of the financial products we distribute or manage, our reputation, client relationships, business, and prospects will be materially and adversely affected.
Because a significant portion of the one-time commissions and recurring service fees we earn on the distribution of financial products are based on commission and fee rates negotiated with financial product providers, any decrease in these commission and fee rates may have an adverse effect on our revenues, cash flow and results of operations.
We derive a significant portion of revenues from recurring fees and commissions paid by financial product providers. These recurring fees and commission rates are negotiated, and vary from product to product. Recurring fees and commission rates fluctuate based on the prevailing political, economic, regulatory, taxation and competitive factors that affect the product providers. These factors, which are not within our control, include the capacity of product providers to place new business, profits of product providers, client demand and preference for financial products, the availability of comparable products from other product providers at a lower cost, the availability of alternative financial products to clients and the tax deductibility of commissions and fees. In addition, the historical volume of financial products that we distributed or managed may have significant impact on our bargaining power with product providers in relation to the commission and fee rates for future products. Since we can neither determine, nor predict, the timing or extent of commission and fee rate changes with respect to the financial products, it is difficult for us to assess the effect of any of these changes on our operations. Therefore, any decrease in commission and fee rates would adversely affect our revenues, cash flow and results of operations.
Beijing Oriental may be required to obtain additional value-added telecommunication business licenses.
PRC regulations impose sanctions on entities for engaging in the provision of telecommunication business of a commercial nature without having obtained a value-added telecommunication business license. If Beijing Oriental fails to obtain licenses required for its business, Beijing Oriental could be subject to sanctions including corrective orders and warnings from the PRC telecommunication administration authority, fines and confiscation of illegal gains and, in the case of significant infringements, Beijing Oriental’s websites and mobile applications may be ordered to cease operation.
Pursuant to the Interim Measures, Beijing Oriental is required to apply for the appropriate telecommunication business operation permit (which is the value-added telecommunication business license) in accordance with relevant provisions of competent communication departments after Beijing Oriental has completed the required registration of online lending intermediaries with its local financial regulatory authority. The local government authority has not yet issued the relevant implementation rules regarding such filing and therefore Beijing Oriental cannot assure you Beijing Oriental will be able to make the necessary filing or apply for the value-added telecommunication business license. Even if Beijing Oriental has obtained the telecommunication business license, Beijing Oriental may also be subject to monetary penalty or suspension of operation and rectification by the telecommunication administrations if Beijing Oriental fails to operate the business as prescribed in the telecommunication operating licenses, or fails to operate the business as regulated by the telecommunications administration or other regulatory authorities.
Nevertheless, the interpretation and the enforcement of such regulations in the context of the online lending industry remains uncertain, and therefore, it remains unclear what kind of value-added telecommunication business licenses Beijing Oriental should obtain. Given the evolving regulatory environment of the consumer finance industry and value-added telecommunication business, Beijing Oriental cannot rule out the possibility that the PRC communication administration authority or other government authorities will explicitly require any of its consolidated VIEs or subsidiaries of its consolidated VIEs to obtain Internet content provider licenses, or ICP licenses, online data processing and transaction processing licenses, or ODPTP licenses or other value-added telecommunication business licenses, or issue new regulatory requirements to institute a new licensing regime for its industry. If such value-added telecommunication business licenses are clearly required in the future, or a new license regime is introduced or new regulatory rules are promulgated, Beijing Oriental cannot assure you that Beijing Oriental would be able to obtain any required license or other regulatory approvals in a timely manner, or at all, which would subject Beijing Oriental to the sanctions described above or other sanctions as stipulated in the new regulatory rules, and materially and adversely affect its business and impede its ability to continue its operations.
If our products and services do not achieve sufficient market acceptance, our financial condition, results of operations and competitive position will be materially and adversely affected.
We facilitate various loan products to our borrowers. While we intend to broaden the scope of products and services that we offer, we may not be successful in doing so. New products and services must achieve a certain level of market acceptance in order for them to be economically feasible for us to bear the default risks associated with the product(s) and to recoup our investment costs in developing and bringing such products to market. Our existing or new products and services could fail to attain sufficient market acceptance for many reasons, including:
|●||its failure to predict market demand accurately and supply attractive and increasingly personalized products and services at appropriate prices and in amount that meet this demand in a timely fashion;|
|●||its existing products and services may cease to be popular among current borrowers and investors or prove to be unattractive to prospective borrowers and investors;|
|●||its failure to assess risk associated with new products and services and to properly price such products and services;|
|●||negative publicity about its products and services or mobile applications’ performance or effectiveness;|
|●||critical assessment taken by regulatory authorities that the launch of new products and services and changes to its existing products and services do not comply with PRC laws, regulations or rules applicable to us; and|
|●||the introduction or anticipated introduction of competing offerings by competitors.|
Increases in market interest rates could negatively affect the amount of loans we facilitate and cost of funds provided to borrowers.
All loans we have facilitated have fixed service fee rates charged by it and interest rates. If prevailing market interest rates rise, the service fee rates and interest rates of loans we facilitate may rise accordingly, and borrowers may be less likely to accept such adjusted terms. If borrowers decide not to use ours products because of such an increase in market interest rates, our ability to retain existing borrowers and engage prospective borrowers as well as our competitive position may be severely impaired. If we are unable to effectively manage such market interest rate risk, our business, profitability, results of operations and financial condition could be materially and adversely affected.
Wangxin Puhui platform is obligated to verify information relating to borrowers and to detect fraud. If Wangxin Puhui platform fails to perform such obligations to meet the requirements of relevant laws and regulations, Wangxin Puhui platform may be subject to liabilities.
Wangxin Puhui platform’s business of connecting investors and individual borrowers constitutes an intermediary service, and its contracts with investors and borrowers are intermediation contracts under the PRC Contract Law. Under the PRC Contract Law, an intermediary that intentionally conceals any material information or provides false information in connection with the conclusion of an intermediation contract, which results in harm to the client’s interests may not claim for any service fee for its intermediary services, and is liable for any damage incurred by the client. Therefore, if Wangxin Puhui platform fails to provide material information to investors and are found to be at fault for failure or deemed the failure to exercise proper care, or to conduct adequate information verification or supervision, Wangxin Puhui platform could be subject to liabilities as an intermediary under the PRC Contract Law. In addition, the Interim Measures and the Inspection Notice have imposed on online lending information intermediaries, including us, additional obligations to verify the truthfulness of the information provided by or in relation to loan applicants and to actively detect fraud, conduct risk evaluation of lenders, categorize lenders and disclose the risk information on borrowers to the lenders. Wangxin Puhui platform leverages a large database of past fraud accounts information and sophisticated rule-based detection technology in detecting fraudulent behaviors. Based on new data collected and fraudulent behaviors detected during its daily business operations, Wangxin Puhui platform updates its database on a monthly basis. As the Interim Measures are relatively new, it is still unclear to what extent online lending information intermediaries should exercise care in detecting fraud. Although Wangxin Puhui platform believe that as an information intermediary, Wangxin Puhui platform should not bear the credit risk for investors as long as Wangxin Puhui platform takes reasonable measures to detect fraudulent behaviors, Wangxin Puhui platform cannot assure you that Wangxin Puhui platform would not be subject to any liabilities under the Interim Measures if Wangxin Puhui platform fails to detect any fraudulent behavior. If that were to occur, its results of operations and financial condition could be materially and adversely affected
We may need additional capital to accomplish business objectives, pursue business opportunities, and respond to challenges or unforeseen circumstances, and financing may not be available on terms acceptable to us, or at all.
Historically, NCF has issued equity shares to support the growth of its business. As we intend to continue to make investments to support the growth of our business, the combined company may require additional capital to accomplish our business objectives and pursue business opportunities, and respond to challenges or unforeseen circumstances, including developing new products and services, further enhancing our risk management capabilities, increasing our marketing expenditures to improve brand awareness and enhancing our operating infrastructure. Accordingly, the combined company may need to engage in equity or debt financings to secure additional funds. However, additional funds may not be available when the combined company needs them, on terms acceptable to it, or at all. In the event that the combined company obtains debt financing, repayment of debt may divert a substantial portion of cash flow, which would reduce funds available for expenses and payment pursuant to other general corporate purposes.
Volatility in the credit markets may also have an adverse effect on its ability to obtain debt financing. If the combined company raises additional funds through further issuances of equity or convertible debt securities, its existing stockholders could suffer significant dilution, and any new equity securities the combined company issues could have rights, preferences, and privileges superior to those of holders its common shares. If the combined company is unable to obtain adequate financing or financing on terms satisfactory to it when it is needed, its ability to continue to accomplish its business objectives and pursue business opportunities, and respond to challenges or unforeseen circumstances could be significantly limited, and its business, operating results, financial condition and prospects could be adversely affected.
Undetected errors or significant disruption in our IT system, including events beyond its control, could prevent us from offering our products and services, thereby reducing the attractiveness of our products and services and resulting in a loss of borrowers or investors.
Our business and internal systems rely on software and processes that are highly technical and complex. In addition, our business depends on the abilities of these software and processes to store, retrieve, process and manage large amounts of data. The software and processes on which we rely have contained, and may now or in the future contain, errors or bugs. Some errors may only be discovered after the code has been released for external or internal use.
In addition, in the event of a system outage and physical data loss, our ability to provide products and services would be materially and adversely affected. Any interruptions or delays in our service, whether as a result of third-party error, our error, natural disasters or security breaches, whether willful or not, could harm our reputation and our relationships with borrowers and investors. Additionally, in the event of damage or interruption, our insurance policies may not adequately compensate us for any losses that we may incur. We also may not have sufficient capacity to recover all data and services in the event of an outage. These factors could prevent us from processing loan applications and other business operations, damage our brand name and reputation, divert our employees’ attention, reduce our revenue, subject us to liability and discourage users from using our products and services, any of which could adversely affect our business, financial condition and results of operations.
If we are unable to protect the confidential information of our users and adapt to the relevant regulatory framework regarding protection of such information, our business and operations may be adversely affected.
We have access to, stores and processes certain personal information and other sensitive data from our users and our business partners, which makes us an attractive target and potentially vulnerable to cyber-attacks, computer viruses, physical or electronic break-ins or similar disruptions. While we have taken steps to protect confidential information that we have access to, our security measures could be compromised. Because techniques used to sabotage or obtain unauthorized access to systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Any accidental or willful security breaches or other unauthorized access to our system could cause confidential user information to be stolen and be used for criminal purposes.
We also face indirect technology, cybersecurity and operational risk relating to the third parties upon whom we rely on to facilitate or enable our business activities, including, among others, custodian banks and third-party online payment service providers who manage accounts for certain borrower and investor funds. Any cyber-attack, computer viruses, physical or electronic break-ins or similar disruptions of such custodian banks and third-party payment service providers could, among other things, adversely affect our ability to serve our users, and could even result in misappropriation of funds of our borrowers and investors. If that were to occur, both us and third-party payment service providers could be held liable to borrowers and investors who suffer losses from the misappropriation.
Security breaches or unauthorized access to confidential information could expose us to liability related to the loss of information, time-consuming and expensive litigation and negative publicity. If security measures are breached because of third-party action, employee error, malfeasance or otherwise, or if design flaws in our technology infrastructure are exposed and exploited, its relationships with users could be severely damaged, we could incur significant liability and our business and operations could be adversely affected.
In addition, PRC government authorities have enacted a series of laws and regulations with respect to the protection of personal information, under which internet service providers and other network operators are required to comply with the principles of legality, justification and necessity, to clearly indicate the purposes, methods and scope of any information collection and usage, and to obtain the consent of users, as well as to establish a user information protection system with appropriate remedial measures. We have obtained consent from our users to use their personal information within the scope of authorization and we have taken technical measures to ensure the security of such personal information and to prevent any loss or divergence of personal information from our users. However, there is uncertainty as to the interpretation and application of such laws. If such laws or regulations are to be interpreted and applied in a manner inconsistent with its current policies and practices, changes to the features of its system may be required and additional costs incurred. We cannot assure you that our existing user information protection system and technical measures will be considered sufficient under applicable laws and regulations. If we are unable to address any information protection concerns, or to comply with the then applicable laws and regulations, we may incur additional costs and liability and our reputation, business and operations might be adversely affected.
On June 1, 2017, the PRC Cybersecurity Law became effective. The law requires network products and services providers, such as us, among other things, to strictly preserve the secrecy of user information they collect and to store within mainland China data that is gathered or produced by such network products and services provider in the country. If we are deemed to have violated the law, potential penalties include, depending on the nature of violation, regulatory warning, correction order, forced shut down of its websites, suspension of operation revocation of business licenses, confiscation of illegal gains. The fines imposed on the company ranging from approximately RMB10,000 (approximately $1,457) to RMB1 million (approximately $145,705) or management personnel ranging from approximately RMB5,000 (approximately $729) to RMB1 million (approximately $145,705 based on the exchange rate of 0.145705 as of December 31, 2018).
Due to the relatively new nature of the PRC Cybersecurity Law and the lack of clarification in the statutory law itself as to the circumstances and standard under which the law should apply and violations be found, there are great uncertainties as to the interpretation and application of the law. The law’s vagueness in its own statutory language also indicates that the CAC, the designated government enforcement agency, will have broad latitude to direct how the law is interpreted and enforced, thus creating greater uncertainties with regard to the interpretation and application of the law since the government enforcement agency has yet to provide further guidance on the enforcement mechanism of the law. If we are found to have violated the PRC Cybersecurity Law in a government enforcement action, we may face severe penalties that may result in monetary losses, losses of access to assets essential for daily operation of our business or for the continuance of service provision, and temporary or total disruption of our business for an extended period of time. In addition, the finding of a violation of the PRC Cybersecurity Law, even if later repealed, may cause damages to our reputation and our brand name, causing users to lose confidence in our service and to refrain from choosing or continuing to use our products and services. All of these consequences may have a material adverse impact on our business, financial condition and results of operations.
Furthermore, the stringent reporting obligation imposed by the PRC Cybersecurity Law itself, without a finding of violation, may have a material adverse impact on our business and results of operations. As we are obligated by the law to inform our users of any security flaw or vulnerability as they are discovered, users may become wary of the existence or frequency of such reports and lose confidence in the security of our system, and thus, become discouraged from choosing or continuing to use our products and services, even though the security flaws or vulnerabilities are quickly fixed and overcome.
If we fail to implement and maintain an effective system of internal controls over financial reporting, we may be unable to accurately report their results of operations, meet their reporting obligations or prevent fraud.
NCF was a private company and its internal controls and procedures, especially over financial reporting, may not be able to sufficiently identify any material weaknesses and control deficiencies that could lead to inaccuracies in our financial statements. NCF’s independent registered public accounting firm has not conducted an attestation of its internal control over financial reporting. However, in connection with the audits of its consolidated financial statements as of and for the fiscal years ended December 31, 2018, NCF and its independent registered public accounting firm identified three “material weaknesses,” and other control deficiencies including significant deficiencies in its internal control over financial reporting. As defined in the standards established by the Public Company Accounting Oversight Board of the United States, or PCAOB, a “material weakness” is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
The material weaknesses identified related to (i) a lack of accounting staff and resources with appropriate knowledge of U.S. GAAP and SEC reporting and compliance requirements; (ii) a lack of sufficient documented financial closing policies and procedures; and (iii) a lack of written policy to identify related party and related party transactions. Subsequent testing by us or our independent registered public accounting firm may reveal deficiencies in our internal control over financial reporting that are deemed to be material weaknesses.
Upon completion of this annual report, NCF has merged with a wholly owned subsidiary of Hunter Maritime, a public company in the United States and the combined company will be subject to the Sarbanes-Oxley Act of 2002. Section 404 of this Act will require that the combined company include a report of management on its internal control over financial reporting in its annual report on Form 20-F. However, as an “emerging growth company” as defined in the JOBS Act, the combined company may choose to not comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 as to the effectiveness of its internal controls over financial reporting until such time that it ceases to be an “emerging growth company,” although it will still be required to implement and maintain internal control over financial reporting and include the management assessment in its annual reports under Section 404. To comply with Section 404, the combined company may incur substantial costs, expend significant management time on compliance-related issues and hire additional accounting, financial and internal audit staff with appropriate public company experience and technical accounting knowledge. Moreover, if the combined company is not able to comply with the requirements of Section 404 in a timely manner or if it or its independent registered public accounting firm identifies deficiencies in its internal control over financial reporting that are deemed to be material weaknesses, the combined company could be subject to sanctions or investigations by the U.S. Securities and Exchange Commission or other regulatory authorities, which would require additional financial and management resources. Any failure to maintain effective disclosure controls and procedures or internal control over financial reporting could have a material adverse effect on the combined company’s business and operating results.
We may not be able to prevent unauthorized use of our intellectual property, which could harm our business and competitive position.
We regard our trademarks, domain names, copyrights, know-how, proprietary technologies and similar intellectual property as critical to our success, and we rely on trademark and trade secret law, confidentiality agreement, invention assignment and non-compete agreements with our employees and others to protect our proprietary rights. See “History and Development of the Company—Intellectual Property” and “History and Development of the Company —Regulation—Regulations on Intellectual Property Rights.” However, we cannot assure you that any of our intellectual property rights would not be challenged, invalidated, circumvented or misappropriated, or that such intellectual property will be sufficient to provide us with competitive advantages. Because of the rapid pace of technological development, we cannot assure you that all of our proprietary technologies and similar intellectual property will be patented in a timely or cost-effective manner, or at all. Furthermore, parts of our business rely on technologies developed or licensed by other parties, or co-developed with other parties, and we may not be able to obtain or continue to obtain licenses and technologies from these other parties on reasonable terms, or at all.
It is often difficult to register, maintain and enforce intellectual property rights in China. Statutory laws and regulations are subject to judicial interpretation and enforcement and may not be applied consistently due to the lack of clear guidance on statutory interpretation. The confidentiality agreement, invention assignment, and non-compete agreements may be breached by counterparties, and there may not be adequate remedies available to us for any such breach. Accordingly, we may not be able to effectively protect our intellectual property rights or to enforce our contractual rights in China. Preventing any unauthorized use of its intellectual property is difficult and costly and the steps we take may be inadequate to prevent the misappropriation of our intellectual property. In the event that we resort to litigation to enforce our intellectual property rights, such litigation could result in substantial litigation costs and a diversion of our managerial and financial resources. We can provide no assurance that we will prevail in such litigation. In addition, our trade secrets may be leaked or otherwise become available to, or be independently discovered by, our competitors. To the extent that our employees or consultants use intellectual property owned by others in their work for us, disputes may arise as to the rights in related know-how and inventions. Any failure in protecting or enforcing our intellectual property rights could have a material adverse effect on our business, financial condition and results of operations.
We may be subject to intellectual property infringement claims, which may be expensive to defend and may disrupt our business and operations.
We cannot be certain that our operations or any aspects of our business do not or will not infringe upon or otherwise violate trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights held by other parties. We may unknowingly infringe on other parties’ trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights through our products and services or other aspects of our business. As a result, we may be subject to legal proceedings and claims relating to the intellectual property rights of others from time to time in the future. Holders of such intellectual property rights may seek to enforce such intellectual property rights against us in China, the United States or other jurisdictions. If any infringement claims are brought against us, we may be forced to divert management’s time and other resources from our business and operations to defend against these claims, regardless of their merits.
Additionally, the interpretation and application of China’s intellectual property right laws and the procedures and standards for protecting trademarks, copyrights, know-how, proprietary technologies or other intellectual property rights in China are uncertain and still evolving, and we cannot assure you that PRC courts or regulatory authorities would agree with its analysis. If we were found to have violated the intellectual property rights of others, we may be subject to liability for our infringement or may be prohibited from using such intellectual property, and we may incur licensing fees or be forced to develop alternatives of our own. As a result, our business and results of operations may be materially and adversely affected.
Any failure by us, institutional funding partners, payment service providers or funds custody banks to comply with applicable anti-money laundering and anti-terrorist financing laws and regulations could damage our reputation, or expose us to significant penalties, and decrease our revenues and profitability.
We have adopted and implemented various policies and procedures including internal controls and “know-your-customer” procedures, for preventing money laundering and terrorist financing. In addition, we rely on our institutional funding partners, payment service providers and funds custody banks, in particular, funds custody banks that handle the transfer of funds from lenders to borrowers, to have their own appropriate anti-money laundering policies and procedures. Our institutional funding partners may be subject to anti-money laundering obligations under applicable anti-money laundering laws and regulations and are regulated in that respect by the People’s Bank of China, or the PBOC. We have adopted commercially reasonable procedures for monitoring our institutional investors and payment processors.
We have not been subject to fines or other penalties, or suffered business or other reputational harm, as a result of actual or alleged money laundering or terrorist financing activities in the past. However, our policies and procedures may not be completely effective in preventing other parties from using us, any of our institutional funding partners, or payment service providers as a conduit for money laundering (including illegal cash operations) or terrorist financing without our knowledge. If we were to be associated with money laundering (including illegal cash operations) or terrorist financing activities, our reputation could suffer and we could become subject to regulatory fines, sanctions, or legal enforcement, including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us, all of which could have a material adverse effect on our financial condition and results of operations. Even if we, our institutional funding partners and payment service providers comply with the applicable anti-money laundering laws and regulations, we, our institutional funding partners and payment service providers may not be able to fully eliminate money laundering and other illegal or improper activities in light of the complexity and the secrecy of these activities. Any negative perception of the industry, such as that which might arise from any failure of other online consumer finance platforms to detect or prevent money laundering activities, even if factually incorrect or based on isolated incidents, could tarnish our image, undermine the trust and credibility we have established, and negatively impact our financial condition and results of operations.
The Guidelines purport to require, among other things, Internet finance service providers to comply with certain anti-money laundering requirements, including the establishment of a user identification program, the monitoring and reporting of suspicious transactions, the preservation of user information and transaction records, and the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the anti-money laundering obligations of Internet finance service providers. The Interim Measures require online lending intermediaries to comply with certain anti-money laundering obligations, including verifying user identity, reporting suspicious transactions and keeping identity data and transaction records. The Custodian Guidelines require the anti-money laundering obligation to be included in the fund custodian agreements between an online lending intermediary and custody banks, and the online lending intermediary shall cooperate with funds custody banks to fulfill anti-money laundering obligations. We cannot assure you that the anti-money laundering policies and procedures we have adopted will be deemed to be in compliance with applicable anti-money laundering implementation rules if and when adopted.
Our business depends on the continued efforts of our senior management and key technology development personnel. If one or more of its key executives or key technology development personnel were unable or unwilling to continue in their present positions, our business may be severely disrupted.
Our business operations depend on the continued services of our senior management and key technology development personnel. In particular, Ms. Huanxiang Li, its President, Mr. Jia Sheng, its Chief Executive Officer, Ms. Xin Li, its Chief Operating Officer, Mrs. Li Wei, its Chief Financial Officer, Mr. Ruoshi Zhang, its Chief Technology Officer are critical to the management of our business and operations and the development of our strategic direction. While we have provided different incentives to our management and key technology development personnel, we cannot assure you that we can continue to retain their services. If one or more of our key executives or key technology development personnel were unable or unwilling to continue in their present positions, we may not be able to replace them easily or at all, our future growth may be constrained, our business may be severely disrupted and our financial condition and results of operations may be materially and adversely affected, and we may incur additional expenses to recruit, train and retain qualified personnel. In addition, while we have entered into confidentiality and non-competition agreements with our management, there is no assurance that any member of our management team and technology development team will not join our competitors or form a competing business. If any dispute arises between us and our current or former officers or key technology development personnel, we may have to incur substantial costs and expenses in order to enforce such agreements in China or we may be unable to enforce them at all.
If we grant employees stock options or other equity incentives in the future, our net income could be adversely affected.
NCF granted incentives and rewards to employees and executives under our share incentive plan. We are required to account for share-based compensation in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718, Compensation—Stock Compensation, which generally requires a company to recognize, as an expense, the fair value of stock options and other equity incentives to employees based on the fair value of equity awards on the date of the grant, with the compensation expense recognized over the period in which the recipient is required to provide service in exchange for the equity award. NCF also granted RSUs to non-employees, which is subject to ASC 505-50 Equity-Based Payments to Non-Employee. All transactions in which services are received in exchange for share-based awards are accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever is more reliably measurable. Share-based compensation is measured at fair value at the earlier of the commitment date or the date the services are completed. NCF re-measured the awards using the then-current fair value at each reporting date until the measurement date, generally when the services are completed, and awards are vested and attribute the changes in those fair values over the service period by the straight-line method. As of December 31, 2018, the outstanding option shares were 35,000,000. As a result, NCF incurred an accumulated share-based compensation expense for the stock options of $1,320,312 as of December 31, 2018. As of December 31, 2018, the outstanding restricted stock units granted to employees were 52,753,394 and the outstanding restricted stock units granted to non-employees were 3,990,950. As a result, an accumulated share-based compensation expense for the restricted stock units of $ 19,891,188 was incurred by NCF as of December 31, 2018. If we grant more options or other equity incentives in the future, we could incur significant compensation charges and our results of operations could be adversely affected.
Increase in labor costs in the PRC may adversely affect our business and results of operations.
In recent years, the Chinese economy has experienced inflationary and labor costs increases. Average wages are projected to continue to increase. Further, under PRC law we are required to pay various statutory employee benefits, including pension, housing fund, medical insurance, work-related injury insurance, unemployment insurance and maternity insurance to designated government agencies for the benefit of its employees. The relevant government agencies may examine whether an employer has made adequate payments to the statutory employee benefits, and those employers who fail to make adequate payments may be subject to late payment fees, fines and/or other penalties. We expect that our labor costs, including wages and employee benefits, will continue to increase. If we are unable to control our labor costs or pass such increased labor costs on to our users by increasing the fees of our services, our financial condition and results of operations may be adversely affected.
We do not have any business insurance coverage.
Insurance companies in China currently do not offer as extensive an array of insurance products as insurance companies in more developed economies. Currently, we do not have any business liability or disruption insurance to cover our operations. We have determined that the costs of ensuring these risks and the difficulties associated with acquiring such insurance on commercially reasonable terms make it impractical for us to have such insurance. Any uninsured business disruptions may result in substantial costs and the diversion of resources, which could have an adverse effect on our results of operations and financial condition.
We are subject to the risk of a severe or prolonged downturn in the Chinese or global economy and deterioration of credit profiles of borrowers, which may materially and adversely affect our business and financial condition.
Any prolonged slowdown in the Chinese or global economy may have a negative impact on our business, results of operations and financial condition. In particular, general economic factors and conditions in China or worldwide, including the general interest rate environment and unemployment rates, may affect borrowers’ willingness to seek credit and investors’ ability and desire to invest in loans. If economic conditions deteriorate, we may face an increased risk of default or delinquency of borrowers, which will result in lower returns or losses. In the event that the creditworthiness of our borrowers deteriorates or we cannot track the deterioration of our creditworthiness, the criteria we use for the analysis of borrower credit profiles may be rendered inaccurate, and our risk management system may be subsequently rendered ineffective. This, in turn, may lead to higher default rates and adverse impacts on our reputation, business, results of operations and financial positions.
The offering of our products and services depends on effective use of mobile operating systems and distribution through mobile application stores, which we do not control.
Our loan products and loan facilitation services are offered through mobile applications. We may need to devote significant resources to support and maintain such applications. The mobile applications are dependent on the interoperability of popular mobile operating systems that we do not control, such as Android and iOS. Any changes in such systems that degrade the accessibility of our mobile applications or give preferential treatment to competing products and services could adversely affect the usability of our mobile applications. In addition, we rely upon third-party mobile application stores for users to download our mobile applications. As such, the distribution, operation and maintenance of our mobile applications are subject to application stores’ standard terms and policies for application developers.
Our future growth and results of operations could suffer if we experience difficulties in the future in offering our products and services through our mobile applications, or if we face increased costs to distribute our mobile applications. If it becomes increasingly difficult for our users to access and utilize our products and services on their mobile devices, or if the prevailing mobile operating systems do not support our mobile applications, our business and financial condition and operating results may be adversely affected.
Our operations depend on the performance of the Internet infrastructure and fixed telecommunications networks in China.
Almost all access to the Internet in China is maintained through state-owned telecommunication operators under the administrative control and regulatory supervision of the Ministry of Industry and Information Technology, or MIIT. We primarily rely on a limited number of telecommunication service providers to provide us with data communications capacity through local telecommunications lines and Internet data centers to host our servers. We may have limited access to alternative networks or services in the event of disruptions, failures or other problems with China’s Internet infrastructure or the fixed telecommunications networks provided by telecommunication service providers. With the expansion of our business, we may be required to upgrade our technology and infrastructure to keep up with increasing traffic. We cannot assure you that our cloud computing service provider and the underlying Internet infrastructure and the fixed telecommunications networks in China will be able to support the demand associated with the continued growth in Internet usage. In addition, we have no control over the costs of the services provided by telecommunication service providers which in turn, may affect our costs of using customized cloud computing services. If the prices we pay for customized cloud computing services rise significantly, our results of operations may be adversely affected. Furthermore, if Internet access fees or other charges to Internet users increase, our user traffic may decline and our business may be harmed.
Risks Relating to our Corporate Structure
If the PRC government deems that the contractual arrangements in relation to its consolidated VIEs do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these regulations or the interpretation of existing regulations change in the future, we could be subject to severe penalties or be forced to relinquish our interests in those operations.
The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage in telecommunications-related businesses. Specifically, foreign investors are not allowed to own more than 50% equity interest in any PRC company engaging in value-added telecommunications businesses, with certain exceptions relating to e-commerce which do not apply to us. The primary foreign investor must also have operating experience and a good track record in providing value-added telecommunications services, or VATS, overseas.
Because we are a company incorporated with limited liability in the British Virgin Islands, we are classified as a foreign enterprise under PRC laws and regulations, and our wholly-owned PRC subsidiaries, Beijing NCF Cloud Service Information Technology Co. Limited and Beijing NCF Financial Services Information Technology Co. Limited, or Beijing WFOEs, are foreign-invested enterprises, or FIEs. To comply with PRC laws and regulations, we conduct our business in China through our consolidated VIEs and affiliates. The Beijing WFOEs have entered into a series of contractual arrangements with the consolidated VIEs and their shareholders. For a description of these contractual arrangements, see “History and Development of the Company —Contractual Arrangements with Beijing Jing Xun Shi Dai Technology Limited Liability Company (“Jing Xun Shi Dai”) and Beijing Oriental Union Investment Management Limited Liability Company (“Beijing Oriental”).”
We believe that our corporate structure and contractual arrangements comply with the current applicable PRC laws and regulations. Our PRC legal counsel, Grandall Law Firm is of the opinion that our current ownership structure, the ownership structure of our PRC subsidiaries, our consolidated VIEs and subsidiaries, and the contractual arrangements among them are not in violation of existing PRC laws, rules and regulations; and these contractual arrangements are valid, binding and enforceable in accordance with their terms and applicable PRC laws and regulations currently in effect. However, as there are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, and the Telecommunications Regulations and the relevant regulatory measures concerning the telecommunications industry, there can be no assurance that the PRC government authorities, such as the Ministry of Commerce, or the MOFCOM, the MIIT, or other authorities that regulate online consumer finance platforms and other participants in the telecommunications industry, would ultimately take a view that is consistent with the opinion of its PRC legal counsel or agree that our corporate structure or any of the above contractual arrangements comply with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the relevant government authorities have broad discretion in interpreting these laws and regulations.
If our corporate structure and contractual arrangements are deemed by the MIIT or the MOFCOM or other regulators having competent authority to be illegal, either in whole or in part, we may lose control of our consolidated VIEs and may have to modify such structure to comply with regulatory requirements. However, there can be no assurance that we can achieve this without material disruption to our business. Further, if our corporate structure and contractual arrangements are found to be in violation of any existing or future PRC laws or regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations, including:
|●||revoking its business and operating licenses;|
|●||levying fines on us;|
|●||confiscating any of its income that they deem to be obtained through illegal operations;|
|●||shutting down its services;|
|●||discontinuing or restricting its operations in China;|
|●||imposing conditions or requirements with which we may not be able to comply;|
|●||requiring us to change its corporate structure and contractual arrangements;|
|●||restricting or prohibiting its use of the proceeds from overseas offerings to finance its PRC consolidated VIEs’ business and operations; and|
|●||taking other regulatory or enforcement actions that could be harmful to its business.|
Furthermore, new PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to its corporate structure and contractual arrangements. See “Risks Relating to our Corporate Structure”. The enactment of the PRC Foreign Investment Law may materially and adversely affect our business and financial condition. The occurrence of any of these events could materially and adversely affect our business and financial condition and results of operations. In addition, if the imposition of any of these penalties or requirements to restructure our corporate structure causes us to lose the right to direct the activities of our consolidated VIEs or our right to receive their economic benefits, we would no longer be able to consolidate the financial results of such VIEs in our consolidated financial statements. If our corporate structure and contractual arrangements are deemed to be illegal by relevant regulators, our business and results of operations would be materially and adversely affected. However, we do not believe that such actions would result in the liquidation or dissolution of its company, our wholly-owned subsidiaries in China or our consolidated VIEs or their subsidiaries. See “History and Development of the Company —Contractual Arrangements with Beijing Jing Xun Shi Dai Technology Limited Liability Company (“Jing Xun Shi Dai”) and Beijing Oriental Union Investment Management Limited Liability Company (“Beijing Oriental”)”.
Our contractual arrangements with our consolidated VIEs may result in adverse tax consequences.
We could face material and adverse tax consequences if the PRC tax authorities determine that our contractual arrangements with its consolidated VIEs were not made on an arm’s length basis and adjust our income and expenses for PRC tax purposes by requiring a transfer pricing adjustment. A transfer pricing adjustment could adversely affect us by (i) increasing the tax liabilities of our consolidated VIEs without reducing the tax liability of our subsidiaries, which could further result in late payment fees and other penalties to its consolidated VIEs for underpaid taxes; or (ii) limiting the ability of our consolidated VIEs to obtain or maintain preferential tax treatments and other financial incentives.
If NCF Cloud Services would not be granted Hi-Tech Enterprise status and the Certification of Software Company, our financial condition would be materially and adversely affected.
NCF Cloud Services holds the Certification of High-tech Enterprise (No. GR201711004462) issued by Beijing Municipal Science and Technology Commission, Beijing Local Taxation Bureau, Beijing Municipal Finance Bureau, Beijing Municipal State Taxation Bureau and Beijing Local Taxation Bureau on October 25, 2017, and the term of validity of the certificate is three years. According to the Corporate Income Tax Law of the People’s Republic of China, corporate income tax for key advanced and new technology enterprises supported by the State shall be at a reduced tax rate of 15%.
NCF Cloud Services holds the Certification of Software Company (Jing RQ-2018-1107) issued by Beijing Software and Information Service Industry Association on November 30, 2018, and the term of validity of the certificate is one year. According to Promulgation of Several Policies for Further Encouraging the Development of Software and Integrated Circuit Industries, any eligible software enterprise that has been determined is entitled to the preferential CIT policy of “exemption for two years and 50% reduction for three years” from the year when it starts to make profits. In the case of co-existence of the preferential CIT policy for eligible software and IC enterprises and other preferential CIT policies, the enterprise concerned may choose the most preferential policy only and shall not enjoy all preferential CIT policies concurrently.
If the above-mentioned policies would change or NCF Cloud Services would not be granted High-tech Enterprise or Eligible Software Enterprise status as defined in Administration of Taxation on Revising and Issuing the Measures for the Administration of the Certification of High-tech Enterprises and Promulgation of Several Policies for Further Encouraging the Development of Software and Integrated Circuit Industries, NCF Cloud Services would not enjoy the benefits of enterprise income tax reduction and exemption, and our financial condition may be materially and adversely affected.
We rely on contractual arrangements with our consolidated VIEs and their shareholders to operate our business, which may not be as effective as direct ownership in providing operational control and may have potential conflicts of interests with us, which may have a material adverse effect on our business and financial condition.
We rely on contractual arrangements with our consolidated VIEs and their shareholders to operate our business. For a description of these contractual arrangements, see “History and Development of the Company —Contractual Arrangements with Beijing Jing Xun Shi Dai Technology Limited Liability Company (“Jing Xun Shi Dai”) and Beijing Oriental Union Investment Management Limited Liability Company (“Beijing Oriental”).” All of our revenue is attributed to its consolidated VIEs. These contractual arrangements may not be as effective as direct ownership in providing us with control over our consolidated VIEs. If our consolidated VIEs or their shareholders fail to perform their respective obligations under these contractual arrangements, our recourse to the assets held by our consolidated VIEs is indirect and we may have to incur substantial costs and expend significant resources to enforce such arrangements in reliance on legal remedies under PRC law. These remedies may not always be effective, particularly in light of uncertainties in the PRC legal system. Furthermore, in connection with litigation, arbitration or other judicial or dispute resolution proceedings, assets under the name of any of the record holders of the equity interest in our consolidated VIEs, including such equity interest, may be put under court custody. As a consequence, we cannot be certain that the equity interest will be disposed of pursuant to the contractual arrangement or ownership by the record holder of the equity interest.
All of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through arbitration in the PRC. Accordingly, these contracts would be interpreted in accordance with PRC laws and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could limit its ability to enforce these contractual arrangements. In the event that we are unable to enforce these contractual arrangements, or if we suffer significant time delays or other obstacles in the process of enforcing these contractual arrangements, it would be very difficult to exert effective control over our consolidated VIEs, and our ability to conduct our business and our financial condition and results of operations may be materially and adversely affected. See “Risks Relating to Doing Business in China —There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.”
In connection with its operations in China, we rely on Mr. Zhenxin Zhang and Ms. Huanxiang Li, the shareholders of our consolidated VIEs, to fulfill the obligations under such contractual arrangements. The interests of these shareholders in their individual capacities as shareholders of our consolidated VIEs may differ from the interests of the company as a whole. There can be no assurance that when conflicts of interest arise, any or all of these individuals or entities will act in our best interest or that those conflicts of interest will be resolved in our favor. In addition, these individuals and entities may breach or cause the consolidated VIEs and their subsidiaries to breach or refuse to renew their existing contractual arrangements with us.
Currently, we do not have arrangements that address potential conflicts of interest shareholders of our consolidated VIEs may encounter due to their dual roles as shareholders of consolidated VIEs and as beneficial owners of its company. However, we could, at all times, exercise our option under the exclusive call option agreement to cause them to transfer all of their equity ownership in our consolidated VIEs to a PRC entity or individual designated by it as permitted by the then applicable PRC laws. In addition, if such conflicts of interest arise, we could also, in the capacity of the attorney-in-fact of the then existing shareholders of our consolidated VIEs as provided under the powers of attorney, directly appoint new directors of our consolidated VIEs. We rely on the shareholders of our consolidated VIEs to comply with PRC laws and regulations, which protect contracts, and to provide that directors and executive officers owe a duty of loyalty to its company and require them to avoid conflicts of interest and not to take advantage of their positions for personal gain, and with the laws of the British Virgin Islands, which provide that directors have a duty of care and a duty of loyalty to act honestly in good faith with a view to its best interests. However, the legal frameworks of China and the British Virgin Islands do not provide guidance on resolving conflicts in the event of a conflict with another corporate governance regime. If there is a dispute between us and the shareholders of our consolidated VIEs, we might have to initiate a lawsuit to protect our rights, which could result in disruption of our business and subject us to substantial uncertainty as to the outcome of any such legal proceedings.
If the custodians or authorized users of its controlling nontangible assets, including chops and seals, fail to fulfill their responsibilities, misappropriate or misuse these assets, its business and operations may be materially and adversely affected.
Under PRC law, legal documents for corporate transactions, including agreements and contracts such as the leases and sales contracts that its business relies on, are executed using the chop or seal of the signing entity or with the signature of a legal representative whose designation is registered and filed with the relevant local branch of the State Administration of Taxation, or the SAIC. We generally execute legal documents by affixing chops or seals, rather than having the designated legal representatives sign the documents.
We have six major types of chops (similar to a corporate seal in the United States)—corporate chops, contract chops and finance chops, invoice chops, human resources chops and legal person chops. We us corporate chops generally for documents to be submitted to government agencies, such as applications for changing business scope, directors or company name, and for legal letters. We use contract chops for executing leases and commercial contracts. We use finance chops generally for making and collecting payments, including issuing invoices. Use of corporate chops and contract chops must be approved by our legal department and administrative department, and use of finance chops must be approved by our finance department. The chops of our subsidiaries and consolidated VIEs are generally held by the relevant entities so that documents can be executed locally. Although we usually utilize chops to execute contracts, the registered legal representatives of our subsidiaries and consolidated VIEs have the apparent authority to enter into contracts on behalf of such entities without chops, unless such contracts set forth otherwise.
In order to maintain the physical security of our chops, we generally have them stored in secured locations accessible only to the designated key employees of our legal, administrative or finance departments. Our designated legal representatives generally do not have access to the chops. Although we have approval procedures in place and mechanisms to monitor our key employees, including the designated legal representatives of our subsidiaries and consolidated VIEs, the procedures may not be sufficient to prevent all instances of abuse or negligence. There is a risk that our key employees or designated legal representatives could abuse their authority, for example, by binding our subsidiaries and consolidated VIEs with contracts against our interests, as we would be obligated to honor these contracts if the other contracting party acts in good faith in reliance on the apparent authority of our chops or signatures of our legal representatives. If any designated legal representative obtains misappropriates the chop in an effort to obtain control over the relevant entity, we would need to have a shareholder or board resolution to designate a new legal representative and to take legal actions to seek the return of the chop, apply for a new chop with the relevant authorities, or otherwise seek legal remedies for the legal representative’s misconduct. If any of the designated legal representatives obtain, misuses or misappropriates its chops and seals or other controlling intangible assets for whatever reason, we could experience disruption to our normal business operations. We may have to take corporate or legal action, which could involve significant time and resources expenses while distracting management from our operations, and our business and operations may be materially and adversely affected.
The enactment of the Foreign Investment Law may materially and adversely affect its business and financial condition.
The Ministry of Commerce (“MOFCOM”) published a discussion draft of the proposed Foreign Investment Law (the “2015 Draft Foreign Investment Law”) in January 2015 aiming to, upon its enactment, replace the major existing laws and regulations governing foreign investment in China.
Among other things, the 2015 Draft Foreign Investment Law purports to introduce the principle of “actual control” in determining whether a company is considered a foreign invested enterprise, or an FIE. The 2015 Draft Foreign Investment Law specifically provides that entities established in China but “controlled” by foreign investors will be treated as FIEs, whereas an entity organized in a foreign jurisdiction, but cleared by MOFCOM as “controlled” by PRC entities and/or citizens, would nonetheless be treated as a PRC domestic entity for investment in the “restriction category” that could appear on “negative list.” In this connection, “control” is broadly defined in the draft law to cover any of the following summarized categories:
|●||holding 50% or more of the voting rights or similar rights and interests of the subject entity;|
|●||holding less than 50% of the voting rights or similar rights and interests of the subject entity but having the power to directly or indirectly appoint or otherwise secure at least 50% of the seats on the board or other equivalent decision making bodies, or having the voting power to materially influence the board, the shareholders’ meeting or other equivalent decision making bodies; or|
|●||having the power to exert decisive influence, via contractual or trust arrangements, over the subject entity’s operational, financial, staffing and technological matters.|
Under the 2015 Draft Foreign Investment Law, VIEs that are controlled via contractual arrangements would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors. For any companies with a VIE structure in an industry category that is in the “restriction category” that could appear on any such “negative list,” the existing VIE structure may be deemed legitimate only if the ultimate controlling person(s) is/are of PRC nationality (either PRC state-owned enterprises or agencies, or PRC citizens). Conversely, if the actual controlling person(s) is/are of foreign nationalities, then the VIEs will be treated as FIEs, in which case, the existing VIE structures will likely be scrutinized and subject to foreign investment restrictions and approval from MOFCOM and other supervising authorities such as MIIT. Any operation in the industry category on the “negative list” without market entry clearance may be considered as illegal.
On December 26, 2018, the National People’s Congress published the Foreign Investment Law of the People’s Republic of China (the “2018 Draft Foreign Investment Law”) on its official website aiming to solicit public opinions. The 2018 Draft Foreign Investment Law is a widely regarded to be a revision of the 2015 Draft Foreign Investment Law.
On March 15, 2019, the Foreign Investment Law was adopted by the NPC and will come into effect on January 1, 2020. The Foreign Investment Law will replace the Law on Sino-Foreign Equity Joint Ventures, the Law on Sino-Foreign Contractual Joint Ventures and the Law on Foreign-Capital Enterprises to become the legal foundation for foreign investment in the PRC. Moreover, as the interpretation and implementation of the Foreign Investment Law has not been officially promulgated, there are uncertainties as to whether it will impact the viability of our current corporate structure, corporate governance and business operations.
Conducting operations through contractual arrangements (VIE agreements) has been adopted by many PRC-based companies, including us, to obtain and maintain necessary licenses and permits in the industries that are currently subject to foreign investment restrictions or prohibitions in China. The 2018 Draft Foreign Investment Law and the Foreign Investment Law deletes not only the concept of “actual controller” introduced by the 2015 Draft Foreign Investment Law, but also all terms of “protocol control”. There is no clear stipulation on whether the control of domestic enterprises or the holding of rights and interests of domestic enterprises through contractual arrangements or other means belongs to the category of foreign investment. Under the new Foreign Investment Law that is adopted on March 15, 2019 and will become effective on January 1, 2020, the operation mode for us to control our subsidiaries in China through VIE structure will not be affected.
Although the Foreign Investment Law did not mention the principle of “actual control” (including VIE structures) as stipulated in the Draft Foreign Investment Law 2015, according to the fourth category of foreign investment activities mentioned in the Foreign Investment Law, namely, “investing in any other ways as stipulated under laws, administrative regulations or provisions of the State Council”, the “actual control” principle (including VIE structures) may be proposed in form of other laws, administrative regulations or means as stipulated by the State Council. Under these circumstances, if the actual controller has foreign nationality, the VIE will be regarded as a foreign invested enterprise. Once an entity is designated as a foreign-invested company, its investment in the PRC will be limited to the scope stated in the Negative List. As advised by our PRC Legal Advisers, if there are no other newly issued or revised laws and regulations about regulating the “control of domestic enterprises through contractual arrangements”, the Foreign Investment Law will not have a significant impact on the effectiveness of our existing Contractual Arrangements.
At the same time, the Foreign Investment Law stipulates that the Negative List for the access of foreign investment is divided into “prohibited investment areas” and “restricted investment areas”. However, the Foreign Investment Law does not specify the scope of business which are included in the fields of restricted investment and prohibited investment. It is unclear whether any business areas of companies that currently controlled by us through the VIEs agreements will be listed on the negative list in the future.
Thus, if the PRC entities currently controlled by us through VIE agreements are identified as a foreign-invested enterprise in the future under the enacted and enforced foreign investment law, and their business areas are listed as restricted or prohibited area according to the negative list for foreign investment access, the competent authority may require those PRC entities to go through further approval procedures. And if those PRC entities do not obtain the necessary approval procedures in time, our business and financial condition and operating results may be materially and adversely affected.
Risks Relating to Doing Business in China
Changes in the political and economic policies of the PRC government may materially and adversely affect our business, financial condition and results of operations and may result in our inability to sustain its growth and expansion strategies.
After the merger, all of the combined company’s operations will be entirely conducted in the PRC and all of its revenue will be sourced from the PRC. Accordingly, the combined company’s financial condition and results of operations are affected to a significant extent by economic, political and legal developments in the PRC.
The PRC economy differs from the economies of most developed countries in many respects, including the extent of government involvement, level of development, growth rate, and control of foreign exchange and allocation of resources. Although the PRC government has implemented measures emphasizing the utilization of market forces for economic reform, the reduction of state ownership of productive assets, and the establishment of improved corporate governance in business enterprises, a substantial portion of productive assets in China is still owned by the government. In addition, the PRC government continues to play a significant role in regulating industry development by imposing industrial policies. The PRC government also exercises significant control over China’s economic growth by allocating resources, controlling payment of foreign currency-denominated obligations, setting monetary policy, regulating financial services and institutions and providing preferential treatment to particular industries or companies.
While the PRC economy has experienced significant growth in the past three decades, growth has been uneven, both geographically and among various sectors of the economy. The PRC government has implemented various measures to encourage economic growth and to guide the allocation of resources. Some of these measures may benefit the overall PRC economy, but may also have a negative effect on the combined company. Its financial condition and results of operations could be materially and adversely affected by government control over capital investments or changes in tax regulations that are applicable to the combined company. In addition, the PRC government has implemented in the past certain measures to control the pace of economic growth. These measures may cause decreased economic activity, which in turn could lead to a reduction in demand for its services and consequently have a material adverse effect on its businesses, financial condition and results of operations.
There are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations.
Substantially all of our operations are conducted in the PRC, and are governed by PRC laws, rules and regulations. Our PRC subsidiary and consolidated VIEs are subject to laws, rules and regulations applicable to foreign investment in China. The PRC legal system is a civil law system based on written statutes. Unlike the common law system, prior court decisions may be cited for reference but have limited precedential value.
In 1979, the PRC government began to promulgate a comprehensive system of laws, rules and regulations governing economic matters in general. The overall effect of legislation over the past three decades has significantly enhanced the protections afforded to various forms of foreign investment in China. However, China has not developed a fully integrated legal system, and recently enacted laws, rules and regulations may not sufficiently cover all aspects of economic activities in China or may be subject to significant degrees of interpretation by PRC regulatory agencies. In particular, because these laws, rules and regulations, especially those relating to the Internet consumer finance industry, are relatively new, and because of the limited number of published decisions and the nonbinding nature of such decisions, and because the laws, rules and regulations often give the relevant regulator significant discretion in how to enforce them, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. In addition, the PRC legal system is based in part on government policies and internal rules, some of which are not published on a timely basis or at all, and may have a retroactive effect. As a result, we may not be aware of our violation of these policies and rules until after the occurrence of the violation.
Any administrative and court proceedings in China may be protracted, resulting in substantial costs and diversion of resources and management attention. Since PRC administrative authorities and courts have significant discretion in interpreting and implementing statutory and contractual terms, it may be more difficult to evaluate the outcome of administrative and court proceedings and the level of legal protection we enjoy than in more developed legal systems. These uncertainties may impede its ability to enforce the contracts we have entered into and could materially and adversely affect our business, financial condition and results of operations.
The approval of the China Securities Regulatory Commission, or the CSRC, may be required in connection with the Merger under a PRC regulation. The regulation also establishes more complex procedures for acquisitions conducted by foreign investors that could make it more difficult for us to grow through acquisitions.
On August 8, 2006, six PRC regulatory agencies, including the MOFCOM, the State-Owned Assets Supervision and Administration Commission, or the SASAC, the SAIC, the CSRC, and the State Administration of Foreign Exchange, or the SAFE, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which came into effect on September 8, 2006 and were amended on June 22, 2009. The M&A Rules include, among other things, provisions that purport to require that an offshore special purpose vehicle formed for the purpose of an overseas listing of securities of a PRC company obtain the approval of the CSRC prior to the listing and trading of such special purpose vehicle’s securities on an overseas stock exchange. On September 21, 2006, the CSRC published on its official website procedures regarding its approval of overseas listings through special purpose vehicles. However, substantial uncertainty remains regarding the scope and applicability of the M&A Rules to offshore special purpose vehicles.
While the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC counsel, Grandall Law Firm, that CSRC approval is not required in the context of the Business Combination given that (i) the Beijing WFOE was established by means of direct investment rather than by a merger with or an acquisition of any PRC domestic companies as defined under the M&A Rules, (ii) no explicit provision in the M&A Rules classifies the respective contractual arrangements among Beijing WFOE, the VIEs and their shareholders as a type of acquisition transaction falling under the M&A Rules and (iii) the CSRC currently has not issued any definitive rule or interpretation concerning whether the Business Combination is subject to the M&A Rules. There can be no assurance that the relevant PRC government agencies, including the CSRC, would reach the same conclusion as our PRC counsel. If the CSRC or other PRC regulatory body subsequently determines that we need to obtain the CSRC’s approval for the Business Combination or if the CSRC or any other PRC government authorities publish any interpretation or implements rules before its listing that would require us to obtain CSRC or other governmental approvals for the Business Combination, we may face adverse actions or sanctions by the CSRC or other PRC regulatory agencies. In any such event, these regulatory agencies may impose fines and penalties on our operations in China, limit our operating privileges in China, delay or restrict the repatriation of the proceeds from the Business Combination into the PRC or take other actions that could have a material adverse effect on our business, financial condition, results of operations, reputation and prospects.
The new regulations also established additional procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time consuming and complex, including requirements in some instances that the MOFCOM be notified in advance of any change-of-control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the MOFCOM be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. We may grow our business in part by acquiring other companies operating in our industry. Compliance with the requirements of the new regulations to complete such transactions could be time-consuming, and any required approval processes, including approval from the MOFCOM, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share. See “Regulations—Regulations on Overseas Listing.”
PRC regulations relating to investments in offshore companies by PRC residents may subject its PRC-resident beneficial owners or its PRC subsidiary to liability or penalties, limit its ability to inject capital into its PRC subsidiary or limit its PRC subsidiary’s ability to increase their registered capital or distribute profits.
The SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Control on Domestic Residents’ Offshore Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, on July 4, 2014, which replaced the former circular commonly known as “SAFE Circular 75” promulgated by the SAFE on October 21, 2005. SAFE Circular 37 requires PRC residents to register with local branches of the SAFE in connection with their direct establishment or indirect control of an offshore entity, for the purpose of overseas investment and financing, with such PRC residents’ legally owned assets or equity interests in domestic enterprises or offshore assets or interests, referred to in SAFE Circular 37 as a “special purpose vehicle.” SAFE Circular 37 further requires the amendment to the registration in the event of any significant changes with respect to the special purpose vehicle, such as an increase or decrease of capital contributed by PRC individuals, share transfer or exchange, merger, division or other material events. In the event that a PRC shareholder holding interests in a special purpose vehicle fails to fulfill the required SAFE registration, the PRC subsidiaries of that special purpose vehicle may be prohibited from making profit distributions to the offshore parent and from carrying out subsequent cross-border foreign exchange activities, and the special purpose vehicle may be restricted in its ability to contribute additional capital into its PRC subsidiary. Moreover, failure to comply with the various SAFE registration requirements described above could result in liability under PRC law for evasion of foreign exchange controls. According to the Notice on Further Simplifying and Improving Policies for the Foreign Exchange Administration of Direct Investment released on February 13, 2015 by the SAFE, local banks will examine and handle foreign exchange registration for overseas direct investment, including the initial foreign exchange registration and amendment registration, under SAFE Circular 37 from June 1, 2015.
Mr. Zhang Zhenxin completed the SAFE Circular 37 registration in relation to his investment in Great Reap Ventures Limited, First P2P Limited (currently known as NCF Wealth Holdings Limited) and UCF Huarong Investment (HK) Co., Limited on September 25, 2014. The registration also recorded the roundtrip investment into Beijing Hua Rong Ju Hui Investment Consultation Co., Limited (currently known as Beijing NCF Financial Service Information Technology Co., Ltd) made indirectly through the aforesaid offshore special vehicle companies. Mr. Zhang Zhenxin completed the SAFE Circular 37 registration in relation to his investment in Nimble Ring Limited, a company established in the British Virgin Islands in September 2014, on July 22, 2015. Neither the two registrations in the abovementioned reflect the domestic interest held by Zhenxin Zhang in Jing Xun Shi Dai and the roundtrip investment of Beijing NCF Cloud Service Information Technology Co., Ltd.
According to the SAFE Circular 37 and the Guidance on Direct Investment Foreign Exchange Affairs, PRC residents are only required to register the first level of the offshore special vehicle directly owned by them and update their SAFE Circular 37 registration in the event of certain material changes at such first-level offshore special vehicle. PRC law does not explicitly require a change of registration to be made in relation to any new roundtrip investment or any changes of the domestic interest held by the PRC resident. Therefore Mr. Zhang Zhenxin is not required to file for new registration or change of registration to reflect the domestic interest in Jing Xun Shi Dai and the roundtrip investment of Beijing NCF Cloud Service Information Technology Co., Ltd., and that the existing two SAFE Circular 37 registrations made by Mr. Zhang Zhenxin are sufficient and in compliance with the PRC law.
We have notified substantial beneficial owners of Class A common shares who we know are PRC residents of their filing obligations. Nevertheless, we may not be aware of the identities of all of our beneficial owners who are PRC residents. We do not have control over our beneficial owners and there can be no assurance that all of our PRC-resident beneficial owners will comply with SAFE Circular 37 and subsequent implementation rules, and there is no assurance that the registration under SAFE Circular 37 and any amendment will be completed in a timely manner, or will be completed at all. The failure of its beneficial owners who are PRC residents to register or amend their foreign exchange registrations in a timely manner pursuant to SAFE Circular 37 and subsequent implementation rules, or the failure of future beneficial owners of its company who are PRC residents to comply with the registration procedures set forth in SAFE Circular 37 and subsequent implementation rules, may subject such beneficial owners or our PRC subsidiary to fines and legal sanctions. Such failure to register or comply with relevant requirements may also limit our ability to contribute additional capital to our PRC subsidiary and limit our PRC subsidiary’s ability to distribute dividends to its company. These risks may have a material adverse effect on our business, financial condition and results of operations.
PRC regulation of loans to, and direct investment in, PRC entities by offshore holding companies and governmental control of currency conversion may restrict or prevent us from using the proceeds of future offerings to make loans to our PRC subsidiary and consolidated VIE, or to make additional capital contributions to our PRC subsidiary.
After the Merger, as an offshore holding company with PRC subsidiaries, Hunter Maritime may transfer funds to its PRC subsidiaries by means of loans or capital contributions, which are treated as foreign-invested enterprises under PRC laws. However, loans by Hunter Maritime to its PRC subsidiaries to finance their activities cannot exceed statutory limits and must be registered with the local counterpart of SAFE and capital contributions to its PRC subsidiary are subject to the requirement of making necessary filings in the Foreign Investment Comprehensive Management Information System, and registration with other governmental authorities in China.
SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming the Administration of Foreign Exchange Settlement of Capital of Foreign-invested Enterprises, or Circular 19, effective on June 1, 2015, in replacement of the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign- Invested Enterprises, or SAFE Circular 142, the Notice from the State Administration of Foreign Exchange on Relevant Issues Concerning Strengthening the Administration of Foreign Exchange Businesses, or Circular 59, and the Circular on Further Clarification and Regulation of the Issues Concerning the Administration of Certain Capital Account Foreign Exchange Businesses, or Circular 45. According to Circular 19, the flow and use of the RMB capital converted from the foreign currency-denominated registered capital of a foreign-invested company is regulated such that RMB capital may not be used for the issuance of RMB entrusted loans, the repayment of inter-enterprise loans or the repayment of bank loans that have been transferred to a third party. Although Circular 19 allows RMB capital converted from foreign currency-denominated registered capital of a foreign invested enterprise to be used for equity investments within the PRC, it also reiterates the principle that RMB converted from the foreign currency-denominated capital of a foreign-invested company may not be directly or indirectly used for purposes beyond its business scope. Thus, it is unclear whether SAFE will permit such capital to be used for equity investments in the PRC in actual practice. SAFE promulgated the Notice of the State Administration of Foreign Exchange on Reforming and Standardizing the Foreign Exchange Settlement Management Policy of Capital Account, or Circular 16, effective on June 9, 2016, which reiterates some of the rules set forth in Circular 19, but changes the prohibition against using RMB capital converted from foreign currency-denominated registered capital of a foreign-invested company to issue RMB entrusted loans to a prohibition against using such capital to grant loans to non-associated enterprises. Violations of SAFE Circular 19 and Circular 16 could result in administrative penalties. Circular 19 and Circular 16 may significantly limit its ability to transfer any foreign currency we hold, including the net proceeds from future offerings, to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in the PRC.
Due to the restrictions imposed on loans in foreign currencies extended to any PRC domestic companies, we are not likely to make such loans to any of our consolidated VIEs and their subsidiaries, each a PRC domestic company. Meanwhile, we are not likely to finance the activities of our consolidated VIEs and their subsidiaries by means of capital contributions given the restrictions on foreign investment in the businesses that are currently conducted by its consolidated VIEs and their subsidiaries.
In light of the various requirements imposed by PRC regulations on loans to, and direct investment in, PRC entities by offshore holding companies, we cannot assure you that we will be able to complete the necessary government registrations or obtain the necessary government approvals on a timely basis, if at all, with respect to future loans to our PRC subsidiary or any consolidated variable interest entity or future capital contributions by us to its PRC subsidiary. As a result, uncertainties exist as to our ability to provide prompt financial support to its PRC subsidiary or consolidated VIEs and their subsidiaries when needed. If we fail to complete such registrations or obtain such approvals, our ability to use foreign currency, and to capitalize or otherwise fund its PRC operations may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business.
Any failure to comply with PRC regulations regarding employee share incentive plans may subject the PRC plan participants or us to fines and other legal or administrative sanctions.
Pursuant to SAFE Circular 37, PRC residents who participate in share incentive plans in overseas non-publicly-listed companies due to their positions as director, senior management or employees of the PRC subsidiaries of the overseas companies may submit applications to SAFE or its local branches for the foreign exchange registration with respect to offshore special purpose companies. Its directors, executive officers and other employees who are PRC residents and who have been granted options may follow SAFE Circular 37 to apply for the foreign exchange registration before its company becomes an overseas listed company. After our company becomes an overseas listed company, us and our directors, executive officers and other employees who are PRC residents and who have been granted options will be subject to the Notice on Issues Concerning the Foreign Exchange Administration for Domestic Individuals Participating in Stock Incentive Plan of Overseas Publicly Listed Company, issued by SAFE in February 2012, according to which, employees, directors, supervisors and other management members who are PRC residents participating in any stock incentive plan of an overseas publicly listed company are required to register with SAFE through a domestic qualified agent, which could be a PRC subsidiary of such overseas listed company, and complete certain other procedures. Subsequent to the completion of the Business Combination, we are making efforts to comply with these requirements. However, there can be no assurance that we can successfully register with SAFE in full compliance with the rules. Failure to complete the SAFE registrations may subject us to fines and legal sanctions and may also limit the ability to make payment under our share incentive plans or receive dividends or sales proceeds related thereto, or our ability to contribute additional capital into its wholly-foreign owned enterprises in China and limit our wholly-foreign owned enterprises’ ability to distribute dividends. We also face regulatory uncertainties that could restrict our ability to adopt additional share incentive plans for our directors and employees under PRC law.
NCF relies to a significant extent on dividends and other distributions on equity paid by its principal operating subsidiaries to fund offshore cash and financing requirements.
NCF is a holding company and relies to a significant extent on dividends and other distributions on equity paid by its principal operating subsidiaries, including its wholly-owned PRC subsidiaries and the subsidiaries of each VIE and on remittances from the consolidated VIEs, for its offshore cash and financing requirements, including the funds necessary to pay dividends and other cash distributions to its shareholders, fund intercompany loans, service any debt NCF may incur outside of China and pay its expenses. When its principal operating subsidiaries or the consolidated VIEs incur additional debt, the instruments governing the debt may restrict their ability to pay dividends or make other distributions or remittances to us. Furthermore, the laws, rules and regulations applicable to its PRC subsidiary and certain other subsidiaries permit payments of dividends only from part of their retained earnings, if any, determined in accordance with applicable PRC accounting standards and regulations.
Under PRC laws, rules and regulations, each of its subsidiaries incorporated in China is required to set aside at least 10% of its net income each year to fund certain statutory reserves until the cumulative amount of such reserves reaches 50% of its registered capital. These reserves, together with the registered capital, are not included in the retained earnings distributable as cash dividends. Furthermore, under PRC law, its wholly-owned PRC subsidiary, which is a wholly foreign-owned enterprise under PRC law, cannot distribute any profits until all of its losses from prior fiscal years have been offset. In accordance with the articles of association of its wholly-owned PRC subsidiary, profit distributions also need to be approved by its executive directors and shareholders before any distribution plan becomes effective. As a result, its subsidiaries incorporated in China are restricted in their ability to transfer a portion of their respective net assets to their shareholders as dividends, loans or advances. In addition, registered share capital and statutory reserve accounts are also restricted from withdrawal in the PRC, up to the amount of net assets held in each operating subsidiary.
Limitations on the ability of its consolidated VIEs to make remittance to the wholly-foreign owned enterprise and on the ability of its subsidiaries to pay dividends to us could limit its ability to access cash generated by the operations of those entities, including to make investments or acquisitions that could be beneficial to its businesses, pay dividends to its shareholders or otherwise fund and conduct its business.
We may be treated as a resident enterprise for PRC tax purposes under the PRC Enterprise Income Tax Law, and we may, therefore, be subject to PRC income tax on our global income.
Under the PRC Enterprise Income Tax Law and its implementing rules, enterprises established under the laws of jurisdictions outside of China with “de facto management bodies” located in China may be considered PRC tax resident enterprises for tax purposes and may be subject to the PRC enterprise income tax at the rate of 25% on their global income. “De facto management body” refers to a managing body that exercises substantive and overall management and control over the production, personnel, accounting books and assets of an enterprise. The State Administration of Taxation issued the Notice Regarding the Determination of Chinese- Controlled Offshore-Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, or Circular 82, on April 22, 2009. Circular 82 provides certain specific criteria for determining whether the “de facto management body” of a Chinese-controlled offshore-incorporated enterprise is located in China. Although Circular 82 only applies to offshore enterprises controlled by PRC enterprises, not those controlled by foreign enterprises or individuals, the determining criteria set forth in Circular 82 may reflect the State Administration of Taxation’s general position on how the “de facto management body” test should be applied in determining the tax resident status of offshore enterprises, regardless of whether they are controlled by PRC enterprises. If we were to be considered a PRC resident enterprise, we would be subject to PRC enterprise income tax at the rate of 25% on its global income. In such a case, our profitability and cash flow may be materially reduced as a result of its global income being taxed under the Enterprise Income Tax Law. We believe that none of our entities outside of China is a PRC resident enterprise for PRC tax purposes. However, the tax resident status of an enterprise is subject to determination by the PRC tax authorities and uncertainties remain with respect to the interpretation of the term “de facto management body.”
Dividends paid to our foreign investors and gains on the sale of its common shares by its foreign investors may be subject to PRC tax.
Under the Enterprise Income Tax Law and its implementation regulations issued by the State Council, a 10% PRC withholding tax is applicable to dividends paid to investors that are non-resident enterprises, which do not have an establishment or place of business in the PRC or which have such establishment or place of business but the dividends are not effectively connected with such establishment or place of business, to the extent such dividends are derived from sources within the PRC. In addition, any gain realized on the transfer of shares by such investors is also subject to PRC tax at a rate of 10%, if such gain is regarded as income derived from sources within the PRC. If the combined company is deemed a PRC resident enterprise, dividends paid on its common shares, and any gain realized from the transfer of its common shares, may be treated as income derived from sources within the PRC and may as a result be subject to PRC taxation. Furthermore, if the combined company is deemed a PRC resident enterprise, dividends paid to individual investors who are non-PRC residents and any gain realized on the transfer of common shares by such investors may be subject to PRC tax at a current rate of 20% (which in the case of dividends may be withheld at source). Any PRC tax liability may be reduced under applicable tax treaties or tax arrangements between China and other jurisdictions. If the combined company or any of its subsidiaries established outside China are considered a PRC resident enterprise, it is unclear whether holders of its common shares would be able to claim the benefit of income tax treaties or agreements entered into between China and other countries or areas. If dividends paid to its non-PRC investors, or gains from the transfer of its common shares by such investors, are deemed as income derived from sources within the PRC and thus are subject to PRC tax, the value of your investment in its common shares may decline significantly.
We and our existing shareholders face uncertainties with respect to indirect transfers of equity interests in PRC resident enterprises or other assets attributed to a Chinese establishment of a non-Chinese company, or immovable properties located in China owned by non-Chinese companies.
In October 2017, the State Administration of Taxation issued the Bulletin on Issues Concerning the Withholding of Non-PRC Resident Enterprise Income Tax at Source, or Bulletin 37, which replaced the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation, on December 10, 2009, and partially replaced and supplemented rules under the Bulletin on Issues of Enterprise Income Tax on Indirect Transfers of Assets by Non-PRC Resident Enterprises or Bulletin 7, issued by the State Administration of Taxation, on February 3, 2015. Pursuant to Bulletin 7, an “indirect transfer” of PRC assets, including a transfer of equity interests in an unlisted non-PRC holding company of a PRC resident enterprise, by non-PRC resident enterprises may be re-characterized and treated as a direct transfer of the underlying PRC assets, if such arrangement does not have a reasonable commercial purpose and was established for the purpose of avoiding payment of PRC enterprise income tax. As a result, gains derived from such indirect transfer may be subject to PRC enterprise income tax. According to Bulletin 7, “PRC taxable assets” include assets attributed to an establishment in China, immovable properties located in China, and equity investments in PRC resident enterprises and any gains from the transfer of such asset by a direct holder, who is a non-PRC resident enterprise, would be subject to PRC enterprise income taxes. When determining whether there is a “reasonable commercial purpose” of the transaction arrangement, features to be taken into consideration include: whether the main value of the equity interest of the relevant offshore enterprise derives from PRC taxable assets; whether the assets of the relevant offshore enterprise mainly consists of direct or indirect investment in China or if its income mainly derives from China; whether the offshore enterprise and its subsidiaries directly or indirectly holding PRC taxable assets have real commercial nature which is evidenced by their actual function and risk exposure; the duration of existence of the business model and organizational structure; the replicability of the transaction by direct transfer of PRC taxable assets; and the tax situation of such indirect transfer and applicable tax treaties or similar arrangements. In the case of an indirect offshore transfer of assets of a PRC establishment, the resulting gain is to be included with the enterprise income tax filing of the PRC establishment or place of business being transferred, and may consequently be subject to PRC enterprise income tax at a rate of 25%. Where the underlying transfer relates to immovable properties located in China or to equity investments in a PRC resident enterprise, which is not related to a PRC establishment or place of business of a non-resident enterprise, a PRC enterprise income tax of 10% would apply, subject to available preferential tax treatment under applicable tax treaties or similar arrangements, and the party who is obligated to make the transfer payments has the withholding obligation. Pursuant to Bulletin 37, the withholding agent shall declare and pay the withheld tax to the competent tax authority in the place where such withholding agent is located within 7 days from the date of occurrence of the withholding obligation, while the transferor is required to declare and pay such tax to the competent tax authority within the statutory time limit according to Bulletin 7. Late payment of applicable tax will subject the transferor to default interest. Both Bulletin 37 and Bulletin 7 do not apply to transactions of sale of shares by investors through a public stock exchange where such shares were acquired from a transaction through a public stock exchange.
There is uncertainty as to the application of Bulletin 37 or previous rules under Bulletin 7. We face uncertainties as to the reporting and other implications of certain past and future transactions where PRC taxable assets are involved, such as offshore restructuring, sale of the shares in its offshore subsidiaries or investments. We may be subject to filing obligations or taxes if our company is transferor in such transactions, and may be subject to withholding obligations if our company is transferee in such transactions, under Bulletin 37 and Bulletin 7. For transfer of shares in our company by investors that are non-PRC resident enterprises, its PRC subsidiary may be requested to assist in the filing under Bulletin 37 and Bulletin 7. As a result, we may be required to expend valuable resources to comply with Bulletin 37 and Bulletin 7 or to request the relevant transferors from whom we purchase taxable assets to comply with these circulars, or to establish that our company should not be taxed under these circulars, which may have a material adverse effect on our financial condition and results of operations.
We are subject to restrictions on currency exchange.
All of our net income is denominated in Renminbi. The Renminbi is currently convertible under the “current account,” which includes dividends, trade and service-related foreign exchange transactions, but not under the “capital account,” which includes foreign direct investment and loans, including loans we may secure from our onshore subsidiaries or consolidated VIE. Currently, certain of its PRC subsidiaries, may purchase foreign currency for settlement of “current account transactions,” including payment of dividends to us, without the approval of the SAFE by complying with certain procedural requirements. However, the relevant PRC governmental authorities may limit or eliminate its ability to purchase foreign currencies in the future for current account transactions. Foreign exchange transactions under the capital account remain subject to limitations and require approvals from, or registration with, the SAFE and other relevant PRC governmental authorities. Since a significant amount of our future net income and cash flow will be denominated in Renminbi, any existing and future restrictions on currency exchange may limit its ability to utilize cash generated in Renminbi to fund our business activities outside of the PRC or pay dividends in foreign currencies to our shareholders, including holders of our common shares, and may limit its ability to obtain foreign currency through debt or equity financing for our subsidiaries and consolidated VIEs.
Fluctuations in exchange rates could result in foreign currency exchange losses and could materially reduce the value of your investment.
The value of the Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in political and economic conditions and the foreign exchange policy adopted by the PRC government. On July 21, 2005, the PRC government changed its policy of pegging the value of the Renminbi to the U.S. dollar. Following the removal of the U.S. dollar peg, the Renminbi appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the Renminbi and the U.S. dollar remained within a narrow band. Since June 2010, the Renminbi has started to appreciate slowly against the U.S. dollar, though there have been periods when the U.S. dollar has appreciated against the RMB. On August 11, 2015, the PBOC allowed the Renminbi to depreciate by approximately 2% against the U.S. dollar. Since then and until the end of 2016, the Renminbi has depreciated against the U.S. dollar by approximately 10%. It is difficult to predict how long such depreciation of RMB against the U.S. dollar may last and when and how the relationship between the RMB and the U.S. dollar may change again.
All of our revenue and substantially all of our costs are denominated in Renminbi. We are a holding company and rely on dividends paid by our operating subsidiaries in China for our cash needs. Any significant revaluation of Renminbi may materially and adversely affect our results of operations and financial position reported in Renminbi when translated into U.S. dollars, and the value of, and any dividends payable on, the common shares in U.S. dollars. To the extent that we need to convert U.S. dollars into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would have an adverse effect on the Renminbi amount we would receive. Conversely, if we decide to convert our Renminbi into U.S. dollars for the purpose of making payments for dividends on our common shares or for other business purposes, appreciation of the U.S. dollar against the Renminbi would have a negative effect on the U.S. dollar amount.
Risks relating to our Securities
We may redeem the Warrants at a time that is not beneficial to Warrant holders.
We may call the Warrants for redemption at any time after the redemption criteria described elsewhere in this annual report have been satisfied. If we call the Warrants for redemption, Warrant holders may be forced to accept a nominal redemption price or sell or exercise the Warrants when they may not wish to do so.
There is no guarantee that the Public Warrants will ever be in the money at a time that they are exercisable and they may expire worthless.
The exercise price for our Public Warrants is $11.50 per share. There is no guarantee that the Public Warrants will ever be in the money when they are exercisable, and as such, the Public Warrants may expire worthless.
Certain security holders have registration rights, the future exercise of which may adversely affect the market price of the Class A common shares.
We have granted the former stockholders of NCF and our pre-IPO security holders the right to demand that we register their unregistered Class A common shares and Warrants. We will bear the cost of registering these securities. The registration and availability of such a significant number of securities for trading in the public market may have an adverse effect on the market price of the Class A common shares.
A market for our securities may not fully develop, which would adversely affect the liquidity and price of our securities.
An active trading market for our securities may never fully develop or, if developed, it may not be sustained. In addition, the price of the securities after the offering can vary due to general economic conditions and forecasts, our general business condition and the release of our financial reports. Additionally, if our securities are not listed on, or become delisted from, Nasdaq for any reason, and are quoted on the Over the Counter Bulletin Board, a FINRA-sponsored and operated inter-dealer automated quotation system for equity securities not included in a securities exchange, the liquidity and price of our securities may be more limited than if we were quoted or listed on Nasdaq or another national exchange. You may be unable to sell your securities unless a market can be established or sustained.
Our ability to request indemnification from the former NCF Stockholders for damages arising out of the merger is limited to those claims where damages exceed $10,000,000 and is also limited to our Class A common shares placed in escrow.
To provide a fund to secure the indemnification obligations of the former NCF Stockholders to us against losses that we may sustain as a result of or in connection with any breach, inaccuracy or nonfulfillment or the alleged breach, inaccuracy or nonfulfillment of any of the representations, warranties and covenants of NCF contained in the Merger Agreement or any certificate or other writing delivered to us pursuant to the Merger Agreement, a portion of the Closing Payment Shares, in the aggregate of 15,000,000 Class A common shares, were placed in escrow, valued at $10.00 per share, which will be returned for cancellation to the extent that we have damages for which we are entitled to indemnification.
The vast majority of our publicly trading Class A common shares were redeemed in connection with the Business Combination and our Class A common shares have limited liquidity.
The vast majority of our publicly trading Class A common shares were redeemed in connection with the Business Combination and our Class A common shares have limited liquidity. As a result, there was significant volatility in our trading price immediately after the closing of the Business Combination and our Nasdaq halted trading in our shares on March 27, 2019 due to such trading volatility. In addition, on April 24, 2019, we received notification from the Nasdaq Hearings Panel (the “Panel”) that the Panel determined to suspend trading in our securities effective at the open of business on Friday, April 26, 2019 and to formally delist the securities on May 9, 2019 unless we appeal the decision. Although we intend to appeal the decision and take all action that we can to remain listed, we cannot assure you that we will be able to remain listed. In the event that we fail to remain listed, our stock will experience reduced liquidity than if we were able to remain on Nasdaq.
Our stockholders will only be able to exercise a Warrant if the issuance of Class A common shares upon such exercise has been registered or qualified or is deemed exempt under the securities laws of the state of residence of the holder of the Warrants.
No Warrants will be exercisable on a cash basis and we will not be obligated to issue registered Class A common shares unless the Class A common shares issuable upon such exercise has been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of the Warrants. Because the exemptions from qualification in certain states for re-sales of Warrants and for issuances of Class A common shares by the issuer upon exercise of a Warrant may be different, a Warrant may be held by a holder in a state where an exemption is not available for issuance of Class A common shares upon exercise of the Warrants and the holder will be precluded from exercising the Warrant. As a result, the Warrants may be deprived of any value, the market for the Warrants may be limited and the holders of Warrants may not be able to exercise their Warrants if the Common Stock issuable upon such exercise is not qualified or exempt from qualification in the jurisdictions in which the holders of the Warrants reside.
Because we are incorporated under the laws of the Marshall Islands, you may face difficulty protecting your interests, and your ability to protect your rights through the U.S. federal courts may be limited.
We are a corporation incorporated under the laws of the Marshall Islands, and certain of our assets may in the future be located outside the United States. In addition, all of our directors and officers, and their assets, are located outside of the United States. As a result, you may have difficulty serving legal process within the United States upon us or any of these persons. You may also have difficulty enforcing, both in and outside the United States, judgments you may obtain in U.S. courts against us or these persons in any action, including actions based upon the civil liability provisions of U.S. federal or state securities laws. You may also have difficulty bringing an original action in the appropriate court of the Marshall Islands to enforce liabilities against us or any person based upon the U.S. federal securities laws.
Nasdaq could delist our Class A common shares, which could limit investors’ ability to transact in our securities and subject us to additional trading restrictions.
Our securities are listed on the Nasdaq Capital Market, although they are currently suspended from trading. On July 23, 2018, we received a written notice from the Listing Qualifications Department of Nasdaq indicating that we are not in compliance with Listing Rule 5550(a)(3), which requires us to have at least of 300 shareholders for continued listing on the exchange (the “Minimum Shareholders Rule”). On September 13, 2018, we submitted to Nasdaq a plan to maintain our Nasdaq listing. Nasdaq accepted our plan and granted us an extension of 180 calendar days from the date of the notice, or until January 22, 2019, to evidence compliance with this rule. On January 24, 2019, we received a letter from Nasdaq stating that the Company had failed to demonstrate compliance with the Minimum Shareholders Rule within the required time period and that, accordingly, the Nasdaq staff had initiated procedures to delist our Class A common shares, units and warrants from Nasdaq. We subsequently appealed the delisting determination, and, subsequent to a February 28, 2019 hearing and subject to certain conditions, we were granted until June 15, 2019 to meet the Minimum Shareholders Rule. In addition, on March 27, 2019, Nasdaq suspended trading in our securities due to the significant volatility in our common stock subsequent to the Business Combination.
Subsequently, on April 24, 2019, we received notification from the Nasdaq Hearings Panel (the “Panel”) that the Panel determined to suspend trading in our securities effective at the open of business on Friday, April 26, 2019 and to formally delist the securities on May 9, 2019 unless we appeal the decision. Although we intend to appeal the decision and take all action that we can to remain listed, we cannot assure you that we will be able to remain listed. In the event that we fail to remain listed, our stock will experience reduced liquidity than if we were able to remain on Nasdaq.
As a result of Nasdaq’s suspension or delisting of our securities, we could face significant material adverse consequences, including:
|●||a limited availability of market quotations for our securities;|
|●||reduced liquidity for our securities;|
|●||a determination that our Class A common shares are a “penny stock” which will require brokers trading in our Class A common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;|
|●||a limited amount of news and analyst coverage; and|
|●||a decreased ability to issue additional securities or obtain additional financing in the future.|
If our common shares become subject to the SEC’s penny stock rules, broker-dealers may experience difficulty in completing customer transactions, and trading activity in our securities may be adversely affected.
If at any time we have net tangible assets of $5,000,001 or less and our common shares have a market price per share of less than $5.00, transactions in our common shares may be subject to the “penny stock” rules promulgated under the Exchange Act. Under these rules, broker-dealers who recommend such securities to persons other than institutional accredited investors must:
|●||make a special written suitability determination for the purchaser;|
|●||receive the purchaser’s written agreement to the transaction prior to sale;|
|●||provide the purchaser with risk disclosure documents which identify certain risks associated with investing in “penny stocks” and which describe the market for these “penny stocks” as well as a purchaser’s legal remedies; and|
|●||obtain a signed and dated acknowledgment from the purchaser demonstrating that the purchaser has actually received the required risk disclosure document before a transaction in a “penny stock” can be completed.|
If our common shares become subject to these rules, broker-dealers may find it difficult to effectuate customer transactions and trading activity in our securities may be adversely affected. As a result, the market price of our securities may be depressed, and you may find it more difficult to sell our securities.
|ITEM 4.||INFORMATION ON THE COMPANY|
|A.||History and Development of the Company|
Hunter Maritime Acquisition Corp. was formed on June 24, 2016 under the laws of the Republic of the Marshall Islands for the purpose of acquiring through a merger, capital stock exchange, asset acquisition, debt acquisition, stock purchase, reorganization or other similar business combination, an operating businesses or assets. Our subsidiary, NCF Wealth Holdings, does business under the NCF name.
Description of the Business Combination
On October 5, 2018, we entered into the Merger Agreement with NCF and Zhenxin Zhang, as representative of the NCF Stockholders, pursuant to which NCF merged with and into our subsidiary, with NCF continuing as the surviving company and as our wholly-owned subsidiary (the “Merger”).
On November 6, 2018, we completed a tender offer, funded with the proceeds then held in the Trust Account, in connection with an amendment to our Amended and Restated Articles of Incorporation to extend the deadline (the “Extension Amendment”) by which a business combination must be consummated to April 23, 2019 (the “Extended Date”), pursuant to which we purchased 12,999,350 Class A common shares at $10.125 per share, for an aggregate purchase price of approximately $131.6 million (the “Extension Tender Offer”). In connection with the Extension Tender Offer, we deposited into the Trust Account an additional $1,896,637.50 to make the total amount on deposit in the Trust Account equal to $10.125 per Class A common share (the “First Tender Contribution”). The First Tender Contribution was funded by a combination of cash on hand held outside the Trust Account and a loan to us from our Sponsor in the principal amount of $500,000 and which bears interest at LIBOR plus 0.60%.
On March 19, 2019, we completed a tender offer in connection with the Business Combination. Based upon information provided by Continental Stock Transfer & Trust Company, the depositary for the Offer, as of the expiration date, a total of 1,926,021 Class A common shares were validly tendered and not properly withdrawn. All such Class A common shares were accepted for purchase. Accordingly, the Company purchased all such Class A common shares at the purchase price of $10.215 per Class A common share, for a total purchase price of $19,674,304.52, excluding fees and expenses related to the Offer.
On March 21, 2019, the Merger closed. The aggregate consideration provided by us to the NCF Stockholders pursuant to the Merger Agreement consists of: (i) 200,000,000 Class A common shares (the “Closing Payment Shares”), of which 15,000,000 Class A common shares were deposited into escrow to secure certain indemnification obligations of NCF and the NCF Stockholders (the “Escrow Shares”), plus (ii) earnout payments consisting of up to an additional 50,000,000 Class A common shares if we (and its subsidiaries on a consolidated basis) meet certain financial performance targets for the 2019 and 2020 fiscal years.
History of NCF
NCF Wealth Group commenced its online finance marketplace business in China in July 2013. NCF Wealth Holdings Limited was incorporated in the British Virgin Islands, or the BVI, as the holding company in December 2011.
Mr. Zhang Zhenxin established Frontier Financial Rental Co., Ltd. In December 2011, which was renamed to First P2P Limited in August 2014, and renamed again to NCF Wealth Holdings Limited in November 2015.
NCF Wealth Holdings Limited established State Ace Limited, Zhan Yang Limited and Tall Lead Limited in the BVI in October 2015. State Ace Limited and Zhan Yang Limited established NCF International Limited and NCF Development (HK) Co., Limited, respectively, in Hong Kong in November 2015 for overseas business. NCF International Limited acquired Shanghai NCF Puhui Business Consulting Co., Ltd. in October 2018.
In addition, NCF Wealth Holdings Limited established UCF Huarong Investment (HK) Co., Limited in December 2011, which further established two wholly owned subsidiaries, namely Beijing NCF Financial Service Information Technology Co., Ltd. and Beijing NCF Cloud Service Information Technology Co., Ltd. in April 2014 and January 2016, respectively, for business within China.
Beijing NCF Financial Service Information Technology Co., Ltd. acquired Shenzhen Yifang Yurong Financial Information Science and Technology Co., Ltd. in August 2018. Beijing NCF Cloud Service Information Technology Co., Ltd. acquired Beijing Yinghua Wealth Investment Management Holdings Co., Ltd. in May 2018. Beijing Yinghua Wealth Investment Management Holdings Co., Ltd. has two subsidiaries, which are Shenzhen Yingxin Fund Sales Co., Ltd. established in December 2015, and Shanghai Cenmu Business Information Consulting Co., Ltd. established in January 2017.
Beijing NCF Financial Service Information Technology Co., Ltd. and Beijing Oriental Union Investment Management Limited Liability Company signed the VIE agreements in September 2014. Beijing Oriental Union Investment Management Limited Liability Company is the principal operating entity of the P2P business of NCF Wealth Group. Beijing Jing Xun Shi Dai Technology Co., Ltd. was acquired in 2016 and stays in the NCF group from then. Beijing NCF Cloud Service Information Technology Co., Ltd. and Beijing Jing Xun Shi Dai Technology Co., Ltd signed the VIE agreements in January 2018. Beijing Jing Xun Shi Dai Technology Co., Ltd. is the principal operating entity of the online platform of NCF Wealth Group. Beijing Jing Xun Shi Dai Technology Co., Ltd. acquired Xin Zu (Beijing) Technology Co., Ltd. in February 2018.
Beijing Jing Xun Shi Dai Technology Limited Liability Company operates the website www.ncfwx.com, and Beijing Oriental Union Investment Management Limited Liability Company operates the website www.firstp2p.cn. Each of Beijing Oriental Union Investment Management Limited Liability Company, Beijing Jing Xun Shi Dai Technology Co., Ltd., Xin Zu (Beijing) Science and Technology Co., Ltd. has obtained an ICP license as an internet information provider.
Where to find additional information
We are subject to the periodic reporting and other informational requirements of the Exchange Act as applicable to foreign private issuers. Under the Exchange Act, we are required to file reports and other information with the SEC. Specifically, we are required to file annually a Form 20-F no later than four months after the close of each fiscal year, which is December 31. The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding registrants that make electronic filings with the SEC using its EDGAR system. As a foreign private issuer, we are exempt from the rules of the Exchange Act prescribing the furnishing and content of quarterly reports and proxy statements, and our executive officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the Exchange Act. In addition, we are not required under the Exchange Act to file periodic reports and financial statements with the SEC as frequently or as promptly as U.S. companies whose securities are registered under the Exchange Act. We maintain a website at ir.ncfwealth.com.
Our securities were listed on the Nasdaq Capital Market, although they are currently suspended from trading. On July 23, 2018, we received a written notice from the Listing Qualifications Department of Nasdaq indicating that we are not in compliance with Listing Rule 5550(a)(3), which requires us to have at least of 300 shareholders for continued listing on the exchange (the “Minimum Shareholders Rule”). On September 13, 2018, we submitted to Nasdaq a plan to maintain our Nasdaq listing. Nasdaq accepted our plan and granted us an extension of 180 calendar days from the date of the notice, or until January 22, 2019, to evidence compliance with this rule. On January 24, 2019, we received a letter from Nasdaq stating that the Company had failed to demonstrate compliance with the Minimum Shareholders Rule within the required time period and that, accordingly, the Nasdaq staff had initiated procedures to delist our Class A common shares, units and warrants from Nasdaq. We subsequently appealed the delisting determination, and, subsequent to a February 28, 2019 hearing and subject to certain conditions, we were granted until June 15, 2019 to meet the Minimum Shareholders Rule.
Subsequently, on April 24, 2019, we received notification from the Nasdaq Hearings Panel (the “Panel”) that the Panel determined to suspend trading in our securities effective at the open of business on Friday, April 26, 2019 and to formally delist the securities on May 9, 2019 unless we appeal the decision. Although we intend to appeal the decision and take all action that we can to remain listed, we cannot assure you that we will be able to remain listed. In the event that we fail to remain listed, our stock will experience reduced liquidity than if we were able to remain on Nasdaq.
As a result of Nasdaq’s suspension or delisting of our securities, we could face significant material adverse consequences, including:
|●||a limited availability of market quotations for our securities;|
|●||reduced liquidity for our securities;|
|●||a determination that our Class A common shares are a “penny stock” which will require brokers trading in our Class A common shares to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;|
|●||a limited amount of news and analyst coverage; and|
|●||a decreased ability to issue additional securities or obtain additional financing in the future.|
Subsequent to the Business Combination, our operations are conducted through our wholly-owned subsidiary, NCF. We are a leading fintech company in China, primarily focused on connecting investors and borrowers, providing multi-scenario investment analysis to platform users to meet their diversified investment needs, and building an ecosystem in the field of internet finance. We also provide technical support for borrowers when they announce their financing needs. We aim to provide simplified, convenient and flexible financing solutions to both small and medium enterprises (“SME”) and individual borrowers. Over RMB 321 billion was facilitated (approximately $47 billion based on the exchange rate of 0.145705 as of December 31, 2018) in transactions from its inception in July 2013 through December 2018. In 2018 and 2017, NCF facilitated transactions over RMB 71 billion and RMB 95 billion, respectively (approximately $10 billion and $15 billion based on the average exchange rate of 0.145237 and 0.148014 for 2018 and 2017).
We operate an online marketplace under the brand name of ‘Wangxin Puhui’ through our subsidiary Beijing Oriental. This is an online lending platform that matches borrowers with investors and executes transactions. At the same time, the platform provides for contract execution, fund clearing and other services to facilitate the transaction. Wangxin Puhui offers borrowers that successfully complete its online application and meet its borrower requirements quick and convenient access to capital at competitive rates. To provide a transparent marketplace, the interest rates, transaction fees, and other charges are disclosed to borrowers upfront. Its borrowers and investors mainly come from online sources, such as the internet and its mobile applications or from referrals of asset cooperative institutions (entities that introduce qualified borrowers) and funding cooperative institutions (entities that introduce investors and other funding sources).
We also operate an internet platform under the brand name of ‘Wangxin’ which is positioned as an open platform for financial technology, providing information publishing, information display, information exchange, and online user diversion services for organizations in a variety of industries including insurance sales, securities and fund sales. At the same time, Wangxin provides technical platforms and operational solutions for various cooperative organizations, and helps cooperative organizations to improve the efficiency of customer management.
In March 2017, we launched a new program to cooperate with financial exchanges and promote exchange administered product program (“E-APP”). The E-APP includes (I) product registration services and (II) promotion services on best efforts basis and (III) Data Processing Technical Services.
We provide investors with attractive returns, the minimum investment threshold of P2P product is RMB 100 (approximately $15 based on the exchange rate of 0.145705 as of December 31, 2018). The minimum investment threshold of E-APP investment is calculated by dividing the borrower’s loan amount by 200 which represents maximum investors allowed in a particular E-APP product.
We believe we have developed an industry-leading risk management system using our proprietary decision-making model of credit risk and fraud detection modules. We accumulate data from our expanding borrower base and our proprietary risk management system enables us to assess the creditworthiness of borrowers more effectively in a market where reliable credit scores and borrower databases are still at an early stage of development. This system also enables us to appropriately price the risks associated with borrowers, reduce delinquency rates, and offer credit investment opportunities to investors.
We also operate a wealth management business. With macro and micro analysis of financial markets coupled with independent and objective screening criteria, we provide high-quality investment products and other comprehensive asset management services to high net worth clients, family businesses and institutional investors.
Currently, we generate revenues primarily from transaction and service fees, and sales commission fees charged for the above-mentioned services. We also charge investor service fees for using our smart matching tool or investment reservation tool. As an information intermediary for borrowers and investors, we act as an agent and do not have any legal obligations for the loans or securities facilities.
During the years ended December 31, 2017 and 2018, total transaction volume increased by 24% and decreased by 26%, respectively, and annualized transaction volume (which annualizes loans of less than year) increased 74% and decreased by 5%, respectively. Based on publicly available industry data (www.wdzj.com), due to the impact of economic conditions and deleveraging policies of the Chinese government, the monthly transaction volume of the whole P2P industry in December 2018 decreased by 49% when compared with the monthly transaction volume in January 2018 while the monthly transaction volume in December 2018 increased by 32% when compared with the monthly transaction volume in January 2018. With the tightening of regulations, many non-compliant or poorly-operated platforms in the industry have gradually ceased operations; however, we believes that our transaction volume increased due to the trust our customers place in our platform.
There is significant growth in the accumulated number of our registered users (who have registered on the platform) and investors (who have registered on the platform and made an investment) which increased from 11.1 million and 3.9 million, respectively, as of December 31, 2017 to 12.0 million and 4.3 million, respectively, as of December 31, 2018, and the respective growth rates are 8% and 9%.
Our Competitive Strengths
We believe that the following competitive strengths have contributed to our growth and helped us to take advantage of the substantial market opportunity:
Large pool of Potential Customers
Our investing customers include affluent investors living in China with personal investable assets of less than RMB 7 million (approximately $1 million based on the exchange rate of 0.145705 as of December 31, 2018) and who seek steady returns with diversified investments but have limited investment options. A large number of investing customers in China fall in this category, and it is obviously an attractive market opportunity for us.
Active Investor Base
In addition, as of December 31, 2018, over 40% of our initial investors have made a second investment through us and over 21% of our initial investors have made a third investment through us.
Large pool of Potential Borrowers
According to the “2018 China Consumer Credit Market Research,” the scale of consumer finance has climbed from 679.8 billion yuan in January 2010 to 8.45 trillion yuan in October 2018, and the proportion of domestic loans rose from 1.7% to 6.3%. However, the domestic consumer finance industry’s consumer credit (excluding mortgages) accounted for only 20% of total consumer spending in 2015, lower than South Korea’s 41% and the US’s 28%. This indicates that the development of China’s consumer finance industry is lagging behind that of developed countries.
According to Capital Gap Of Funding SMEs: Analysis Of The Disadvantages And The Opportunities In Funding SMEs In Emerging Market written by Institute of Dongxing Securities, in China, the potential financing demand from SMEs has reached RMB 44 trillion while the capital supply was only RMB 25 trillion, meaning 43% of the demand was underserved. Bank loans account for 60% of the capital supplied but support only 15.5% of the total SMEs, which means most of the capital flows to only a small number of businesses. As a result, at least 80% of the SMEs in China, especially the small and micro businesses, still face serious problems of tight cash flow.
Active Borrower Base
The borrowers on our platform include both individual borrowers and corporate borrowers. The borrowers increased from approximately 65,000 in 2016 to approximately 1.8 million in 2017, and decreased from approximately 1.8 million in 2017 to approximately 160,000 in 2018. In terms of the amount of borrowing we facilitated, the proportion of SMEs’ borrowings to the total borrowings was 76%, 85% and 95% respectively in 2016, 2017 and 2018.
Innovative Wealth Management
Unlike traditional wealth management companies, we combine our online and offline services in order to meet the demands of our customers. The information obtained from the data online offers us an opportunity to analyze changes in demand of our users, allowing us to adjust wealth management products in a timely fashion. The information obtained also supports our compliance and risk control management.
We use an innovative mobile customer relationship system for wealth management that provides real-time data tracking, high-quality investment recommendations, label management to customers, performance comparisons and real-time settlement of commissions. The system has the ability to manage every action a customer wishes to take, such as topping up, withdrawing and re-investing to realize real-time data tracking. It can also analyze users’ investment preferences on term, interest rate, and product type, among other variables. The system can also compare investment performance among different products or in different periods.
Big Data-based Individual and SME Lending System
We have an advanced and proprietary risk management system making use of online big data analysis. We have developed an advanced individual system and an advanced enterprise system. Our system can detect multiple features of our users, including user authentication, user behavior, borrowing history, fingerprinting devices, identity attributes and solvency. With over five years of experience with the financial services of private enterprises and SMEs, we have accumulated abundant project resources and first-hand data. A major risk in our business is information asymmetry on a borrower, and we combine know your client principles and information cross-validation techniques, including risk valuation, fraud recognition, value exploration and loss forecast to reduce the risk a loan being made to a borrower that will default.
We are one of the Founding Members of the National Internet Finance Association of China, and are the Executive Vice President Institution of the Beijing Internet Finance Industrial Association. We have strictly complied with the regulatory requirements in China and have completed a self-examination and applied to receive a compliance inspection by the regulatory authorities.
Experienced Management Team
We have a strong management team with a long history in the consumer financial industry in China. Our President, Huanxiang Li, has over 15 years of experience in the financial industry. Our CEO, Jia Sheng, has twelve years of experience in internet and finance. Our COO, Xin Li, possesses a deep understanding of the industry with more than 10 years of experience in the financial industry and many years of management experience. In addition, since its inception, we have adopted robust corporate governance policies and practices and have engaged extensively with key regulators to ensure compliance with evolving PRC laws and regulations and help to shape the best practices in Chinese marketplace.
Our Growth Strategies
We plan to implement the below key strategies to continue our development.
Offer more diversified products
We expect to expand our targeted investor base by offering a more comprehensive suite of investment products with a wider range of risk-return profiles. We intend to attract more investors by providing them with diversified investment products tailored to their characters. For example, we will offer a new product with higher yields associated with higher risks to investors with the appetite for such risk and the ability to afford the potential losses.
Continue to increase borrowers
We plan to increase the number of borrowers by expanding our project resources to more private companies and SMEs under financing pressure. We will focus on attracting borrowers with good credit records according to our risk management system. We will enhance our relationship with borrowers by providing flexible financing services to meet borrowers’ needs.
Continue to invest in our technology platform
We plan to continue to develop our proprietary technologies and data sources to improve risk control and the speed of lending. We plan to increase the efficiency of our lending and customer satisfaction by providing artificial intelligence advisory services to both borrowers and investors. Investors can receive a brief and general introduction of diversified product offerings by communicating with intelligent robots. Borrowers can receive their loans much more quickly by using the auto assessment on credit evaluation.
We plan to expand to Hong Kong and Singapore, and anticipate expanding to more countries such as the United Kingdom, Australia, New Zealand and the United States in the future.
We target both SMEs and individuals in China. Currently, approximately 94% of our annualized transaction volume for the year ended December 31, 2018 was contributed by our business borrowers.
We mainly depend on the referrals of asset cooperative institutions with which we cooperate to obtain our borrowers. Asset cooperative institutions are companies that introduce us to qualified borrowers. In addition, we utilize online channels, such as website, mobile application, and social media (such as WeChat), to attract new borrowers.
We welcome customers domiciled in China with an appetite for investment opportunities with stable returns. Currently, we focus our efforts on attracting individual customers and 97% of our customers are individuals, in terms of total borrowing amount.
We believe that the large and rapidly growing sector of Chinese individual investors is currently underserved by traditional financial institutions in China. We believe that the average investment returns on our marketplace, ranging from 5% to 12.5%, are generally higher than those of traditional financial institutions.
We have attracted a large number of investors to our marketplace through online channels, such as our website, mobile application and social media (such as WeChat). We have also acquired many high net worth investors through our wealth management teams. Our investor acquisition efforts are primarily directed towards enhancing our brand name and building investor trust.
Our Products and Services
As an internet information intermediary platform, we connect the investors and the borrowers efficiently and safely utilizing advanced technology such as artificial intelligence, big data, and cloud computing. We have the ability to match the investment needs of investors with the capital needs of the borrowers, and charges service fees as a result.
We also cooperate with financial exchanges with a program to promote exchange administered financial instruments (“E-APP”) and connect investors and borrowers. The E-APP includes (I) product registration services and (II) promotion services on best efforts basis and (III) Data Processing Technical Services.
Products Offered to Borrowers
Based on the intended purpose of the capital, our online market place facilitates the following products to borrowers:
Products Offered to Individual Borrowers
Our online marketplace facilitates financing products to individual borrowers to meet their specific needs. Most of our products offered to individual borrowers feature fixed monthly payments and offer terms from three to 24 months.
Products Offered to Corporate Borrowers
Our online marketplace facilitates financing products to corporate borrowers or the owners of companies to satisfy the capital needs for the operations of those entities. Most of our products feature fixed monthly payments and offer terms within 12 months.
Products Offered to Investors
Through our marketplace, investors have the opportunity to invest in a wide range of products:
(1) P2P products, which are loans that investors, individual borrowers and SME borrowers consummate directly through our platform;
(2) Targeted financing products and income right transfer products of local financial asset exchanges. Targeted financing products are for companies that have direct financing needs, and the source of repayment is mainly the company’s future income. Income right transfer products are for companies that have an income right and would like to transfer the income right for an immediate cash payment.
(3) Debt acquisition products by financial leasing/factoring companies of local financial asset exchanges. These products are for companies that have cash flow or other asset income rights. We will recommend them to financial leasing companies or factoring companies that have financial leasing or factoring demand, and the financial leasing company or factoring companies acquire the rights held by the borrowers at a price agreed upon through negotiation.
We have invented and developed the following investing tools to help investors match with the appropriate products more efficiently:
|●||smart matching tool|
With automatic matching and automatic transfer technology, the funds of an investor would be distributed based on the investor’s authorization according to a certain proportion that matches different borrowing items, upon which the calculation of interest would also begin automatically.
|●||investment reservation tool|
Providing investors with reservation and lending functions with different terms, the system automatically matches borrowers and investors, and investors can reserve multiple projects with different terms at the same time.
Wealth Management Products
We also recommend certain investments to investors, such as the products of securities companies and insurance broker companies, as well the agent products of publicly offered funds and private equity funds of its wholly-owned subsidiary Shenzhen Yingxin Fund Sales Co., Ltd. During this process, we provide comprehensive asset management services with professional, independent and objective screening criteria through macro and micro analysis of financial markets.
Our Transaction Process
Our Transaction Process for P2P online lending Borrowers
We believe that our online marketplace offers a superior overall user experience with a fast loan application process based on an advanced credit assessment procedure. Our platform enables borrowers to undertake the entire process from initial application to repayment online. We set up different application procedures with decision-tree processes as well as management standards for individual borrowers and corporate borrowers to achieve an efficient loan process.
Stage 1: Application
Our borrower loan application process begins with the submission of a loan application by a prospective borrower.
In the case of individual borrowers, they can complete the loan application process through online channels, such as website and mobile application. After an individual borrower has finished registration online and filed the loan application, we will acquire relevant personal details of the individual borrower with his or her permission. Typically, we will require the individual borrowers to provide the following personal information:
|●||basic information: including name, identification number, age, income and profession, etc.;|
|●||relevant device data: including information such as the identification and the Internet Protocol address of the device, the model of the mobile phones and the device location, etc.;|
|●||information gathered by telecom carriers: including information such as telecom carrier’s name, duration of call, frequency of call, number of persons contacted, etc.;|
|●||credit card information: including credit line, credit card statements, etc.;|
|●||e-commerce platform information: including amount of consumption and consumption details etc.;|
|●||credit information: including loan application status, overdue status, debts, etc.|
In the case of corporate borrowers, the loan application process would be facilitated by our staff. After a corporate borrower has filed a loan application, our staff would collect the following information:
|●||legal person’s identification;|
|●||financial statements for the past three years;|
|●||credit report of the corporate and its legal person;|
|●||articles of association;|
|●||board resolutions and shareholders’ resolutions; and|
|●||related information of the guarantor.|
We may acquire supplementary information for a corporate borrower through public channels which mainly includes:
|●||litigation and/or arbitration that the corporate borrower is involved in;|
|●||information of the affiliated enterprise(s);|
|●||information of the industry that the corporate borrower is in;|
|●||public opinion of the corporate borrower and its legal person.|
Stage 2 Decision Making
After the completion of the loan application, our risk control team will be involved in the decision making procedure to review the information collected. We apply different decision making methods for individual borrowers and corporate borrowers.
For individual borrowers, we have developed our own artificial intelligence risk control model to assess and approve or deny the individual borrowers’ loan applications. Our artificial intelligence risk control model is primarily based on the following two types of models:
|●||anti-fraud model: We utilize an intelligent image recognition technology to identify the authenticity of the identity of the individual borrowers. The anti-fraud model has the ability to discern group fraud activities such as fraud by intermediate agents;|
|●||risk assessment model: Our risk assessment model utilizes machine learning technology to process the applications of individual borrowers.|
For corporate borrowers, we apply the following steps:
|●||due diligence: Our operation staff and risk management staff conduct field due diligence procedures, including management team interviews and business operation site visits to verify the business operations, financial status and legal compliance status of the corporate borrower;|
|●||cross check: After we obtain the due diligence data, industry data and the data submitted by the corporate borrower, we cross check the information and come to a conclusion on the actual financial status of the corporate borrower;|
|●||comprehensive credit assessment: Our senior risk control staff then assess the industry risk, management ability, profitability and repayment ability of the corporate borrowers before making a decision.|
Stage 3 Listing
After the borrower’s loan application is approved, we would publish the borrower’s loan application on our online lending platform with the borrower’s permission, and will reveal the borrower’s related information to the extent permitted by law. Investors can then access the information to make their own investment decision.
Stage 4 Loan disbursement
If the loan amount that the borrower has applied for is fully raised through our online lending platform within the prescribed period, we transfer the loan amount from investors to the borrower’s bank account directly through our cooperative bank, and the borrower pays us the service fee.
If the loan amount that the borrower has applied is not fully raised, the fund raising procedure is terminated.
Stage 5 Repayment
After the borrower has received the loan, it repays the loan according to the pre-agreed repayment schedule. We assist investors to manage the repayment process by, among other things:
|●||sending repayment reminder messages to the borrower when the loan is due for repayment; and|
|●||revealing and sending post-loan check and post-loan information regarding the borrower to the investor.|
Stage 6 Collection
Each loan has a guarantor who perform guarantee obligation when the borrower fails to repay the loan. When a loan is overdue, the guarantor or the assets co-operation institution (when the guarantor has not performed its guarantee obligation) shall on behalf of the investor collect the loan from the borrower. The collection methods include telephone collection, on-site collection and litigation collection, etc. During the collection procedure, we provide assistance and co-operation, and we supervise the collection institution to ensure the legality, compliance and effectiveness of the collection activity to protect the legal rights of the investors and the borrowers, but does not currently guarantee any such loan.
Our Service Process for E-APP products
We advise borrowers on the selection of local financial assets exchanges. We review registration application documentation and assists with the due diligence. Then the borrowers submit the application to local financial assets exchanges. The local financial assets exchanges reviews registration application, registers the financial instrument and issues registration approval notice to the issuer.
Upon registered, we can provide promotion services to the borrowers and promote the financial products registered at local financial assets exchanges to investors. The investors then can enter into a purchase or subscription contract with the registration holders and deposit to an escrow account in local financial assets exchanges until the financial instrument is fully subscribed. When the financial instrument is fully subscribed, local financial assets exchanges transfers the fund to the issuer.
Our Service Process for Investors
Our Service Process for Loan Products
Through our online marketplace, investors have the opportunity to invest in a wide range of loan products with attractive returns. An investor can complete its investment procedure on our platform, including registration, account opening, and subscription and redemption of the investment.
Step 1 Registration
First the investors register on our platform. They upload basic personal information to complete the registration.
Step 2 Account Opening
Investors open an account on our platform. The investment account is administered by a bank or payment company selected by us.
Step 3 Pre-investment assessment
Investors complete the risk assessment evaluation to determine the investor’s risk preference level. We recommend investment products and investment amounts to investors based on their evaluation results. The risk assessment assists the investors in finding suitable investment targets.
Step 4 Subscription of the Investment
While we may recommend suitable investment products and amounts based on investors’ risk assessment results, investors can choose different investment products with different terms, interest rates and types of loans at their own will pursuant to the loan information available on our platform.
Step 5 Redemption of the investment
We assist investors in managing the repayment process by the borrowers. The repayment of the loan will, through the banking system, be automatically transferred to the investment account to complete the redemption of the investment.
Our Service Process for Wealth Management Products
High net worth individuals are our core resource. We provide consistent value-added services to customers from pre-investment product selection and subscription, investment product information disclosure and delivery, and post-investment product repayment and communication. As we are not subject to any third-party product supplier, we have the ability to provide our customers professional, independent and objective finance management advice and we believe the core of our success is our comprehensive, consistent, sound, individualized and professional service. We have specialized investment consultants to take charge of the communication with customers and determine their investment target and risk exposure. We provide to the high net worth individuals the following services:
1、 Financial plan
We allocate to each high net worth individual a specialized investment consultant who is responsible for daily financial management and services. Our investment consultant provides individualized asset allocation strategy to customers, who are mainly high net worth individual investors, through the communication with the customer based on the analysis and assessment on the customers’ financial status, past investment experience, investment risk exposure and investment target. Our investment consultant also provides customers with consistent financial plan consultancy services with adjustments based on economy and market conditions.
We assist customers in asset allocation based on the financial plan risk profile, introducing the customers to products and assisting them in making purchasing decisions. Our customers are the ultimate decision makers when purchasing products. Our investment consultants follow strict disclosure and compliance procedures to ensure that the customer subscribes for investment products based on full knowledge of the product information. When a customer decides to purchase any of the investment products we recommend, we will inform the relevant product management party of the investment purpose of the customer after verifying that the customer is eligible for the subscription, and the customer shall complete the transaction directly with the product provider. We do not accept the customer’s authorization or instructions to conduct transaction activities or execute transaction on behalf of the customer. Because we are not involved in the transaction or its settlement, we avoids the risks associated with such services, including human error in the execution of customer’s orders or technical system failures.
For customers who purchase products throughus, we will disclose the latest information relating to the product and relevant information of the management party to them through SMS and email. In addition, we provide our customers with various investor education services, such as investment presentations, investment seminars and market analysis sessions.
Our Technology and Risk Management System
The credit infrastructure in China is still under development, and China currently lacks a reliable national credit information system. To that end, we have developed our own risk management system for borrowers to identify credit risk effectively.
For risk control on individual borrowers, we have developed Tianyuan Intellectual Risk Control System or Tianyuan. Tianyuan consists of the following:
|●||big data system: with the permission of the individual borrowers, we collect and store the individual borrowers’ personal data relating to the whole loan period, including structural data (for example, individual borrower’s name, identification number, age, income, profession, etc.), semi-structural data and non-structural data (for example, video, image, voice record, etc.). The individual borrowers’ personal data forms the foundation for risk control and system development;|
|●||intellectual model laboratory: a visible model development and data analysis system, with direct access to the data in the big data system. It employs multiple algorithms and algorithm frameworks to automatically develop Tianyuan on its own, and can also analyze the big data using its statistical analysis tool. The intellectual model laboratory contains development tools for customized intellectual models, and has the ability to assist our risk control staff to process advanced algorithm and advanced intellectual models.|
|●||intellectual decision making engine: it is a visible and intellectual decision making tool with direct access to the intellectual model laboratory to efficiently complete the risk management process.|
|●||risk monitoring and warning system: it monitors and supervises the entire loan period of the individual borrowers on the basis of big data system, and can issue timely warning to our risk control staff by drawing their attention to any actions undertaken by the individual borrowers and their asset portfolios.|
For risk control on corporate borrowers, we have developed a risk control procedure combining big data from big data systems and a model to process risk control procedure, including data collection, loan limit monitoring, approval and post-loan management. Our risk control on corporate borrowers combines our own and third party’s big data with the experience of the risk control experts to increase the efficiency and accuracy of risk control.
Contractual Arrangements with Beijing Jing Xun Shi Dai Technology Limited Liability Company (“Jing Xun Shi Dai”) and Beijing Oriental Union Investment Management Limited Liability Company (“Beijing Oriental”)
Due to PRC legal restrictions on foreign ownership and investment in value-added telecommunications services, and Internet content provision services in particular, we currently conduct our activities through Jing Xun Shi Dai and Beijing Oriental, which we effectively control through a series of contractual arrangements. These contractual arrangements allow us to:
|●||exercise effective control over Jing Xun Shi Dai and Beijing Oriental;|
|●||receive substantially all of the economic benefits of Jing Xun Shi Dai and Beijing Oriental; and|
|●||have an exclusive option to purchase all or part of the equity interests in Jing Xun Shi Dai and Beijing Oriental when and to the extent permitted by PRC law.|
As a result of these contractual arrangements, we have become the primary beneficiary of Jing Xun Shi Dai and Beijing Oriental, and we treat Jing Xun Shi Dai and Beijing Oriental as our variable interest entities under U.S. GAAP.
Agreements that Provide us with Effective Control over Jing Xun Shi Dai and Beijing Oriental
Equity Interest Pledge Agreements Pursuant to the equity interest pledge agreements, each of Mr. Zhenxin Zhang and Ms. Huanxiang Li, as the respective 99% and 1% equity holders of both Jing Xun Shi Dai and Beijing Oriental, has pledged all of his/her equity interest in Jing Xun Shi Dai and Beijing Oriental to guarantee the shareholders’ and Jing Xun Shi Dai and Beijing Orientals’ performance of their obligations under the exclusive business cooperation agreement, exclusive option agreement and power of attorney. If Jing Xun Shi Dai and Beijing Oriental or any of its shareholders breaches their contractual obligations under these agreements, Beijing NCF Cloud Service Information Technology Co., Limited (“NCF Cloud Service”), under the agreement with Jing Xun Shi Dai, Beijing NCF Financial Service Information Technology Co., Limited, previously Beijing Huarong Ju Hui Investment Consulting Co., Ltd., (“NCF Financial Service”) under the agreement with Beijing Oriental, as pledgee, will be entitled to certain rights regarding the pledged equity interests, including being paid in priority based on the monetary valuation that the equity interest is converted into or receiving proceeds from the auction or sale of the pledged equity interests of Jing Xun Shi Dai and Beijing Oriental in accordance with the PRC law. Each of the shareholders of Jing Xun Shi Dai and Beijing Oriental agrees that, during the term of the equity interest pledge agreements, he will not transfer the pledged equity interests or place or permit the existence of any security interest or encumbrance on the pledged equity interests without the prior written consent of each of NCF Cloud Service and NCF Financial Service. The equity interest pledge agreements remain effective until Jing Xun Shi Dai and Beijing Oriental and their shareholders discharge all of their obligations under the contractual arrangements. We have registered the equity pledge with the relevant office of the Administration for Industry and Commerce in accordance with the PRC Property Rights Law.
Powers of Attorney Pursuant to the powers of attorney, each shareholder of Jing Xun Shi Dai and Beijing Oriental has irrevocably appointed Mr. Zhang Zhenxin to act as such shareholder’s exclusive attorney-in-fact to exercise all shareholder rights, including, but not limited to, voting on all matters of Jing Xun Shi Dai and Beijing Oriental requiring shareholder approval, disposing of all or part of the shareholder’s equity interest in Jing Xun Shi Dai and Beijing Oriental, and appointing directors and executive officers. Mr. Zhang Zhenxin is entitled to designate any person to act as such shareholder’s exclusive attorney-in-fact without notifying or the approval of such shareholder, and if required by PRC law, Mr. Zhang Zhenxin shall designate a PRC citizen to exercise such right. Each power of attorney will remain in force for so long as the shareholder remains a shareholder of Jing Xun Shi Dai and Beijing Oriental. Each shareholder has waived all the rights which have been authorized to Mr. Zhang Zhenxin and will not exercise such rights.
Agreement that Allows us to Receive Economic Benefits from Jing Xun Shi Dai and Beijing Oriental
Exclusive Business Cooperation Agreement Under the exclusive business cooperation agreement between NCF Cloud Service and Jing Xun Shi Dai, and the exclusive business cooperation agreement between NCF Financial Service and Beijing Oriental, each of NCF Cloud Service and NCF Financial Service has the exclusive right to provide Jing Xun Shi Dai and Beijing Oriental with technical support, consulting services and other services. Without each of NCF Cloud Service and NCF Financial Service’s prior written consent, Jing Xun Shi Dai and Beijing Oriental agree not to accept the same or any similar services provided by any third party. Each of NCF Cloud Service and NCF Financial Service may designate other parties to provide services to Jing Xun Shi Dai and Beijing Oriental. Jing Xun Shi Dai and Beijing Oriental agree to pay service fees on a monthly basis and at an amount determined by each of NCF Cloud Service and NCF Financial Service after taking into account multiple factors, such as the complexity and difficulty of the services, respectively, provided, the time consumed, the content and commercial value of services provided and the market price of comparable services. Each of NCF Cloud Service and NCF Financial Service owns the intellectual property rights arising out of the performance of this agreement. In addition, Jing Xun Shi Dai and Beijing Oriental have granted NCF Cloud Service and NCF Financial Service an irrevocable and exclusive option to purchase any or all of the assets and businesses of Jing Xun Shi Dai and Beijing Oriental at the lowest price permitted under PRC law. Unless otherwise agreed by the parties or terminated by each of NCF Cloud Service and NCF Financial Service unilaterally, this agreement will remain effective permanently.
Agreements that Provide us with the Option to Purchase the Equity Interest in Jing Xun Shi Dai and Beijing Oriental
Exclusive Option Agreements Pursuant to the exclusive option agreements, each shareholder of Jing Xun Shi Dai and Beijing Oriental has irrevocably granted NCF Cloud Service and NCF Financial Service, respectively, an exclusive option to purchase, or have its designated person or persons to purchase, at its discretion, to the extent permitted under PRC law, all or part of the shareholder’s equity interests in Jing Xun Shi Dai and Beijing Oriental. The purchase price is nominal price or the minimum price required by PRC law. If each of NCF Cloud Service and NCF Financial Service exercises the option to purchase part of the equity interest held by a shareholder, the purchase price shall be calculated proportionally. Jing Xun Shi Dai and Beijing Oriental and each of its shareholders have agreed to appoint any persons designated by each of NCF Cloud Service and NCF Financial Service to act as Jing Xun Shi Dai and Beijing Orientals’ directors. Without each of NCF Cloud Service and NCF Financial Service’s prior written consent, Jing Xun Shi Dai and Beijing Oriental shall not amend its articles of association, increase or decrease the registered capital, sell or otherwise dispose of its assets or beneficial interest, create or allow any encumbrance on its assets or other beneficial interests, provide any loans to any third parties, enter into any material contract with a value of more than RMB 100,000 (approximately $14,571 based on the exchange rate of 0.145705 as of December 31, 2018) in the case of Beijing Oriental or RMB 50,000,000 (approximately $7 million based on the exchange rate of 0.145705 as of December 31, 2018) in the case of Jing Xun Shi Dai (except those contracts entered into in the ordinary course of business), merge with or acquire any other persons or make any investments, or distribute dividends to the shareholders. The shareholders of Jing Xun Shi Dai and Beijing Oriental have agreed that, without each of NCF Cloud Service and NCF Financial Service’s prior written consent, they will not dispose of their equity interests in Jing Xun Shi Dai and Beijing Oriental or create or allow any encumbrance on their equity interests. These agreements will remain effective until all equity interests of Jing Xun Shi Dai and Beijing Oriental held by their shareholders have been transferred or assigned to each of NCF Cloud Service and NCF Financial Service or its designated person(s).
However, there are substantial uncertainties regarding the interpretation and application of current and future PRC laws, regulations and rules. In particular, in January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law for public review and comments. Among other things, the draft Foreign Investment Law expands the definition of foreign investment and introduces the principle of “actual control” in determining whether a company is considered a foreign-invested enterprise (FIE). Under the draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the draft law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties. On March 15,2019, the Foreign Investment Law was adopted by the NPC and will come into effect on January 1,2020. The Foreign Investment Law stipulates that the Negative List for the access of foreign investment is divided into “prohibited investment areas” and “restricted investment areas”. Although the Foreign Investment Law did not mention the principle of “actual control” (including VIE structures) as stipulated in the Draft Foreign Investment Law 2015, according to the fourth category of foreign investment activities mentioned in the Foreign Investment Law, namely, “investing in any other ways as stipulated under laws, administrative regulations or provisions of the State Council”, the “actual control” principle (including VIE structures) may be proposed in form of other laws, administrative regulations or means as stipulated by the State Council. Under these circumstances, if the actual controller has foreign nationality, the VIE will be regarded as a foreign invested enterprise. Once an entity is designated as a foreign-invested company, its investment in the PRC will be limited to the scope stated in the Negative List. If the PRC government finds that the agreements that establish the structure for operating our online consumer finance marketplace business do not comply with PRC government restrictions on foreign investment in value-added telecommunications services businesses, such as internet content provision services, we could be subject to severe penalties, including being prohibited from continuing operations.
We do not maintain property insurance policies covering equipment and other property against risks and unexpected events. We provide social security insurance including pension insurance, unemployment insurance, work-related injury insurance and medical insurance for our employees. We also maintain a director and officer liability insurance policy for our board directors, executives and employees. We do not maintain business interruption insurance or general third-party liability insurance, nor do we maintain product liability insurance or key-man insurance. We consider our insurance coverage to be sufficient for our business operations in China.
The online consumer finance marketplace industry in China is intensely competitive and we compete with other consumer finance marketplaces. Our key competitors include Lujinsuo (Lufax) and Yirendai (YRD). In light of the low barriers to entry in the online consumer finance industry, more players may enter this market and increase the level of competition. We anticipate that more established internet, technology and financial services companies that possess large, existing user bases, substantial financial resources and established distribution channels may enter the market in the future.
We also compete with other financial products and companies that attract borrowers, investors or both. With respect to borrowers, we compete with other consumer finance marketplaces and traditional financial institutions, such as consumer finance business units in commercial banks, credit card issuers and other consumer finance companies. With respect to investors, we primarily compete with other investment products and asset classes, such as equities, bonds, investment trust products, bank savings accounts and real estate.
We use a combination of software copyrights, trademarks, patents, domain names and other rights to protect our intellectual property and our brand.
In mainland China, we have completed registration of 32 software copyrights with Copyright Protection Center of China as of December 31, 2018. We have registered 41 domain names, are applying for 35 pending patents with National Intellectual Property Administration and have registered 102 trademarks with Trademark Office of The State Administration for Industry & Commerce of the People’s Republic of China as of December 31, 2018.
Outside China, we have registered 64 trademarks in Singapore, the United Kingdom, the European Union, Hong Kong, Australia, and the Philippines, and are in the process of applying for 261 pending trademarks in the United States, Japan, Canada, South Korea, Australia, New Zealand and other countries as of December 31, 2018.
In addition to our intellectual property rights, we believe we maintain a competitive advantage over our peers through our in-depth knowledge in China’s credit industry and its continuously evolving proprietary technology and know-how.
We also enter into contracts with our employees and third-party partners to prevent any unauthorized dissemination of our technology.
To date, we have not experienced any material misappropriation of our intellectual property. Despite our efforts to protect our proprietary rights, third parties may attempt to use, copy or otherwise obtain and market or distribute our proprietary technology or develop a similar platform. We cannot be certain that the steps we have taken or will take in the future will prevent misappropriations of our technology and intellectual property rights.
Our headquarters are located in Beijing. We lease an aggregate of approximately 4,874 square meters (approximately 52,463 square feet) of office space for our headquarters in Beijing.
As of December 31, 2018, we had 902 employees. We cultivate a productive culture for our employees and aim to foster a strong sense of loyalty and dedication with them. We strive to motivate our employees with a clear career path and opportunities to improve their skillset. We provide mandatory training to our employees upon hiring and on an ongoing basis as appropriate for their assigned duties and potential skillset enrichment. In particular, we provide regular training for all operation employees.
Compensation for our employees typically comprises basic salaries and discretionary bonuses. We provide employees in China with benefits as required under the relevant laws. We believe our relationship with our employees is good, and have not experienced any material labor disputes or work stoppages.
As required by PRC Laws and regulations, we participate in various government statutory employee benefit plans, including a pension contribution plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan, a maternity insurance plan and a housing provident fund. We are required under PRC law to contribute to employee benefit plans at specified percentages of the salaries, bonuses and certain allowances of our employees up to a maximum amount specified by the local government from time to time.
We enter into standard labor contracts with our employees. We also enter into standard confidentiality and non-compete agreements with our executive officers.
We are currently not a party to any material legal or administrative proceedings. We may from time to time be subject to various legal or administrative claims and proceedings arising in the ordinary course of business. Litigation or any other legal or administrative proceeding, regardless of the outcome, may result in additional costs and diversion of our resources, including our management’s time and attention.
This section sets forth a summary of the most significant rules and regulations that affect our business activities in China.
As a consumer lending marketplace connecting investors with private enterprises and individual borrowers, we are regulated by various government authorities, including but not limited to:
|●||the MIIT, which regulates telecommunications and telecommunications-related activities, including, but not limited to, the Internet information services and other value-added telecommunication services;|
|●||the PBOC, as the central bank of China, which regulates the formation and implementation of monetary policy, issuing the currency, supervising the commercial banks and assisting the administration of the financing;|
|●||China Banking Regulatory Commission (the “CBRC”), which regulates financial institutions and promulgating the regulations related to the administration of financial institutions.|
|●||Cyberspace Administration of China (“the CAOC”), which implements the guidelines and policies of internet information communication and promoting legal construction of internet information communication, guiding, coordinating and urging relevant departments to strengthen the management of Internet information content and investigating illegal websites according to law.|
|●||National Internet Finance Association of China (“the NIFA”), which regulates the market behavior of P2P industry institutions, protecting legitimate rights and interests of the industry, promoting institutions to serve social and economic development better and guiding healthy operation of the industry through self-regulation and member services.|
Regulations Relating to Online Consumer Lending
Online consumer lending is regarded under PRC law as direct loans between parties through an Internet platform, and governed by the PRC Contract Law, the General Principles of the Civil Law of the PRC, Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries, the Guidelines for the Online Lending Fund Depository Business , the Guidelines for the Administration of Recordation Registration of Online Lending Information Intermediary Institutions, the Guidelines for the Disclosure of Information on the Business Activities of Online Lending Information Intermediary Institutions and related judicial interpretations promulgated by the Supreme People’s Court.
Regulations on Consumer Lending Service Provider
On July 18, 2015, ten PRC regulatory agencies, including the PBOC, the MIIT and the CBRC, jointly issued the Guidelines on Promoting the Healthy Development of Internet Finance, or the Guidelines. The Guidelines define online consumer lending as direct loans between parties through an Internet platform, which is under the supervision of CBRC, and governed by the PRC Contract Law, the General Principles of the Civil Law of the PRC, and related judicial interpretations promulgated by the Supreme People’s Court. The Guidelines require that online consumer lending service providers must conduct the followings:
|i.||act as an intermediary platform to provide information exchange, matching, credit assessment and other intermediary services which providing credit enhancement services and/or engage in illegal fund-raising is explicitly prohibited;|
|ii.||complete registration with the relevant local counterpart of the MIIT in accordance with implementation regulations that may be promulgated by the MIIT or/and the Office for Cyberspace Affairs pursuant to the Guidelines;|
|iii.||set up a custody account with a qualified bank in order to deposit, manage and supervise borrower and investor funds, and separate borrower and investor funds from the funds of the online consumer lending service provider, with that custody account being subject to independent audits, the results of which must be disclosed to investors and borrowers, all in accordance with implementation regulations that may be promulgated by the PBOC and other relevant regulatory agencies pursuant to the Guidelines;|
|iv.||fully disclose all relevant information to customers, including but not limited to the online consumer lending service provider’s financial status, transaction model, the rights and obligations of customers, and provide customers with reminders of the risk of loss;|
|v.||not disseminate any untrue information and conduct any bundle sales;|
|vi.||protect the personal information of the online consumer lending service provider’s customers from any unauthorized disclosure and must not sell and/or disclose such information illegally; and|
|vii.||establish a customer identification program, monitor and report suspicious transactions, preserve customer information and transaction records, and provide assistance to the public security department and judicial authorities in investigations and proceedings in relation to anti-money laundering matters.|
On August 17, 2016, CBRC, MIIT, PBOC and other relevant government authorities published Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries, or the Online Lending Information Intermediaries Measures. The Online Lending Information Intermediaries Measures defines the consumer lending as the direct lending among individuals via Internet platforms. Individuals shall include natural persons, legal persons and other organizations. The Online Lending Information Intermediaries Measures also defines the consumer lending information intermediaries as the financial information intermediaries that specialized in consumer lending information intermediary business. Such intermediaries provide services including information collection, information release, credit assessment, information exchange, and match of lending, on the Internet as the primary channel to facilitate the direct lending between borrowers and lenders (creditors). The Online Lending Information Intermediaries Measures requires that consumer lending information intermediaries must conduct the following concerning filing and registration:
|i.||register the record-filing with the local financial regulatory department at the place where it is registered with the industry and commerce authority by presenting relevant materials within ten working days after obtaining the business license;|
|ii.||after completing the record-filing with the local financial regulatory departments, apply for telecommunication business operating licenses pursuant to the relevant provisions of the competent authorities of communications;|
|iii.||shall be clearly identified as consumer lending information intermediaries in their business scope.|
The Online Lending Information Intermediaries Measures requires that consumer lending information intermediaries shall not engage in or be entrusted to engage in any of the following activities:
|i.||financing for themselves directly or in a disguised form;|
|ii.||accepting, collecting or gathering funds of lenders directly or indirectly;|
|iii.||providing security to lenders or promising break-even principals and interests directly or in a disguised form;|
|iv.||publicizing or promoting financing projects on other physical premises other than such digital channels as the Internet, fixed-line telephone or mobile phone by themselves or upon entrustment or authorization of any third party;|
|v.||making loans, unless otherwise stipulated by laws and regulations;|
|vi.||splitting the term of any financing project;|
|vii.||raising funds by issuing such financial products on their own as wealth management products, or selling bank wealth management products, assets management by securities traders, funds, insurance, trust products or other financial products on a commission basis;|
|viii.||carrying out business similar to asset-backed securities or conducting the transfer of creditor’s rights in the form of packaged assets, asset-backed securities, trust assets, and fund units;|
|ix.||engaging in any form of mixture, bundling or agency with other institutions in investment, sale on a commission basis, brokerage etc., unless otherwise permitted by laws, regulations and relevant regulatory provisions on consumer lending;|
|x.||making up or overstating the authenticity of financing projects and the prospect of profits, concealing flaws and risks in financing projects, publicizing or promoting in biased language or by other fraudulent means in a false and one-sided way, fabricating or spreading false or incomplete information to damage others’ business reputation, or misleading lenders or borrowers;|
|xi.||providing information intermediary services for those highly risky financing projects whose purpose is the investment in stock market, over-the-counter financing, futures contracts, structured products and other derivatives;|
|xii.||engaging in equity-based crowd funding etc.; and|
|xiii.||undertaking other activities prohibited by laws and regulations as well as relevant regulatory provisions on consumer lending.|
The Online Lending Information Intermediaries Measures provides requirements for consumer lending information intermediaries, such as business rules and risk management, protection of lenders and borrowers, information disclosure, etc. Consumer lending information intermediaries shall manage their own funds and funds of lenders and borrowers separately, and select qualified banking financial institutions as agencies to deposit lenders’ and borrowers’ funds. Local financial regulatory departments shall order consumer lending information intermediaries to make rectification within a period of no more than 12 months, which may subject to the adjustment from the relevant regulatory departments from time to time. Any violation of the Online Lending Information Intermediaries Measures by a consumer lending information intermediary after they come into effect, may subject such consumer lending information intermediary to certain penalties as determined by applicable laws, and regulations, or by relevant government authorities if the applicable laws and regulations are silent on the penalties. The applicable penalties may include but not limited to, criminal liabilities, warning, rectification, tainted integrity record and fines up to RMB30,000 (US$4,425).
On October 28, 2016, the CBRC, the MIIT and the Industry and Commerce Administration Department, jointly issued the Guidance of Administration, which provides the general filing rules for online lending intermediaries, and delegates the filing authority to local financial authorities. Although the Guidance of Administration has not been officially promulgated or launched and also may not be found from authorized source, it is generally accepted by the industry that it needs to be followed. The Guidance of Administration sets forth that online lending intermediaries are approved locally. Under the general filing procedures for online lending intermediaries, before a filing application is submitted to local financial regulators, the online lending intermediaries may be required to: (i) rectify any breach of applicable regulations as required by local financial regulators; and (ii) apply to the Industry and Commerce Administration Department to amend or register such entity’s the business scope.
On February 22, 2017, the CBRC released the Guidelines to the Operation of Depositing Online Lending Funds, or the Guidelines of Depositing Lending Funds, which provide detailed requirements for setting up a custody account with a qualified bank and depositing online lending funds. The Guidelines of Depositing Lending Funds define online lending funds as the special lending funds and related funds deposited by the custodian pursuant to the entrustment of online lending information intermediary (as the principal), which are formed by borrowers, lenders and guarantors, etc. in their investment and financing activities. The Guidelines of Depositing Lending Funds define a custodian as a commercial bank that provides custody services for the online lending business.
In the online lending funds custody business, the principal should perform the following duties:
|i.||to be responsible for the continuous development and safe operation of the technical system of the online consumer lending platform;|
|ii.||to organize the implementation of the information disclosure of the online lending information intermediary, including but not limited to the basic information of the principal, the information of the lending project, the basic information and operation of the borrower, the information of the participants, etc., which should be fully disclosed to the custodian;|
|iii.||to check the accounts with the custodian on a daily basis to ensure the accuracy of the system data;|
|iv.||to keep the records, account books, statements and other relevant materials of the online lending business, and the relevant paper or electronic information shall be kept for more than five years after the expiration of the lending contract;|
|v.||to organize an independent audit of the client’s fund custody account and to disclose the audit results to the client;|
|vi.||to fulfill and cooperate with the custodian to perform the anti-money laundering obligations; and|
|vii.||other duties stipulated in laws, administrative regulations, rules, other regulatory documents and online lending funds deposit contracts.|
Where the principal and custodian that have carried out custodian business of online lending funds fail to comply with the requirements of the Guidelines of Depositing Lending Funds in the business course, they shall effect rectification for a period of no more than six months, which may subject to the adjustment from the relevant regulatory departments from time to time. Where they fail to effect rectification within such period, they shall be treated in accordance with the Online Lending Information Intermediaries Measures and other laws and regulations. In accordance with the Guidelines and the Online Lending Information Intermediaries Measures, on August 23, 2017, the CBRC issued the Disclosure Guidelines, which stipulate that consumer lending information intermediary platforms shall disclose relevant information on their websites and other Internet channels, and the Disclosure Guidelines have provided detailed requirements for such information disclosure. According to the Disclosure Guidelines, to the extent that consumer lending information intermediary platforms that have provided the services before the issuance of the Disclosure Guidelines are not in full compliance with the requirements, they are required to make rectification within a six-month rectification period starting from the date the Disclosure Guidelines was promulgated. For platforms that fail to make such rectification, sanctions could be imposed by the relevant regulatory departments, including but not limited to, supervision interviews, warning letters, rectification requests, tainted integrity records, fines of up to RMB30,000 (US$4,425), and criminal liabilities if the act constitutes a criminal offense.
On December 1, 2017, the Office of the Leading Group for the Special Campaign against Internet Financial Risks and the Office of the Leading Group for the Special Campaign against Peer-to-peer Lending Risks issued the Notice on the Regulation and Rectification of the “Cash Loan” Business (Circular No. 141). The notice comprehensively regulates the “cash loan” business, including supervision of eligibility, business and the suitability of borrowers. The withdrawal of inventory was arranged as well.
The Notice requires improvements to the business management of P2P lending information intermediary institutions including
|i.||Loan businesses that are not in compliance with the provisions of the law on interest rates shall not be matched directly or in a disguised manner; it is forbidden to deduct interests, commission fees, management fees, margin from the loan principal in advance or set high overdue interest, late fee and interest penalty, among others.|
|ii.||Clients’ information collection, selection, credit rating, account opening and other core work shall not be outsourced.|
|iii.||Participation in P2P lending with the funds of banking financial institutions shall not be matched.|
|iv.||Loan matching services shall not be provided for any student in school or any borrower without source of repayment or repayment capacity. “Down payment loans,” real estate off-floor financing and other house purchase financing loans matching services shall not be provided. Loan matching services without designated use shall not be provided.|
On December 8, 2017, the Office of the Leading Group for Special Rectification on Risks in P2P Lending issued “Notice on the Rectification, Remediation and Acceptance for Risks of P2P Online Lending” (Circular No. 57) to Local Joint Work Office for P2P Rectification. The Notice requires that assignment of filing and registration of principal P2P institutions shall be mainly accomplished by local authorities within their jurisdiction by the end of April in 2018 and shall be fully finished by the end of June in 2018. Key issues include transfer of creditors’ rights, provisions for risks, depository of the funds shall be explained further. On August 18, 2018, the Office of the Leading Group for Special Rectification on Risks in P2P Lending issued “Notice on the Compliance Inspection for P2P Online Lending Institutions” and “Checklist of Compliance Inspection of P2P” to Local Joint Work Office for P2P Rectification and IFAC and listed 108 detailed rules. It requires that compliance inspection, like self-inspection, self-discipline inspection and administrative inspection shall be accomplished by the end of December 2018. Local standards for rectification and acceptance shall be unified to resolve the problems of regulatory arbitrage caused by different local standards.
According to Opinions on Operating Well in Classified Disposition and Risk Prevention of Online Credit Institutions, or Circular 175, promulgated by the Head Office for Special Rectification of Online Finance Risk and Head Office for Special Rectification of Peer-to-Peer Online Lending on December 19th, 2018, P2P online lending intermediaries are classified as risk-emerged institutions, which include registered and non-registered, and risk-emerging institutions, which include zombie institutions, small institutions and large institutions. Within the category of large risk-emerging institutions, there are normal institutions and high-risk institutions. Institution containing one of the five following factors would be deemed as a high-risk institution, five factors as follows: (i) exist self-financing, fake tender or uncertain capital flow conditions; (ii) more than 10% of all loans are overdue; (iii) generated many negative public opinions and petitions; (iv) refuse inspections or do not cooperate in inspections; (v) conduct one vote veto in regulation compliance. Normal institutions are required to clean up all illegal businesses and leave no hidden dangers and risks. Large risk-emerging institutions shall conduct market cleaning mechanism, and strive to achieve positive exits. There are four prohibitions on actions of financing institutions stated in Circular 175. Financing institutions are prohibited to (i) financing through Online Credit Institutions; (ii) provide guarantee for Online Credit Institutions; (iii) accept investments from Online Credit Institutions; (iv) sell products of Online Credit Institutions.
Pursuant to the requirements of the abovementioned Notice, Beijing Oriental already submitted self-inspection report and related materials of “Checklist” for self-discipline inspection and administrative inspection to the Office of the Leading Group for Special Rectification on Risks in P2P Lending through Jin-Guan-Tong System on October 14, 2018.
Pursuant to the requirements of the abovementioned Notice, Beijing Oriental already submitted self-inspection report, self-correction report and related materials to National Internet Finance Association of China through the System of National Internet Finance Association of China on October 19, 2018.
Our marketplace serves as an information intermediary between borrowers and lenders and we are not a party to the loans facilitated through our marketplace. We believe that we have taken measures to comply with the laws and regulations that are applicable to our business operations, including the regulatory principles raised by the CBRC and the Online Lending Information Intermediaries Measures, and avoid conducting any activities that may be deemed as illegal fund-raising under the current applicable laws and regulations. However, due to the lack of detailed regulations and guidance in the area of consumer lending services and the possibility that the PRC government authority may promulgate new laws and regulations regulating consumer lending services in the future, we cannot assure you that our practice would not be deemed to violate any PRC laws or regulations, especially relating to illegal fund-raising, credit enhancement services and/or information disclosure. If our practice is deemed to violate any PRC laws or regulations, our business, financial conditions and results of operations would be materially and adversely affected.
Regulations on Loans between Individuals
The PRC Contract Law governs the formation, validity, performance, enforcement and assignment of contracts. The PRC Contract Law confirms the validity of loan agreements between individuals and provides that the loan agreement becomes effective when the individual lender provides the loan to the individual borrower. The PRC Contract Law requires that the interest rates charged under the loan agreement must not violate the applicable provisions of the PRC laws and regulations. In accordance with the Provisions on Several Issues Concerning Laws Applicable to Trials of Private Lending Cases issued by the Supreme People’s Court on August 6, 2015, or the Private Lending Judicial Interpretations, which came into effect on September 1, 2015, private lending is defined as financing between individuals, legal entities and other organizations. When private loans between individuals are paid by wire transfer, through online consumer lending platforms or by other similar means, the loan contracts between individuals are deemed to be validated upon the deposit of funds to the borrower’s account. In the event that the loans are made through an online consumer lending platform and the platform only provides intermediary services, the courts shall dismiss the claims of the parties concerned against the platform demanding the repayment of loans by the platform as guarantors. However, if the online consumer lending service provider guarantees repayment of the loans as evidenced by its web page, advertisements or other media, or the court is provided with other proof, the lender’s claim alleging that the consumer lending service provider shall assume the obligations of a guarantor will be upheld by the courts. The Private Lending Judicial Interpretations also provide that agreements between the lender and borrower on loans with interest rates (including penalty and other costs thereof) no more than 24% per annum are valid and enforceable. As to loans with interest rates per annum over 24% but no more than 36%, if the interest on the loans has already been paid to the lender, and so long as such payment has not damaged the interest of the state, the community and any third parties, the courts will not find the merit in the borrower’s demand for the return of the interest payment on the ground of invalidity. If the annual interest rate of a private loan is higher than 36%, the interest that in excess of 36% will not be upheld by the courts. All the loan transactions facilitated over our marketplace are between individuals currently. The APRs for the term loans on our marketplace currently range from 7% to 36%. The interest rate does not and is not expected to exceed the mandatory limit for loan interest rates.
Pursuant to the PRC Contract Law, a creditor may assign its rights under an agreement to a third party, provided that the debtor is notified. Upon due assignment of the creditor’s rights, the assignee is entitled to the creditor’s rights and the debtor must perform the relevant obligations under the agreement for the benefit of the assignee. We allow investors to transfer the loans they hold to other investors before the loan reaches maturity. To facilitate the assignment of the loans, the template loan agreement applicable to the lenders and borrowers on our platform specifically provides that a lender has the right to assign his/her rights under the loan agreement to any third parties and the borrower agrees to such assignment.
In addition, according to the PRC Contract Law, an intermediation contract is a contract whereby an intermediary presents to its client an opportunity for entering into a contract or provides the client with other intermediary services in connection with the conclusion of a contract, and the client pays the intermediary service fees. Our business of connecting investors with individual borrowers may constitute intermediary service, and our service agreements with borrowers and investors may be deemed as intermediation contracts under the PRC Contract Law. Pursuant to the PRC Contract Law, an intermediary must provide true information relating to the proposed contract. If an intermediary conceals any material fact intentionally or provides false information in connection with the conclusion of the proposed contract, which results in harm to the client’s interests, the intermediary may not claim for service fees and is liable for the damages caused. The Interim Measures for the Administration of Business Activities of Online Lending Information Intermediaries provides detailed requirements for Consumer Lending Information Intermediaries.
Regulations on Illegal Fund-Raising
Raising funds by entities or individuals from the general public must be conducted in strict compliance with applicable PRC laws and regulations to avoid administrative and criminal liabilities. The Measures for the Banning of Illegal Financial Institutions and Illegal Financial Business Operations promulgated by the State Council in July 1998, and the Notice on Relevant Issues Concerning the Penalty on Illegal Fund-Raising issued by the General Office of the State Council in July 2007, explicitly prohibit illegal public fund-raising. The main features of illegal public fund-raising include: (i) illegally soliciting and raising funds from the general public by means of issuing stocks, bonds, lotteries or other securities without obtaining the approval of relevant authorities, (ii) promising a return of interest or profits or investment returns in cash, properties or other forms within a specified period of time, and (iii) using a legitimate form to disguise on unlawful purpose.
To further clarify the criminal charges and punishments relating to illegal public fund-raising, the Supreme People’s Court promulgated the Judicial Interpretations to Issues Concerning Applications of Laws for Trial of Criminal Cases on Illegal Fund-Raising, or the Illegal Fund-Raising Judicial Interpretations, which came into force in January 2011. The Illegal Fund-Raising Judicial Interpretations provide that a public fund-raising will constitute a criminal offense related to “illegally soliciting deposits from the public” under the PRC Criminal Law, if it meets all the following four criteria: (i) the fund-raising has not been approved by the relevant authorities or is concealed under the guise of legitimate acts; (ii) the fund-raising employs general solicitation or advertising such as social media, promotion meetings, leafleting and SMS advertising; (iii) the fundraiser promises to repay, after a specified period of time, the capital and interests, or investment returns in cash, properties in kind and other forms; and (iv) the fund-raising targets the general public as opposed to specific individuals. An illegal fund-raising activity can incur a fine or prosecution in the event it constitutes a criminal offense. Pursuant to the Illegal Fund-Raising Judicial Interpretations, an offender that is an entity will be subject to criminal liabilities, if it illegally solicits deposits from the general public or illegally solicits deposits in disguised form (i) with the amount of deposits involved exceeding RMB1,000,000 (US$147,507.9), (ii) with over 150 fund-raising targets involved, or (iii) with direct economic loss caused to fund-raising targets exceeding RMB500,000 (US$73,753.9), or (iv) the illegal fund-raising activities have caused baneful influences to the public or have led to other severe consequences. An individual offender is also subject to criminal liabilities but with lower thresholds. In addition, an individual or an entity who has aided in illegal fund-raising from the general public and charges fees including but not limited to agent fees, rewards, rebates and commission, may be considered an accomplice in the crime of illegal fund-raising. In accordance with the Opinions of the Supreme People’s Court, the Supreme People’s Procurator and the Ministry of Public Security on Several Issues concerning the Application of Law in the Illegal Fund-Raising Criminal Cases, the administrative proceeding for determining the nature of illegal fund-raising activities is not a prerequisite procedure for the initiation of criminal proceedings concerning the crime of illegal fund-raising, and the administrative departments’ failure in determining the nature of illegal fund-raising activities does not affect the investigation, prosecution and trial of cases concerning the crime of illegal fund-raising.
Regulations Relating to Foreign Investment
The PRC Foreign Investment Law
In January 2015, the MOFCOM published a discussion draft of the proposed Foreign Investment Law for public review and comments (the “2015 Draft Foreign Investment Law”). The 2015 Draft Foreign Investment Law purports to change the existing “case-by-case” approval regime to a “filing or approval” procedure for foreign investments in China. The State Council will determine a list of industry categories that are subject to special administrative measures, which is referred to as a “negative list,” consisting of a list of industry categories where foreign investments are strictly prohibited, or the “prohibited list” and a list of industry categories where foreign investments are subject to certain restrictions, or the “restricted list.” Foreign investments in business sectors outside of the “negative list” will only be subject to a filing procedure, in contrast to the existing prior approval requirements, whereas foreign investments in any industry categories that are on the “restricted list” must apply for approval from the foreign investment administration authority.
The 2015 Draft Foreign Investment Law for the first time defines a foreign investor not only based on where it is incorporated or organized, but also by using the standard of “actual control.” The 2015 Draft Foreign Investment Law specifically provides that entities established in China, but “controlled” by foreign investors will be treated as FIEs. Once an entity is considered to be an FIE, it may be subject to the foreign investment restrictions in the “restricted list” or prohibitions set forth in the “prohibited list.” If an FIE proposes to conduct business in an industry subject to foreign investment restrictions in the “restricted list,” the FIE must go through market entry clearance approvals by the MOFCOM before it can be established. If an FIE proposes to conduct business in an industry subject to foreign investment prohibitions in the “prohibited list,” it must not engage in the business. However, an FIE that conducts business in an industry that is in the “restricted list,” upon market entry clearance, may apply in writing for being treated as a PRC domestic investment if it is ultimately “controlled” by PRC government authorities and its affiliates and/or PRC citizens. According to the 2015 Draft Foreign Investment Law, variable interest entities would also be deemed as FIEs, if they are ultimately “controlled” by foreign investors, and be subject to restrictions on foreign investments. However, the 2015 Draft Foreign Investment Law has not taken a position on what actions will be taken with respect to the existing companies with the “variable interest entity” structure, whether or not these companies are controlled by Chinese parties.
The 2015 Draft Foreign Investment Law emphasizes on security review requirements, whereby all foreign investments that jeopardize or may jeopardize national security must be reviewed and approved in accordance with the security review procedure. In addition, the 2015 Draft Foreign Investment Law imposes stringent ad hoc and periodic information reporting requirements on foreign investors and the applicable FIEs. Aside from the investment implementation report and the investment amendment report that are required at each investment and alteration of specific investment terms, an annual report is mandatory, and large foreign investors meeting certain criteria are required to report on a quarterly basis. Any company found to be non-compliant with these information reporting obligations may potentially be subject to fines and/or administrative or criminal liabilities, and the persons directly responsible may be subject to criminal liabilities.
On September 3, 2016, the Standing Committee of the National People’s Congress published 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 provides that wholly foreign-owned enterprises, Chinese-Foreign equity joint ventures and Chinese-Foreign contractual joint ventures which formation do not involve the implementation of special access management measures as prescribed by the state shall be subject to post-filing administration instead of prior approval administration.
On December 26, 2018, National People’s Congress published the Foreign Investment Law of the People’s Republic of China (the “2018 Draft Foreign Investment Law”) on its official website aiming to solicit public opinions.
On March 15, 2019, the Foreign Investment Law was adopted by the NPC and will come into effect on January 1, 2020. The Foreign Investment Law stipulates that the Negative List for the access of foreign investment is divided into “prohibited investment areas” and “restricted investment areas”. However, the Foreign Investment Law does not specify the scope of business which are included in the fields of restricted investment and prohibited investment. Although the Foreign Investment Law did not mention the principle of “actual control” (including VIE structures) as stipulated in the Draft Foreign Investment Law 2015, according to the fourth category of foreign investment activities mentioned in the Foreign Investment Law, namely, “investing in any other ways as stipulated under laws, administrative regulations or provisions of the State Council”, the “actual control” principle (including VIE structures) may be proposed in form of other laws, administrative regulations or means as stipulated by the State Council. Under these circumstances, if the actual controller has foreign nationality, the VIE will be regarded as a foreign invested enterprise. Once an entity is designated as a foreign-invested company, its investment in the PRC will be limited to the scope stated in the Negative List.
When the Foreign Investment Law becomes effective, the trio of existing laws regulating foreign investment in China, namely, the Sino-foreign Equity Joint Venture Enterprise Law, the Sino-foreign Cooperative Joint Venture Enterprise Law and the Wholly Foreign-invested Enterprise Law, together with their implementation rules and ancillary regulations, will be abolished. See “Risk Factors—Risks Relating to Our Corporate Structure—The enactment of the Foreign Investment Law may materially and adversely affect our business and financial condition.”
Industry Catalog Relating to Foreign Investment
Investment activities in the PRC by foreign investors are principally governed by the Guidance Catalog of Industries for Foreign Investment, or the Catalog, which was promulgated and amended from time to time by the MOFCOM and the National Development and Reform Commission. Industries listed in the Catalog are divided into three categories: encouraged, restricted and prohibited. Industries not listed in the Catalog are generally deemed as constituting a fourth “permitted” category. Establishment of wholly foreign-owned enterprises is generally allowed in encouraged and permitted industries. Some restricted industries are limited to equity or contractual joint ventures, while in some cases Chinese partners are required to hold the majority interests in such joint ventures. In addition, restricted category projects are subject to higher-level government approvals. Foreign investors are not allowed to invest in industries in the prohibited category. Industries not listed in the Catalog are generally open to foreign investment unless specifically restricted by other PRC regulations.
NCF’s subsidiaries are mainly engaged in providing investment and financing consultations and technical services, which fall into the “permitted” category under the Catalog. NCF believes that its PRC subsidiaries have obtained all material approvals required for its business operations. However, industries such as value-added telecommunication services (except e-commerce), including Internet information services, are restricted from foreign investment. We provide the value-added telecommunication services that are in the “restricted” category.
On June 28, 2017, the MOFCOM and the National Development and Reform Commission (“the NDRC”) promulgated Catalogue of Industries for Guiding Foreign Investment, that came into effect on July 28, 2017, under which the investment and financing consultations fall into the “permitted” category. On June 28, 2018, the MOFCOM and the NDRC promulgated Special Management Measures for the Market Entry of Foreign Investment (Negative List), that came into effect on July 28, 2018), under which value-added telecommunication services (except e-commerce) fall into “restricted” category.
Foreign Investment in Value-Added Telecommunication Services
The Provisions on Administration of Foreign Invested Telecommunications Enterprises promulgated by the State Council in December 2001 and subsequently amended in September 2008 prohibit a foreign investor from owning more than 50% of the total equity interest in any value-added telecommunications service business in China and require the major foreign investor in any value-added telecommunications service business in China to have a good and profitable record and operating experience in this industry. Catalogue of Industries for Guiding Foreign Investment (2017 Revision) allows a foreign investor to own more than 50% of the total equity interest in an E-Commerce business.
In July 2006, the Ministry of Information Industry, the predecessor of the MIIT, issued the Circular on Strengthening the Administration of Foreign Investment in the Operation of Value-added Telecommunications Business, pursuant to which a domestic PRC company that holds an operating license for value-added telecommunications business, which we refer to as a VATS License, is prohibited from leasing, transferring or selling the VATS License to foreign investors in any form and from providing any assistance, including resources, sites or facilities, to foreign investors that conduct a value-added telecommunications business illegally in China. Further, the domain names and registered trademarks used by an operating company providing value-added telecommunications services must be legally owned by that company or its shareholders. In addition, the VATS License holder must have the necessary facilities for its approved business operations and to maintain the facilities in the regions covered by its VATS License.
Anti-money Laundering Regulations
The PRC Anti-money Laundering Law, which became effective in January 2007, sets forth the principal anti-money laundering requirements applicable to financial institutions as well as non-financial institutions with anti-money laundering obligations, including the adoption of precautionary and supervisory measures, establishment of various systems for client identification, retention of clients’ identification information and transactions records, and reports on large transactions and suspicious transactions. According to the PRC Anti-money Laundering Law, financial institutions subject to the PRC Anti-money Laundering Law include banks, credit unions, trust investment companies, stock brokerage companies, futures brokerage companies, insurance companies and other financial institutions as listed and published by the State Council, while the list of the non-financial institutions with anti-money laundering obligations will be published by the State Council. The PBOC and other governmental authorities issued a series of administrative rules and regulations to specify the anti-money laundering obligations of financial institutions and certain non-financial institutions, such as payment institutions. However, the State Council has not promulgated the list of the non-financial institutions with anti-money laundering obligations.
The Guidelines, the Online Lending Information Intermediaries Measures and the Guidelines of Custodian Lending Funds require Internet finance service providers, including online consumer lending platforms to comply with certain anti-money laundering requirements, including the establishment of a customer identification program, the monitoring and reporting of suspicious transactions, the preservation of customer information and transaction records, and the provision of assistance to the public security department and judicial authority in investigations and proceedings in relation to anti-money laundering matters. The PBOC will formulate implementing rules to further specify the anti-money laundering obligations of Internet finance service providers.
In cooperation with our partnering custodian banks and payment companies, we have adopted various policies and procedures, such as internal controls and “know-your-customer” procedures, for anti-money laundering purposes. However, as the detailed anti-money laundering regulations of Internet finance service providers have not been published, there is uncertainty as to how the anti-money laundering requirements will be interpreted and implemented, and whether online consumer lending service providers like ourselves must abide by the rules and procedures set forth in the PRC Anti-money Laundering Law that are applicable to non-financial institutions with anti-money laundering obligations. We cannot assure you that our existing anti-money laundering policies and procedures will be deemed to be in full compliance with any anti-money laundering laws and regulations that may become applicable to us in the future.
Regulations on Value-Added Telecommunication Services
The Telecommunications Regulations promulgated by the State Council and its related implementation rules, including the Catalog of Classification of Telecommunications Business issued by the MIIT, categorize various types of telecommunications and telecommunications-related activities into basic or value-added telecommunications services, and Internet information services, or ICP services, and on-line data processing and transaction processing 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.
In September 2000, the State Council also issued the Administrative Measures on Internet Information Services, which was 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 obtain a VATS License for Internet information services, or 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 application for renewal shall be submitted to the original license issuing authority 90 days before expiration.
Online Lending Information Intermediaries Measures requires consumer lending information intermediaries apply for telecommunication business operating licenses pursuant to the relevant provisions of the competent authorities of communications. As the detailed provisions for such telecommunication business operating licenses has not been published, there is uncertainty as to which type of license is required for consumer lending information intermediaries.
Regulations on Internet Information Security
Internet information in China is also regulated and restricted from a national security standpoint. The National People’s Congress, China’s national legislative body, has enacted the Decisions on Maintaining Internet Security, which may subject violators to criminal punishment in China for any effort to: (i) gain improper entry into a computer or system of strategic importance; (ii) disseminate politically disruptive information; (iii) leak state secrets; (iv) spread false commercial information; or (v) infringe intellectual property rights. The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways which, among other things, result in a leakage of state secrets or a spread of socially destabilizing content. If an Internet information service provider violates these measures, the Ministry of Public Security and the local security bureaus may revoke its operating license and shut down its websites. On November 7, 2016, Standing Committee of the National People’s Congress published Cyber Security Law of the PRC (will be effective on June 1, 2017), which requires network operators to take technical measures and other necessary measures to ensure the secure and stable operation of the network, effectively respond to cyber security incidents, prevent illegal crimes committed on the network, and maintain the integrity, confidentiality and availability of cyber data.
In addition, the Guidelines require Internet finance service providers, including consumer lending platforms, among other things, to improve technology security standards, and safeguard customer and transaction information. The PBOC and other relevant regulatory authorities will jointly adopt the implementing rules and technology security standards. The Online Lending Information Intermediaries Measures requires consumer lending information intermediaries to take the following measures:
|i.||according to the relevant national provisions on cyberspace security and the graded protection system for national information security, carry out the grading record-filing and class testing for information system, have sophisticated cyberspace security facilities, such as firewall, and those facilities for intrusion detect, data encryption, and disaster recovery, as well as relevant management systems of such facilities, establish relevant systems with regard to information technology management, technology risk management, and technology auditing, allocate sufficient resources, take thorough management and control measures and technological means to ensure the safe and steady operation of the information system, and protect the security of the information of lenders and borrowers;|
|ii.||record and retain the Internet access logs of both parties involved in lending, information interaction and other data for a period of five years after the expiration of loan contracts, and shall give a comprehensive security evaluation at least once every two years, and accept the information security inspection and auditing of the state or competent authorities of the industry;|
|iii.||establish or adopt application-level disaster recovery systems and facilities compatible with their business scales within two years after their establishment.|
|iv.||enhance the business cooperation with the operating organizations of financial credit information basic database and credit reporting agencies, and provide, access and use the relevant financial credit information according to law;|
|v.||consumer lending information intermediaries which use the digital authentication systems of third parties shall evaluate the third-party digital authentication organizations regularly so as to ensure the safety, reliability and independence of the relevant authentications; and|
|vi.||adopt proper methods and technologies to record and safe keep data and materials on consumer lending activities and back up data carefully. Such data and materials shall be kept for a certain period that meets the requirements of laws and regulations as well as the relevant regulatory provisions on consumer lending. Loan contracts shall be kept for at least five years after their expiry.|
Regulations on Privacy Protection
In recent years, PRC government authorities have enacted laws and regulations on Internet use to protect personal information from any unauthorized disclosure. Under the Several Provisions on Regulating the Market Order of Internet Information Services issued by the MIIT in December 2011, an ICP service operator may not collect any user personal information or provide any such information to third parties without the consent of the user. An ICP service operator must expressly inform users of the method, content and purpose of the collection and processing of such user personal information and may only collect such information necessary for the provision of its services. An ICP service operator is also required to properly maintain the user personal information, and in case of any leak or likely leak of the user personal information, the ICP service operator must take immediate remedial measures and, in severe circumstances, make an immediate report to the telecommunications regulatory authority. In addition, pursuant to the Decision on Strengthening the Protection of Online Information issued by the Standing Committee of the National People’s Congress in December 2012 and the Order for the Protection of Telecommunication and Internet User Personal Information issued by the MIIT in July 2013, any collection and use of user personal information must be subject to the consent of the user, abide by the principles of legality, rationality and necessity and be within the specified purposes, methods and scopes. An ICP service operator must also keep such information strictly confidential, and is further prohibited from divulging, tampering or destroying any such information, or selling or providing such information to other parties. An ICP service operator is required to take technical and other measures to prevent the collected personal information from any unauthorized disclosure, damage or loss. Any violation of these laws and regulations may subject the ICP service operator to warnings, fines, confiscation of illegal gains, revocation of licenses, cancellation of filings, closedown of websites or even criminal liabilities. The Cyber Security Law of the PRC (effective on June 1, 2017) requires that network operators shall strictly keep confidential users’ personal information that they have collected, and establish and improve the users’ information protection system. The Guidelines also prohibit Internet finance service providers, including online consumer lending platforms, from illegally selling or disclosing customers’ personal information. The PBOC and other relevant regulatory authorities will jointly adopt the implementing rules. Pursuant to the Ninth Amendment to the Criminal Law issued by the Standing Committee of the National People’s Congress in August 2015 and becoming effective in November, 2015, any Internet service provider that fails to fulfill the obligations related to Internet information security administration as required by applicable laws and refuses to rectify upon orders, shall be subject to criminal penalty for the result of (i) any dissemination of illegal information in large scale; (ii) any severe effect due to the leakage of the client’s information; (iii) any serious loss of criminal evidence; or (iv) other severe situation, and any individual or entity that (i) sells or provides personal information to others in a way violating the applicable law, or (ii) steals or illegally obtain any personal information, shall be subject to criminal penalty in severe situation. The Online Lending Information Intermediaries Measures requires the consumer lending information intermediaries as well as the fund custodian agencies and other outsourcing service providers to keep confidential the lenders’ and borrowers’ information collected in the course of their business, and they shall not use such information for any other purpose except for services they provide without approval of lenders or borrowers.
In operating our online consumer finance marketplace, we collect certain personal information from borrowers and investors, and also share the information with our business partners such as third-party online payment companies and loan collection service providers for the purpose of facilitating loan transactions between borrowers and investors over our marketplace. We have obtained consent from the borrowers and investors on our marketplace to collect and use their personal information, and have also established information security systems to protect the user information and privacy. However, there is uncertainty as to how the requirements for protecting customers’ personal information in the Guidelines and Online Lending Information Intermediaries Measures will be interpreted and implemented. We cannot assure you that our existing policies and procedures will be deemed to be in full compliance with any laws and regulations that may become applicable to us in the future.
Regulation on Intellectual Property Rights
The PRC has adopted comprehensive legislation governing intellectual property rights, including trademarks. The PRC Trademark Law and its implementation rules protect registered trademarks. The PRC Trademark Law has adopted a “first-to-file” principle with respect to trademark registration. The Trademark Office under the State Administration of Industry and Commerce is responsible for the registration and administration of trademarks throughout the PRC, and grants a term of ten years to registered trademarks and another ten years if requested upon expiry of the initial or extended term. Trademark license agreements must be filed with the Trademark Office for record. As of the date of this report, we have 102 registered trademarks and no trademark application pending registration of transfer with the Trademark Office under the State Administration for Industry and Commerce.
Regulations Relating to Indirect Transfers and Dividend Withholding Tax
Pursuant to the EIT Law and its implementation rules, if a non-resident enterprise has not set up an organization or establishment in the PRC, or has set up an organization or establishment but the income derived has no actual connection with such organization or establishment, it will be subject to a withholding tax on its PRC-sourced income at a rate of 10%. In connection with the EIT Law, the SAT issued Circular 698, which became effective as of January 1, 2008 (and was abolished on December 1, 2017), Circular 59 on April 30, 2009, and the SAT Announcement 7, on February 3, 2015. By promulgating and implementing the above, the PRC tax authorities have strengthened their scrutiny over the direct or indirect transfer of equity interest in a PRC resident enterprise by a non-PRC resident enterprise. Pursuant to SAT Announcement 7, if a non-resident enterprise, or referred to as a transferor, transfers its equity in an offshore enterprise which directly or indirectly owns PRC taxable assets, including ownership interest in PRC resident companies or the Taxable Properties, without a “reasonable commercial purpose”, such transfer shall be deemed as a direct transfer of such Taxable Properties. The payer, or referred as a transferee, in such transfer shall be the withholding agent, and is obligated to withhold and remit the enterprise income tax to the relevant PRC tax authority. If a transferor fails to declare for payment timely or in full of the tax due on proceeds from indirect transfer of PRC taxable assets and the withholding agent also fails to withhold such tax, the tax authority shall, in addition to supplementary collection of such tax, also charge for interest on a daily basis from the transferor according to the EIT Law and its implementation rules. Factors that may be taken into consideration when determining whether there is a reasonable commercial purpose include, among other factors, the value of the transferred equity, offshore taxable situation of the transaction, the offshore structure’s economic essence and duration and trading fungibility. If an equity transfer transaction satisfies all the requirements mentioned above, such transaction will be considered an arrangement with reasonable commercial purpose.
Pursuant to the Double Taxation Avoidance Arrangement and the Prevention of Fiscal Evasion with Respect to Taxes on Income signed by State Administration of Taxation and Government of the Hong Kong Special Administrative Region, the withholding tax rate in respect to the payment of dividends by a PRC enterprise to a Hong Kong enterprise is reduced to 5% from a standard rate of 10% if the Hong Kong enterprise directly holds at least 25% of the PRC enterprise. Pursuant to Circular 81, a Hong Kong resident enterprise must meet the following conditions, among others, in order to enjoy the reduced withholding tax: (i) it must be the beneficial owners of the relevant dividends; and (ii) it must have directly owned at least 25% of the PRC resident enterprise throughout the 12 months prior to receiving the dividends. However, a transaction or arrangement entered into for the primary purpose of enjoying a favorable tax treatment should not be a reason for the application of the favorable tax treatment under the Double Taxation Avoidance Arrangement. If a taxpayer inappropriately is entitled to such favorable tax treatment, the competent tax authority has the power to make appropriate adjustments. In August 2015, the State Administration of Taxation promulgated Circular 60, which became effective on November 1, 2015. Circular 60 provides that non-resident enterprises are not required to obtain pre-approval from the relevant tax authority in order to enjoy the reduced withholding tax rate. Instead, non-resident enterprises and their withholding agents may, by self-assessment and on confirmation that the prescribed criteria to enjoy the tax treaty benefits are met, directly apply the reduced withholding tax rate, and file necessary forms and supporting documents when performing tax filings, which will be subject to post-tax filing examinations by the relevant tax authorities. However, if a competent tax authority finds out that it is necessary to apply the general anti-tax avoidance rules, it may start general investigation procedures for anti-tax avoidance and adopt corresponding measures for subsequent administration.
Regulations Relating to Foreign Exchange
Regulation on Foreign Currency Exchange
The principal regulations governing foreign currency exchange in China are the Foreign Exchange Administration Regulations, most recently amended in August 2008. Under the PRC foreign exchange regulations, payments of current account items, such as profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior approval from SAFE by complying with certain procedural requirements. By contrast, approval from or registration with appropriate government authorities is required where RMB is to be converted into foreign currency and remitted out of China to pay capital account items, such as direct investments, repayment of foreign currency-denominated loans, repatriation of investments and investments in securities outside of China. On February 28, 2015, the SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment, or SAFE Notice 13. After SAFE Notice 13 became effective on June 1, 2015, instead of applying for approvals regarding foreign exchange registrations of foreign direct investment and overseas direct investment from SAFE, entities and individuals will be required to apply such foreign exchange registrations with qualified banks. The qualified banks, under the supervision of the SAFE, will directly examine the applications and conduct the registration.
In August 2008, SAFE issued the Circular on the Relevant Operating Issues Concerning the Improvement of the Administration of the Payment and Settlement of Foreign Currency Capital of Foreign-Invested Enterprises, or SAFE Circular 142, regulating the conversion by a foreign-invested enterprise of foreign currency-registered capital into RMB by restricting how the converted RMB may be used. SAFE Circular 142, provides that the RMB capital converted from foreign currency registered capital of a foreign-invested enterprise may only be used for purposes within the business scope approved by the applicable government authority and may not be used for equity investments within the PRC. In addition, SAFE strengthened its oversight of the flow and use of the RMB capital converted from foreign currency registered capital of foreign-invested enterprises. The use of such RMB capital may not be changed without SAFE’s approval, and such RMB capital may not in any case be used to repay RMB loans if the proceeds of such loans have not been used. Violations may result in severe monetary or other penalties.
In November 2012, SAFE promulgated the Circular of Further Improving and Adjusting Foreign Exchange Administration Policies on Foreign Direct Investment, which substantially amends and simplifies the current foreign exchange procedure. Pursuant to this circular, the opening of various special purpose foreign exchange accounts, such as pre-establishment expenses accounts, foreign exchange capital accounts and guarantee accounts, the reinvestment of RMB proceeds derived by foreign investors in the PRC, and remittance of foreign exchange profits and dividends by a foreign-invested enterprise to its foreign shareholders no longer require the approval or verification of SAFE; multiple capital accounts for the same entity may be opened in different provinces, which was not possible previously. In addition, SAFE promulgated another circular in May 2013, which specifies that the administration by SAFE or its local branches over direct investment by foreign investors in the PRC must be conducted by way of registration and banks must process foreign exchange business relating to the direct investment in the PRC based on the registration information provided by SAFE and its branches.
In July 2014, SAFE issued SAFE Circular 36, which purports to reform the administration of settlement of the foreign exchange capitals of foreign-invested enterprises in certain designated areas on a trial basis. Under the pilot program, some of the restrictions under SAFE Circular 142 will not apply to the settlement of the foreign exchange capitals of the foreign-invested enterprises established within the designated areas and the enterprises are allowed to use its RMB capital converted from foreign exchange capitals to make equity investment. However, NCF’s PRC subsidiaries are not established within the designated areas. On March 30, 2015, the SAFE promulgated Circular 19, to expand the reform nationwide. Circular 19 came into force and replaced both Circular 142 and Circular 36 on June 1, 2015. Circular 19 allows foreign-invested enterprises to conduct equity investments by using RMB fund converted from foreign exchange capital. However, Circular 19 continues to, prohibit foreign-invested enterprises from, among other things, using RMB fund converted from its foreign exchange capitals for expenditure beyond its business scope, providing entrusted loans or repaying loans between non-financial enterprises.
On June 9, 2016, the SAFE promulgated Circular 16, which expands the application scope from only the capital of the foreign-invested enterprises to the capital, the foreign debt fund and the fund from oversea public offering. Also, Circular 16 allows the enterprises to use their foreign exchange capitals under capital account allowed by the relevant laws and regulations.
Regulations on Foreign Exchange Registration of Overseas Investment by PRC Residents
SAFE issued the SAFE Circular on Relevant Issues Relating to Domestic Resident’s Investment and Financing and Roundtrip Investment through Special Purpose Vehicles, or SAFE Circular 37, that became effective in July 2014, replacing the previous SAFE Circular 75. SAFE Circular 37 regulates foreign exchange matters in relation to the use of special purpose vehicles, or SPVs, by PRC residents or entities to seek offshore investment and financing or conduct round trip investment in China. Under SAFE Circular 37, a SPV refers to an offshore entity established or controlled, directly or indirectly, by PRC residents or entities for the purpose of seeking offshore financing or making offshore investment, using legitimate onshore or offshore assets or interests, while “round trip investment” refers to direct investment in China by PRC residents or entities through SPVs, namely, establishing foreign-invested enterprises to obtain the ownership, control rights and management rights. SAFE Circular 37 provides that, before making contribution into an SPV, PRC residents or entities are required to complete foreign exchange registration with SAFE or its local branch. SAFE promulgated the Notice on Further Simplifying and Improving the Administration of the Foreign Exchange Concerning Direct Investment in February 2015, which took effect on June 1, 2015. This notice has amended SAFE Circular 37 requiring PRC residents or entities to register with qualified banks rather than SAFE or its local branch in connection with their establishment or control of an offshore entity established for the purpose of overseas investment or financing.
PRC residents or entities who had contributed legitimate onshore or offshore interests or assets to SPVs but had not obtained registration as required before the implementation of the SAFE Circular 37 must register their ownership interests or control in the SPVs with qualified banks. An amendment to the registration is required if there is a material change with respect to the SPV registered, such as any change of basic information (including change of the PRC residents, name and operation term), increases or decreases in investment amount, transfers or exchanges of shares, and mergers or divisions. Failure to comply with the registration procedures set forth in SAFE Circular 37 and the subsequent notice, or making misrepresentation on or failure to disclose controllers of the foreign-invested enterprise that is established through round-trip investment, may result in restrictions being imposed on the foreign exchange activities of the relevant foreign-invested enterprise, including payment of dividends and other distributions, such as proceeds from any reduction in capital, share transfer or liquidation, to its offshore parent or affiliate, and the capital inflow from the offshore parent, and may also subject relevant PRC residents or entities to penalties under PRC foreign exchange administration regulations.
Regulations on Dividend Distribution
The principal regulations governing distribution of dividends of foreign-invested enterprises include the Foreign-Invested Enterprise Law, as amended in October 2016, and its implementation rules. Under these laws and regulations, wholly foreign-owned enterprises in China may pay dividends only out of their accumulated after-tax profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, wholly foreign-owned enterprises in China are required to allocate at least 10% of their respective accumulated profits each year, if any, to fund certain reserve funds until these reserves have reached 50% of the registered capital of the enterprises. Wholly foreign-owned companies may, at their discretion, allocate a portion of their after-tax profits based on PRC accounting standards to staff welfare and bonus funds. These reserves are not distributable as cash dividends.
Regulations on Overseas Listings
Six PRC regulatory agencies, including the CSRC, jointly adopted the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, or the M&A Rules, which became effective in September 2006 and was amended on June 22, 2009 by Ministry of Commerce of People’s Republic of China (“the MOFCOM”). The M&A Rules, among other things, require offshore SPVs formed for overseas listing purposes through acquisitions of PRC domestic companies and controlled by PRC companies or individuals, to obtain the approval of the CSRC prior to publicly listing their securities on an overseas stock exchange.
While the application of the M&A Rules remains unclear, we believe, based on the advice of our PRC legal counsel, Grandall Law Firm, that CSRC approval is not required in the context of the Business Combination because: (a) NCF established its PRC subsidiaries, NCF Cloud Service and NCF Financial Service, by means of direct investment rather than by merger with or acquisition of PRC domestic companies, and (b) no explicit provision in the M&A Rules classifies the respective contractual arrangements between Beijing Oriental and NCF Financial Service, NCF Cloud Service and Jin Xun Shi Dai and its shareholders as a type of acquisition transaction falling under the M&A Rules. However, as there has been no official interpretation or clarification of the M&A Rules, there is uncertainty as to how this regulation will be interpreted or implemented.
Regulations Relating to Employment
The PRC Labor Law and the Labor Contract Law require that employers must execute written employment contracts with full-time employees. If an employer fails to enter into a written employment contract with an employee within one month from the date on which the employment relationship is established, the employer must rectify the situation by entering into a written employment contract with the employee and pay the employee twice the employee’s salary for the period from the day following the lapse of one month from the date of establishment of the employment relationship to the day prior to the execution of the written employment contract. All employers must compensate their employees with wages equal to at least the local minimum wage standards. Violations of the PRC Labor Law and the Labor Contract Law may result in the imposition of fines and other administrative sanctions, and serious violations may result in criminal liabilities.
Enterprises in China are required by PRC laws and regulations to participate in certain employee benefit plans, including social insurance funds, namely a pension plan, a medical insurance plan, an unemployment insurance plan, a work-related injury insurance plan and a maternity insurance plan, and a housing provident fund, and contribute to the plans or funds in amounts equal to certain percentages of salaries, including bonuses and allowances, of the employees as specified by the local government from time to time at locations where they operate their businesses or where they are located. Failure to make adequate contributions to various employee benefit plans may be subject to fines and other administrative sanctions. Also, enterprises in China are required by PRC laws and regulations to be the individual income tax withhold agents and withhold individual income tax for their employees accordingly.
The following diagram illustrates our corporate structure, including our subsidiaries and consolidated variable interest entities, as of the date of this annual report:
|D.||Property, Plant and Equipment|
Our headquarters is located in Beijing. We lease an aggregate of approximately 4,874 square meters of office space for our headquarters in Beijing.
|ITEM 4A.||UNRESOLVED STAFF COMMENTS|
|ITEM 5.||OPERATING AND FINANCIAL REVIEW AND PROSPECTS|
You should read the following discussion and analysis of Hunter Maritime and its subsidiaries’ financial condition and results of operations in conjunction with the section headed “Summary Combined and Consolidated Financial and Operating Data” and its combined and consolidated financial statements and the related notes included elsewhere in this Form 20-F. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of selected events could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those set forth under “Risk Factors” and elsewhere in this Form 20-F.
On March 21, 2019, NCF merged with and into Hunter Maritime (BVI) Limited, a British Virgin Islands company and a wholly-owned subsidiary of the registrant, Hunter Maritime Acquisition Corp. (“Hunter Maritime”), with NCF continuing as the surviving company and becoming a wholly-owned subsidiary of Hunter Maritime. Upon closing of the Merger, Hunter Maritime issued an aggregate of 200,000,000 of its Class A common shares to the shareholders of NCF plus earn out payments consisting of up to an additional 50,000,000 Class A common shares if NCF (and its subsidiaries on a consolidated basis) meets certain financial performance targets for the 2019 and 2020 fiscal years.
The merger is being accounted for, in accordance with GAAP, as a “reverse merger” and recapitalization at the date of the consummation of the transaction since the former stockholders of NCF own at least 50.1% of the outstanding common stock of Hunter Maritime immediately following the completion of the merger, NCF’s officers assumed all corporate and day-to-day management offices of Hunter Maritime, including chief executive officer and chief financial officer, and board members appointed by NCF constitute a majority of the board of the combined company after the Business Combination. Accordingly, NCF is deemed to be the accounting acquirer in the transaction and, consequently, the transaction is treated as a recapitalization of NCF. Accordingly, the consolidated assets, liabilities, and results of operations of NCF Wealth Group will become the historical financial statement. Hunter Maritime’s assets, liabilities and results of operations are consolidated with the assets, liabilities and results of operations of NCF.
We are a leading fintech company in China, primarily focused on connecting investors and borrowers, providing multi-scenario investment analysis to platform users to meet their diversified investment needs, and building an ecosystem in the field of internet finance. We aim to provide simplified, convenient and flexible financing solutions to both small and medium enterprises (“SME”) and individual borrowers. We facilitated over RMB 321 billion (approximately $47 billion based on the exchange rate of 0.145705 as of December 31, 2018) in transactions from our inception in July 2013 through December 2018. In 2018 and 2017, we facilitated transactions over RMB 71 billion and RMB 95 billion, respectively (approximately $10 billion and $15 billion based on the average exchange rate of 0.145237 and 0.148014 for 2018 and 2017). Many P2P platforms ceased their operations because of a series of defaults in the middle of 2018, but the demand for financing remains strong. Although we had a decline in the annualized transaction volume facilitated through our marketplace, our transaction volume began to increase at the end of 2018. The increase in the aggregate transaction and service revenue was attributable to the increase of the average transaction/service fee rate. The average transaction fee rate for P2P services increased by 28% from 4.3% in 2017 to 5.5% in 2018. The average service fee rate for non-P2P services increased by 32% from 4.3% in 2017 to 5.7% in 2018.
Since 2013, we operate an online marketplace under the brand of ‘Wangxin Puhui’ through our consolidated VIE, Beijing Oriental Union Investment Management Limited Liability Company (“Beijing Oriental”). This is an online Peer-to-peer, (“P2P”) platform matching borrowers with investors and facilitating transactions. Wangxin Puhui offers qualified borrowers quick and convenient access to affordable credit at competitive prices. To provide a transparent marketplace, the interest rates, transaction fees, and other charges are all clearly disclosed to borrowers upfront. Its borrowers and investors mainly come from online sources, such as the internet and its mobile applications or from referrals of assets cooperative institutions (entities that introduce qualified borrowers) and funding cooperative institutions (entities that introduce investors and other funding sources).
Since 2016, we also operate an internet platform with a brand of ‘Wangxin’ which is positioned as an open platform for financial technology, providing information publishing, information display, information exchange, and online user diversion services for a variety of organizations including insurance sales, securities, fund sales. We also provide Premier Wealth Management (“PWM”) services to investors and borrowers to facilitate the matching of investors with various registered Wealth Management Products.
Since March 2017, we launched a new program to cooperate with financial exchanges and promote exchange administered product program (“E-APP”). The E-APP includes (I) product registration services, (II) promotion services on best efforts basis and (III) Data Processing Technical Services.
We provide investors with attractive returns. The minimum investment threshold of P2P product is RMB 100 (approximately $15 based on the exchange rate of 0.145705 as of December 31, 2018). The minimum investment threshold of E-APP investment is calculated by dividing the borrower’s loan amount by 200 which represents maximum investors allowed in a particular E-APP product.
We also operate a wealth management business. With macro and microanalysis of financial markets coupled with independent and objective screening criteria, we provide high-quality investment products and other comprehensive asset management services to high net worth clients, family businesses and institutional investors.
Currently, we generate revenues primarily from the transaction and service fees, and commission fees charged for the above- mentioned services. We also charges investor service fees for using our smart matching tool or investment reservation tool. As an information intermediary for borrowers and investors, we act as an agent and do not have any legal obligations to the loans or securities facilities.
Key Factors Affecting Results of Operations
We believe the key factors affecting our financial condition and results of operations include the following:
Economic Environment and Credit Demand in China
The success of the online platform, to a large extent, depends on the overall credit demand in China especially that of personal consumption loans and business loans for small and medium-sized enterprises, and the overall credit demand depends on the overall economic situation in China. Any slowdown in China’s economic growth could cause a negative impact on borrowers’ demand for loans, as the uncertainty of economics could affect the level of individuals’ disposable income and corporate profits thus leading to a decline in the demand for loans for individuals and businesses. The economic downturn could also affect borrowers’ ability to repay negatively and lead to an increase in default rates. If the actual or expected default rate in Chinese online loan market increases generally, investors may delay or reduce related investments in general loan products, including the willingness to borrow on our platform.
The regulatory environment in China
The regulatory environment for the online lending information intermediary service industry in China is developing and evolving, creating both challenges and opportunities that could affect our financial performance. Due to the relatively short history of the online lending information intermediary service industry in China, although PRC government has issued certain guidelines, regulations, and rules to regulate and support the development of, the online lending information intermediary service industry in China, the PRC government has yet to establish a comprehensive regulatory framework governing the industry. We will continue to make efforts to ensure that we are in compliance with the existing laws, regulations and governmental policies relating to our industry and to comply with new laws and regulations or changes under existing laws and regulations that may arise in the future. While new laws and regulations or changes to existing laws and regulations could make loans more difficult to be accepted by investors or borrowers on terms favorable to us, or at all, these events could also provide new product and market opportunities.
The Product mix and the Pricing
The ability to maintain profitability, to a large extent, depends on the ability to continuously optimize product portfolios and provide a wide range of products and services with accurate pricing through the platform. At present, the platforms mainly provide transaction facilitation services, including P2P loan and Non-P2P financing, and wealth management.
Transaction facilitation services are the main source of income at present, mainly including personal loans and loans to small and medium-sized enterprises (SMEs).
Currently, personal loans are mainly from P2P, and the majority of personal loans are consumer loans, with terms of 14 days to 36 months and loan cost rates of 9%-30% (of which the platform charge rate is 2.36%-8.2%). SME borrowings are divided into premier wealth management borrowings, E-APP, and P2P business loans. The terms of premier wealth management borrowings and E-APP are the same, which range from15 days to 12 months with loan cost rates of 8.2% -21% (of which the platform charge rate is 3.5%-7.75%); the terms of P2P business loans are 15 days to 24 months with loan cost rates of 6.5%-31% (of which the platform charge rate is 3%-8%). E-APP is currently our major product and is expected to be one of our major products in the near future.
In addition, we charge investors service fees for using our automated investing tool or self-directed investing tool.
Starting in 2018, our platforms display products such as public funds, private funds, securities, and insurance, as well as providing financial technology support to investors. We also have a wealth management team, Yinghua Wealth, a professional wealth management agency covering major cities across the country with a comprehensive wealth management product portfolio providing professional wealth structure analysis, asset allocation planning and financial product selection advice and other quality financial services.
Ability to effectively acquire and maintain borrowers and investors
Our ability to facilitate transactions, to a large extent, depends on the ability to attract potential borrowers and investors through sales and marketing. We intend to continue to invest significant resources in sales and marketing and to improve our effectiveness, particularly in terms of the maintenance of qualified borrowers and investors.
At present, we rely on asset cooperative institutions and online channels to acquire borrowers. Asset cooperative institutions are the companies who introduce us to qualified borrowers. They are financial advisory institutions operating in specific areas or specific types of business.
Our investors are mainly obtained through the marketing team and funding cooperative institutions. In addition, we obtain investors by means of major search engines and five mainstream Android market channels and APP promotions (application solution Application Treasure, OPPO, VIVO, Xiaomi, 360 Mobile Phone Assistant). At present, our average investor acquisition cost is about RMB 320, which is at a relatively low level in the industry.
Through funding cooperative institutions, we provide high-net-worth investors with professional financial advisors. Traditional wealth management institutions rely more on the offline personal relationship between the financial advisor and the investor, which leads to low efficiency. In comparison, our teams are equipped with the systematic customer management tool, such as NCF Butler, a mobile APP for wealth management, which our financial advisors use to maintain investor relationship, to identify investors’ need, and to provide necessary financial services.
In order to maintain investors, we use advanced systems such as the user’s lifecycle system and the precision marketing system with the combination of artificial intelligence and big data, in addition to various online marketing activities.
Efficient risk management
For risk control on individual borrowers from transaction facilitation services, we have developed the Tianyuan Intellectual Risk Control System or Tianyuan. Tianyuan is a four-dimensional risk control system managing credit risk, operational risk, compliance risk, and information security risk. Relying on its exclusive technologies, we implement multi-step credit valuation and risk control system to ensure the quality and authenticity of borrowers. For more information about our risk management system, please see “Business-Our technologies and risk management system.”
For risk control on corporate borrowers from transaction facilitation services, we have developed a risk control procedure combining big data from big data systems and expert models to process risk control procedures, including data collection, loan limit monitoring, approval, and post-loan management. Our risk control on corporate borrowers combines our own and third party’s big data with the experience of the risk control experts to increase the efficiency and accuracy of risk control.
We intend to continue optimizing our risk control systems and improving the accuracy of our risk assessment models through the combination of our big-data analytical capabilities and the increasing amount of data we accumulate through our operations.
Critical Accounting Policies, Judgments and Estimates
An accounting policy is considered critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time such estimate is made, and if different accounting estimates that reasonably could have been used, or changes in the accounting estimates that are reasonably likely to occur periodically, could materially impact the combined and consolidated financial statements.
The preparation of combined and consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities including allowance for doubtful accounts, and disclosures of contingent assets and liabilities as of the date of the combined and consolidated financial statements and the reported amounts of revenues and expenses during the periods presented. Actual results could differ from these estimates. Significant accounting estimates reflected in our combined and consolidated financial statements include: our ability to realize deferred tax assets, determinations of the useful lives of long-lived assets, estimates of allowance for doubtful accounts and valuation assumptions in share-based compensation.
The following descriptions of critical accounting policies, judgments and estimates should be read in conjunction with our combined and consolidated financial statements and other disclosures included in this report. When reviewing our financial statements, you should consider (i) our selection of critical accounting policies, (ii) the judgments and other uncertainties affecting the application of such policies and (iii) the sensitivity of reported results to changes in conditions and assumptions.
|(a)||Principal of consolidation|
The combined and consolidated financial statements include the financial statements of the Group, its wholly-owned subsidiaries, and consolidated VIEs. All significant intercompany transactions and balances have been eliminated upon consolidation.
We have an employee benefit trust to facilitate share transactions pursuant to certain equity incentive plans. The trust is a separate legal entity under our control, for which we are the primary beneficiary using variable interest entities model criteria under Accounting Standards Codification (“ASC”) 810, Consolidations. Consequently, we have consolidated and classified the trust shares within our combined and consolidated balance sheets.
Variable Interest Entities (“VIE”) arrangements
To be in compliance with PRC regulations for information intermediary companies, we entered into VIE arrangements with the following entities:
|(i)||On September 28, 2014 (“Effective Date”), NCF Financial and Beijing Oriental signed the VIE agreements. Beijing Oriental is the principal operating entity of the P2P business of the Group. The VIE agreements enable NCF Financial to (1) have the power to direct the activities that most significantly affect the economic performance of Beijing Oriental , and (2) receive the economic benefits and of Beijing Oriental that could be significant to Beijing Oriental. Accordingly, NCF Financial is considered the primary beneficiary of Beijing Oriental and has consolidated Beijing Oriental’s assets, liabilities, results of operations, and cash flows in the accompanying combined and consolidated financial statements.|
On January 22, 2018 (“Effective Date”), Cloud Services, a wholly owned subsidiary of the Group, entered into a series of VIE agreements with Jing Xun Shi Dai’s shareholders, Mr. Zhang Zhenxin and Ms. Li Huanxiang, who acquired Jing Xun Shi Dai from Bejing Oriental on January 4, 2018.
The VIE agreements enable Cloud Services to (1) have the power to direct the activities that most significantly affect the economic performance of Jing Xun Shi Dai, and (2) receive the economic benefits of Jing Xun Shi Dai that could be significant to Jing Xun Shi Dai. Accordingly, Cloud Services is considered the primary beneficiary of Jing Xun Shi Dai and has consolidated Jing Xun Shi Dai’s assets, liabilities, results of operations, and cash flows in the accompanying audited combined and consolidated financial statements.
We engage primarily in operating an online consumer finance marketplace and match borrowers with investors. The transaction fees are not earned until a borrower and investor are matched and enter into a transaction. We earn revenue through transaction and service fees, commission fees, and various other types of revenue.
As an information intermediary in the introduction between borrowers and investors, we act as an agent and do not have any legal obligations to the loans or securities facilities. Therefore, we do not record loans receivable and payable arising from the loans between lending investors and borrowers on our combined and consolidated balance sheets.
Revenue is recognized when each of the following criteria is met under ASC Topic 605:
|1)||Persuasive evidence of an arrangement exists;|
|2)||Services have been rendered;|
|3)||Pricing is fixed or determinable; and,|
|4)||Collectability is reasonably assured.|
Transaction and service fees
Transaction and service fees include the following products:
|●||Online P2P loan facilitation services: matching services to connect borrowers with investors and setting up automated repayment schedule upon loan origination. The Group charges borrowers a transaction fee for the service;|
|●||Premier wealth management services (“PWM”): services provided to borrowers to facilitate the matching of investors with various registered wealth management products. The Group charges borrowers a transaction fee for the PWM services.|
|●||Exchange administered product program (E-APP) – product registration services include advising registration holders (usually borrowers) on the selection of local financial assets trading service platforms, review registration application documentation and assists with due diligence conducted by the local financial assets trading service platform. We charge registration holders for registration services to connect borrowers with investors.|
Transaction fees are usually non-refundable and recognized upon loan origination or upon funding received by registration holders for E-APP or when the price is considered fixed. At this point, we have completed all performance obligations to the borrowers and collectability is reasonably assured.
Incentives to investors
We occasionally provide incentives to potential investors at our sole discretion. The voucher incentives are offered to all investors who invest through the Wangxin Puhui platform and Wangxin platform.
We provide the following types of incentive:
|Cash incentive types||Description||Awarded to||Benefit|
|Event reward/sign up voucher||Earned upon sign-up for platform events and applied upon investment||Potential investor||One-time fee deduction|
|Investment reward voucher||Earned upon making an investment and applied in the next investment||Investor||One-time fee deduction or Additional interest|
When an investor makes an investment through us, the investor can redeem the vouchers, either upfront as a one-time contribution to the investment amount or on a monthly basis over the term of the investment as additional interest. If the investor chooses to redeem the voucher upfront, their investment is reduced by the voucher value, and the investor still entitled to full repayment of the stated principal value.
We consider both investors and borrowers as customers. The event reward and sign up voucher can be applied to the initial investment only. The cost of the awarded vouchers is treated as a direct reduction of revenue upon initial investment by the investor in accordance with ASC 605-50-25-7.
The investment reward voucher can be applied after the initial investment. We consider the investment reward voucher as an obligation to investors for future investment. As the amount of the investment reward is relatively insignificant as compared to the financial statements taken as a whole, we do not record a deferred revenue.
Yinghua Wealth, one of our subsidiaries, engages in the businesses of introducing potential investors to purchase contractual funds from other financial institutions. The commission fee is calculated based on a certain percentage of the funds invested by investors that are recommended by Yinghua Wealth and is recognized as revenue when the funds are fully subscribed.
We provided E-APP product promotion services to promote financial products registered at local financial assets exchange trading service platform. The commission fee is calculated based on a certain percentage of the funds invested by investors and we recognize revenue when registration holders of the financial instruments received funding.
Other revenues mainly include advisory income and technology service fees, such as E-APP data processing technology services, etc.
Advisory income is charged to a borrower for assistance with the credit assessment before the borrower qualifies for their financing. We earn a fee based on the percentage between 0.5%-1% of the loan.
E-APP data processing technology services include data transmission and storage to E-APP borrowers to facilitate the preparation of registration application.
Other revenues are recognized upon loan origination or upon funding received by registration holders for E-APP.
|(c)||Foreign currency and foreign currency translation|
Our reporting currency is the US dollar. The functional currency of the BVI and HK entities is the Hong Kong dollar (“HK$”). The functional currency of our PRC subsidiaries, VIEs and the subsidiaries of the VIEs is RMB based on the criteria of ASC 830, Foreign Currency Matters.
The combined and consolidated financial statements are translated to U.S. dollars using the period-end rates of exchange for assets and liabilities, equity is translated at historical exchange rates, and average rates of exchange (for the period) are used for revenues and expenses and cash flows. As a result, amounts relating to assets and liabilities reported on the statements of cash flows may not necessarily agree with the changes in the corresponding balances on the balance sheets. Translation adjustments resulting from the process of translating the functional currency financial statements into U.S. dollars are included in determining comprehensive income / loss. Transactions denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing on the transaction dates. Assets and liabilities denominated in foreign currencies are translated into the functional currency at the exchange rates prevailing at the balance sheet date with any transaction gains and losses that arise from exchange rate fluctuations on transactions denominated in a currency other than the functional currency are included in the results of operations as incurred.
Short-term investments consist of certificates of deposit and available for sale debt securities with original maturities of greater than 90 days and not more than one year.
We intend to hold the certificates of deposit until maturity. Investment in certificates of deposit are valued at amortized cost, which approximates fair value.
The Group classifies the debt securities as available for sale in accordance with FASB ASC Topic 320 “Investments — Debt and Equity Securities.” The debt securities not classified as held to maturity or trading shall be classified as available for sale and are reported at fair value. Unrealized gains and losses on available for sale securities are excluded from earnings and reported as accumulated other comprehensive income or loss (a separate component of equity), net of related income taxes. Realized gains or losses are included in earnings during the period in which the gain or loss is realized. The unrealized gain for the available-for-sale financial assets as of December 31, 2017 is immaterial as compared to the combined and consolidated financial statements taken as a whole.
As of December 31, 2017, the Group only holds debt securities which are the loan products listed on the online marketplace platform. The average term of most of loan products the Group purchased were 21 days. As a result, the Group classified such investments as available-for-sale and carry them at fair value. As of December 31, 2018, the Group redeemed all of the available-for-sale financial assets and the short term investment only consists held-to-maturity financial assets.
We review our held to maturity and available-for-sale financial assets for other-than-temporary impairment (“OTTI”) based on the specific identification method. The Group considers available quantitative and qualitative evidence in evaluating potential impairment of its investments. If the cost of an investment exceeds the investment’s fair value, the Group considers, among other factors, general market conditions, expected future performance of the investees, the duration and the extent to which the fair value of the investment is less than the cost, and the Group’s intent and ability to hold the investment.
We apply ASC 718, Compensation-Stock Compensation (“ASC 718”), to account for our employee share-based payments. In accordance with ASC 718, we determine whether an award should be classified and accounted for as a liability award or an equity award. All of our share-based awards to employees were classified as equity awards. The awards granted are only subject to a service condition and contain graded vesting features. We measure the employee share-based compensation based on the grant date fair value of the equity instrument issued and recognized as compensation expense net of an estimated forfeiture rate using graded vesting method, over the requisite service period, with a corresponding amount reflected in additional paid-in capital. The amount of accumulated compensation costs recognized at any date is at least equal to the portion of the grant date fair value of the vested awards on that date.
The estimated forfeiture rate will be adjusted over the requisite service period to the extent that actual forfeiture rate differs, or is expected to differ, from such estimates. Changes in the estimated forfeiture rate are recognized through a cumulative catch-up adjustment in the period of change.
Share-based awards granted to non-employees are accounted for in accordance with ASC 505-50 Equity-Based Payments to Non-Employee. All transactions in which services are received in exchange for share-based awards are accounted for based on the fair value of the consideration received or the fair value of the awards issued, whichever is more reliably measurable. Share-based compensation is measured at fair value at the earlier of the commitment date or the date the services are completed. We remeasured the awards using the then-current fair value at each reporting date until the measurement date, generally when the services are completed, and awards are vested and attribute the changes in those fair values over the service period by the straight-line method.
Deferred income tax
We account for income taxes using the asset/liability method prescribed by ASC 740, “Accounting for Income Taxes.” Deferred income taxes are recognized with net operating loss carryforwards and credits are applied using enacted statutory tax rates applicable to future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that a portion of or all of the deferred tax assets will not be realized.
An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. Penalties and interest incurred related to underpayment of income tax are classified as income tax expense in the period incurred. PRC tax returns filed in 2017, 2016, and 2015 are subject to examination by any applicable tax authorities. We had no uncertain tax position for the years ended December 31, 2018, 2017 and 2016.
Deferred income tax assets and liabilities are offset when there is a legally enforceable right to offset current tax assets against current tax liabilities and when the deferred income tax assets and liabilities relate to income taxes levied by the same taxation authority on either the taxable entity or different taxable entities where there is an intention to settle the balances on a net basis.
Key Operational Metrics
We regularly review a number of metrics to evaluate our business, measure our performance, identify trends, formulate financial projections and make strategic decisions. The main metrics we consider are set forth in the following tables:
|For the Years Ended December 31,|
|Transaction volume facilitated (1)|
|P2P - individual||$||506,271,476||$||2,174,485,366||$||2,665,829,684|
|P2P - business||544,035,660||25,782,134||5,889,302,383|
|Exchange administered product program – business||7,728,254,236||40,440,154||-|
|Premier Wealth Management - business||1,558,943,901||12,392,274,787||2,467,937,133|
|Annualized transaction volume facilitated (2)|
|P2P - individual||$||383,970,929||$||937,642,641||$||1,135,493,732|
|P2P - business||172,426,261||19,248,104||1,651,197,687|
|Exchange administered product program - business||4,728,226,047||22,063,853||-|
|Premier Wealth Management - business||894,059,540||5,905,582,907||911,034,537|
|Number of transactions facilitated (3)|
|P2P - individual||183,316||5,152,068||83,897|
|P2P - business||3,769||186||28,420|
|Exchange administered product program - business||7,696||17||-|
|Premier Wealth Management - business||469||34,045||11,195|
|Number of borrowers (4)|
|P2P - individual||154,157||1,793,058||64,949|
|P2P - business||2,476||171||228|
|Exchange administered product program - business||504||7||-|
|Premier Wealth Management - business||196||624||222|
|Number of investors (5)|
|(1)||Transaction volume refers to the total principal amount of transactions facilitated on our marketplace during the relevant period.|
|(2)||Annualized transaction volume refers to the total principal amount of loans facilitated on our marketplace during the relevant period multiply by the ratio of the number of months of data available divided by 12 months.|
|(3)||Number of transactions facilitated refers to the total number of loans facilitated on our marketplace during the relevant period.|
|(4)||Number of borrowers refers to the number of borrowers who recorded successful borrowing activity on our marketplace during the relevant period.|
|(5)||Number of investors refers to the number of investors who recorded successful investment activity on our marketplace during the relevant period.|
The majority of the loans facilitated on our marketplace have terms of less than 1 year. Therefore, the annualized total principal amount of loans facilitated is smaller than the actual facilitated amount during the relevant period. Management uses annualized data as the basis to evaluate operating performance.
Currently, we generate revenues primarily from the transaction and service fees, which includes the following products:
|●||Online P2P loan facilitation services: matching services to connect borrowers with investors and setting up automated repayment schedule upon loan origination. The Group charges borrowers a transaction fee for the service;|
|●||Premier wealth management services (“PWM”): services provided to borrowers to facilitate the matching of investors with various registered wealth management products. The Group charges borrowers a transaction fee for the PWM services.|
|●||Exchange administered product program (E-APP) – product registration services include advising registration holders (usually borrowers) on the selection of local financial assets trading service platforms, review registration application documentation and assists with due diligence conducted by the local financial assets trading service platform. We charge registration holders for services to connect borrowers with investors.|
In the middle of 2018, a wave of defaults was sweeping across China’s peer-to-peer lending industry and caused a decline in the annualized transaction volume facilitated through our marketplace, and caused some of our competitors to cease operations. Our transaction volume began to improve in late 2018. The annualized transaction volume facilitated through our marketplace was $6.2 billion, $6.9 billion and $3.7 billion in 2018, 2017, and 2016, respectively.
We acquire borrowers through various online channels as well as referrals from asset cooperative institutions. Asset cooperative institutions are the companies who introduce us to qualified borrowers. The total number of borrowers who successfully completed borrowings on our marketplace during the year ended December 31, 2018 was 157,333, as compared to 1,793,860 and 65,399 during the year ended December 31, 2017, and 2016, respectively. Currently, we focus more on attracting business borrowers, and approximately 94% of our annualized transaction volume for the year ended December 31, 2018 was contributed by our business borrowers.
We utilize online channels and funding cooperative institutions to obtain investors. Funding cooperative institutions are companies who introduce investors. While the number of new investors has been decreasing over the years presented, the average investment amount of new investors has been increasing steadily throughout the same period. This is the result of our efforts to focus on acquiring creditworthy investors who are able and willing to invest more on our platform. Currently, we focus more on attracting individual investors, and 97% of our investment amount for the year ended December 31, 2018 was contributed by individual investors.
Many P2P platforms ceased their operations because of a series of defaults in the middle of 2018, but the demand for financing remains strong. Although we had a decline in the annualized transaction volume facilitated through our marketplace, our transaction volume began to increase at the end of 2018. We will attract more business and individual borrowers through the development of innovative financial technology or through the acquisition of other P2P related business. We expect the annualized transaction volume to steadily grow in 2019.
With the strengthening of industry supervision by Chinese government, investors are more inclined to make investment through companies that regulatory compliance and financially strong. We expect the number of investors to increase, especially for high-net-worth customers.
Results of Operations for the Years Ended December 31, 2018, 2017, and 2016
The following table sets forth a summary of our combined and consolidated results of operations for the years i